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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 23 Jun 2012 03:33 AM PDT
Internet connectivity here in Kenya has been far better than I expected. The hotels have the usual set of problems, I could hardly connect at either one we've stayed at so far due to lack of adequate bandwidth to meet demand. But 3G access and coverage through Safaricom has been surprisingly good.
Why is that? It probably has something to do with the electronic money transfer system here in Kenya, which appears to be more advanced than in other countries in Africa. Such a system requires a widespread, dependable network, and that gives widespread, dependable access to the internet more generally.
But that brings up another question, why is electronic money used here more than in other countries?
The answer begins with the fact that in most countries the financial sector is very powerful politically. Put that together with the fact that the development of electronic money eats into the profits of the traditional financial institutions, and it's easy to understand how and why existing financial institutions have used regulatory blocks to hinder the development of the electronic money system in most countries.
If that's the case, why wasn't the financial sector as effective at blocking the development of this type of transactions system in Kenya? The government owns half of Safaricom, and that probably explains why attempts to use regulatory hurdles to impede the development of the system have been relatively ineffective (there are regulatory restrictions, e.g. Safaricom cannot pay interest on the currency balances it holds for people, but they haven't impeded the ability of Safaricom to establish substantial monopoly power).
As I understand it, Safaricom took large losses as the infrastructure needed to support the system was being built. But now that it largely in place, Safaricom gets a fee on each and every financial transaction, and it appears to be doing better.
I need to think about this more, but it this seems to be a case where government ownership is actually beneficial in overcoming the hurdles that stand in the way of building such a system (and the government is using devices such as exclusive contracts with dealers to make sure its monoploly power continues).  Of course, if government wasn't so corrupt, then it would be much harder to erect regulatory barriers and perhaps government ownership wouldn't be needed. But when it is corrupt, giving government a large stake in the outcome seems to make a difference.
Posted: 23 Jun 2012 03:15 AM PDT
Luigi Zingales:
No Shareholders' Spring, by Luigi Zingales, Commentary, Project Syndicate: The ongoing global economic crisis is not only causing incumbent governments to lose elections; it is also shaking corporate boards. ... Frustrated by low returns, investors are much feistier.
Shareholder activists can also claim other (at least partial) victories at Yahoo!, where a shareholder activist forced the newly appointed CEO to resign for falsifying his educational credentials.
But many commentators' hyperbolic depiction of a "shareholders' spring," with its resonance of ousted Arab dictators, is inappropriate for several reasons, not the least of which is the fact that the Arab Spring actually toppled regimes. At the moment, the current shareholders' revolt is failing to achieve any significant result. ...
Posted: 23 Jun 2012 02:43 AM PDT
Dan Little:
How much inequality?, UnderstandingSociety: How much inequality is too much? Answers range from Gracchus Babeuf (all inequalities are unjust) to Ayn Rand (there is no moral limit on the extent of inequalities a society can embody). Is there any reasoned basis for answering the question? What kinds of criteria might we use to try to answer this kind of question?

John Rawls offered a fairly simple criterion of the extent of inequalities that a just society can tolerate in A Theory of Justice. His background assumption is that the wealth of a society is a joint product of all members of society. The rules of distribution create more or less inequality among citizens. Citizens are concerned to "protect" their interests in case they wind up being in the worst-off positions in society. So justice requires that institutions should create the least degree of inequalities subject to maximizing the position of the least-well-off position in society. (He also stipulated an equality of opportunity principle: positions need to be open to all through a fair system of competition.) If the empirical theory is true that economic inequalities sometimes create more wealth (through incentive effects), then it is just to increase inequalities up to the point where any further increase would leave the position of the least-well-off member of society unchanged. This is the least system of inequalities subject to maximizing the position of the least-well-off. Rawls justifies this principle (the difference principle) on the ground that it expresses an important sense of fairness: everyone is fairly treated when higher incomes are assigned to some individuals only when doing so benefits all individuals.

By this principle, current inequalities in the United States and Great Britain are demonstrably unjust: it would obviously be possible to lower the incomes of the 1 percent without lowering the income of the bottom forty percent. So current inequalities are plainly more extensive than they need to be for the purpose of increasing overall output and improving the condition of the least-well-off.

Joseph Stiglitz offers a different kind of theory of inequality in his recent The Price of Inequality: How Today's Divided Society Endangers Our Future. (Here is the anchor essay as it appeared in Vanity Fair; link.) His argument is a pragmatic one based on a theory of social stability. Essentially he argues that when inequalities become too extreme in a given society they breed social conflict and instability. This happens perhaps because of raw deprivation -- the bottom 40% really do have pretty desperate lives -- but more because of what Stiglitz identifies as erosion of the social contract. Here is how he puts the point in the Vanity Fair article:
Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from "food insecurity")—given all this, there is ample evidence that something has blocked the vaunted "trickling down" from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.
So for Stiglitz, inequality is not simply a moral issue, but is also an issue of social stability and cohesion.

Here is another way of answering the question: perhaps extreme inequalities are actually bad for a population's health. There is one sense in which this is obviously true: extremely poor people have worse health outcomes than affluent people. But maybe the simple fact of inequalities is itself a toxic influence on public health, for poor and rich alike. This is the argument that Richard Wilkinson and Kate Pickett make in The Spirit Level: Why Greater Equality Makes Societies Stronger. Their argument is a complex one that suggests several causal explanations for why this might be the case; but their core idea is that great inequalities create widespread "stress" that is harmful to each individual's health. Wilkinson and Pickett are public health experts and their argument is a cross-national statistical one.

So we might adapt their analysis into an answer to the question posed above: inequalities should be reduced until there is not measurable harm to public health. (These arguments are considered in earlier posts.)

There is even a utilitarian argument for greater equality of income. If we accept the plausible point that income makes a diminishing marginal contribution to happiness as income rises (perhaps after some inflection point), then under many realistic circumstances a more equal society with lower GNP will have a higher level of happiness than a more unequal society with higher GNP. Lower-income people have more to gain from an additional $1000 of income than higher-income people. So if we think it is a good thing to maximize happiness, then we ought to regulate inequalities accordingly. Benjamin Page makes some of these arguments in an Institute for Research on Poverty position paper, "Utilitarian Arguments for Equality" (link).

Are we forced to choose among these frameworks in order to conclude that our economy has generated vastly too wide a set of inequalities of wealth and income? No, we aren't, because these arguments are mutually supportive. A system of greater equality, regulated by a tax system designed for that purpose, would be more fair, more supportive of equality of opportunity, more harmonious, likely healthier, and likely happier. We have lots of good reasons for preferring greater equality of wealth and income and lots of good reasons to reject the "anything goes" philosophy that currently drives much of the political discourse on the right.
Posted: 23 Jun 2012 12:06 AM PDT

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