tag:theconversation.com,2011:/uk/topics/economic-modelling-216/articlesEconomic modelling – The Conversation2023-12-20T15:23:52Ztag:theconversation.com,2011:article/2192712023-12-20T15:23:52Z2023-12-20T15:23:52ZThis Christmas, avoid slipping cash into your children’s stockings<figure><img src="https://images.theconversation.com/files/563670/original/file-20211213-19-1sx1oes.jpg?ixlib=rb-1.1.0&rect=47%2C51%2C1443%2C884&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A gift's value goes beyond its price tag.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Fake_one_dollar_with_Santa_Claus.jpg">Lloydoramcdowell / Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>What toy should I buy my niece for Christmas? No easy task, since I was never an eight-year-old girl. For my brother, a bottle of whisky. But hasn’t he stopped drinking it lately? And my aunt? The Prix Goncourt of the year, as always. But I’m not sure he’s interested in the story this time.</p>
<p>For my partner, it’s easier, I know her tastes and everything she already owns. In any case, no money for either of them - possibly a gift voucher if I don’t have time to scour the shops and websites. The economics of gift-giving never cease to fascinate me.</p>
<p>In the early 1990s, they baffled a young assistant professor at Yale University, Joel Waldfogel. Intrigued by the economic theory of rational consumer choice, Waldfogel took issue with the Christmas tradition of giving something to someone else <a href="https://www.amherst.edu/media/view/104699/original/christmas.pdf">without fully knowing their preferences</a>. Had he spent 50 dollars on a present for a loved-one, he reasoned, the recipient would have likely been better qualified to direct that money toward something more suited to their taste.</p>
<p>He then asked the students on his microeconomics course to estimate the price of the gifts they recently received for Christmas, and what they would be prepared to fork out for their gifts had they not received them. One person answered that the sweatshirt they found under the tree cost €50 in the shops, but that they would have only been willing to pay €43 had they had to buy it.</p>
<h2>Gift-giving: a deadweight loss?</h2>
<p>The young teaching assistant observes a systematic difference of around 20% between the two estimates of the students interviewed. Applying this ratio to the sales figure for Christmas 1992, he deduced that the exchange of gifts resulted in a deadweight loss to society of several billion dollars. To correct this inefficient allocation of resources, he recommended giving money rather than wrapped presents - i.e. a 50 euro note rather than 7 euros wasted on a surprise sweatshirt.</p>
<p>But his economic reasoning is flawed and absurd.</p>
<p>But before I explain why, let’s note that had his reasoning been correct, the loss of wealth would be even greater today. Spending on Christmas presents has risen considerably since the early 1990s. China and its low-cost production have been there.</p>
<p>Take toys, for example. The Middle Kingdom accounts for <a href="https://www.economist.com/graphic-detail/2017/12/25/china-is-still-a-toy-manufacturing-powerhouse">around three quarters of global production</a>.</p>
<p>All the companies in the rest of the world source their supplies or manufacture there. Even <a href="https://theconversation.com/economie-du-jouet-le-jeu-de-lego-52608">Lego ended up building a factory there</a>. European consumers appreciate this, having seen the price of toys steeply fall over the past decades. </p>
<p><iframe id="REZaV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/REZaV/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>At the same time as this unit decline, the budget allocated to Christmas presents is steadily increasing. In the United States, spending per household has increased by almost <a href="https://think.ing.com/reports/special-report-presents-of-mind-christmas-2016/">40% over the last 30 years</a>. Some people have a problem with this spending spree. Two out of ten Americans say they went into debt for Christmas. And just over one in two say it’s the time of year when they don’t have to worry about spending money. The same may be true for you. In any case, marketing experts and salespeople know this, and they’re having a field day trying to get us to spend money at this time of the year.</p>
<p>Had Waldfogel been right when he calculated that one-fifth of Christmas gift spending goes up in smoke, the bill - or rather the subtraction - would be even higher today. But there’s no need to worry because, as announced above, he’s wrong.</p>
<h2>Reciprocity</h2>
<p>Intuitively, this won’t surprise you. Imagine giving your partner money under the Christmas tree rather than a present. They’re unlikely to react any more positively than they would to a beautifully wrapped present. The same goes for the friend who has invited you to New Year’s Eve dinner, when you hand them a 10 or 20 euro note on the doorstep instead of a bottle of wine or a bouquet of flowers!</p>
<p>And Christmas presents are usually reciprocal. Imagine an exchange of envelopes between spouses, each containing 50 euros. Great, the two gifts cancel each other out! Note that the situation would undoubtedly be even trickier if one put far fewer notes in one’s envelope than the other.</p>
<p>Modern-day economists make no mistake. In 2013, nearly fifty of them, most of them teaching at Chicago, Harvard, MIT, Stanford and Berkeley, had been asked to respond to the following <a href="https://www.igmchicago.org/surveys/bah-humbug/">proposal</a>:</p>
<blockquote>
<p>“Giving specific gifts as party favours is inefficient because recipients could satisfy their preferences much better with cash.</p>
</blockquote>
<p>Only a small minority agreed. As for the seven winners of the "Nobel” prize for economics questioned in the group, they were unanimously against.</p>
<p>Anthropologists would surely have been even more unanimous. As keen <a href="https://journals.openedition.org/lectures/520">observers of giving</a> in traditional and modern societies, they know more about this complex subject than anyone else. They can only denounce the reductionism of Joel Waldfogel. But by looking to economics for a rebuttal, we can brush up our knowledge of consumer theory.</p>
<p>The loss between the gift of a wrapped present and the gift of money has its origins in the now outmoded model of a consumer who chooses what they buy in a perfectly rational way: they know their own preferences intimately and calculate, for all goods and on the basis of their means, what would maximise their pleasure, or utility, as the economists would say. Like <em>Homo œconomicus</em>, they are therefore unbeatable in their choice of purchases.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437177/original/file-20211213-21-1twe7l5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Christmas presents are usually reciprocated.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/vintagehalloweencollector/2084765580/">Dave/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Joel Waldfogel’s merit would then have lay in being the first to measure to what extent the person who chooses instead of the consumer is beaten. Except that his approach isn’t strictly orthodox. In the eyes of a purist, he is committing a sin: he is capturing utility through a monetary measure and comparing utility between people. In a way, this amounts to making money the universal instrument for measuring pleasure, and a dollar for the giver is worth as much as a dollar for the receiver, even though the former may be richer than the latter, or vice versa; something that is contested by theorists.</p>
<h2>The pleasure of giving</h2>
<p>Moreover, the <a href="https://www.nber.org/system/files/working_papers/w18687/w18687.pdf">theoretical model of the consumer</a> has shifted away from perfect rationality and is currently seeking to integrate the affects (feelings and emotions) and motivations (family devotion, altruism, socialisation, etc.) that guide its choices. The wrapped gift can therefore be appreciated as a signal of the giver’s attachment, because they have thought about it and <a href="https://sites.duke.edu/djepapers/files/2016/10/Yao.pdf">spent time choosing it</a>, or even because it simply provides a few minutes spent discovering a surprise, the time it takes to remove the ribbon and open the package.</p>
<p>In short, there’s more to a gift than its monetary value. What’s more, as soon as the question put to the students is no longer to estimate the price of the gift received, telling them to leave out the sentimental value, but to ask about its total value, understood as its material value plus its sentimental value, a <a href="https://www.jstor.org/stable/pdf/116876.pdf">gain rather than a loss</a> appears.</p>
<p>Strictly speaking, the donor’s satisfaction should also be taken into account. Isn’t it said that the pleasure of giving is often greater than the pleasure of receiving? The consumption of the gift received can also give rise to a <a href="https://www.jstor.org/stable/pdf/116876.pdf">positive feedback effect</a>, such as the smile and thanks of the recipient. </p>
<h2>Our relationship to gifts in practice</h2>
<p>After these considerations on how we should and could behave with our Christmas presents, it might be time to take a look at what happens in practice. What do the polls and surveys say?</p>
<p>Firstly, the vast majority of gift-givers are satisfied with the presents they receive. In Europe, only one <a href="https://think.ing.com/reports/special-report-presents-of-mind-christmas-2016/">in seven has received a gift they don’t appreciate</a>, with France having the highest proportion. Donors are therefore quite right. Some may have been helped by suggestions from the friends and family of the person they wanted to give a present to. Or even by asking them directly what they want for Christmas!</p>
<p>Secondly, the gift of money is very much in the minority – one person in 10 receives one among all their gifts. The gift card still far outstrips it. It avoids giving a soulless cheque or notes and reduces the chances of a specific gift being disliked. But it shifts the burden of going to the shop, whether brick and mortar or online, onto the recipient. According to one consumer association, an American spends about <a href="https://www.consumerreports.org/cro/news/2010/11/americans-spend-42-hours-each-on-holiday-shopping-and-partying/index.htm">fifteen hours shopping plus three hours wrapping</a> gifts.</p>
<p>Lastly, gifts that don’t appeal have all sorts of fates. They usually end up at the bottom of a cupboard or drawer, but are sometimes thrown away with the wrapping paper. </p>
<p>To avoid waste, gifts can be passed on, exchanged in a shop, or donated to charity.
Given the commercial scale of the Christmas season and the avalanche of gifts it triggers, we may also be tempted to return to a more sober tradition of giving to others. Many charities accept gifts for redistribution.</p>
<p>You can donate any of the gifts you have received that you don’t like or that you already have. You can also donate a gift that you like, but that would be more pleasing or even more useful to others: this would be no more an economic heresy than sending a cheque or transferring money to a charity.</p><img src="https://counter.theconversation.com/content/219271/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>François Lévêque ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>From an economic viewpoint, the idea may initially appeal by appearing to maximise the economic utility of the receiver. But it suffers from fundamental flaws.François Lévêque, Professeur d’économie, Mines ParisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2086422023-10-18T12:31:48Z2023-10-18T12:31:48ZNonprofits can become more resilient by spending more on fundraising and admin − new research<figure><img src="https://images.theconversation.com/files/542880/original/file-20230815-27-yy2jd5.jpg?ixlib=rb-1.1.0&rect=224%2C232%2C4618%2C2761&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Food banks can operate on a large scale that requires expensive equipment and skilled management.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-la-regional-food-banks-food-distribution-need-is-news-photo/1574657525?adppopup=true">Brittany Murray/MediaNews Group/Long Beach Press-Telegram via Getty Images</a></span></figcaption></figure><p>Most food banks, homeless shelters and other social services nonprofits constantly face hard decisions about how to use their limited funds. Should they spend as much as possible on meeting the immediate needs of people who need help? How much of their budget is appropriate to spend on new equipment, skilled managers and everything else required for an organization to thrive and endure?</p>
<p>To help nonprofits tackle this quandary, <a href="https://scholar.google.com/citations?user=beWthGIAAAAJ&hl=en">we</a> <a href="https://scholar.google.com/citations?hl=en&user=iROwJisAAAAJ">teamed up with two other business professors</a>, <a href="https://scholar.google.com/citations?hl=en&user=D4AJOw4AAAAJ">Arian Aflaki</a> and <a href="https://scholar.google.com/citations?hl=en&user=Dd8JoPIAAAAJ">Goker Aydin</a>, to develop a mathematical model to guide nonprofits on how to <a href="https://doi.org/10.1287/msom.2020.0660">divvy up their spending</a> to optimize both current performance and future resilience through their spending priorities.</p>
<p>Having observed <a href="https://www.charitynavigator.org/about-us/our-methodology/ratings/accountability-finance/?">how charity watchdogs like Charity Navigator rate nonprofits</a>, our model takes into account that spending more on core programs leads to increased funding for a nonprofit. In consultation with the Indiana Hoosier Hills Food Bank, we also studied the relationship of administration costs with a nonprofit’s capacity, which comprises the organization’s infrastructure, equipment, staff and other resources. This capacity is crucial for the nonprofit’s ability to meet its immediate and future needs.</p>
<p>Building on this, our research challenges the conventional wisdom that nonprofits should allocate nearly all of their budget to program costs. We found that striking the right balance depends on an organization’s existing capacity.</p>
<p>Our model indicates that new organizations and groups that are operating on small budgets need to spend a larger share of their revenue on administrative costs than larger, more established nonprofits. This investment lays a solid foundation for long-term resilience and ensures they are better equipped to serve their beneficiaries.</p>
<p>As nonprofits grow and establish some level of capacity, the emphasis should then shift to fundraising. That approach allows them to gather the funding necessary to maximize their existing capabilities. Importantly, the share of spending for administration or fundraising should align with the organization’s anticipated future needs.</p>
<p>For instance, if a nonprofit expects to take on larger projects or greater responsibilities in the future, it would be prudent to increase administrative spending now to prepare for those challenges.</p>
<h2>Why it matters</h2>
<p><a href="https://www.councilofnonprofits.org/running-nonprofit/administration-and-financial-management/misunderstanding-overhead">Administrative costs</a>, also known as overhead, encompass salaries, training, infrastructure, equipment and upkeep.</p>
<p>Donors and grantmakers often <a href="https://insidecharity.org/2022/10/30/nonprofit-starvation-cycle-avoid-it-in-2023/">pressure nonprofits to devote as much of their budgets as possible</a> to providing services, generally known as a nonprofit’s program. Many funders even set admin and fundraising caps in grant agreements. These well-meaning practices can compel nonprofits to scrimp in ways that <a href="https://theconversation.com/nonprofits-that-scrimp-on-overhead-arent-necessarily-better-than-those-spending-more-111700">make them less effective</a>.</p>
<p>After years of investing too little money in, say, computers and professional development, nonprofits eventually have to pivot and devote more money to those neglected needs. Once their financial health is no longer shaky, those groups tend to cave again to their donors’ concerns, cutting their budgets for fundraising and administrative activities.</p>
<p>Scholars of nonprofit management have sounded the alarm about this “<a href="http://www.ssireview.org/articles/entry/the_nonprofit_starvation_cycle/">starvation cycle</a>,” for two decades. But there are some signs that this loop might be breaking.</p>
<p>Big donors like the <a href="https://www.fordfoundation.org/news-and-stories/stories/increasing-our-indirect-cost-commitment/">Ford Foundation are now dedicating 20%-25% of their grants to cover overhead</a> – or even providing their support <a href="https://theconversation.com/what-is-unrestricted-funding-two-philanthropy-experts-explain-164589">with no strings attached</a>, recognizing that for a nonprofit to be successful it needs to be well managed. Meanwhile, organizations that rate nonprofits, like Charity Navigator, are starting to broaden their criteria to look at an <a href="https://www.charitynavigator.org/about-us/news-thought-leadership/rating-unification/">organization’s overall well-being and impact</a>, not just how they <a href="https://philanthropynewsdigest.org/news/charity-navigator-announces-changes-to-its-ratings-system">minimize spending on administration and fundraising</a>.</p>
<p>Rather than neglect urgent spending priorities, some nonprofits resort to misclassifying certain expenses. That is, they <a href="https://www.philanthropy.com/article/charity-navigator-stars-can-boost-donations-but-charities-might-game-the-system">pay for administrative work with money designated as</a> program related in their budgets. This strategy makes financial distress less likely but interferes with transparency and can undermine budget discipline.</p>
<h2>What isn’t known</h2>
<p>In the future, we plan to collaborate with charity watchdogs to gain their insights on how our evaluation recommendations could be applied to reflect each organization’s specific capabilities and goals. This will help us understand any limitations and make necessary adjustments for broader use.</p>
