Author: Joshua Gans

How did the Snowden revelations impact behaviour?

This week the Australian government announced what seems to be an extraordinary piece of legislation.

Spies who leak sensitive information will face tough new penalties of up to 10 years’ jail and internet firms could be forced to store customers’ data for up to two years under sweeping national security reforms.

Prompted in part by the leaks from renegade US intelligence contractor Edward Snowden, the Abbott government will on Wednesday introduce legislation clamping down on intelligence officers who leak to journalists, lawyers and other members of the public.

Separately, Attorney-General George Brandis has given his strongest hint yet that the government will move ahead with controversial ”data retention” laws.

This would mean basic records of internet communications such as emails and Skype calls would have to be stored by providers for up to two years to help intelligence and law enforcement agencies carry out investigations and prosecutions.

Indeed, it appears to go further.

Australian journalists could face prosecution and jail for reporting Snowden-style revelations about certain spy operations, in an “outrageous” expansion of the government’s national security powers, leading criminal lawyers have warned.

A bill presented to parliament on Wednesday by the attorney general, George Brandis, would expand the powers of the Australian Security Intelligence Organisation (ASIO), including creation of a new offence punishable by five years in jail for “any person” who disclosed information relating to “special intelligence operations”.

The person would be liable for a 10-year term if the disclosure would “endanger the health or safety of any person or prejudice the effective conduct of a special intelligence operation”.

Suffice it to say this seems to fly way over the bar that we would normally want to protect free speech and freedom of the press; not that these are enshrined in the Australian constitution in the way they are in the US.

To appreciate the impact of policies designed to curtail the dissemination of disclosures, it is useful to actually go to the evidence. A few months ago, Alex Marthews and Catherine Tucker provided that evidence in this paper. Here is the abstract:

This paper uses data from Google Trends on search terms from before and after the surveillance revelations of June 2013 to analyze whether Google users’ search behavior shifted as a result of an exogenous shock in information about how closely their internet searches were being monitored by the U. S. government. We use data from Google Trends on search volume for 282 search terms across eleven different countries. These search terms were independently rated for their degree of privacy-sensitivity along multiple dimensions. Using panel data, our result suggest that cross-nationally, users were less likely to search using search terms that they believed might get them in trouble with the U. S. government. In the U. S., this was the main subset of search terms that were affected. However, internationally there was also a drop in traffic for search terms that were rated as personally sensitive. These results have implications for policy makers in terms of understanding the actual effects on search behavior of disclosures relating to the scale of government surveillance on the Internet and their potential effects on international competitiveness.

What this suggests is that moving to a culture and policy regime where it is widely known that citizens are under surveillance has a multiplier effect on their behaviour — making them fearful of investigated terms that they might guess would be part of that surveillance. If you look on page 33-34 of the paper you might well be surprised at how broad that brush is. While one could read this as supporting bans on such disclosures so that the bad guys keep searching and can be surveilled, it is not at all clear who was changing their behaviour. It may just be people who wanted to monitor their own government and perhaps bring to light governmental bad behaviour.

One thing is more certain, this adjustment is suggesting that moves like this one for the Australian government may be actually upsetting more citizens than they think and that might well add up in terms of votes. I’m sure that will be of interest to politicians who think supporting this legislation is innocuous.

Economists support carbon price

I have to admit that it saddens me that we are in 2014 and still need to lobby Australian politicians for something so blindingly obvious than a price on carbon but here we are. Coordinated by the World Wildlife Federation, today a letter signed by 59 economists (including myself) has been released. The text is below.

2014 ECONOMISTS¹ OPEN LETTER SUPPORTING A PRICE AND LIMIT ON CARBON POLLUTION

We are writing this open letter as a group of concerned economists with a broad range of personal political views, but united in the judgment that a well-designed mechanism that puts a price and limit on carbon pollution is the most economically efficient way to reduce carbon emissions that cause global warming.

Such a mechanism is a necessary and desirable structural reform of the Australian economy, designed to change relative prices in a way that provides an effective incentive to consumers and producers to shift over time to more low-carbon, energy-efficient patterns of consumption and production. Australia’s major trading partners are acting on climate change and it is important to have an effective price and limit on pollution in place now to begin Australia’s transition to a low-carbon economy. A well-designed price and limit on carbon pollution has many benefits over alternative schemes, including:
• stable and long-term policy settings that improve certainty for business
• greater confidence that emission reduction targets will be met
• lower administrative cost and complexity
• the ability to link to other global schemes, such as emissions trading schemes operating in Europe, China and the United States
• incentives for consumers to reduce their demand for emissions-intensive goods
• incorporation of the cost of the damages caused by carbon emissions into business decisions, by requiring companies to pay to pollute.
The Intergovernmental Panel on Climate Change has made it clear that human influence, through activities such as accelerated and large scale burning of fossil fuels and clearing of forests, is warming the globe and that the impacts of climate change are being felt across the world. These findings are supported by the leading scientific bodies of the world, including the CSIRO and the Australian Academy of Science.

