Sanjeev Sabhlok's blog

Thoughts on economics and liberty

Misplaced environmentalism

I came across "The Economics of Ecosystems and Biodiversity Interim Report" by The Economics of Ecosystems and Biodiversity (TEEB) here, being highly recommended by some, and which apparently raises some fundamental questions.

However, as soon as I opened the report and came to the Preface (page 5) I found such absurd claims that I've shut the report and decided not to waste time on it further. 

1) "we find poverty and the loss of ecosystems and biodiversity to be inextricably intertwined."

False. Poverty is related to socialist governance everywhere in the world including absence of well-defined property rights. The loot of forests in India by the corrupt bureaucrats and ministers is related to poverty not directly but through the mechanism of bad governance. Lack of freedom is the ONLY perfect correlate of poverty. Societies without the rule of law and freedom suffer environmental degradation AND poverty. That is an iron law that can't be violated.

2) "The second issue is of ethics – risks, uncertainty, and discounting the future, issues which have also been raised in the Stern Review."

This is quite nonsensical. It is like asking the cave man to worry for our needs. We get wealthier over time. That rules out the idea of caring disproportionately for our future generations. If we take care of ourselves well enough, the future will look after itself. Ramsay was wrong. We must always focus on ourselves.

This is another form of the invisible hand: the more you look after your own self-interest the better the society becomes. 

Yes, by all means price externalities and care for the environment, but for that the Coase theorem, along with Pigovian taxes, should do us perfectly well. Standard economics is PERFECTLY capable of dealing with all environmental issues. 

I refer the writers of this report to Steven Landsburg's book, The Armchair Economist who points out numerous fundamental errors of environmentalists. I also refer the writers of this report to Julian Simon's The Ulimate Resource. And to my books.

ADDENDUM 14 August 2010
Comments from a fellow economist in red below) so I thought I'd deal with them in the main blog

On (1) – I reckon you're right, but the existence of one explanatory variable for poverty (bad governance) doesn't negate the existence of other explanatory variables. I highly doubt the correlation (beta coefficient) on the variable for environmental damage/depletion of natural capital would be zero. You might question causation – e.g. bad governance leads to excessive or premature depletion of natural capital.

My response: The most basic flaw with the econometric way of thinking is to start modelling without a theory. Science is a theory-based exercise, not an exercise of fitting the curve. There is no theory that leads directly from environmental damage to poverty. But there is a very strong theory that leads from lack of freedom, through bad governance, to BOTH environmental damage and poverty. Explanatory variables must be independent to rule out multicollinearity. In this case I can't see how the environmental damage variable is independent. Why is there environmental damage? That is the cause. And that is bad governance which, in turn, is predicted by the lack of freedom in society.

General comment: Economists are good at maximising the size of the cake and poor at splitting the cake (an equity issue – which we leave to politics). The same argument might extend to notions of 'sustainability' or 'inter-generation equity'. That said, we also understand that there is a difference between dynamic and static models – e.g. the idea of 'investment'. This suggests that economists can probably help define the amorphous concept of 'sustainability' (e.g. optimisation of consumption/investment over time). I imagine that even the cave man put a few morsels of mammoth meat aside for a rainy day (so to speak)… to last through winter…  or maybe even to feed its (unborn?) offspring. Another idea: future generations can not express their preferences in any present market (even where they exist). Is this a type of (inter-termporal) market failure which will mean society will more often than not get the inter-temporal optimisation 'wrong'? 

My response: I disagree that there is any equity issue in society. The ONLY equity issue is that of deep poverty. And that means a social minimum provided for through the social insurance program. The need for such insurance has dropped significantly in the West but these societies are now on a ruinous path because they want a welfare state (semi-socialist), thus destroying all incentives to work and to gain skills. Equity is a productivity demolishing concept, if used in any sense beyond the social minimum.