<p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take on interesting academic work.</em></p><img src="https://counter.theconversation.com/content/208642/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Donors and grantmakers often pressure nonprofits to spend as little as possible on fundraising and overhead.Telesilla Kotsi, Assistant Professor of Operations and Business Analytics, The Ohio State UniversityAlfonso J. Pedraza Martinez, Professor of IT, Analytics, and Operations, University of Notre DameLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2145792023-10-03T19:05:37Z2023-10-03T19:05:37ZHave some economists severely underestimated the financial hit from climate change? Recent evidence suggests yes<figure><img src="https://images.theconversation.com/files/551615/original/file-20231003-21-n2lo07.jpg?ixlib=rb-1.1.0&rect=17%2C0%2C5882%2C4174&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Scientists say severe climate change is now the <a href="https://www.science.org/doi/10.1126/science.aaw6974">greatest threat to humanity</a>. Extreme weather is expected to upend lives and livelihoods, intensifying wildfires and pushing ecosystems towards collapse as ocean heatwaves savage coral reefs. The threats are <a href="https://www.ipcc.ch/report/ar6/wg2/chapter/summary-for-policymakers/">far-reaching and widespread</a>.</p>
<p>So what effect would you expect this to have on the economy in coming decades? It may surprise you, but most economic models predict climate change will just be a blip, with a minor impact on gross domestic product (GDP). </p>
<p>Heating the planet beyond 3°C is <a href="https://www.science.org.au/supporting-science/science-policy-and-analysis/reports-and-publications/risks-australia-three-degrees-c-warmer-world">extraordinarily dangerous</a>. The last time Earth was that warm was <a href="https://mashable.com/article/carbon-dioxide-earth-co2#:%7E:text=The%20Pliocene%20was%20a%20significantly,temperatures%20of%20the%20late%201800s.">three million years ago</a>, when there was almost no ice and seas were 20 metres higher. But economic models predict even this level of heat to have <a href="https://www.aeaweb.org/articles?id=10.1257/jep.23.2.29">very mild impacts</a> on global GDP per capita by century’s end. Most predict a hit of around 1% to <a href="https://www.sciencedirect.com/science/article/pii/S0140988321004898">7%</a>, while the most pessimistic modelling suggests GDP <a href="https://www.nature.com/articles/nature15725">shrinking by 23%</a>.</p>
<p>In these models, some countries are completely unaffected by climate change. Others even benefit. For most countries, the damage is small enough to be offset by technological growth. Australia’s recent Intergenerational Report suggests something similar. </p>
<p>This, it is becoming abundantly clear, is a failure of the modelling. To make these models, economists reach into the past to model damage from weather. But severe climate change would be a global shock that is wholly outside our experience. Inevitably, models can’t come close to capturing the upheavals climate change could cause in markets fundamental to human life, such as agriculture. </p>
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Read more:
<a href="https://theconversation.com/intergenerational-report-highlights-the-threat-of-a-hotter-less-productive-australia-due-to-global-warming-212121">Intergenerational report highlights the threat of a hotter, less productive Australia due to global warming</a>
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<a href="https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="drought hit field" src="https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/551617/original/file-20231003-25-kgks1r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">If many grain-producing regions are hit by drought at once, trading to escape food shortages stops working.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>Economic models aren’t capturing the reality</h2>
<p>When the <a href="https://treasury.gov.au/publication/2023-intergenerational-report">Intergenerational Report</a> came out in August, it pictured what Australia would look like in 2063. </p>
<p>What would unchecked climate change mean for the economy? The report estimated what it would do to labour productivity – Australia’s GDP would be lower by between A$135 and $423 billion. Over 40 years, that figure is actually vanishingly small, implying an average yearly effect of around 0.3% of today’s GDP. </p>
<p>The report stressed that a number of impacts of severe climate change were not modelled. Even so, it appears the damages that were included weren’t likely to be major economic concerns.</p>
<p>So why the disconnect between climate scientists and economists? </p>
<p>Most economic models in this area rely on a fundamental premise – that we can gain useful insight into future damage by looking at how economies have been hit by earlier weather shocks. </p>
<p>But there’s a fundamental limitation here. Historically, weather shocks tended to be local or regional. Even if there’s intense drought in, say, India, harvests will still be good elsewhere. And, for economists, that means you can potentially trade your way out of danger. </p>
<p>There is some truth to it. Almost every country – <a href="https://www.theguardian.com/australia-news/2019/may/15/australia-to-import-wheat-for-first-time-in-12-years-as-drought-eats-into-grain-production">including Australia</a> – uses international trade to cushion themselves from weather shocks. Even in regular years, <a href="https://www.nature.com/articles/s43016-020-0060-7">large parts of the globe</a> rely on imported food.</p>
<p>Here’s how it works. During the intense 2018–2020 drought in eastern Australia, wheat production across the country <a href="https://www.statista.com/statistics/1095735/australia-wheat-crop-production/">roughly halved</a> compared to 2017. </p>
<p>In New South Wales and Queensland, the production of all grains <a href="https://www.aegic.org.au/41-how-the-2018-19-drought-affected-grain-flows-in-australia/">fell below consumption levels</a>. That forced these states to import grain, largely from Western Australia where the drought was not as severe. </p>
<p>But what would have happened if Australia’s western and eastern grain regions were hit by severe drought at the same time? Prices would rise significantly. Wholesalers would look to import grains from overseas. </p>
<p>But climate change makes it more and more likely that several parts of the world could be in severe drought <a href="https://www.pnas.org/doi/abs/10.1073/pnas.1718031115">at the same time</a>. As Australian researchers have found, climate change could indeed lead to crop failures across <a href="https://theconversation.com/climate-change-threatens-to-cause-synchronised-harvest-failures-across-the-globe-with-implications-for-australias-food-security-209250">multiple regions at once</a>. If that happened, food prices would surge to unprecedented levels. </p>
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Read more:
<a href="https://theconversation.com/what-if-several-of-the-worlds-biggest-food-crops-failed-at-the-same-time-74017">What if several of the world's biggest food crops failed at the same time?</a>
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<p>You can see the early warning signs already. When there are food production shortfalls, the first thing exporters tend to do is stop exporting to try to keep down domestic prices. India did <a href="https://www.reuters.com/markets/commodities/india-prohibits-export-non-basmati-white-rice-notice-2023-07-20/">exactly this</a> earlier this year because of damage to their crops from extreme weather. At a stroke, the world’s largest rice exporter stopped half their exports – and made it harder for other countries to trade their way out of food shortages. Top soy and corn producer Argentina had less to export this year too <a href="https://www.aljazeera.com/news/2023/3/9/argentinas-grain-harvest-suffers-under-worst-drought-in-60-years">due to severe drought</a>. </p>
<p>Already, the world’s surging growth in farm productivity has slowed to the <a href="https://www.ers.usda.gov/amber-waves/2022/december/world-agricultural-output-growth-continues-to-slow-reaching-lowest-rate-in-six-decades/">lowest rate in 60 years</a>. Yet the risk of global food insecurity is not captured in economic models of climate change. </p>
<h2>Global shocks are greater than the sum of their parts</h2>
<p>National security experts and the <a href="https://unfccc.int/blog/conflict-and-climate">United Nations have warned</a> climate change makes wars more likely, as countries fight over water, food or land. Climate change also threatens crop yields and <a href="https://www.nber.org/papers/w20352">damage to homes and infrastructure</a> from extreme weather and sea level rise.</p>
<p>A collapse in biodiversity and mounting extinctions could also have <a href="https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review">fundamental implications for our economy</a>. That’s to say nothing of <a href="https://www.thelancet.com/journals/lanplh/article/PIIS2542-5196(21)00170-4/fulltext">labour productivity</a>, <a href="https://www.thelancet.com/article/S0140-6736(21)01787-6/fulltext">health impacts</a>, <a href="https://www.nature.com/articles/s41586-022-04788-w">zoonotic virus spillover</a>, and <a href="https://link.springer.com/article/10.1007/s10584-019-02560-0">mass migration</a> among other possibilities. These upheavals will interact in unpredictable ways. </p>
<p>When economists model how economies perform in the future, they often have to simplify by ignoring certain risks or variables. The Intergenerational Report did just this by focusing on the climate impact on labour productivity and crop yields.</p>
<p>But these kinds of damage can overlap and make others worse. Because our global economy is so tightly interwoven, what happens elsewhere affects us here in many ways, as we saw during the early COVID years and the global financial crisis. </p>
<h2>We need better economic models of climate damage</h2>
<p>So why, in 2023, are we still not properly accounting for the real risks? It’s hard, but it is possible. <a href="https://ideas.repec.org/p/swe/wpaper/2023-09.html">My research</a> – as well as that of other other economists – is working towards building global weather shocks into modelling of what climate change will do to individual economies, which should radically change economic predictions.</p>
<p>In the meantime, when you see economic modelling suggesting climate change won’t do much, you should treat it with serious scepticism. Look at what is being modelled – and everything left out.</p>
<p>The impact of climate change on <a href="https://www.science.org/doi/10.1126/science.aan5360">natural systems</a> is well understood. We don’t know nearly as much about what it will do to human systems. We must hope the world decarbonises before we find out the hard way.</p><img src="https://counter.theconversation.com/content/214579/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy Neal does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When economists model climate impacts, they look to what past weather shocks have done to the economy. But this does not remotely capture what climate change could do.Timothy Neal, Senior lecturer in Economics / Institute for Climate Risk and Response, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2110092023-08-18T11:12:18Z2023-08-18T11:12:18ZClimate change is making debt more expensive – new study<figure><img src="https://images.theconversation.com/files/543226/original/file-20230817-14573-wkk79g.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5004%2C3333&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tokyo-japan-august-26-2021-sign-2178575211">Ned Snowman/Shutterstock</a></span></figcaption></figure><p>Earth is overheating due to the greenhouse gas emissions from burning fossil fuels. This is “the biggest market failure the world has seen” according to economist <a href="https://www.aeaweb.org/articles?id=10.1257/aer.98.2.1">Nicholas Stern</a>. The rational behaviour of companies that pollute by making profitable commodities, and consequences of most people’s desire to drive everywhere are creating irrational outcomes for everyone: an increase in the average global temperature which threatens to make the planet uninhabitable. </p>
<p>But our <a href="https://pubsonline.informs.org/doi/10.1287/mnsc.2023.4869">recent research</a> indicates that this pollution will have a direct financial cost. We used artificial intelligence to combine Standard and Poor’s (S&P) <a href="https://www.spglobal.com/ratings/en/about/intro-to-credit-ratings">credit ratings formula</a> (which captures the ability of those who borrow money to pay it back) with climate-economic models to simulate the effects of climate change on sovereign ratings for 109 countries over the next ten, 30 and 50 years, and by the end of the century.</p>
<p>We found that by 2030, 59 countries will see a deterioration in their ability to pay back their debts and an increased cost of borrowing as a result of climate change. Our predictions to 2100 entail the number of countries rising to 81.</p>
<p>Financial markets and businesses need credible information on how climate change translates into material risks to be able to factor them into all decisions they make. Although it is important to design economic tools and policies that can mitigate the effects of climate change, the field of economics responsible for doing so is relatively young. </p>
<p>New financial products have emerged to help countries and investors take better account of the climate and environment being degraded as a result of debt markets, but several problems remain.</p>
<p>Credit ratings or environmental, social and governance (ESG) ratings (which assess how well a company manages these kinds of risks) are not based on scientific information, and are often charged with <a href="https://www.ft.com/content/74888921-368d-42e1-91cd-c3c8ce64a05e">greenwashing</a>. For example, some investment funds branded as green according to these ratings, have been <a href="https://www.theguardian.com/business/2023/may/02/green-investment-funds-pushing-money-into-fossil-fuel-firms-research-finds">linked to fossil fuel companies</a>.</p>
<p>Financial institutions such as banks frequently misunderstand models for predicting the economic costs of climate change and underestimate risks such as <a href="https://www.ft.com/content/a5027391-41a4-4e21-a72d-f8189d6a7b71">temperature rises</a>, according to a <a href="https://actuaries.org.uk/media/qeydewmk/the-emperor-s-new-climate-scenarios.pdf">recent report</a> by actuaries – people who use mathematics to measure and manage risk and uncertainty.</p>
<p>Their research found “a clear disconnect” between climate scientists, economists, the people building these economic models and the financial institutions using them. </p>
<p>In our study, we tried to integrate climate science into financial indicators widely used and understood by investors, such as credit ratings. Without such science-based indicators, financial decision making will reflect risk calculations which are incorrect and misrepresent the <a href="https://www.nature.com/articles/s41558-020-00984-6">economic consequences</a> of climate change.</p>
<h2>Debt servicing to rise almost everywhere</h2>
<p>Credit ratings express a country’s ability and willingness to pay back debt and affect the cost of borrowing to nations as well as other entities, such as corporations and banks. Inevitably, these costs are passed on to the public.</p>
<p>When interest rates rise for banks, businesses find it more expensive to fund their operations and so raise prices for consumers. Higher costs to banks also mean higher mortgage interest rates for residential borrowers. When banks invest savings such as pensions in bonds offered by countries hit by climate disasters, their worth is affected too, meaning that pensions may fall in value.</p>
<p>Our <a href="https://pubsonline.informs.org/doi/10.1287/mnsc.2023.4869">paper</a> has three key findings. First, in contrast to much of the economics literature, we found that climate change could have material effects on economies and credit ratings as early as 2030. </p>
<p>Credit ratings are categorised in a 20-notch ladder scale, with default being the lowest rating, equivalent to one notch, and AAA being the highest rating at 20 notches. The highest rating signifies the lowest risk of an entity not paying back its debts and vice versa.</p>
<p>Under a high-emissions scenario in which recent emissions continue on an upwards trajectory, 59 countries would suffer downgrades of just under a notch by 2030, rising to 81 countries facing an average downgrade of two notches by 2100.</p>
<p>The nations which would be most affected include Canada, Chile, China, India, Malaysia, Mexico, Slovakia and the US. More importantly, our results show that virtually all countries, whether rich or poor, hot or cold, will suffer downgrades if the current trajectory of carbon emissions is maintained.</p>
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<a href="https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A global map depicting how much each country's credit rating is expected to fall." src="https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=456&fit=crop&dpr=1 754w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=456&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/543218/original/file-20230817-23-spmgd3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=456&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Rating downgrades under a high-emissions scenario (20-notch scale).</span>
<span class="attribution"><span class="license">Author provided</span></span>
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<p>Second, if countries honoured the <a href="https://unfccc.int/sites/default/files/english_paris_agreement.pdf">Paris Agreement</a> and limited warming to below 2°C, the impact on ratings would be minimal.</p>
<p>Third, we calculated the additional costs of servicing debt for countries (best interpreted as increases in annual interest payments) to be between US$45–67 billion (£35-53 billion) under a low-emissions scenario, and US$135–203 billion under a high-emissions one. These translate to additional annual costs of servicing corporate debt, ranging from US$9.9–17.3 billion to US$35–61 billion in each case.</p>
<p>As climate change batters national economies, debt will become harder and more expensive to service. By connecting climate science with indicators that are already baked into the financial system, we’ve shown that climate risk can be assessed without compromising the integrity of scientific assessments, the economic validity of the modelling and the timeliness necessary for making effective policies.</p>
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<p><strong><em>Don’t have time to read about climate change as much as you’d like?</em></strong>