Australia can and should do its fair share to contribute to global emissions cuts, which will require Australia to make significant and sustained reductions in emissions and transition to a low-carbon economy. Clear short-, medium- and long-term targets to limit emissions would guide expectations. It is important therefore to provide stable, long-term policy that can meet deeper cuts in the future, and that improves certainty for business and investors to begin an orderly transition to cleaner technology.

We urge all Members of Parliament and Senators to work in the national interest towards lasting agreement on a fair, economically efficient and environmentally effective policy to price and limit carbon emissions.

Email Subscriptions: A Change

There are some of you who have subscribed to posts from this blog via email. The service used is a paid one (Feedblitz) but these days there are actually free ones that are the same, if not better. Consequently, I am going to discontinue that service.

If you want to keep subscribing, please enter your email in the sidebar to the right. This is the WordPress service and it looks excellent. Alternatively you might want to try out Blogtrottr.

Efficiency Improvements to Australian Health Insurance

Successive Australian governments have rested on their laurels regarding reforming health insurance. However, Stephen King and I have always maintained that there was more to be done to ensure welfare gains at the margin. This is why we re-released our book, Finishing the Job, this year ($1 at Amazon and free on iBooks). Our theory (published in the Economic Record in 2003) was that Australia could gain from moving from a system where private treatments were paid for at full cost to one where they were a ‘top up’ over public treatments.

Liran Einav, Amy Finkelstein and Heidi Williams have just released a paper that provides support for this. Here is the abstract.

We present a simple framework to illustrate the welfare consequences of a “top up” health insurance policy that allows patients to pay the incremental price for more expensive treatment options. We contrast it with common alternative policies that require essentially no incremental payments for more expensive treatments (as in the United States), or require patients to pay the full costs of more expensive treatments (as in the United Kingdom). We provide an empirical illustration of this welfare analysis in the context of treatment choices among breast cancer patients, where lumpectomy with radiation therapy is a more expensive treatment than mastectomy, with similar average health benefits. We use variation in distance to the nearest radiation facility to estimate the relative demand for lumpectomy and mastectomy. Extrapolating the resultant demand curve (grossly) out of sample, our estimates suggest that the “top-up” policy, which achieves the efficient treatment decision, increases total welfare by $700-2,500 per patient relative to the current US “full coverage” policy, and by $700-1,800 per patient relative to the UK “no top up” policy. While we caution against putting much weight on our specific estimates, the analysis illustrates the potential welfare gains from more efficient reimbursement policies for medical treatments. We also briefly discuss additional tradeoffs that arise from the top-up and UK-style policies, which both lead to additional (ex-ante) risk exposure.

These are quite large estimates for just a single treatment type. It provides strong support that health insurance reform should still be on the Australian policy agenda.

‘Out of the Box’ thinking on inequality

Whatever you might think about it, good or bad, there is ample evidence that, in countries all around the world, the rich are getting richer. Best-selling economist, Thomas Piketty, has confirmed it using a wealth of data, alongside an admittedly more controversial opinion that it will continue. But ultimately, whatever the concerns about wealth disparities are, those concerned have a starting place for action: they want the rich to pay more in taxes.

To be sure, there have been ample periods in history where such calls to tax the rich have been successful. This is why I am sure that many rich, who would prefer not to hand over their income or wealth to the government, are themselves concerned. Either they will end up paying more or start to exist in a broader society where many people think they are gaming the system to their own ends.

I’m here to propose a fresh perspective at this issue. It is one that asks people to give a little in their attitude but otherwise not take any actions other than ones that are purely voluntary. To do this, the government should take a leaf out of the private sector’s book and learn better ways to extracting money from wealthy people.

Whatever you might think about how markets lead to situations where the wealthy have benefits, it is also the case that they have been very imaginative at convincing the rich to part with that wealth. Let’s begin with the airlines.

As David Owen recently investigated, airlines spend up to a half a million dollars to install first class seats to attract rich patrons. The tickets for those seats can run up to $20,000 for perhaps 14 hours of use. Better still, they are rated highly by their users even though, in effect, stripped of glamour, it is not much more than a dorm room shared with 10 or so other people. That you can ask people to shell out that much for so little should give us pause.