Let me explain the inter-generational issue thus: If I care for the environment, it is incumbent on me to take care of it during my lifetime, so I gain its benefits. That is why the economist insists on resolving negative externalities TODAY, for the current generation. If I am able to ensure a good clean environment today for myself, then would it not be tautological that a good clean environment would be passed on to my kids? So by taking care of MYSELF I take care of my kids. That is how the Ramsay problem is solved. By becoming rich I provide better for my kids. By ensuring a clean environment today, I ensure a clean environment for my kids. Let us take care of OURSELVES and our kids will find it easier to take care of themselves. Let us generate knowledge, let us generate wealth, let us do the right thing for the environment. That's all that is needed – or expected of us. Any other conception is misguided. In DOF I explain this at length. It is called enlightened self-interest.

In any event, the best way to conserve the environment is to apply classical economic theories and either ensure that the offender internalises the externality, or where possible, property rights enable the relevant parties to negotiate an outcome (Coase solution). I'm not arguing against regulatory standards in this area, but I'm arguing for restraint and good cost-benefit analyses.   

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An economist after my heart: Steve Landsburg

As I noted here I don't know what led me to my earlier accidental ignorance of Steve Landsburg's outstanding books. But fortunately I'm now actively working to restore my hitherto unknown loss!

After reading two of them: More Sex is Safer Sex and The Armchair Economist I find that both are outstanding, but perhaps The Armchair Economist  is the best layman's economics book so far (or close to the best)

I now keenly await the publication of The Big Questions – an advance copy of which has been received by the American Economic Review which annotated it in its recent journal, but which the Book Depository tracking system tells me is still not published. When I receive it (in the next few weeks surely) I'll talk about it as well – time permitting (I don't review all the books I read!).

In the meanwhile, here's a very brief review of The Armchair Economist.

Review

A fabulous book that takes you across a good number of foundational economic concepts, but more importantly, provides a deep insight into the way a good economist should think. 

In particular I liked his exposition of the Coase theorem and the benefits of using cost-benefit analysis (CBA) to assess the value of a policy. Chapter 10 is absolutely fantastic ("Choosing sides in the drug war: how the Atlantic Monthly got it wrong"). Simple principles with far-reaching implications are discussed, such as: Only individuals matter and All individuals matter equally. Also:

Principle 1: Tax revenues are not a net benefit, and a reduction in tax revenues is not a net cost.

Principle 2: A cost is a cost, no matter who bears it.

Principle 3: A good is a good, no matter who owns it.

Principle 4: Voluntary consumption is a good thing.

Principle 5: Don't double count.

It is true that CBA has philosophical and practical implications that are hard to fully reconcile (and I talk about some of these briefly in DOF in relation to the limits of utilitatrianism, but without doubt it remains the clearest and most objective principle for policy making; almost "scientific". 

In a couple of areas his views challenge concepts that I currently hold – such as in occupational health and safety where he suggests (at p.91) that miners should bear the costs of accidents so that every cost-justified method of preventing accidents can be undertaken. A similar unexepected approach is offered for the justice system, to ensure that judges reduce their tendency to lock up people for minor offences (or in some cases, depending on the design of the system, to let most people free). It will take me at least another round of reading the book carefully, and asking questions, before I can start owning some of Landsburg's redical ideas. But his points are deep and well-argued. It is a hard ask to find counter-arguments.

Another area where I am unable to follow his argument is in relation to dollar-cost averaging which he believes is bad financial advice. I'm not convinced because I find it sensible to diversify risk by investing in an index-based fund through a monthly drip-feed. In my view this is sensible given one's ignorance about details of the millions of thing that impact an economy, but with broad knowledge of the overall long-term trend of economic growth. The alternative to dollar-cost averaging through a drip-feed is to pick shares (like Warren Buffet does) and time the market which is too time-expensive and likely to be a fool's errand in most cases. But maybe I've misunderstood what he is trying to say, and perhaps I need to read his ideas again.

If you want to expand your critical thinking abilities, then read this book and re-read it. I plan to re-read it at least once. That is a privileged status I have accorded to less than two per cent of the books I've read in my life. So this is definitely a top-end book. Well worth having in your libray, and reading it at least twice.

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Good work but not good enough (Lok Satta)

I received an impressive update on JP's work over the past year in his constituency (see below).