<br><em><a href="https://theconversation.com/uk/newsletters/imagine-57?utm_source=TCUK&utm_medium=linkback&utm_campaign=Imagine&utm_content=DontHaveTimeTop">Get a weekly roundup in your inbox instead.</a> Every Wednesday, The Conversation’s environment editor writes Imagine, a short email that goes a little deeper into just one climate issue. <a href="https://theconversation.com/uk/newsletters/imagine-57?utm_source=TCUK&utm_medium=linkback&utm_campaign=Imagine&utm_content=DontHaveTimeBottom">Join the 20,000+ readers who’ve subscribed so far.</a></em></p>
<hr><img src="https://counter.theconversation.com/content/211009/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrycja Klusak receives funding from the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE).</span></em></p><p class="fine-print"><em><span>Matt Burke receives funding from the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE).</span></em></p>The first ‘climate-smart’ sovereign credit rating shows 59 nations will have lower ratings before 2030 without emissions cuts.Patrycja Klusak, Affiliated Researcher, Bennett Institute of Public Policy, University of Cambridge and Associate Professor in Banking and Finance, University of East AngliaMatt Burke, WTW Research Fellow, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2101612023-07-27T12:16:57Z2023-07-27T12:16:57ZHow can you tell if hosting the Olympics or Commonwealth games offers value for money? Here are our expert tips<p>Victorian Premier Dan Andrews’ decision to back out of a commitment to host the 2026 Commonwealth Games because it <a href="https://www.abc.net.au/news/2023-07-20/andrews-defends-axing-commonwealth-games-offers-little-detail/102622252">might cost A$6 billion to $7 billion</a> that did “<a href="https://www.abc.net.au/news/2023-07-19/commonwealth-games-vp-challenges-victorian-decision-730/102622720">not represent value for money</a>” raises the question: is it even possible to work out the costs and benefits of such major events?</p>
<p>It’s a question still hanging over Brisbane’s plans for the <a href="https://olympics.com/ioc/brisbane-2032">2032 Olympics</a>.</p>
<p>Except in extreme cases – such as the 1976 Montreal Olympics, which is widely regarded as a <a href="https://www.theguardian.com/cities/2016/jul/06/40-year-hangover-1976-olympic-games-broke-montreal-canada">financial disaster</a> – comparing the costs and benefits of events such as the Commonwealth and Olympic Games is anything but straightforward.</p>
<p>Often economic studies are carried out before the events to build the case for hosting them. In the lead-up to the 2000 Sydney Olympics, a study prepared for the New South Wales government by the consulting firm KPMG pointed to benefits topping <a href="https://catalogue.nla.gov.au/Record/677">$7 billion</a>.</p>
<p>But after the event, when much more information is in, official studies are rare.</p>
<h2>The Sydney Olympics’ $3.7 billion cost</h2>
<p>A decade after the Sydney Olympics, James Giesecke and I attempted to fill the gap using an economic model developed by the <a href="https://www.vu.edu.au/centre-of-policy-studies-cops">Centre of Policy Studies</a> and the data that arrived in the subsequent years to examine what the games changed.</p>
<p><a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1759-3441.2011.00109.x">Our study</a> found the 2000 Olympics <em>reduced</em> Australia’s real private and public consumption by about $3.7 billion (adjusted to 2023 dollars) over the nine years in which the Olympics impacted the economy.</p>
<p>It is often claimed that hosting the Olympics brings intangible benefits to the host nation – things such as national pride and social cohesion. </p>
<p>Our modelling didn’t take these into account. There’s no doubt there were some, but they came at a substantial price.</p>
<h2>How to calculate the value of a mega event</h2>
<p>If you want to disentangle the effects of an event from the effects of all the other forces acting upon an economy, an economic model is required.</p>
<p>It’s important to use a model equipped for the task, and to properly simulate the effect of the event.</p>
<p>In the past, major event studies – such as KPMG’s pre-Sydney Olympics study – used <a href="https://www.pc.gov.au/research/supporting/input-output-tables/input-output-tables.pdf">input-output</a> models. </p>
<p>But they have <a href="https://www.pc.gov.au/research/supporting/input-output-tables/input-output-tables.pdf">limitations</a>. These include assuming there is unlimited labour and capital available at fixed prices – meaning they often generate unrealistically large benefits. </p>
<p>A better way to assess the economy-wide effects of an event is to use a computable general equilibrium (<a href="https://academic.oup.com/cjres/article/6/2/285/363749">CGE</a>) model of the kind we used to study the Olympics after it was over. </p>
<figure class="align-right zoomable">
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<span class="caption">The Sydney Olympics didn’t boost international tourism.</span>
<span class="attribution"><span class="source">Mick Tsikas/AAP</span></span>
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<p>Central to CGE modelling are supply constraints and price-responsive behaviour, features missing from input-output models. </p>
<p>Modern CGE models track deviations from what would have otherwise happened, as the effects of an event work their way through the economy.</p>
<p>Correctly setting up a simulation to properly capture the economics of an event is important. For instance, past studies have often failed to include all of the costs of the event, such as diverting public services away from their usual uses.</p>
<p>Studies undertaken before the event often include predicted legacies, such as a large boost to tourism following the event. </p>
<p>These are rarely supported by post-event studies. Our study found <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1759-3441.2011.00109.x">no evidence</a> the Sydney Olympics produced a boost in post-event international tourism. </p>
<h2>Feelings aside, the Sydney Games had a net cost</h2>
<p>The net <em>direct</em> cost of the Sydney Olympics (Olympic costs not funded by Olympics revenue), when updated to 2023 prices, was $4.5 billion.</p>
<p>But our post-event modelling showed that once the direct effects of the Olympics worked their way through the economy, they caused a <em>reduction</em> of about $3.7 billion (again in 2023 dollars) in Australia’s real private and public consumption, relative to the base-case forecast over the nine years from 1997-98 to 2005-06.</p>
<p>A frequent claim by proponents of big events is that the demand stimulus from the event will far offset its net direct cost. But our real consumption result indicates the demand stimulus offset only about a fifth of the net direct cost.</p>
<p>Unsurprisingly, the loss fell almost entirely on NSW households.</p>
<p>But while hosting the Olympics cut real consumption in NSW, that doesn’t automatically mean it wasn’t value for money. </p>
<h2>Feelings and other intangible benefits</h2>
<p>Hosting the Olympics clearly brought enjoyment, for which many people would have been willing to pay a price. The question is: how big a price? </p>
<p>The loss in real consumption (including forgone public services) of $3.7 billion works out at about $1,440 per NSW household at today’s prices, given the population at the time.</p>
<p>That is a sizeable figure to pay for the intangible benefits not already counted in the prices of tickets, broadcasting rights and other <a href="https://www.parliament.nsw.gov.au/tp/files/9904/SOCOG%20July%201999%20-%20Oct%202001.pdf">organising committee sales</a>.</p>
<p>However, those intangible benefits – including national and sporting pride, a feelgood atmosphere and inspiring children – might also be sizeable.</p>
<p>There are no estimates for the value of intangible benefits from the Sydney Olympics. However, a 2008 UK study found Britons would have been willing to pay almost <a href="https://www.jstor.org/stable/43197760">£2 billion</a> for the net intangible benefits thought to arise from hosting the 2012 Olympics.</p>
<p>Converting to 2023 Australian dollars, that’s A$230 per UK household. Londoners were found to be willing to pay a higher amount, about A$440 per household. </p>
<p>It may be that NSW households were willing to pay as much as their London counterparts for intangible benefits from hosting a Summer Olympics – maybe much more. </p>
<p>However, it’s difficult to see NSW households willing to pay enough to match what we worked out to be the real consumption cost of $1,440 per head.</p>
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<em>
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Read more:
<a href="https://theconversation.com/hosting-the-olympics-cash-cow-or-money-pit-7403">Hosting the Olympics: cash cow or money pit?</a>
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<p>The UK study showed households outside London also perceived intangible benefits, though only half as much per household as their London counterparts. </p>
<p>This suggests some greater spreading of the financing burden across Australia might be fairer, which would reduce the average cost to NSW households – but not enough to bring it down to the willingness to pay. </p>
<p>And in any event, assessing how to spread costs in line with the geographical diversity in willingness to pay would be extremely problematic.</p>
<h2>Lessons for future mega events</h2>
<p>In all of the work that’s been done to date on the economics of hosting mega events, a few lessons stand out.</p>
<p>For an event to have the best chance of representing value for money for the host, it should require little government support, generate large foreign interest and have large intangible benefits.</p>
<p>Events with wide appeal can generate enough revenue to cover their operating costs – and this was the case for the Sydney Olympics. But they still have to rely on sizeable government support for infrastructure.</p>
<p>Hosts using suitable existing venues therefore have an advantage. New venues are unlikely to provide a post-event legacy and often require substantial ongoing government support to continue to operate.</p>
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<strong>
Read more:
<a href="https://theconversation.com/existential-questions-is-this-the-beginning-of-the-end-of-the-commonwealth-games-209961">'Existential questions': is this the beginning of the end of the Commonwealth Games?</a>
</strong>
</em>
</p>
<hr>
<p>The most important lesson is that bidders for such events ought to conduct a rigorous analysis of the event’s expected net value <em>before</em> submitting their bids. </p>
<p>Ideally, this would involve an independent expert CGE study. If intangible benefits are to be considered, a separate study should be undertaken to properly estimate the intangibles’ value to residents of the host city and the rest of the nation.</p>
<p>Moreover, bidders ought to make all of the costs known, with no part of arrangements shielded from scrutiny under the veil of “commercial-in-confidence”.</p>
<p>Some mega events might pay their way, when intangibles such as the feelings they engender are taken into account. But the existence of intangibles doesn’t automatically mean they will. The evidence so far suggests they are unlikely to.</p><img src="https://counter.theconversation.com/content/210161/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Madden is a past recipient of ARC funding. In the 1990s, the New South Wales Treasury and Arthur Andersen funded the University of Tasmania for research studies, undertaken by John, estimating the economic effects of the Sydney 2000 Summer Olympics.</span></em></p>It’s the question still hanging over Brisbane’s 2032 Olympics, which made Victoria cancel its Commonwealth Games: do such mega events pay their own way? The evidence suggests they’re unlikely to.John Madden, Emeritus Professor, Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2053792023-05-16T12:39:11Z2023-05-16T12:39:11ZCOVID-19’s total cost to the economy in US will reach $14 trillion by end of 2023 – new research<figure><img src="https://images.theconversation.com/files/525744/original/file-20230511-13703-c57kdq.jpg?ixlib=rb-1.1.0&rect=130%2C0%2C5474%2C3755&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Once guests trickled back into hotels, they were urged to socially distance.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/people-check-into-a-hotel-in-times-square-on-april-27-2022-news-photo/1394037006?adppopup=true">Spencer Platt/Getty Images</a></span></figcaption></figure><p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em></p>
<h2>The big idea</h2>
<p>The economic toll of the COVID-19 pandemic in the U.S. <a href="https://doi.org/10.1016/j.econmod.2022.106147">will reach US$14 trillion</a> by the end of 2023, <a href="https://scholar.google.com/citations?user=M283AQ4AAAAJ&hl=en">our team</a> of <a href="https://scholar.google.com/citations?user=MdqrwWwAAAAJ&hl=en">economists</a>, <a href="https://scholar.google.com/citations?user=DMyZI3UAAAAJ&hl=en">public policy researchers</a> and <a href="https://scholar.google.com/citations?user=A1xnFJcAAAAJ&hl=en">other experts</a> have estimated.</p>
<p>Putting a price tag on all the pain, suffering and upheaval Americans and people around the world have experienced because of COVID-19 is, of course, hard to do. More than <a href="https://covid.cdc.gov/covid-data-tracker/#datatracker-home">1.1 million people</a> have died as a result of COVID-19 in the U.S., and many more have been hospitalized <a href="https://doi.org/10.1093/geronb/gbac085">or lost</a> <a href="https://www.nih.gov/news-events/news-releases/more-140000-us-children-lost-primary-or-secondary-caregiver-due-covid-19-pandemic">loved ones</a>. Based on data from the first 30 months of the pandemic, we forecast the scale of total economic losses over a four-year period, from January 2020 to December 2023.</p>
<p>To come up with our estimates, our team used economic modeling to approximate the revenue lost due to mandatory business closures at the beginning of the pandemic. We also used modeling to assess the economic blows from the many changes in personal behavior that continued long after the lockdown orders were lifted – such as avoiding restaurants, theaters and other crowded places.</p>
<p>Workplace absences, and sales lost due to the cessation of brick-and-mortar retail shopping, air travel and public gatherings, contributed the most. At the height of the pandemic, in the second quarter of 2020, our survey indicates that international and domestic airline travel fell by nearly 60%, indoor dining by 65% and in-store shopping by 43%. </p>
<p>We found that the three sectors <a href="https://doi.org/10.1016/j.econmod.2022.106147">that lost the most ground</a> during the first 30 months of the pandemic were air travel, dining, and health and social services, which contracted by 57.5%, 26.5% and 29.16%, respectively.</p>
<p>These losses were offset to a degree by surges in online purchases, a series of large <a href="https://www.worldbank.org/en/publication/wdr2022/brief/chapter-1-introduction-the-economic-impacts-of-the-covid-19-crisis">fiscal stimulus and economic relief packages</a> and an unprecedented expansion of the number of <a href="https://www.bls.gov/opub/mlr/2022/article/telework-during-the-covid-19-pandemic.htm">Americans working from home</a> – and thus were able to keep doing jobs that might otherwise have been cut.</p>
<p>From 2020 to 2023, the cumulative net economic output of the United States will amount to about <a href="https://www.whitehouse.gov/wp-content/uploads/2023/03/ERP-2023.pdf">$103 trillion</a>. Without the pandemic, the total of GDP over those four years would have been $117 trillion – nearly 14% higher in inflation-adjusted 2020 dollars, according to our analysis. </p>
<p>We also simulated four different possible economic outcomes had the number of COVID-19 deaths been different because of either more or less successful public health strategies in the first 30 months of the pandemic.</p>
<p>The direct health expenses, driven mostly by hospitalization costs in these scenarios, would have totaled $20 billion in a best-case scenario in which 65,000 Americans would have died from January 2020 to June 2022. In the worst-case scenario, about 2 million would have died during that period, with $365 billion in direct health-related expenses.</p>
<p>Based on our findings, most economic losses were not due to these health care expenditures.</p>
<p><iframe id="kLF88" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/kLF88/8/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Why it matters</h2>
<p>The COVID-19 pandemic’s economic consequences are unprecedented for the U.S. by any measure. The toll we estimate that it took on the nation’s gross domestic product is <a href="https://doi.org/10.1016/j.ijdrr.2021.102317">twice the size of that of the Great Recession</a> of 2007-2009. It’s 20 times greater than the economic costs of the 9/11 terrorist attacks and 40 times greater than the toll of any other disaster to befall the U.S. in the 21st century to date.</p>
<p>Although the federal government has now <a href="https://theconversation.com/what-does-ending-the-emergency-status-of-the-covid-19-pandemic-in-the-us-mean-in-practice-4-questions-answered-205165">lifted its COVID-19 Public Health Emergency declaration</a>, the <a href="https://www.brookings.edu/blog/up-front/2021/12/08/a-most-unusual-recovery-how-the-us-rebound-from-covid-differs-from-rest-of-g7/">pandemic is still influencing the U.S. economy</a>. The <a href="https://fred.stlouisfed.org/series/CIVPART">labor force participation rate</a>, which stood at 62.6% in April 2023, has only recently neared the February 2020 level of 63.3%. </p>
<h2>What is not known</h2>
<p>We modeled only the pandemic’s standard economic effects. We didn’t estimate the vast array of <a href="https://covid.cdc.gov/covid-data-tracker/#trends_weeklydeaths_select_00">economic costs tied to COVID-19</a>, such as lost years of work after an early death or a severe case of long-COVID-19.</p>
<p>We also didn’t assess the costs due to the many ways that the disease has affected the physical and mental health of the U.S. population or the <a href="https://www.brookings.edu/blog/brown-center-chalkboard/2022/03/03/the-pandemic-has-had-devastating-impacts-on-learning-what-will-it-take-to-help-students-catch-up/">learning loss experienced by students</a>.</p><img src="https://counter.theconversation.com/content/205379/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jakub Hlávka received funding from Centers for Disease Control and Prevention and the U.S. Department of Homeland Security to conduct COVID-19-related research.