This type of phenomenon occurs everywhere. Airlines have continued it by awarding ‘status’ associated with frequent flyer use as have credit card companies. Luxury products in jewellery, fashion, cars and other things sell for well above their cost of manufacturer or their functional value. And, as so many have noted, it is often the conspicuous nature of such expenditures — especially what they tell the rich about each other — that drives demand. After all, in first class, the rich check out who else is with them. I don’t see that happening in coach.

A new approach

Which brings me back to taxes. The issue with taxes is that they are an inherently private activity. We have set ourselves up to ensure no one outside of the IRS, and potentially not even they, know about our income and wealth. While a rich person may lament being under-appreciated for the tax contributions they do make, the system drives a lack of transparency. This is not a choice the private sector would make. After all, charities who target the wealthy rarely do so with a plea that all remains private. A gala ball and big awards remain standard fare.

Put this way, there is no reason why the government could not to the same. It knows precisely how many dollars each individual has paid. And it could use that knowledge to set up their own status and recognition system. Imagine, for instance, a ‘US Platinum’ status which is conferred on individuals who have made one billion dollars in actual tax payments over the last decade. Each year those who had reached this threshold would receive their recognition at the White House or Capitol. Of course, if one wanted to keep such things private, they could opt out of the program. Hence, it is purely voluntary.

The new status could come with other benefits beyond public recognition. Taking a leaf from the airlines, recipients would receive a Platinum card entitling them to various perks, from an easy time at airports and wherever government lines are (such as the DMV) but also to favoured treatment in dealing with government agencies. To be sure, they might receive those things already but this would allow it all to be transparent.

More importantly, the government could be imaginative about how status may be used so that recipients could receive their due recognition. As I already mentioned, it is by playing on the conspicuous nature of consumption amongst other rich people that private businesses extract more from the rich. The government could do the same thing by ensuring that wherever the rich congregate, it is clear who has status and who does not. The British have a system that, while not tied to taxes as I have proposed here, does that by awarding knights and dames. Australia has recently decided to re-adopt the same system (that’s the benefit of outsourcing your head of state to a millennium old dynasty). In the tax-based system, the same recognition would arise with the, I’ll admit, consciously manipulative: “you say your rich but I don’t see you with your Platinum pin, what gives?” I suspect opting out will be rare.

At the margin, one could imagine that this would change the attitudes of the rich towards spending money on activities designed to reduce the amount of tax they had to pay. Of course, once you have got your one billion dollar threshold, you might tax avoid with abandon thereafter but let’s face it, extracting more from those at that level is hardly worth the effort. There is a sense in which a fair share has been paid.

Potential Objections

There would, of course, be things to object to with all of this. First, there is the notion that the government would be celebrating the pure rich. That is, of course, a feature here so seeing it as so requires an attitude change. It is not unprecedented for the government to confer status: it does so for veterans and could do more there. Would it be so bad if those who paid for the tanks also received some recognition too? Remember, the award only goes to those who have signed checks to the US government.

Second, what about charities? Shouldn’t contributions to charities or non-profits also count toward the US Platinum status? It is true that they give but they receive separate recognition for that already. What I am arguing for here is for balance in that recognition with whatever consequence that means for the balance of contributions.

Third, what about those who aren’t rich? Don’t they contribute? Of course they do, but one issue at a time. There can be other awards for other contributions. What I am suggesting here is that there is a new awarded tied objectively and unapologetically to pure money given to the US government. It is a missing element in public recognition.

Fourth, won’t this just entrench rich dynasties with more benefits? This is a concern but I would ensure the status is only conferred to individuals. That means that if you should pass away, the status would not be given to your children. The private sector doesn’t do that and neither should the government. They would have to earn it the same way as everyone else although they could get a head start by paying their share of any inherited estate to the government with an estate tax.

Fifth, even one billion dollars seems a tad high a threshold, shouldn’t there be others? Yes, that number was pulled out of the air but my goal was to start at the long tail of the income distribution. One can imagine that different levels may occur for different tax payments. The precise details would require study but the model the airlines use is a pretty good place to start.

Finally, if this works, won’t it mean that the rich will end up paying more taxes in total? Sometimes the rich travel more just to improve their airline status. Might some just pay more than they have to in order to do the same? Won’t that reduce incentives as much as higher tax rates would?

To which I say, if that occurs, bravo! Our job is done. Self-redistribution is the ultimate voluntary act and because it is something people choose to do rather than are forced to do, it must be something they prefer. In other words, how great would it be for incentives if the rich tried to get richer so they could pay more taxes and earn the benefits that accrue from it? That sounds like a win-win for the political and economic ages.