Nice. Good work.

My only issue: This doesn't change policy at any level, only implements existing policies possibly (not necessarily) a little better. It is not a systemic reform of any sort. If transforming India was simply a matter of implementing existing policies better both JP and I not only could have done far more than a mere MLA, but have actually delivered far, far more in our roles as Secretaries to Government, Directors of Rural Development etc. For instance, I can't even begin to list things like the hundreds of school buildings I got built, the kilometers of roads constructed, in rural areas, the massive irrigation programmes implemented, etc., etc.

This kind of 'achievement' will simply not do. We need a radical shift in major policies and that needs a clear majority in parliament. 

The problems of India requires not implementation of existing policies as a solution, but a total change in most policies. That is where JP needs to show leadership. Unfortunately, I'm not aware of any clear policy leadership that LS has, nor can any single MLA deliver it in any case. I therefore oppose the current LS strategy and have made it abundantly clear on my blog. LS must change its strategy if it is not to remain a bit player on the political scene. 

A report on work by JP in the Kukatpally constituency 

For last few months lot of developments happening at high pace in Kukatpally constituency and below few are worth to highlight:

Schools:

1. Dr. JP's proposal of 23 new class rooms in 8 schools in Kukatpally has been approved and another 30 new class rooms for 5 high schools is under approval process. All in all, 53 new class rooms for total 13 schools will be ready by next year.

2. Total 17 Primary schools are identified which are being run in community halls. Loksatta has proposed lands in kukatpally for constructing brand new buildings for these  schools and submitted to GHMC for approval.

3. Loksatta requested Govt. 1 acre of land for construction of High Schools in Babbu Guda and amlost in the final approval to sanction land.

4. Total 23 new Toilets in 5 High Schools will be ready by this year.

5. Loksatta requested Govt. to outsource Mid day Meal preparation to Naandi Foundation for all 46 govt. schools in Kukatpally. It is on the minister table for final approval.

6. One of the Loksatta members donated Rs. 10 Lakhs for adoption of a High School. An Italian company and a team of volunteers from American Bank  came  forward to work with Loksatta to improve the quality of education in one of the schools.

7. A two month professional English Language course for all 10th Class students in Kukatpally High Schools will start this week in a phased fashion. 

8. Loksatta is also working hard to improve the academic standards in all these schools and strategies are being planned for the same.

9. Proposed 2 Acres of land for construction of Govt. Degree College, in Kukatpally which is presently running in shifts, in the premises of Govt. Jr. College, Kukatpally

Roads & Drainage:

1. An undergroung Railway Bridge is constructed at Safdhar Nagar in Mothinagar division with project cost of Rs.1.69 Crores. It is the shortest root to Moosapet and Mothinagar.

2. Street lights are arranged through out Vasanthnagar, Dilsukhnagar colony and Satyanarayana Swamy Colony total worth of Rs. 14 Lakhs 

3. After Dr. JP  elected, works on 37 BT roads & 66 CC roads were completed in the whole constituency and works on 8 BT roads & 25 CC roads are in progress. Apart from these there are several other roads that are in the pipeline.

4. All the 14 lakes present in Kukatpally are surveyed and FTL (Full Tank Level) stones are laid for 3 lakes. To avoid encroachments, efforts are in progress with different  government departments to make sure that the registrations of the lands with in the boundaries of these 14 lakes are not being done.

5. Construction of 3 SULABH Complexes at busy public places is proposed.

6. A proposal is sent to the govt. for shifting the Kukatpally Truck Parking area and to develop the same place for community use, construction of an auditorium and a shopping complex.

7. Rain Water drainage pipe line from Vasanthnagar to Bagath Singh Nagar is completed in KPHB Division (Worth 50 Lakhs).

8. The long pending issue of Under Ground Drainage system which affects 2 lakh people across 11 colonies/slums is laid in the constituency.

Traffic & Transport :

1. Total 5 foot over bridges on proposal are sanctioned to be set up at 5 different locations in Kukatpally Assembly Constituency.

     a. JNTU Junction

     b. Kukatpally Village Bus Stop

     c. Moosapet Junction

     d. Balanagar area

     e. Begumpet.