</span></em></p><p class="fine-print"><em><span>Adam Rose receive funding from Centers for Disease Control and Prevention and the U.S. Department of Homeland Security.</span></em></p>Workplace absences, along with sales lost due to the cessation of brick-and-mortar retail shopping, airline travel and public gatherings, contributed the most.Jakub Hlávka, Research Assistant Professor of Health Policy and Management; Schaeffer Center Fellow, University of Southern CaliforniaAdam Rose, Professor of Public Policy, University of Southern CaliforniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1915872022-10-04T07:00:37Z2022-10-04T07:00:37ZA basic income grant for South Africa: more money in poor people’s pockets, but at a heavy cost<figure><img src="https://images.theconversation.com/files/487325/original/file-20220929-5657-so6h92.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A South African street vendor awaits customers. The country has some of the highest inequality in the world.</span> <span class="attribution"><span class="source">Mujahid Safodien/AFP via Getty Images</span></span></figcaption></figure><p>Analyses of the implications of extending income support measures in South Africa, including a basic income grant, have focused on one of three things: how much it will cost, calculations about how much revenue would need to be raised (but without assessing the ripple effects), and how it might affect the incomes of the rich and the poor.</p>
<p>Each of these provide important contributions. But they don’t address the dynamic and long-term implications of basic income support options on the country’s economy and its finances. What’s been missing is a modelling that compares – or tests – the impact of the different policy choices and their permutations and how these are funded and who benefits and who loses.</p>
<p>In <a href="https://econrsa.org/publications/technical-background-paper-the-macroeconomics-of-establishing-a-basic-income-grant-in-south-africa/">a recent paper</a> we attempt to do just that.</p>
<p>Our model allows for both positive and negative economic effects of higher direct transfers to households. The model thus captures feedback effects between government expenditure, taxation, household consumption, firm investment, debt, interest rates and economic growth.</p>
<p>On the one hand, our model shows that a basic income grant would decrease economic growth through three main channels: an increase in borrowing costs, an increase in taxes, and crowding-out of private and other forms of public spending.</p>
<p>On the other hand, it would have a positive impact on economic growth through one main channel: an increase in consumption by poor households. </p>
<p>Overall, the results suggest that the negative economic effects of an expansion in social grants would outweigh the positive. We conclude that, without structural reform of the economy and sustained economic growth, introducing additional permanent social transfers could threaten South Africa’s macroeconomic and fiscal stability.</p>
<h2>Three possibilities</h2>
<p>The paper considers three basic income grant scenarios. And it estimates different combinations of tax and debt funding. </p>
<p><strong>Scenario 1:</strong> This estimates tax and debt outcomes for different grant sizes without imposing any specific “funding policy”. The estimated model based on historical data guides the macro-fiscal dynamics. </p>
<p>The scenario estimates two possibilities for expanding social transfers:</p>
<ul>
<li><p>convert the R350 temporary social relief of distress grant into a permanent basic income grant</p></li>
<li><p>raise the grant in three possible ways – to the food poverty line (R624 in current prices); the lower bound poverty line (R890 in current prices); the upper bound estimate of the poverty line (R1,335 in current prices). </p></li>
</ul>
<p>Different eligibility criteria can also be inferred. These include considering four potential eligibility groups. They are:</p>
<ul>
<li><p>covering 8.3 million people</p></li>
<li><p>reaching the same as the current social relief of distress grant (10.5 million people) </p></li>
<li><p>a grant targeting all poor people (33 million).</p></li>
<li><p>a universal basic income grant to the whole population (60 million) </p></li>
</ul>
<p>Converting the R350 social relief of distress grant into a permanent basic income grant is estimated to require an increase in public debt of about 3 percentage points of GDP after five years. It would require a marginal increase in effective indirect taxes (mainly the value added tax rate, VAT), an increase in the effective personal income tax rate of about 2 percentage points, and an increase in the effective corporate income tax rate of about 0.25 percentage points. </p>
<p>The model shows that the consumption of poor households would rise. But it
predicts that there would be some job losses owing to the contractionary impact on investment and growth from higher debt and higher taxes.</p>
<p>Introducing a grant at the food poverty line (R624 per person in 2022 prices for an eligible population of 10.5 million at a cost of R79 billion) would lead to higher debt, VAT and personal income tax increases. Debt would rise by 7.7 percentage points of GDP, VAT by about half a percentage point and personal income tax by about 5.3 percentage points.</p>
<p>The model predicts job losses amounting to about 200,000. These
come about because of the fiscal impact of a permanent increase in spending (higher taxes and higher interest rates).</p>
<p>The contractionary effects operate through:</p>
<ul>
<li><p>higher debt, which leads to relatively higher borrowing costs and lower long-term economic growth </p></li>
<li><p>direct crowding-out of government expenditure in an attempt to maintain fiscal sustainability </p></li>
<li><p>crowding-out of private sector expenditure through higher taxes. </p></li>
</ul>
<p>These effects dominate any expansionary effects from higher transfers. </p>
<p>As a result, a large fiscal transfer of the type proposed by advocates of BIG is not estimated to boost economic growth. </p>
<p>The largest transfer expansion considered is a grant of R840 per month for 33 million households at a cost of R333 billion. This, the model suggests, would increase debt by 42 percentage points of GDP, requiring higher VAT of 3 percentage points and personal income tax to rise by 29 percentage points, essentially a doubling. </p>
<p>The contractionary impact on the economy would be estimated to lead to nearly a
million job losses.</p>
<p><strong>Scenario 2.</strong> This focuses on a basic income at the food poverty line financed by an increase in taxes (a “balanced budget” scenario). Debt would still rise marginally because the economy would slow. If the new grant was funded by VAT alone, this would require an increase of 7 percentage points in the rate – from 15% currently to 22%.</p>
<p>If funded from a combination of higher VAT and personal income tax, VAT would need to rise by 4 percentage points and personal income tax would rise by almost 3.5 percentage points. For the average taxpayer, who earns R370,000 and pays an effective rate of 21.3%, this would mean an increase in taxes from R79,000 per year to R91,500 per year. This, in turn, would lead to significant contraction in the economy, even though there would be some short-term employment gains from the large direct income effects from higher transfers.</p>
<p><strong>Scenario 3.</strong> This models a grant at the food poverty line financed by a combination of higher VAT but also higher economic growth. In this scenario, the assumption is that government simultaneously expands government investment by R60 billion and successfully undertakes structural reforms (such as removing constraints on electricity availability).</p>
<p>In this scenario, VAT would still need to rise (by 9 percentage points without structural reform, and 5 percentage points with reform) to fund the transfer expansion. </p>
<p>This scenario is estimated to lead to job gains but only because the structural reforms permanently raise long-run growth and, therefore, government revenue. </p>
<p>Moreover, by enhancing the economy’s productive capacity, government
investment would have long-run growth-enhancing effects.</p>
<h2>The take-away</h2>
<p>Our paper shows that the introduction of a basic income grant would require significant long-term tax increases and would likely lead to employment losses. We also show that without sustained higher economic growth, much higher social transfers could threaten fiscal sustainability. </p>
<p>Poverty, inequality and unemployment are three interdependent socio-economic challenges South African policymakers are seeking to address. Addressing this triple challenge is critical for the future of the country. But an unfunded expansion of the social transfer system could lead to even worse economic outcomes — the medicine should not be worse than the disease.</p><img src="https://counter.theconversation.com/content/191587/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hylton Hollander receives funding from Economic Research Southern Africa and has received funding from UNU-WIDER. He is affiliated with Stellenbosch University.</span></em></p><p class="fine-print"><em><span>Daan Steenkamp receives funding from ERSA. He is affiliated with Codera Analytics, and Stellenbosch University Economics Department and SARB as a research fellow.</span></em></p><p class="fine-print"><em><span>Roy Havemann receives funding from Economic Research South Africa. He is affiliated with Stellenbosch University and the Western Cape Government. </span></em></p>An unfunded expansion of the social transfer system could lead to even worse economic outcomes — the medicine should not be worse than the disease.Hylton Hollander, Senior Lecturer, Stellenbosch UniversityDaan Steenkamp, Research Associate, Stellenbosch UniversityRoy Havemann, Research Associate, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1828472022-05-17T20:58:10Z2022-05-17T20:58:10ZCanada faces huge physical costs from climate change, making net zero a great investment<figure><img src="https://images.theconversation.com/files/463426/original/file-20220516-21-53jagw.jpg?ixlib=rb-1.1.0&rect=40%2C35%2C2941%2C2061&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ontario fire rangers carry sandbags to fortify a wall holding back floodwaters in Pembroke, Ont., in May 2019.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Justin Tang</span></span></figcaption></figure><p>There has been a lot of discussion in Canada lately about the <a href="https://globalnews.ca/news/8743093/environment-investments-needed-net-zero-budget-2022/">financial costs of achieving the country’s climate targets</a>. And rightly so. The situation is urgent and we need to act now. </p>
<p>Fighting climate change will require a concerted effort, affecting all sectors of the economy. And while there will be great economic opportunity and lots of new jobs in the green economy, there will be considerable disruptions in the workforce, major economic challenges and significant capital investment required. </p>
<p>However, we in the finance business like to look at both sides of the ledger. And when one considers the damage to the <a href="https://cca-reports.ca/wp-content/uploads/2019/07/Report-Canada-top-climate-change-risks.pdf">Canadian economy</a> we can expect from fires, floods, melting ice caps and loss of biodiversity due to climate change, the investment in greenhouse gas reductions starts to look very worthwhile indeed.</p>
<h2>Climate change impacts economic prosperity</h2>
<p>In a <a href="https://smith.queensu.ca/centres/isf/news/climate-change-damage.php">new study</a> we recently published with the Institute for Sustainable Finance, we posit that economic value is sacrificed every day that action is not taken to mitigate the economic and ecological risks posed by climate change. Existing economic models agree that losses are unavoidable without change and investment. But questions remained regarding how much value will be lost and how quickly.</p>
<p>Our study modelled the physical risk to Canada, or how much capital output might be lost, over various warming scenarios between now and the end of the century. We found that under a business-as-usual scenario, with no new international greenhouse gas mitigation measures taken, allowing the climate to warm 5 C by 2100, the cumulative cost to Canada would be $5.5 trillion. </p>
<p>That’s a big number. And it’s a lot higher than the damage we would see under a scenario where global warming is kept to 2 C, which we estimate to be around $2.8 trillion. </p>
<figure class="align-center ">
<img alt="Two men wearing baseball caps position a solar panel on a roof." src="https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=466&fit=crop&dpr=1 754w, https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=466&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/463433/original/file-20220516-16-82bl89.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=466&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Workers install solar panels onto a roof in Toronto.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Frank Gunn</span></span>
</figcaption>
</figure>
<p>Of course, this is just the financial cost and does not take into account the suffering of those who will lose livelihoods, homes and businesses, or even their lives, due to climate-related disasters.</p>
<p>Our study further reveals that the associated costs of physical damage are larger than the investments required to reduce greenhouse gas emissions. In fact, the difference is up to $45.4 billion larger than the required investment. And this doesn’t even consider the potential economic benefits of transitioning to a low-carbon economy. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/sustainable-finance-canada-risks-being-left-behind-in-low-carbon-economy-118814">Sustainable finance: Canada risks being left behind in low-carbon economy</a>
</strong>
</em>
</p>
<hr>
<p>Yes, it is true that Canada can’t fight climate change on its own, and that it’s a global effort. But the incentive is clear for a rich, developed, industrialized country like Canada to take a global leadership role and meet our <a href="https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/net-zero-emissions-2050.html">own net-zero targets</a>.</p>
<h2>Quick action is crucial</h2>
<p>There is also a big incentive to act now, as we will face some inflection points in the coming decades that will make the challenge considerably more difficult. </p>
<p>Our study found that the costs of climate change damage are expected to grow gradually until 2050, around which time there is a sharp increase under all scenarios. By 2070 there is an exponential increase in damages. These dates correspond to two of the significant target dates for achieving net zero noted by the <a href="https://www.ipcc.ch/site/assets/uploads/sites/2/2019/05/SR15_SPM_version_report_LR.pdf">Intergovernmental Panel on Climate Change in its reports</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/insurance-isnt-enough-governments-need-to-do-better-on-natural-disaster-resilience-173136">Insurance isn't enough: Governments need to do better on natural disaster resilience</a>
</strong>
</em>
</p>
<hr>
<p>Despite the recent increased attention to addressing climate change, progress has been too slow. It is becoming clear that <a href="https://wedocs.unep.org/xmlui/bitstream/handle/20.500.11822/34426/EGR20.pdf?sequence=3">we are not on pace</a> to limit the global temperature increase to 1.5 C above pre-industrial levels by 2100. <a href="https://changingclimate.ca/site/assets/uploads/sites/2/2020/06/CCCR_FULLREPORT-EN-FINAL.pdf">Estimates from the IPCC</a> and others suggest that with current progress, and if the world meets its existing commitments, we are more on pace for a 3 C warming scenario. There is a very real risk that warming will be higher still.</p>
<p>This is all bad news for Canada, which is highly susceptible to the impacts of climate change and is warming at twice the rate of the global average. But until now, we haven’t had an effective assessment of the physical risks and the potential capital cost to Canada. </p>
<p>We have much to lose. And it should now be clear that tackling climate change more than pays for itself in terms of avoided physical damage alone.</p><img src="https://counter.theconversation.com/content/182847/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Neal Willcott receives funding from the Institute for Sustainable Finance at Queen's University at Kingston and his PhD work is supported by grants provided by both the Smith School of Business and the School of Graduate Studies at Queen's University.</span></em></p><p class="fine-print"><em><span>Sean Cleary has previously received funding from SSHRC for finance research projects, but not specifically related to sustainable finance. He is a CFA charterholder and is a member of the CFA Society Toronto Advisory Council.</span></em></p>Reducing greenhouse gases is expensive, but it’s a great investment compared to the damage we can expect to the Canadian economy if the climate warms 5 C by 2100.Neal Willcott, PhD Candidate - Finance, Queen's University, OntarioSean Cleary, BMO Professor of Finance, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1764322022-02-22T19:13:02Z2022-02-22T19:13:02ZWhy the cost of climate change can’t be boiled down to one right number, despite some economists’ best attempts<figure><img src="https://images.theconversation.com/files/445776/original/file-20220210-24693-1m5bgil.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C7662%2C5104&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Renewable energy prices have fallen faster than predicted.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/wind-turbine-at-motorway-a8-baden-wuerttemberg-royalty-free-image/1210777997">ImageBROKER/Lilly</a></span></figcaption></figure><p>A group of economists has issued a new estimate of the future cost of climate change that is grabbing headlines. The consultancy Deloitte estimates that unchecked climate change could cost the global economy <a href="https://www2.deloitte.com/content/dam/Deloitte/global/Documents/gx-global-turning-point-report.pdf">US$178 trillion</a> over the next 50 years.</p>
<p>While climate change does harm economies, there are a lot of problems with long-term estimates like this.</p>
<p>New technologies arrive and evolve. Human behaviors shift. For example, who would have thought before the COVID-19 pandemic that a large percentage of the population would stop driving to the office and work from home instead?</p>
<p>I am a microeconomist who investigates the <a href="https://escholarship.org/uc/item/3qp74527">causes and consequences of climate change</a>. When I think about the climate change challenge in 2040 and beyond, I anticipate many “known unknowns” about our future. Thus, I am amazed to read precise climate cost estimates like those published by economic consultants like Deloitte and <a href="https://www.mckinsey.com/business-functions/sustainability/our-insights/the-net-zero-transition-what-it-would-cost-what-it-could-bring">McKinsey & Co</a>.</p>
<p>Deloitte’s <a href="https://www2.deloitte.com/global/en/pages/about-deloitte/articles/global-turning-point.html">new estimate</a> predicts that the damage from unchecked <a href="https://www.c2es.org/content/international-emissions/">greenhouse gas emissions</a>, with global temperatures rising 3 degrees Celsius (5.4 F) over pre-industrial times, would slow growth in every region and could shave 7.6% off global GDP in 2070 alone compared to a world without climate change. That includes harms such as lost productivity during heat waves and crop failures.</p>
<p>Numbers like these are widely used to encourage action by governments, companies and individuals. Economists agree that climate change, left unchecked, will harm economies. But these estimates are produced using formal models that feature many assumptions, any one of which could throw off the accounting in a big way, leaving the estimates either wildly high or low. </p>
<p>While people might think they want “precision,” precise predictions <a href="https://www.nber.org/system/files/working_papers/w28472/w28472.pdf">raise the risk of conveying too much certainty</a> in a constantly changing world. </p>
<h2>The prediction challenge</h2>
<p><a href="https://www.nobelprize.org/uploads/2018/10/nordhaus-lecture.pdf">Climate economic models</a> seek to answer several prediction questions, such as:</p>
<ul>
<li><p>“What will we gain economically by reducing greenhouse gas emissions?”</p></li>
<li><p>“What will be the economic and quality-of-life impact if we do nothing and just allow greenhouse gas emissions to rise under ‘business as usual’?”</p></li>
</ul>
<p>To answer these complex questions, climate economists make a series of assumptions that are “baked” into their mathematical models.</p>
<h2>Known unknowns</h2>
<p>First, economists must predict the world’s average income per person for each year in the future. </p>