An edited version of this article first appeared at The Conversation.

Inspiration for this idea came from Scott Adams who made a convincing but sadly ignored (until now) call to start thinking in more innovative ways about taxing the rich.

Letter to IACO on Carbon Emissions

I put my name this week to a letter organised by the WWF on airline emissions. Basically, while, in general, I am in favour of markets that allow meaningful offsets of emissions I am concerned that, in this instance, they do not appropriately offset the emissions generated (as evidenced by the very low costs associated with emissions offsets on airline sites). The emission offsets themselves have to be priced into the market in an appropriate way or there is the possibility of abuse. Apparently, I am in good company being worried that the cost of carbon will not be reflected quickly enough with current proposals.

As the ICAO Council and its technical committees develop the global market-based measure over the next few years, the biggest question they must face is at what level to price that risk. That is, how large an incentive is needed for economic agents to cut back on the production of emissions by an appropriate amount? The answer is that for all these agents—whether consumers, businesses, entrepreneurs, or investors—the level of the incentive should equal the expected present value of the discounted damages that may be created by the production of emissions. In other words, the right price for every amount of carbon emitted into the atmosphere should reflect the expected cost of these emissions to society as a whole, taking into account the risks that they create.

Economists refer to this value as the social cost of carbon. Several reputable studies have attempted to calculate the social cost of carbon. The Stern Review estimated it to be about US$85 per metric ton of carbon dioxide emitted into the atmosphere. The recently revised official US government value is $37 per metric ton.

Unfortunately, all available evidence suggests that many countries within ICAO and the aviation industry support a type of market-based measure, which would allow airlines to buy emissions offsets in order to meet an already weak 2020 carbon neutrality target. If ICAO adopts this approach, it would not bend the aviation industry’s total emissions downward and thus would fall short of being a meaningful policy. Such a market-based measure that fails to create appropriate incentives could set a bad precedent and would waste a significant opportunity to move the global climate response forward.

Basically, there hasn’t been enough innovation in airlines to give us confidence as opposed to ensuring people substitute away from airline travel (especially for meetings) in the short and medium term.

Cyberbullying hysteria

From what I can gather, Australian politicians and the media are gearing up for some good old hysteria with regard to cyberbullying. And as part of the process is a recourse to regulation of social media sites to apparently deal with the problem.

For that reason, I thought I’d link to some reminders of actual evidence that suggests a more thoughtful approach:

  • Cyberbullying is just bullying and what we know from bullying is that it must be treated school by school and family by family and that entering the formal legal process is potentially destructive and never helpful to the victims. For this, read Emily Bazelon’s thoughful book.
  • Laws that prevent under 13’s from engaging in social media take control and discretion away from parents and educators and are making the problem worse. See here, here and here.
  • Teenagers engage in social media in a fairly sophisticated way it is important parents understand exactly what is going on before intervening. For this there is no better read than danah boyd’s latest book.

Chris Berg is right that an online watchdog is unlikely to help but he is not correct to say there are adequate legal protections. The point is, as he hints to at the end of his article, that legal protections are the wrong approach here.

It’s time for Flappy Economist

While most of the world think that Flappy Bird is fairly useless and without redeeming value, some think there is opportunity.

Folks, thanks to my son, I bring you Flappy Economist. In it you control the money supply but you have to balance between the economy going between disastrous unemployment or rampant inflation. Of course, if you fail then the economy dies.

You’ll also notice that the economy has a Keynesian bias in that you have to keep active with enough money to stop the economy falling into depression. I am sure that others can work on an Austrian version.

10 Years since Finishing the Job

Ten years ago Stephen King and I wrote a book called Finishing the Job. It was published by Melbourne University Press who timed it to coincide with just missing a Federal election and another book of theirs also dealing with economic policy. Consequently, it did not get the interest we had hoped for.

We continued to think the policy ideas as they related to housing, health insurance, education funding and road congestion pricing were very important but alas the text was locked down with the publishers who saw little interest in putting out new editions.

I noticed recently that the book no longer is in print. So I have seized the moment to re-release it for the first time in electronic book format. You can get it worldwide (rare for Australian books) on Amazon Kindle (for $0.99 but DRM free) or on iBooks (a prettier version and for free; Amazon doesn’t allow that) or as a pdf. The version was our final draft — before MUP made it different. So it is the authors’ cut. I also designed the cover to be something I could be more proud of than the bland thing MUP produced.

The book is dated in that it was written in 2004 and some things would need updating. But nothing has really happened on those policies in Australia so the ideas themselves are still fresh. If there is sufficient interest, Stephen and I may update it and give it all another push.