2. Road from Moosapet ‘Y’ Junction to Miyapur on NH-9 is proposed for widening and providing the service roads from both left & right sides to control heavy traffic on this route.

3. To ease traffic in JNTU junction, two alternate roads to Hi-Tech city were sanctioned. First one through IDL factory and the second one through Moosapet

Health :

1. Urban Health Centre(UHC) and Primary Health Centre(PHC) in Kukatpally are not functioning because of no salaries paid to employees. The issue has been taken to concerned officials and work is under way to get their salaries paid regularly and re-instate the hospitals.

2. A free health checkup center is set up in Balanagar area; everyday a doctor voluntarily checks up the patients and occasionally provides medicines for free.

3. Free Eye, Thyroid & other Health checkup camps are conducted several times in the constituency.

Others :

1. KPHB Division 6th Phase Swimming Pool & Indoor Stadium construction work is in progress.

 

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Socialist USA: lessons for the world

Nicole Gelinas's article in City Journal is an absolute must-read. The gist of this long but well-argued article is this:

"Over the two decades leading up to 2008, financial markets were anything but free. The nuts-and-bolts government infrastructure that free markets require to thrive—healthy fear of failure, respect for the rule of law, and fair rules for everyone—was crumbling. The crisis books make clear, too, that Washington’s extraordinary rescues of Wall Street have eroded much of what’s left of free-market infrastructure in finance. Worse, Congress’s efforts to reform the industry will do yet more damage. The next time the financial world implodes, it will hurt the economy even more severely."

This article entirely confirms my views published in Freedom First  in January 2009. It is obvious that the USA is no longer the kind of society that the world can look up to. The freedoms of its citizens are on the back foot. It has aped the worst of Europe (welfare state) and the Keynesians have destroyed all semblance of economic sense. Their simplistic arguments (that display ZERO understanding of human incentives and human nature) have created massive amounts of moral hazard in the American monetary and financial systems, education and welfare systems,  and soon its health system. People like Greenspan, whom Ayn Rand at one time regarded highly as a votary of freedom, have bent over backwards to destroy freedom. The free market is almost dead. The heavy hand of the stupid gorilla – the state – now controls the levers of the American economy. 

What are the lessons from this for India? – That socialism is a dangerously attractive but guaranteed to be fatal mental disease. Even America, the great bastion of freedom, could not avoid this mental disease. It is therefore hurtling downwards into ignominy: and in the next 50 years if India and China become genuinely free, the power of the USA would be history. It is not Osama who has destroyed USA. It is Keynes; it is Rawls; it is the soft-touch American 'liberals' (not classical liberals like Hayek who no one listens to in America).

Each bout of 'saving' those who are too big to fail – by stealing from the tax payer – creates a guaranteed Ponzi game where even greater risks are taken. Finally, when the day of reckoning comes (and it always does come), the Emperor is found to have no clothes.

India was denuded by Nehru. The Keynesians and Rawlsians  have denuded the once great USA. A hollow shell remains. Images from Detroit reflect the end of America as  the once great nation of the past 200 years. Socialist ideal are ruinous beyond imagination. The most dangerous poison the human mind can create. If India has been a C-rated  economy for most of the past 60 years (on a sovereign risk scale of the S&P variety), USA has now clearly fallen from A to B. If India manages to follow some of the advice in BFN and gets its house in order in the next 10 years, and USA continues its downhill journey, then expect the tables to be easily reversed in the next 30 years. 

There is only ONE LESSON in economics: that there is no free lunch. Period. If you have  understood this lesson (and the subsidiary lesson of accountability – that I talk about at length in BFN and DOF) then you are done. Then you can govern and never fail. 

Reference

GELINAS, NICOLE, "Surveying the Wreckage: What can we learn from the top books on the financial crisis?", City Journal, Summer 2010, Vol. 20. No. 3.

ADDENDUM. The social security debacle in USA

http://www.economics21.org/commentary/fairly-understanding-simpson-bowles-social-security-proposal

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