<p>Macroeconomists have faced challenges <a href="https://www.philadelphiafed.org/the-economy/macroeconomics/why-are-recessions-so-hard-to-predict-random-shocks-and-business-cycles">predicting the timing and duration of recessions</a>. Predicting future <a href="https://doi.org/10.1073/pnas.1713628115">economic growth over the course of 30 or 40 years</a> requires predicting how the quantity and quality of the world’s workforce and our technology will evolve over time. Predicting the world’s population growth is also a challenging exercise, as increases in <a href="https://link.springer.com/article/10.1007/s11113-012-9230-0">urbanization</a>, <a href="https://faculty.wcas.northwestern.edu/%7Emdo738/research/Doepke_JODE_15.pdf">women’s access to education</a> and improvements in birth control are all associated with reductions in fertility.</p>
<p>Second, they must make an informed guess about what technologies will exist in the future concerning our sources of power generation and the energy we use in transportation. If they can estimate the future world population level, income level and technology, then they can measure how much extra greenhouse gas emissions the world produces each year.</p>
<p>Third, they use a climate science model to estimate the extra climate change risk caused by the production of greenhouse gas emissions. This is typically measured by the increase in <a href="https://climate.nasa.gov/ask-nasa-climate/3017/making-sense-of-climate-sensitivity/">the world’s average surface temperature</a>.</p>
<p>Fourth, they must take a stand on how our future economy’s production will be affected by rising climate change risk. Ideally, these models also tell us how releasing more greenhouse gas emissions increases the <a href="https://scholar.harvard.edu/files/weitzman/files/fattaileduncertaintyeconomics.pdf">likelihood of disaster scenarios</a>.</p>
<p>By combining all of these equations with their own respective assumptions, a research team generates a single number.</p>
<h2>The ‘art’ of predicting future emissions</h2>
<p>Economists estimate future global greenhouse gas emissions by multiplying the predicted global gross national product – the total value of goods and services – by the average emissions per dollar of gross national product. </p>
<p>If the world succeeds in ending fossil fuel use, this latter figure could be close to zero. The innovation and deployment of low-carbon technologies – think electric vehicles and solar farms – can significantly shift the costs and benefits that economists are trying to quantify.</p>
<p>Many factors determine this path of technological advance, including investment in research and development. International politics also don’t always factor into climate economic models. For example, if China chooses to become more insular, will it increase its coal consumption because the nation is endowed with coal? Conversely, could <a href="https://www.nytimes.com/roomfordebate/2011/01/18/can-the-us-compete-with-china-on-green-tech/how-we-gain-from-chinas-advances">China choose to use its powerful state</a> to push the green tech sector to create a booming future export market that greens the world’s economy? </p>
<h2>Forecasting future climate change impacts</h2>
<p>Economic mathematical models boil down the impact of climate change into a single algebra equation called the “climate damage function.” In <a href="https://yalebooks.yale.edu/book/9780300246711/adapting-climate-change">my book “Adapting to Climate Change,”</a> I provide several examples for why this function is continually changing and thus is very difficult to predict. </p>
<p>For example, many companies are developing <a href="https://theconversation.com/a-new-ratings-industry-is-emerging-to-help-homebuyers-assess-climate-risks-171898">climate risk ratings systems</a> to educate real estate buyers about the different future climate risks specific pieces of real estate will face, such as wildfires or flooding.</p>
<p>Suppose this emerging climate risk rating industry makes progress in identifying less risky areas to live, and zoning codes are changed to allow more people to live in these safer areas. The damage that Americans suffer from climate change would decrease as people literally “move to higher ground”.</p>
<p>The confident climate modeler cannot capture this dynamic with inflexible algebra.</p>
<h2>Prediction under uncertainty</h2>
<p>Climate economics models can play a “Paul Revere” role – educating policymakers and the public about the likely risks ahead. As economists build these models, they must be <a href="https://doi.org/10.1093/reep/rew012">honest about their limitations</a>. A model that generates “the answer” may lead decision-makers astray. </p>
<p>As much as everyone might like a concrete answer to how much climate change and acting on climate change will cost, we’ll have to live with uncertainty. </p>
<p><em>This article was updated May 24, 2022, with Deloitte’s new estimate.</em></p><img src="https://counter.theconversation.com/content/176432/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew E. Kahn does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Human behaviors shift. Policies change. New technology arrives and evolves. All those changes and more are hard to predict, and they affect tomorrow’s costs.Matthew E. Kahn, Provost Professor of Economics and Spatial Sciences, USC Dornsife College of Letters, Arts and SciencesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1715022021-11-14T19:09:23Z2021-11-14T19:09:23ZThe government’s net-zero modelling shows winners, we’ve found losers<figure><img src="https://images.theconversation.com/files/431817/original/file-20211114-19-1bm6d06.jpg?ixlib=rb-1.1.0&rect=264%2C139%2C2375%2C1208&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">The Conversation</span></span></figcaption></figure><p>On Friday November 12, after a <a href="https://theconversation.com/heres-how-the-governments-modellers-concluded-net-zero-would-leave-us-better-off-171743">wait of a fortnight</a>, the government released a 100-page summary of the modelling and analysis behind its claim that an emissions target of net-zero by 2050 would leave the economy no worse off.</p>
<p>The report details both formal in-house modelling using a large global economic model and a relatively informal but detailed assessment of employment outcomes prepared by the consultancy McKinsey & Company.</p>
<p>The formal modelling starts with a scenario labelled “no Australian action”, in which every developed country other than Australia cuts its emissions to net-zero by 2050, and when taken together every country other than Australia does whatever else is needed to hold global warming to 2°C.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=495&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=495&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431763/original/file-20211113-15340-1mrr5nq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=495&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.industry.gov.au/sites/default/files/November%202021/document/australias-long-term-emissions-reduction-plan-modelling.pdf">Department of Industry, Science, Energy and Resources</a></span>
</figcaption>
</figure>
<p>In “<a href="https://www.industry.gov.au/sites/default/files/November%202021/document/australias-long-term-emissions-reduction-plan-modelling.pdf">no Australian action</a>” Australia as good as ignores the major green technological advances in the rest of the world (including those in hydrogen) and is penalised for not targeting net-zero via measures including carbon tariffs and a reluctance of financiers to advance money to Australian projects. </p>
<p>The modelling compares “no Australian action” with a number of alternative “action” scenarios, of which “<a href="https://www.industry.gov.au/data-and-publications/australias-long-term-emissions-reduction-plan">the plan</a>” is the most preferred. </p>
<p>Included in “the plan” are the technological advances foregone in “no Australian action” and excluded are the financial penalties. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-is-about-to-be-hit-by-a-carbon-tax-whether-the-prime-minister-likes-it-or-not-except-the-proceeds-will-go-overseas-170959">Australia is about to be hit by a carbon tax whether the prime minister likes it or not, except the proceeds will go overseas</a>
</strong>
</em>
</p>
<hr>
<p>Under “the plan”, Australia’s gross emissions fall to between 25% and 35% of their 2005 level by 2050. As yet unknown technological advances remove a further 15%, and the rest of the path to net zero is provided by the purchase of emissions offsets, the foreign ones costing (a remarkably cheap) A$40 per tonne.</p>
<p>Given the technological advances and freedom from penalties associated with the plan, it isn’t surprising that it produces a better economic outcome.</p>
<p>What is surprising, given those assumptions, is that the gain in real income the modellers came up with is so small. </p>
<h2>Six months difference after 30 years</h2>
<p>The projected gain under “the plan” compared with “no Australian action” is 1.6% after 30 years, which is about six months worth of economic growth, meaning the economy would be as big in June 2050 as it would have been in December 2050.</p>
<p>The summary says the employment outcomes produced by McKinsey are “broadly in line” with the outcomes produced by the macroeconomic modelling. </p>
<p>What this means isn’t quite explained. It might have just turned out that way, or the government might have picked or asked for results that mirrored its own.</p>
<p>Regardless, the summary released on Friday has little to say (except in a cursory way) about the impacts of the plan on regions, on industries other than the most emission-intensive, and on the labour market adjustments and changes to the skills and types of education that will be required.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/five-things-you-need-to-know-about-the-glasgow-climate-pact-171799">Five things you need to know about the Glasgow Climate Pact</a>
</strong>
</em>
</p>
<hr>
<p>As it happened, the day before the summary was released, my team at the Centre of Policy Studies at Victoria University published its <a href="https://cdn.theconversation.com/static_files/files/1853/20211111COPS.pdf">own modelling</a> of the economic impact on Australia of achieving net-zero emissions with a good deal more detail about the impacts on regions and industries.</p>
<p>We are preparing a second report on the impact on education with the Mitchell Institute for release early next year.</p>
<h2>We asked a slightly different question…</h2>
<p>My team assessed the impacts of net-zero in a slightly different way to the government, by asking what would happen to the Australian economy if the rest of the world (including Australia) moved to net-zero by 2050, comparing it to what would happen if they did not. </p>
<p>In our modelling Australia faced no financial penalty for not pulling its weight and there was no role for as yet unknown technologies and no ability for Australia to achieve net-zero by buying permits from overseas. This made our modelling conservative, less likely to find that net-zero produced an economic benefit.</p>
<h2>…and got a similar answer</h2>
<p>We found that despite deep cuts in emissions, the Australian economy would continue to grow strongly in terms of production and employment. However after 30 years real GDP and income would be <a href="https://cdn.theconversation.com/static_files/files/1853/20211111COPS.pdf">slightly lower</a> than they would have been without action.</p>
<p>In contrast to the government’s projected gain of around 1.6% after 30 years (six months of economic growth) we found a loss of around 1%, equivalent to four to five months of economic growth. </p>
<hr>
<p><strong>Real GDP in 2021 prices, base case and net-zero scenarios</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431768/original/file-20211113-21-106d0cb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Zero Greenhouse Gas Emissions by 2050: What it means for the Australian Economy, Industries and Regions.</span>
<span class="attribution"><a class="source" href="https://www.vu.edu.au/centre-of-policy-studies-cops/about-the-centre/news-publications">Centre of Policy Studies, 2021</a></span>
</figcaption>
</figure>
<hr>
<p>What’s significant is that when we last did this work in 2014, we estimated a larger loss in GDP of 3.8%.</p>
<p>The loss is smaller now because the task has become easier, thanks to lower than previously expected renewable generation costs and a faster than expected uptake of both light and heavy electric vehicles.</p>
<p>On employment, we found Australia would have about the same number of jobs by 2050 under either scenario.</p>
<p>Industries such as coal mining would suffer, although not as much as might be thought. Coal mining would continue in 2050 due to continued international demand, with production down 34% and hours worked down 37% compared to no more toward net-zero.</p>
<h2>But more detail on jobs</h2>
<p>Decarbonisation will provide an impetus to many industries, especially renewable electricity and forestry which would almost double as decarbonisation boosted tree planting in order to take advantage of bio-sequestration opportunities. </p>
<p>This would lead to significant increases in forested land and increased sales of logs for processing and export as forest pulp. Surprisingly, we found little mention of forestry or wood processing and exports in the government’s summary.</p>
<hr>
<p><strong>Change in hours worked by industry under net zero scenario, 2050</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431803/original/file-20211114-15515-iwkna1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">ANZSIC industry divisions.</span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/1853/20211111COPS.pdf">Centre of Policy Studies, November 11, 2021</a></span>
</figcaption>
</figure>
<hr>
<p>Electricity would replace more than all the jobs lost in coal generation with additional jobs in renewables generation and electricity distribution and supply as more of the economy became electric-powered.</p>
<p>Although vulnerable industries account for less than 4% of employment across the country, some regions are much more heavily dependent on them than others.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-government-modelling-found-net-zero-would-leave-us-better-off-171743">How government modelling found net-zero would leave us better off</a>
</strong>
</em>
</p>
<hr>
<p>We identify nine of Australia’s 88 statistical area level 4 regions as vulnerable to loss of employment. They include the coal-dependent regions such as Hunter in NSW, Fitzroy in Queensland and Gippsland in Victoria. </p>
<p>On the other hand, another 46 regions are identified as likely to gain employment. They are more highly exposed to the industries that would grow.</p>
<hr>
<p><strong>Change in real state product by industry under net zero scenario, 2050</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431809/original/file-20211114-60463-j9qsgi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/1853/20211111COPS.pdf">Centre of Policy Studies, November 11, 2021</a></span>
</figcaption>
</figure>
<hr>
<p>By state, Tasmania benefits the most under net-zero, having more hydroelectricity, forestry and wood products industry than other states as well as no coal-fired generation. Its real gross state product would be 4.9% higher than otherwise in 2050, and employment 11,600 higher </p>
<p>Queensland suffers the most, because of an over-representation of coal mining, broadacre agriculture and coal-generated electricity in its economy. Its real gross state product would be 5.9% lower than otherwise in 2050, and employment 97,800 lower. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cop26-experts-react-to-the-un-climate-summit-and-glasgow-pact-171753">COP26: experts react to the UN climate summit and Glasgow Pact</a>
</strong>
</em>
</p>
<hr>
<p>The worse outcomes need to be put into perspective. Queensland is expected to employ an extra 1.2 million people by 2050 without decarbonisation. With decarbonisation it would be slightly fewer extra people, an extra 1.1 million.</p>
<h2>It’s important our leaders do this work too</h2>
<p>Whatever the government does to achieve zero emissions there will be a clear need for adjustment packages to cushion impacts on those most affected. </p>
<p>Given that we will be embarking on decarbonisation to secure community-wide benefits, it will be appropriate for the community to fund those packages. </p>
<p>To do that we will need detailed projections for the parts of the economy (regions, industries, occupations by skill) that will most benefit from the changes and the parts that will be most hurt. To date, the government hasn’t told us.</p><img src="https://counter.theconversation.com/content/171502/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Adams receives funding from Victoria University.. </span></em></p>Forestry is a surprising winner in detailed projections prepared by Victoria University. Queensland has the most to lose from a move to net-zero.Philip Adams, Professor at the Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1370582020-04-30T19:49:09Z2020-04-30T19:49:09ZIt could take two years for the economy to recover from the coronavirus pandemic<figure><img src="https://images.theconversation.com/files/331599/original/file-20200429-155252-2jpdjc.jpg?ixlib=rb-1.1.0&rect=77%2C0%2C5639%2C3828&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Economists are using models to try to determine what short- and long-term impacts the coronavirus pandemic will have on the global economy. </span> <span class="attribution"><span class="source">(AP Photo/Koji Sasahara)</span></span></figcaption></figure><p>Predictions about <a href="https://www.marketwatch.com/story/us-gdp-in-the-first-quarter-is-going-to-be-bad-and-the-damage-is-far-from-done-2020-04-28">the effects of the coronavirus pandemic</a> on the world’s economy arrive almost daily. How can we make sense of them in the midst of this economic storm? After all, research shows that economic forecasts made <a href="https://www.ncbi.nlm.nih.gov/books/NBK92473/">during events such as SARS</a> are often <a href="https://doi.org/10.1016/j.healthpol.2008.03.003">wildly inaccurate</a>. </p>
<p>To calibrate current forecasts — such as the International Monetary Fund’s prediction of a 6.2 per cent decline in <a href="https://www.thesolutionsjournal.com/article/a-short-history-of-gdp-moving-towards-better-measures-of-human-well-being/">Gross Domestic Product</a> for Canada — I’ve looked at the history of similar worldwide economic shocks, studied macroeconomics models and reviewed nearly <a href="https://ssrn.com/abstract=3581243">75 studies</a> to better understand what might happen in a post-pandemic world.</p>
<h2>The economic effects of 1918-20 flu</h2>
<p>The <a href="https://www.stlouisfed.org/%7E/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf">influenza outbreak of 1918-20</a> killed at least 40 million people, or approximately two per cent of the world’s population. <a href="https://www.canadashistory.ca/explore/arts-culture-society/killer-flu">In Canada</a> alone, at least 50,000 deaths were attributed to the flu, approaching the number of Canadian deaths in the First World War. Solid data about GDP did not exist for that era, so economic historians have to recreate economic measurements based on the data that was collected. </p>
<p>The <a href="https://www.sciencedirect.com/science/article/pii/S0167629614000344">most thorough study</a> focuses on how the influenza pandemic 100 years ago affected Sweden. The Swedish study took advantage of the fact that the country kept very detailed data on causes of death, as well as having a history of accurate economic record-keeping dating back to the 1800s.</p>
<p>Sweden was a neutral country in the First World War, so unlike other Western nations, the war had limited impact on the country’s economy. The fatality rate from the flu in Sweden was comparable to most Western nations and its economy was similar to other developed countries.</p>
<p>The study of Sweden’s flu experience a century ago suggests there could be permanent negative long-term economic effects from the current pandemic. There was a decline in income from capital sources such as interest, dividends and rents of five per cent that lasted at least until 1929. This was a permanent decline not recovered once the flu pandemic passed. </p>
<h2>Swedish poor never recovered</h2>
<p>There was also an increase in absolute poverty for those Swedes at the bottom of the economic pyramid: enrolment in government-run “poorhouses” in higher flu-incidence regions jumped 11 per cent and did not decline over the next decade. There was some good news: while employment income was reduced during the crisis, it quickly rebounded to predicted normal levels.</p>
<p>A <a href="https://www.nber.org/papers/w26866">recent study</a> attempts to measure the effects of the influenza on 1918-21 GDP. Harvard economist Robert Barro and his colleagues painstakingly put together a set of economic data that attempts to recreate what GDP in 42 countries would have been. </p>