Supply side effects of direct action

This is a guest post by Evan Calford, a PhD Student at UBC

This post seeks to describe one particular concern with the implementation of the Australian Government’s Direct Action policy, as laid out in the recent Green Paper. There are many concerns with the Green Paper that have already been pointed out which, in the interests of space, I shall ignore. I wish to focus solely on the potential change in producer behaviour induced by Direct Action. I shall call this change in behaviour the supply-side response to the policy.

Direct action works by providing incentives to producers to reduce their carbon dioxide equivalent (CO2-e) emissions; the Government will, through a reverse-auction tender process, pay companies for reducing their emissions beneath their historical emissions levels. This causes firms to face an effective marginal cost for emissions, when they are operating beneath their baseline emissions levels (the direct action plan will not include penalties for firms that exceed their historical emissions levels).

Some media coverage has been worried that the lack of upside penalties means that firms won’t make any emissions reductions. This seems backwards, as it implies that firms will leave cash on the table. The effect of using a reverse-auction tender process will be to pay firms more than the actual cost of their emissions reductions. If the tender process uses a second price approach (so that all firms will be paid at the rate of the most expensive reductions contracted for at that auction) then this conclusion is straightforward. Even in a first price auction (each firm is paid what they bid) the conclusion is still valid – in equilibrium, firms will bump up their asking prices above actual emissions reduction costs.

This implies that firms (and industries) who make emissions reductions are being subsidized relative to the rest of the economy. It is unclear, given the contents of the green paper, what the relationship between quantity of production and the size of subsidy will be. The exact accounting mechanism used for changes in production and new entrants will be critical in determining this relationship. This point should be obvious to anyone who has thought about how to design carbon pollution abatement schemes, and seems to be understood in the green paper. A more subtle point is that, in a dynamic world, even if changes in production and new entrants are accounted for in a manner which does not distort incentives the mere existence of a direct action plan, and associated subsidies, will increase production levels in high emissions intensity industries.

To understand why this is true, consider a simplified scenario in which a firm that reduces emissions is paid a for the costs of these reductions, plus an annual lump sum payment (to a first approximation, this is what a well-designed direct action scheme will achieve). Under a CPRS or carbon tax, some high emissions intensity firms would shut down due to the higher costs. These shutdowns may not occur under the direct action scheme because the annual lump sum payment will decrease the firm’s average variable costs and affect the shut down decision. The direct action plan will see less reallocation of resources from high emissions intensity sectors to low emissions intensity sectors.

Furthermore, the annual lump sum payment can influence future investment decisions by changing relative rates of returns between industries. In a competitive environment we would expect, in the long run, rates of returns to be equalized across industries; externally induced changes in rates of return can lead to changes in resource allocations between industries.

It is natural to ask “how much effect will the supply response have on emissions levels?” This is a very difficult question to answer. A paper published by ABARE (now ABARES) in 2010 tried to estimate the supply response effect for the agriculture industry [disclosure – I am the lead author of the ABARE paper]. The paper made use of a computable general equilibrium model, developed by ABARE and Treasury, called the Global Trade and Environment Model (GTEM) which embeds many assumptions (see the paper for details).

supplyeffect

The key graph in the paper is figure d on page 24. This graph demonstrates that, by 2030, applying an emissions offsets scheme to agriculture (the emissions offsets scheme modelled is roughly comparable to the Government’s Direct Action policy) would have reduced Australian agricultural emissions by almost 8 million tonnes of CO2-e, relative to 2030 emissions without any specific emissions reduction policies for agriculture. However, this 8 Mt conceals the fact that agriculture would have made efficiency improvements equivalent to a reduction of over 10 Mt of CO2-e. The difference between these two numbers (2.6 Mt of CO2-e, or roughly 25% of the efficiency improvements) is the effect of the supply response caused by subsidies to the agricultural industry. The subsidy causes overall agricultural production to increase and causes a substitution away from low emissions intensity cropping to high emissions intensity beef cattle and dairy production.

To put it another way, you need to pay for 10 million tonnes of `direct action’ to get 8 million tonnes of emissions reductions.

Note that these figures are specific to agriculture, and depend on a specific set of modelling assumptions. Even when viewed in context, these numbers are best thought of as an educated best guess rather than a pinpoint prediction. The supply response effect of the Direct Action plan could be bigger, or smaller, than the 25% estimated by ABARE for the agricultural sectors. I don’t know the answer to the question “how much effect will the supply response have on emissions levels?” But I do know that the Government (in particular, ABARES and Treasury) have the expertise to try and answer this question, and that knowing the answer is crucial for designing an effective Direct Action policy.