<p>They have found that the flu was responsible for an additional six per cent decline in global GDP. The study concludes that the effects were reversed by 1921. This estimate of the flu’s historical GDP effects is strikingly similar to the IMF’s current prediction of six per cent reduction in GDP for Western economies as a result of the coronavirus pandemic.</p>
<h2>Modelling economic effects of a pandemic</h2>
<p>Beyond economic history, we can look at macroeconomic models of the global, regional or national economies that run scenarios about pandemic economic shocks. </p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S0277953611003029?via%3Dihub">One scenario</a> by British economists and health science academics is particularly apt in light of COVID-19.</p>
<p>Their scenario models virus incidence and fatality rates close to the current best estimates and includes strong and early social distancing measures such as school closures and work-from-home arrangements that we see today in many countries fighting the pandemic.</p>
<p>Their model estimates a 21 per cent decline in U.K. GDP in the first full quarter of the pandemic, with a 4.45 per cent decline in GDP for first year. The model also suggests the time frame to economic recovery is about two years. The current IMF projection for the U.K. is a 6.5 per cent decline in annual GDP.</p>
<p>There is no doubt that COVID-19 is a major shock to the global economy. Across all the studies I reviewed, the conclusion of a significant decline in GDP in the order of 4.5 to six per cent with full recovery within two years seems to be well justified.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=500&fit=crop&dpr=1 600w, https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=500&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=500&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=628&fit=crop&dpr=1 754w, https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=628&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/331601/original/file-20200429-155205-4g1irl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=628&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Men wear masks in Alberta during the influenza pandemic of 1918. Second and third waves of the flu added to economic woes in the early 20th century.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/National Archives of Canada</span></span>
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<p>The economic history of the influenza pandemic 100 years ago suggests early easing of social distancing measures and the inability to develop an effective vaccine contributed to second and third flu waves. These waves might have greater effects on the modern service-based economy of Western nations than they did on the more agrarian economy of 100 years ago.</p>
<p>Economic history serves as a potential warning that the economy could get much worse if these measures are ignored.</p>
<p>It’s important to remember that GDP is a marker of a nation’s overall economic health. On an individual level, the effects may be more far-reaching and painful. There are financial and professional losses that may never be recovered.</p>
<p>The 1918-20 flu offers an important history lesson for the world’s current economic outlook: there may be significant declines in the returns to capital in the next decade, as well as relative increases in poverty for the neediest in our society.</p><img src="https://counter.theconversation.com/content/137058/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven E. Salterio receives funding from the Social Sciences and Humanities Research Council for his research on evidence based policy making. </span></em></p>As countries get ready to re-open their economies, will there be a post-pandemic recovery? History and current economic models suggest those looking for a quick rebound will be disappointed.Steven E. Salterio, Stephen JR Smith Chair of Accounting and Auditng, Professor of Business, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1350252020-03-30T04:03:48Z2020-03-30T04:03:48ZModelling suggests going early and going hard will save lives and help the economy<p>In 1997, a <a href="https://en.wikipedia.org/wiki/Guns,_Germs,_and_Steel">bestselling book</a> by Jared Diamond purported to explain how the West “won” world dominance based on the good luck of geography, and because western countries were the first to industrialise. </p>
<p>Fast forward to 2020, and to COVID-19. Geography still matters, but the West is no longer “winning”. </p>
<p>Despite initial mistakes, it seems <a href="https://www.abc.net.au/news/2020-03-26/coronavirus-covid19-global-spread-data-explained/12089028">China</a> has been successful at containing the virus, and other countries such as South Korea and Singapore have, so far, been able to dramatically slow the rate of infection.</p>
<p>Western countries were slow to respond and are paying a very high price. As of March 30, Italy had 98,000 confirmed cases and 10,800 COVID-19 deaths.</p>
<p><a href="https://theconversation.com/newsletter"><img src="https://images.theconversation.com/files/320030/original/file-20200312-116261-a6ugi0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=90&fit=crop&dpr=2" alt="Sign up to The Conversation" width="100%"></a></p>
<p>While cross-country comparisons on confirmed cases are <a href="https://edition.cnn.com/2020/03/26/health/number-of-cases-testing-data-intl/index.html">problematic</a> because of large differences in testing, the United States currently has more than <a href="https://coronavirus.jhu.edu/map.html">137,000</a> confirmed cases – the highest in the world, more than in China. </p>
<p>This number will get much larger very quickly if cases continue to double every few days.</p>
<p>The number of Americans who will die will soon be in the thousands, and possibly tens of thousands, if the US does not do much more at a national level to ensure physical distancing. </p>
<p>If the current growth rate continues, parts of its health system, especially <a href="https://www.nytimes.com/interactive/2020/03/20/us/coronavirus-model-us-outbreak.html">intensive care units</a>, will be overwhelmed.</p>
<h2>Exponential growth</h2>
<p>Currently, the rate of infection – without sufficient measures – tracks very closely exponential growth. </p>
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<img alt="" src="https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=648&fit=crop&dpr=1 600w, https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=648&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=648&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=814&fit=crop&dpr=1 754w, https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=814&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/323869/original/file-20200330-146724-1hn67l7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=814&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>This allows us to accurately predict, with a basic <a href="https://www.maa.org/press/periodicals/loci/joma/the-sir-model-for-spread-of-disease-the-differential-equation-model">disease spread model</a>, the minimum, maximum, and most likely number of confirmed cases, at least for the next week or so (although it should be noted that an increased rate of testing will increase this number).</p>
<p>The data tells us that for countries in the earlier phase of the pandemic such as Australia the number of confirmed cases doubles every few days. </p>
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Read more:
<a href="https://theconversation.com/how-to-flatten-the-curve-of-coronavirus-a-mathematician-explains-133514">How to flatten the curve of coronavirus, a mathematician explains</a>
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<p>In Australia it began by doubling roughly every four days, and is now doubling every seven days. (The number undoubtedly underestimates the rate of infection.)</p>
<p>Australia had about <a href="https://infogram.com/ama-covid-19-factsheet-daily-update-1hdw2j7np1ko2l0?live">2,000</a> confirmed cases on 24 March. Given rates of infection and changes in growth, our forecasts of infections made on March 27 for Sunday March 29 ranged from 3,950 to 4,460.</p>
<h2>Robust short-term predictions</h2>
<p>The actual reported number on Sunday March 29 was 3,984, near the low end of that range.</p>
<p>Our forecast for 6pm on Wednesday April 1 now ranges from 5,080 to 5,970 cases, with 5,220 most likely.</p>
<p>For Thursday April 2 the range is 5,510 to 6,835, with 5,715 most likely.</p>
<p>Until physical distancing has had an effect, exponential growth is as good as certain. This will make our forecasts robust.</p>
<p>The current measures might already be cutting infection growth rates, but it is too early to tell. Even stricter measures will be needed to cut the number infected.</p>
<p>With sufficient physical distancing, Australia could end up with an infection rate as low as 1%. By comparison, if it fails to control the infection by not implementing sufficient physical distancing, it could end up with a much worse rate of 20%.</p>
<h2>The payoff from going hard and going early</h2>
<p>What is the difference in the number of deaths between an infection rate of 1% versus 20%? </p>
<p>Overseas death rates suggest Australia could face an additional 48,000 premature deaths without distancing. This is equivalent to about 30% of annual deaths in Australia.</p>
<p>Although <a href="https://fortune.com/2020/03/18/coronavirus-young-people-getting-sick-covid-19-us-italy-france/">recent evidence</a> suggests young people might be more vulnerable than previously thought, those premature deaths would be clustered in the old and those with other illnesses, and those also in remote Indigenous communities, should the virus get there.</p>
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Read more:
<a href="https://theconversation.com/new-oecd-estimates-suggest-a-22-hit-to-australias-economy-135026">New OECD estimates suggest a 22% hit to Australia's economy</a>
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<p>Economists use the <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1650128/">value of an economic life</a> for cost-benefit analysis of public projects. It is a measure of society’s willingness to pay to reduce the risk of an additional death. </p>
<p>Using the <a href="https://www.pmc.gov.au/sites/default/files/publications/Value_of_Statistical_Life_guidance_note.pdf">New South Wales Treasury’s value of a statistical life</a> of $4.2 million, the economic loss of 48,000 premature deaths amounts to some $200 billion, or about 10% of Australia’s annual economic output.</p>
<p>This means it makes sense to act early and hard before the infection rate gets too high, cutting it as quickly as possible. The Spanish Influenza pandemic suggests <a href="https://www.bloomberg.com/opinion/articles/2020-03-27/tough-pandemic-shutdowns-work-for-the-economy-too">aggressive physical distancing</a> works.</p>
<p>The question Australians should ask of their leaders is this: is strict physical distancing a cost worth paying?</p>
<h2>Costs and benefits from distancing</h2>
<p>The main economic benefit from insufficient physical distancing would be that, at least initially, more Australians would stay employed, there would be more economic activity, more taxes would be paid, and government would need to spend less.</p>
<p>But not imposing a lockdown or equivalent measures would come at the cost of a higher infection rate, which would also mean more non-pandemic patients might die because of insufficient beds or medical equipment or staff to look after them. </p>
<p>A higher infection rate would also increase the death rate of pandemic patients as there would be fewer ventilators available to treat each one.</p>
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Read more:
<a href="https://theconversation.com/why-defeating-coronavirus-in-one-country-isnt-enough-there-needs-to-be-a-coordinated-global-strategy-134474">Why defeating coronavirus in one country isn't enough – there needs to be a coordinated global strategy</a>
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<p>And the economy would suffer even without sufficient physical distancing, although the worst would be delayed. Many people would still get sick and be unable to work until they were recovered.</p>
<p>A much higher infection rate would also isolate Australia from the rest of the world. Why would any country want Australians to visit if it had high rates of infection, and why would anyone from another country want to visit Australia?</p>
<h2>The wage subsidy provides a way out</h2>
<p>A high enough wage subsidy for all workers (including part-timers and casuals) who cannot work because of control measures, coupled with the already announced additional $550 a fortnight COVID-19 supplement to the <a href="https://theconversation.com/scalable-without-limit-how-the-government-plans-to-get-coronavirus-support-into-our-hands-quickly-134353">Jobseeker Payment</a>, could provide most Australians with enough income to survive and pay the bills during a lockdown.</p>
<p>Such an approach combines “sharing the burden” with “flattening the curve”, a two-fold economic and public health approach that would save lives while minimising economic disruption, especially for younger and casual workers who are the most disadvantaged by severe physical distancing. </p>
<p>It’s the smartest and safest strategy, and Australia appears to be adopting it.</p>
<p>Our model for the spread of the infection is an adapted [SEIR-M] model. It is still under development and needs further validation and also peer-review. </p>
<p>For now, we assume a homogeneously mixed population. We are also working on a spatially explicit model to account for more complex population contact.</p>
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Read more:
<a href="https://theconversation.com/overjoyed-a-leading-health-expert-on-new-zealands-coronavirus-shutdown-and-the-challenging-weeks-ahead-134395">'Overjoyed': a leading health expert on New Zealand's coronavirus shutdown, and the challenging weeks ahead</a>
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<p>Our current results are roughly in line with changes in basic growth rates and their projections by state. </p>
<p>We will continue to provide forward projections that can then be compared with actual numbers.</p>
<p>All data is sourced from state and commonwealth websites. </p>
<p>A valuable discussion of this and more complicated infectious disease models is found on the University of Melbourne <a href="https://pursuit.unimelb.edu.au/articles/flattening-the-curve-to-help-australia-s-hospitals-prepare">Pursuit</a> website.</p>
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<p><em>This piece is co-published with <a href="https://www.policyforum.net/policy-file-climate-refugees-where-to-next/">Policy Forum</a> at the ANU Crawford School of Public Policy.</em></p><img src="https://counter.theconversation.com/content/135025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Quentin Grafton has received funding from multiple organisations in the past but none in relation to covid-19 or human health.</span></em></p><p class="fine-print"><em><span>Tom Kompas has received funding from multiple sources and organisations in the past but none in relation to COVID-19 or human health.</span></em></p>Australian National University modelling has a good record on predicting infections. Deaths will depend on the extent of the lockdown.Quentin Grafton, Director of the Centre for Water Economics, Environment and Policy, Crawford School of Public Policy, Australian National UniversityTom Kompas, Visiting Professor, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1327592020-03-03T00:19:41Z2020-03-03T00:19:41ZThe first economic modelling of coronavirus scenarios is grim for Australia, the world<p>The COVID-19 coronavirus is spreading across the world. Initially the epicenter was China, with reported cases either in China or in travellers from China. There are now at least four further epicenters: Iran, Italy, Japan and South Korea. </p>
<p>Although the World Health Organisation believes the number of cases in China has peaked and should fall, case reports are climbing from countries previously thought to be resilient due to stronger medical standards and practices.</p>
<p>In a strongly connected and integrated world, the impacts of the disease will go beyond mortality (deaths) and morbidity (people incapacitated or caring for the incapacitated and unable to work). </p>
<p>Companies across the world, irrespective of size, depend on inputs from China – much more so than during the 2002-04 China-centred Severe Acute Respiratory Syndrome (SARS) pandemic. </p>
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Read more:
<a href="https://theconversation.com/world-economy-flashes-red-over-coronavirus-with-strange-echoes-of-1880s-yellow-peril-hysteria-132414">World economy flashes red over coronavirus – with strange echoes of 1880s Yellow Peril hysteria</a>
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<p>In 2003 China accounted for less than one twentieth of world trade. It now accounts for one seventh, making it the world’s biggest importer and an integral part of most global production chains. </p>
<p>Just as important to the world economy, panic is distorting spending. Global stock markets have plunged.</p>
<h2>Fear is as important as trade</h2>
<p>Entire cities in China have closed and travel restrictions have been placed on people entering from infected countries. </p>
<p>The fear of an unknown deadly virus is similar in its psychological effects to the reaction to terrorism threats and produces a high level of stress, often with longer-term consequences. </p>
<p>A large number of people feel at-risk at the onset of a pandemic, even if their actual risk of dying is low.</p>
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Read more:
<a href="https://theconversation.com/were-staring-down-the-barrel-of-a-technical-recession-as-the-coronavirus-enters-a-new-and-dangerous-phase-132752">We're staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase</a>
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<p>The International Monetary Fund expects COVID-19 to knock 0.4 points off China’s economic growth target of 5.6% and 0.1 points off global growth, an assessment it will continue to update. </p>
<p>On Monday the Organisation for Economic Co-operation and Development sliced 0.8 points off its forecast for China’s growth and <a href="https://www.oecd-ilibrary.org/docserver/7969896b-en.pdf?expires=1583190648&id=id&accname=ocid194681&checksum=0394E7E583C8F97E4F5F8D9B7B14AE8E">0.5 points</a> off its forecast for Australian growth.</p>
<p>As part of a large research project in the Centre for Excellence in Population Ageing Research (CEPAR) at the Australian National University, we have applied experience gained from evaluating the impact of SARS for the World Health Organisation in <a href="https://www.lowyinstitute.org/sites/default/files/pubfiles/WP_5_03_Globalization_and_disease_FINAL_1.pdf">2003</a> and <a href="https://cama.crawford.anu.edu.au/pdf/working-papers/2006/262006.pdf">2006</a> to <a href="https://cama.crawford.anu.edu.au/publication/cama-working-paper-series/16221/global-macroeconomic-impacts-covid-19-seven-scenarios">seven scenarios</a> for COVID-19:</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=346&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=346&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=346&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=435&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=435&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=435&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The scenarios vary the attack rate (the proportion of the total population contracting the virus), the mortality rate (the proportion of total
population who dies), whether epidemic is a one-off (essentially temporary) or recurrs each year (essentially permanent), and whether it spreads globally or is largely confined to China.</p>
<h2>Australian faces a significant hit to GDP</h2>
<p>We find that in the four scenarios where the epidemic goes global, Australia’s GDP which in the 12 months to December grew just 1.7%, would suffer a hit in the first year of between 2% and 7.9%, most likely sending GDP backwards (a recession).</p>
<p>In all countries the sharp hit to growth would be followed by a gradual recovery.</p>
<p>The results are very sensitive to the assumptions used, including government responses in each country.</p>
<p>In the short term, central banks and treasuries will need to make sure disrupted economies continue to function. </p>
<hr>
<p><strong>Australia: percentage change in real GDP</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=395&fit=crop&dpr=1 754w, https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=395&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=395&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Percentage deviation from business as usual.</span>
<span class="attribution"><a class="source" href="https://cama.crawford.anu.edu.au/publication/cama-working-paper-series/16221/global-macroeconomic-impacts-covid-19-seven-scenarios">Source: McKibbin and Fernando, March 2020</a></span>
</figcaption>
</figure>
<hr>
<p>While cutting interest rates is an option, the shock will require a mix of monetary, fiscal and health policy responses. Quarantining affected people and reducing large scale social interaction would be an effective response.</p>
<p>Wide dissemination of <a href="https://www.brookings.edu/opinions/simple-steps-to-reduce-the-odds-of-a-global-catastrophe/">good hygiene practices</a> can be a low cost and highly effective response that can also reduce the extent of contagion and keep down the social and economic cost.</p>
<p>The longer-term responses are even more important. </p>
<p>Many governments have been reluctant to invest sufficiently in their health care systems, especially in public systems in less developed countries where many infectious diseases are likely to originate. </p>
<h2>Investments in overseas public health matter</h2>
<p>The idea that any country can be an island in an integrated global economy is being proved wrong. </p>
<p>Poverty kills people. However, the outbreak of COVID-19 shows that diseases, potentially generated in poor countries due to overcrowding, poor public health and interaction with wild animals, can kill people of any socioeconomic group in any country. </p>
<p>There needs to be vastly more investment in public health and development in the richest but also, and especially, in the poorest countries. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/its-now-a-matter-of-when-not-if-for-australia-this-is-how-were-preparing-for-a-jump-in-coronavirus-cases-132448">It's now a matter of when, not if, for Australia. This is how we're preparing for a jump in coronavirus cases</a>
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<p>Our study suggests big economic costs in countries such as Australia can be avoided through global cooperative investment in public health in all countries. </p>
<p>We have known this for decades, yet politicians continue to ignore the scientific and economic evidence about the role of global public health in improving the quality of life and driving economic growth for us all.</p><img src="https://counter.theconversation.com/content/132759/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The same techniques used to model the SARS pandemic for the World Health Organisation produce results ranging from bad to catastrophic.Warwick J. McKibbin, Chair in Public Policy, ANU Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy, Australian National UniversityRoshen Fernando, PhD Student in Economic Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1068412018-11-13T19:03:15Z2018-11-13T19:03:15ZStamp duty fever: the bad economics behind swapping stamp duty for land tax<figure><img src="https://images.theconversation.com/files/245245/original/file-20181113-194494-19rdn8k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Eliminating stamp duty would bring on more real estate transactions, but that might not be a good thing.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>To paraphrase former prime minister Paul Keating, walk into <a href="https://www.smh.com.au/politics/federal/plenty-of-bark-any-bite-20101028-175mv.html">any pet shop in the country</a> and you’ll find the resident galah saying we should swap stamp duty for a land value tax.</p>
<p>Just about every economic think tank in the land thinks it’s about the best value tax change there is, among them the <a href="https://theconversation.com/abolish-stamp-duty-the-act-shows-the-rest-of-us-how-to-tax-property-105378">Grattan Institute</a>, <a href="https://percapita.org.au/our_media/replacing-stamp-duty-with-broad-based-land-tax-could-increase-revenue-to-11-2-billion-by-2047-new-report-shows/">Per Capita</a>, the <a href="http://www.tai.org.au/sites/defualt/files/P149_Tax%20the%20need%20for%20change.pdf">Australia Institute</a>, and the <a href="https://www.cis.org.au/commentary/articles/dominic-perrottets-reforms-are-welcome-but-the-government-must-break-its-addiction-to-this-bad-tax/">Centre for Independent Studies</a> as well as <a href="https://www.thepolicyspace.com.au/2015/25/58-five-ways-to-reform-state-taxes">a swag of academics</a>, the Treasury in its work on the <a href="http://bettertax.gov.au/files/2015/03/08_GST-and-State-Taxes.pdf">draft white paper for tax reform</a> and the <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_g2-2.htm">Henry Tax Review</a>.</p>
<p>Among the benefits of what I will call SD4LVT are said to be greater ease in upsizing and downsizing, a more mobile population (less reluctant to buy and sell houses) and a more reliable source of revenue for state governments.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/abolish-stamp-duty-the-act-shows-the-rest-of-us-how-to-tax-property-105378">Abolish stamp duty. The ACT shows the rest of us how to tax property</a>
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</em>
</p>
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<p>One state, the Australian Capital Territory, has already begun a <a href="https://www.revenue.act.gov.au/tax-reform">20-year</a> phase out of stamp duty and a 20-year build up of land tax.</p>
<p>But beneath the near universal enthusiasm for SD4LVT are layers of bad economics.</p>
<p>It is extremely frustrating to me that the leading minds in Australian policy have put their heads together and decided that the best reform they can think of is to replace a good tax on property with another good one that would be even less popular.</p>
<p>The more thoughtful among them don’t even bother to claim that SD4LVT will make housing more affordable, yet still put it forward as the “holy grail” of tax reform.</p>
<p>It is bad economics because of four key points its proponents miss or overlook.</p>
<h2>Price effects</h2>
<p>Stamp duty comes out of what the buyer is prepared to pay. This means that if you remove it, all other things equal, prices will rise by exactly the amount of the duty removed. </p>
<p>If the average home price is A$500,000, and buyers pay a 5% stamp duty, taking the total to A$525,000, then when stamp duty is removed the price will immediately increase to $525,000 being what the buyer was prepared to pay.</p>
<p>If you replace the stamp duty revenue with revenue from land value taxes, the effects on price are less clear. The change could push them up (enriching sellers) or it could push them down.</p>
<p>Imagine an example economy with:</p>
<ul>
<li>20 houses </li>
<li>Turnover of one house each year (a turnover rate of 5%) </li>
<li>An average home price of A$500,000 </li>
<li>Average land price component of A$250,000</li>
<li>Total stamp duty revenue of A$25,000 per year</li>
</ul>
<p>Replacing the A$25,000 stamp duty revenue with a land value tax requires taxing all 20 homes at A$1,250 per year each.</p>
<p>Whether the market price of homes rises or falls depends on whether buyers think the cost to them of A$1,250 per year is lower or higher than the A$25,000 upfront stamp duty they avoided. If they thought it was about the same, SD4LVT wouldn’t much affect prices. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/killing-off-stamp-duty-a-good-policy-that-no-politician-supports-38536">Killing off stamp duty: a good policy that no politician supports</a>
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</em>
</p>
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<p>But what if turnover was half that, say 2.5%, which in this example would be where one house was sold every two years? In that case, the total stamp duty to be replaced would be A$12,500, which would be only A$625 per house in land tax.</p>
<p>The new buyer could pay A$512,500 for the house plus A$625 per year in land tax and be equally as well off as paying A$500,000 for the house plus A$25,000 in stamp duty. </p>
<p>The net effect would be a 5% land price increase from A$250,000 to A$262,500</p>
<p>If that happened nationally it would mean a transfer of almost A$200 billion to existing owners.</p>
<p>Whether or not that did happen would depend on the turnover and buyer’s views about the future value of money. In short, the price effects of a SD4LVT are ambiguous.</p>
<h2>Mobility</h2>
<p>While it is said that stamp duties deter Australians from changing addresses and switching jobs, there is little evidence that they are not changing enough.</p>
<p>Most people who relocate for work <a href="https://www.rba.gov.au/publications/bulletin/2017/mar/pdf/bu-0317-3-housing-market-turnover.pdf">don’t buy and sell homes in order to do it</a>.</p>
<p>They rent first, becoming both a renter and a landlord for a while, perhaps selling their first home later, but not quickly.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-older-australians-dont-downsize-and-the-limits-to-what-the-government-can-do-about-it-76931">Why older Australians don't downsize and the limits to what the government can do about it</a>
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</em>
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<p>When they do sell, often for a healthy profit, stamp duty ensures they pocket less than would have, grabbing back some of what might otherwise be an untaxed capital gain. </p>
<p>Lower housing turnover from stamp duties mainly falls on the nearly half of sales involving investors who buy speculatively to capitalise on short bursts of capital growth before selling, in the process fuelling the boom and bust price cycle.</p>
<p>To me, anything that slows down real estate turnover and captures capital gains seems like a good idea.</p>
<h2>Revenue stability</h2>
<p>It is claimed that stamp duty revenues are much more volatile than other taxes. During a boom, they climb more than proportionally to prices since they also depend on turnover. During a bust, they fall more quickly than prices.</p>
<p>If I was to think in the abstract about what sort of taxes are good for the economy, I would say it is those that are pro-cyclical, meaning they automatically increase takings during a boom, and wind them back during a bust. </p>
<p>On this measure, stamp duty is a good tax for stabilising the economy, something important given how much our economic cycles are tied to housing markets.</p>
<p>The land value tax that SD4LVT proponents would replace stamp duty with would make the tax system as a whole less stabilising.</p>
<h2>Odd modelling</h2>
<p>You might have seen a chart like the Treasury graph below, with stamp duties presented as having enormous flow-on economy-wide costs compared to other taxes. In this example, land tax which is presented as having an economic benefit.</p>
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<iframe src="https://datawrapper.dwcdn.net/i78qD/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
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<p>The problem with the graph is that modelling used to prepare it (computational general equilibrium modelling) can’t directly account for transaction taxes because it doesn’t model transactions. </p>
<p>Instead of using a better tool for the job, the modellers assume that stamp duties increase cost of housing to all buyers and renters. It’s this assumption that drives a conclusion they describe as merely “<a href="http://www.policypartners.com.au/assets/treasury---economic-incidence-of-taxes-(2015).pdf">illustrative</a>”. </p>
<h2>To sum up</h2>
<p>Stamp duties don’t push up the cost of housing. The claim that they impede household mobility is overblown. They do reduce asset churn, and as a result they help maintain price stability. </p>
<p>Their “revenue instability” is actually a huge positive for the economy as a whole. And the modelling that has underpinned the talk of high economy-wide costs is as good as made up.</p>
<p>Yet SD4LVT remains the apparent holy grail of Australian tax policy. </p>
<p>Our best policy wonks continue to push our politicians to use up the precious capital to swap one very good property tax for another, for no obvious economic gain.</p><img src="https://counter.theconversation.com/content/106841/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cameron Murray is affiliated with the Sustainable Australia party. </span></em></p>The conventional case for swapping stamp duty for land tax will boost the economy has weak underpinnings.Cameron Murray, Lecturer in Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/990802018-07-09T20:00:03Z2018-07-09T20:00:03ZMissing evidence base for big calls on infrastructure costs us all<p>When the case for big transport projects is made without due analysis, we risk building the wrong projects. The result is we waste billions of dollars and rob ourselves of the infrastructure our booming cities need to be more liveable. Given <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/3218.0">how fast our big cities are growing</a>, we simply can’t afford to make decisions based on limited or misleading information. Yet this keeps happening.</p>
<p>Two stark examples – proposed rail links to <a href="https://theconversation.com/western-sydney-aerotropolis-wont-build-itself-a-lot-is-riding-on-what-governments-do-97462">Western Sydney</a> and <a href="https://theconversation.com/airport-rail-link-can-open-up-new-possibilities-for-the-rest-of-melbourne-80203">Melbourne</a> airports and <a href="https://theconversation.com/city-wide-trial-shows-how-road-use-charges-can-reduce-traffic-jams-86324">road congestion charges</a> – illustrate the problem in different ways. </p>
<p>The proposed airport rail links show how governments continue to make huge taxpayer commitments to projects before they are able to articulate the costs, benefits and risks. </p>
<p>In the case of proposed road congestion charges we see an important reform languishing. This is because when reforms rest on obscure or unclear analysis they inevitably fail to generate public support.</p>
<hr>
<p><em><strong>Read more:</strong> <a href="https://theconversation.com/western-sydney-aerotropolis-wont-build-itself-a-lot-is-riding-on-what-governments-do-97462">Western Sydney Aerotropolis won’t build itself – a lot is riding on what governments do</a></em>
<em><a href="https://theconversation.com/airport-rail-link-can-open-up-new-possibilities-for-the-rest-of-melbourne-80203">Airport rail link can open up new possibilities for the rest of Melbourne</a></em></p>
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<h2>Funding pledges don’t wait for a business case</h2>
<p>In the case of the recently announced multi-billion-dollar investments in airport rail in <a href="https://www.theguardian.com/australia-news/2018/mar/04/7bn-pledge-for-badgerys-creek-airport-rail-link-to-sydneys-west">Western Sydney</a> and <a href="https://www.pm.gov.au/media/announcement-funding-melbourne-airport-rail-link">Melbourne</a>, neither project has a business case. Yet politicians on both sides tripped over themselves in committing to building them.</p>
<p>There are good reasons to be wary of their eagerness. A <a href="https://www.transport.nsw.gov.au/system/files/media/documents/2018/wsrns-outcomes-report-mar-2018.pdf">government study released this year</a> stated that <a href="https://theconversation.com/flying-into-uncertainty-western-sydneys-aerotropolis-poses-more-questions-than-answers-73682">Western Sydney airport rail</a> wouldn’t be needed to cater for customers and workers at the airport until 2036 at the earliest. Without a business case, we have no way to understand the grounds on which the government still believes this project represents value for money.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/flying-into-uncertainty-western-sydneys-aerotropolis-poses-more-questions-than-answers-73682">Flying into uncertainty: Western Sydney's 'aerotropolis' poses more questions than answers</a>
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<p>In the case of Melbourne airport rail, the project’s <a href="https://www.theage.com.au/national/victoria/airport-rail-routes-the-pros-and-cons-20180412-p4z97u.html">route hasn’t been resolved</a>, let alone its costs, ticket pricing structure, or potential benefits. Infrastructure Australia’s <a href="http://infrastructureaustralia.gov.au/projects/infrastructure-priority-list.aspx">most recent priority list</a> did not include a proponent for the project. </p>
<p>And <a href="http://infrastructurevictoria.com.au/sites/default/files/images/Options%20book%20-%20FINAL%20-%20December%202016.pdf">Infrastructure Victoria says</a> upgrading airport bus services should be investigated first. This is because, at A$50-100 million, bus services would be a much cheaper way to tackle the same problem. It has also said the rail line should be delivered – but not for at least 15 years.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/melbourne-airport-is-going-to-be-as-busy-as-heathrow-so-why-the-argument-about-one-train-line-95289">Melbourne Airport is going to be as busy as Heathrow, so why the argument about one train line?</a>
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<h2>Touting estimated benefits without showing calculations</h2>
<p>The second example of Australia’s transport planning information deficit is different but still damaging. It concerns the way infrastructure experts encourage governments to make worthwhile but politically challenging reforms to how we use existing infrastructure. The idea is to get <a href="https://theconversation.com/delay-in-changing-direction-on-how-we-tax-drivers-will-cost-us-all-87931">more value from the assets we already have</a>.</p>
<p>Infrastructure Australia <a href="https://www.afr.com/business/infrastructure/afr-infrastructure-summit-deputy-pm-embraces-radical-overhaul-of-road-charges-20180604-h10x9v">advocates a road congestion tax</a>. This would replace annual registration fees and petrol taxes with a scheme that charges motorists more when they travel in congested places at congested times.</p>
<p>It’s a very good idea. Indeed, a <a href="https://grattan.edu.au/wp-content/uploads/2017/10/892-Road-congestion.pdf">Grattan Institute report</a> last year recommended governments think seriously about road congestion charges for Sydney and Melbourne. But the way Infrastructure Australia has mounted the case leaves a lot to be desired.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/delay-in-changing-direction-on-how-we-tax-drivers-will-cost-us-all-87931">Delay in changing direction on how we tax drivers will cost us all</a>
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<p>Last month, Infrastructure Australia <a href="http://infrastructureaustralia.gov.au/policy-publications/publications/prioritising-reform.aspx">released estimates of the benefits</a>, prepared with PwC, of a scheme to charge motorists more precisely according to the location, time and distances they travel. According to these estimates, in just over a decade, Australia’s GDP would be A$21 billion larger every year – and this would increase to A$36.5 billion a year by 2047.</p>
<p>The problem is that Infrastructure Australia provides little information about how these enormous numbers were calculated. In a flawless example of circular reasoning, IA refers to analysis done by PwC. PwC in turn notes that the estimates were “collaboratively developed by IA and PwC”.</p>
<p>The calculations do not appear to have included the costs of implementing and running such a scheme. And we have been told nothing about how this grand plan might work in practice.</p>
<h2>Converting reductions in travel times to increases in GDP</h2>
<p>The most commonly cited estimates of the “avoidable costs” of congestion in Australia come from the Bureau of Infrastructure, Transport and Regional Economics. In 2015, <a href="https://bitre.gov.au/publications/2015/is_074.aspx">BITRE estimated</a> the annual costs for Australia’s eight capitals totalled about A$16.5 billion. This was forecast to rise to about A$30 billion by 2030.</p>
<p>Such estimates have been important in highlighting the fact that congestion is not just aggravating but costly. But such estimates are, as <a href="https://bitre.gov.au/publications/2015/files/is_074.pdf">BITRE itself states</a>, “very blunt instruments for estimating and projecting congestion occurrence”.</p>
<p>It is difficult to precisely convert estimates of avoidable congestion costs into changes in GDP, of course. But the new Infrastructure Australia estimates do not even follow some simple, but important, rules of modelling. </p>
<p>First, they don’t make it easy for readers to see the basis for the assumptions used. Second, they don’t appear to have factored in costs as well as benefits. And third, in a situation where significant uncertainty surrounds the estimates, they haven’t published a range for the estimated impacts.</p>
<p>Getting transport projects right is critically important in cities that are already under pressure. Yet too many big infrastructure calls in Australia are based on misleading information or wafer-thin evidence. We need to do better.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/budget-policy-check-do-we-need-ribbon-cutting-infrastructure-for-jobs-and-growth-95362">Budget policy check: do we need ribbon-cutting infrastructure for jobs and growth?</a>
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<img src="https://counter.theconversation.com/content/99080/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities. </span></em></p>Billions of taxpayer dollars are committed before all the evidence for, and against, infrastructure projects is in. As well as missing business cases, basic rules of economic modelling are broken.Hugh Batrouney, Transport Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/970552018-06-04T10:42:10Z2018-06-04T10:42:10Z22 percent of men without college don’t have jobs. Here’s why they’re being left behind<figure><img src="https://images.theconversation.com/files/221467/original/file-20180603-142102-oew7s4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The job market is still tough for many Americans.</span> <span class="attribution"><span class="source">AP Photo/Lynne Sladky</span></span></figcaption></figure><p>The unemployment rate <a href="https://fred.stlouisfed.org/series/UNRATE">has plunged</a> to about the lowest level in half a century. Yet at least one group of Americans is being left behind: men who didn’t go to college. </p>
<p>Just 78 percent of men aged 25-54 who never went to college were employed in 2016, the latest year for which data are available in the <a href="https://www.census.gov/programs-surveys/acs/">American Community Survey</a>. That contrasts with about 90 percent for those who have at least one year of college and is a big change from the 1950s, when employment rates for college and non-college men were the same. </p>
<p>What’s driving the employment gap, which has been with us for decades? </p>
<p>Economists have traditionally pointed the finger at what are known as demand-side factors, such as <a href="http://faculty.som.yale.edu/peterschott/files/research/papers/pierce_schott_pntr_2016.pdf">jobs moving out of the U.S.</a> or <a href="http://www.nber.org/papers/w23285">robots</a>. More recently, economists have been blaming the supply side, such as <a href="http://www.nber.org/papers/w21252">growing welfare payments</a> and <a href="http://faculty.chicagobooth.edu/erik.hurst/research/leisure-luxuries-feb-21-2018_updated.pdf">better video games</a> that glue more men to their couches. </p>
<p>Supply side just means that the explanation has to do with the individual – the supplier of labor — as opposed to something related to a company – the demand.</p>
<p><a href="https://sites.google.com/site/erinwolcott/research">My research</a> attempts to get to the bottom of why non-college men aren’t working in hopes that it can suggest the right solutions to turn this around. </p>
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<img alt="" src="https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/221460/original/file-20180603-142093-wrxdgf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A recent study suggests video games are why some young men aren’t working.</span>
<span class="attribution"><span class="source">AP Photo/Kamil Zihnioglu</span></span>
</figcaption>
</figure>
<h2>Employment vs. unemployment</h2>
<p>One of the most important measures of an economy is the number of jobs it’s creating, typically measured by the unemployment rate. The <a href="https://www.bls.gov/news.release/pdf/empsit.pdf">latest jobs report</a>, which came out on June 1, showed that the rate dipped to 3.8 percent in May, the lowest since 2000. If it falls any more, it’ll be the lowest since 1969.</p>
<p>But the unemployment rate doesn’t tell the full story because it only includes people actively looking for work. People who report not having looked for work in the previous four weeks are completely left out of this number. The employment rate, which is the share who are actually employed, captures the full picture.</p>
<p>And the numbers are stark. Back in the 1950s, there was no education-based gap in employment. About 90 percent of men aged 25-54 – regardless of whether they went to college – were employed. That began to change in the 70s and 80s as non-college men left the workforce. </p>
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<p>The Great Recession was particularly painful for men without any college. By 2010, only 74 percent had a job, compared with 87 percent of those with a year or more of college.</p>
<p>In other words, employment rates diverged over 10 percentage points in just half a century. </p>
<p>The gap extends to the wages of those who actually had jobs as well. As recently as 1980, real hourly wages for the two groups differed by a mere US$7. In 2014, men with at least a little college saw their wages bump up 14 percent to $35 an hour. Meanwhile, pay for those who never attended plunged nearly 20 percent to $20.</p>
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<h2>Modeling the economy</h2>
<p>In fact, wages reveal the answer to this puzzle.</p>
<p>In my analysis, which I’m planning to publish, I wanted to determine whether the widening employment rate gap was caused by factors related to the supply of workers — video games and welfare — or demand — trade and robots.</p>
<p>So I built and calibrated an economic model aimed at finding the answer. Just as an architect builds a model city to test out ideas, economists build model economies out of math. Models allow architects and economists alike to push aside the gory details of reality and cut to the gist of things.</p>
<p>They also allow us to run experiments on what would otherwise be untestable hypotheses. An architect might ask: If I build a balcony, will that compromise the building’s structural integrity? I asked: If the only things that changed since the 1970s were supply-side factors, what would have happened to employment rates?</p>
<p>To answer this question, I plugged employment, wage and other relevant data into my model so that it replicates the real world. I then ran different analyses on the model to try to learn things, such as the underlying causes of the fall in employment for non-college men.</p>
<p>The intuition is like this: If a significant part of the reason non-college men dropped out of the workforce was because of supply-side factors that allowed them to remain home yet still afford their lifestyles, companies would have had to pay them more to entice them to join the labor market. On the other hand, demand-side factors would have put downward pressure on wages. </p>
<p>That’s exactly what my model helped me identify, suggesting that most of the blame goes to demand-side factors like trade and automation, not video games. </p>
<p>An important caveat with my analysis — and economic research in general — is that our models are not reality. Economists have to make tough judgment calls in hopes of approximating reality and teasing out underlying truths that are otherwise difficult to ascertain. </p>
<h2>Work wanted</h2>
<p>All the same, I think my work reveals some important truths. </p>
<p>While it is true that many non-college men are home <a href="http://faculty.chicagobooth.edu/erik.hurst/research/leisure-luxuries-feb-21-2018_updated.pdf">playing video games</a>, <a href="https://www.ssa.gov/oact/STATS/dibStat.html#f1">collecting welfare payments</a> and, unfortunately, <a href="http://www.princeton.edu/%7Eaccase/downloads/Mortality_and_Morbidity_in_21st_Century_Case-Deaton-BPEA-published.pdf">addicted to opioids</a>, it’s by and large not because they are choosing these over a job. Rather, sadly, it’s because they couldn’t find a job in the first place. </p>
<p>The takeaway is if the government wants to get more of these men back into the workforce, it should focus on stimulating demand or helping people learn new skills. </p>
<p>Even though we know what the problem is, we still have a lot of work ahead to solve it and get these men back into the workforce.</p>
<p><em>This article has been updated to correct the data showing a widening gap between college-educated men and those with no college education. The revised data still show a growing discrepancy but one that isn’t as large.</em></p><img src="https://counter.theconversation.com/content/97055/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erin Wolcott received funding from the National Science Foundation Graduate Research Fellowship Program, Grant No. DGE-1144086</span></em></p>The May jobs report showed that US unemployment is at about a 50-year low. That’s not how it feels to many men who’ve never been to college.Erin Wolcott, Assistant Professor of Economics, MiddleburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/901242018-02-24T10:38:00Z2018-02-24T10:38:00ZOracles and models: ancient and modern ways of telling the future<figure><img src="https://images.theconversation.com/files/205034/original/file-20180206-14072-1ca1liw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:The_Oracle_of_Delphi_Entranced.jpg">Heinrich Leutemann [Public domain], via Wikimedia Commons</a></span></figcaption></figure><p>When something unexpected happens to us we still tend to ask “why me?” – and it’s difficult to know where to look for an answer.</p>
<p>While scientific analysis can provide us with better general comprehension of how the world works, it doesn’t always help us to understand our own experience. And public discussions of risk all too often become arguments about who is to blame, for example, <a href="http://www.telegraph.co.uk/news/weather/10629749/UK-flooding-homeowners-knew-the-risk-says-Environment-Agency-chairman.html">after disastrous flooding</a>.</p>
<p>In previous eras, we might have turned to the language of fate, luck and fortune. But although still used colloquially, these concepts have lost their explanatory power. In many ways, this is surely a good thing: ideas of fate, luck and fortune have often been linked to moral judgements about people, <a href="http://www.nbcnews.com/id/9600878/ns/msnbc-morning_joe/t/hurricane-katrina-wrath-god/#.WoiIRHxG0dU">as happened after Hurricane Katrina</a>. </p>
<p>But we can also learn a lot from history, specifically the Ancient Greeks and how they conceptualised fate, luck and fortune, and tried to anticipate the future.</p>
<h2>Ancient futures</h2>
<p>In Ancient Greek culture, fate, luck and fortune were familiar, everyday concepts. They were not just imposed by the gods, but were themselves divine forces, invisibly disrupting people’s lives. </p>
<p>People coped by trying to engage with these forces. One way was to <a href="https://quatr.us/greeks/oracles-ancient-greece.htm">visit an oracle</a> – a temple or sanctuary where a supernatural figure could provide insights into matters that were hidden or unclear, such as future events. The most famous oracle was at Delphi in central Greece, where a woman (<a href="https://www.ancient.eu/Pythia/">the Pythia</a>), possessed by the god Apollo, answered questions posed to her, often by representatives of city-states.</p>
<p>Examining the thinking behind deciding to visit an oracle can help us to understand why people did this. Before visiting an oracle, to make sure they got the most useful response, consultants had to phrase their questions carefully. To do this they had to reflect on the different ways in which their futures might work out.</p>
<p>Once they had an answer from the oracle, they had to work out what it meant. Scholarship is undecided as to whether Delphi’s responses were <a href="https://www.jstor.org/stable/3287085">given as riddles</a> that had to be solved or <a href="https://www.yes-no-oracle.com/dice-oracle.php">as simple “yes” or “no” responses</a>. Either way, visitors would still have had to try to fit the answer they received to a likely future outcome – and decide on what action they would take.</p>
<h2>Trust in your wooden wall</h2>
<p>Herodotus, the fifth-century BC historian of the Persian Wars gives <a href="http://www.pbs.org/empires/thegreeks/characters/themistocles_p8.html">a famous example</a> of this process. He relates how, as the Persian invaders approached, the city of Athens sent ambassadors to Delphi. The first oracle they received was one of impending doom. The ambassadors felt they could not take this message back to Athens, so they asked for another. </p>
<p>The second oracle was more puzzling: long and full of vivid imagery, it included the idea that a wooden wall would help the Athenians. The ambassadors took this oracle back to Athens, where the citizens discussed its meaning. Different groups interpreted it differently, and pursued various courses of action, but the majority followed the military commander, Themistocles. He argued that the wooden wall represented the navy and that Delphi was foretelling an Athenian naval victory at Salamis – which, as history tells us, is what actually happened.</p>
<p>True or not, this episode provides two important insights into ancient Greek futures thinking. First, the Athenians seem to have conceived of their future as being both plural and full of possibilities. Their future was not set in stone, but was something fluid that they could influence. Second, that in the process of thinking about the future, they exercised a crucial skill: storytelling.</p>
<h2>Storytelling and uncertainty</h2>
<p>We all tell stories – it’s so natural we rarely think about it. But in fact, storytelling is a crucial tool for dealing with the unexpected. If we can explore different possible multiple narratives about how the future might turn out, we can make more informed decisions in the present. </p>
<p>In the process of developing different stories about, and imagining our roles in, different possible futures, there’s room for further learning – about ourselves, and how we respond to particular situations.</p>
<p>The everyday process of storytelling can support us as individuals in dealing with the unexpected, and – at the policy level – inform how we plan for the future. My discussions on this subject with <a href="https://royalsociety.org/people/claire-craig-9083/">Claire Craig</a> (chief science policy officer at the Royal Society – here acting in a personal capacity) suggest that thinking about ancient oracles and how they work brings us face-to-face with some aspects of modern approaches to dealing with risk and uncertainty.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206762/original/file-20180216-131003-1i95bbx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The modern-day oracle speaks.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/business-analytics-financial-technology-concept-3d-730273642?src=ENeJGcs9HO5OyfzYfJX2vQ-1-14">Ditty_about_summer via Shutterstock</a></span>
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<p>Some of the most important approaches to coping with unexpected events, from economics to the weather, involve modelling: these include <a href="http://www.economist.com/node/12000755">scenario planning</a> (an approach to strategy that uses storytelling) and <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/682579/computational-modelling-blackett-review.pdf">computational modelling</a>. These approaches enable us to imagine in detail what it would be like if a particular future came about.</p>
<h2>Exploring the future</h2>
<p>This does not mean that this approach can tell us what will happen – none of us knows how the future will develop and no model can tell us exactly. We must still think critically about how models are used as evidence, what answers they provide and how the uncertainties around them are presented. </p>
<p>We also need to take account of what is known about how individuals react to new and challenging information. For example, the <a href="https://theconversation.com/confirmation-bias-a-psychological-phenomenon-that-helps-explain-why-pundits-got-it-wrong-68781">effects of confirmation bias</a> may mean that it is difficult for people to change their minds; and individual decisions will be shaped by the <a href="https://www.gov.uk/government/publications/innovation-managing-risk-not-avoiding-it">interplay of analysis and emotion</a>.</p>
<p>But telling stories about the future does enable us to explore different possible answers. We can learn a lot from examining the futures that models depict and reflecting on how those imagined environments could shape our behaviour. </p>
<p>Modelling, oracles: both are technologies of anticipation. With both technologies we need to craft our future stories with care: paying attention to the questions we ask, as well as the answers we create. Perhaps one of the insights from thinking about our pasts is how to approach our futures.</p><img src="https://counter.theconversation.com/content/90124/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Esther Eidinow receives funding from the Arts and Humanities Research Council and the Leverhulme Trust. </span></em></p>There’s a surprising amount in common between ancient ways of thinking about the future and the techniques we use now.Esther Eidinow, Professor of Ancient History, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/909212018-02-08T05:44:32Z2018-02-08T05:44:32ZDoes a sugar tax cause alcohol sales to spike? The research doesn’t give a decisive answer<figure><img src="https://images.theconversation.com/files/204690/original/file-20180204-19948-1j8cqgb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There's no direct evidence that taxing sugary drinks will lead to more consumption of alcohol.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Consuming sugar-sweetened drinks is associated with a <a href="https://theconversation.com/health-check-how-much-sugar-is-it-ok-to-eat-57345">range of health issues</a> including weight gain and obesity. These are risk factors for diabetes, heart disease, high blood pressure, strokes and certain cancers. </p>
<p>Taxing these drinks is an <a href="https://theconversation.com/taxing-sugary-drinks-would-boost-productivity-not-just-health-79410">effective means of reducing their consumption</a> and related health issues – as well as generating revenue for the government.</p>
<p>A recent study in the <a href="http://jech.bmj.com/content/early/2018/01/11/jech-2017-209791">Journal of Epidemiology and Community </a> set out to test whether a sugar tax might impact on other behaviours affecting public health, along with whether such a tax would prompt people to choose no- or low-calorie drinks.</p>
<p>The researchers ended up finding an <em>association</em> between higher soft-drink prices and higher demand for some alcoholic beverages in terms of family food and drink purchases. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/clearing-up-confusion-between-correlation-and-causation-30761">Clearing up confusion between correlation and causation</a>
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</em>
</p>
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<p>They did not find that a sugar tax, let alone higher soft drink prices, <em>caused</em> people to drink more lager, as <a href="http://www.dailymail.co.uk/health/article-5302821/Sugar-tax-soft-drinks-drive-alcohol-consumption.html">news reports suggest</a>. In fact, the study provided no direct evidence a sugar tax will lead alcohol sales to increase. </p>
<h2>How was the study conducted?</h2>
<p>In this study, researchers from the London School of Hygiene & Tropical Medicine estimated elasticity of demand on non-alcoholic and alcoholic drinks in the UK, based on households’ response to price differences in sugary drinks. </p>
<p>They used existing consumer survey expenditure data collected between 2012 and 2013 from nearly 32,000 households. </p>
<p>Households recorded their individual groceries and drinks they had purchased and brought home using scanned bar codes (or manually entered them if there was no bar code). The researchers tracked how much the household spent, where they purchased, the day of purchase and volume of beverage purchased. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australian-sugary-drinks-tax-could-prevent-thousands-of-heart-attacks-and-strokes-and-save-1-600-lives-56439">Australian sugary drinks tax could prevent thousands of heart attacks and strokes and save 1,600 lives</a>
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<hr>
<p>They didn’t track consumption, or drinks which were bought and consumed elsewhere (for instance, in a bar or at a tuckshop), just the purchase of these products. </p>
<p>The researchers then compared how much one family bought and brought home of each beverage type when faced with a particular set of prices, against how much another family bought of each beverage type with a different set of prices. </p>
<h2>What were the results?</h2>
<p>The results were mixed, with variations between beverage types and income groups. There were several key outcomes.</p>
<p>In families where the price paid for high sugar-sweetened beverages such as Coke and Red Bull was higher, there were greater purchases of lager (such as Stella Artois, Beck’s or Corona), but less purchasing of spirits. </p>
<p>Where the price paid for medium sugar-sweetened drinks (including Fanta, Sprite and Powerade) was higher, there were fewer purchases of beer, lager and wines, but more of spirits. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/sugar-tax-is-not-nanny-state-its-sound-public-policy-59059">Sugar tax is not nanny state, it's sound public policy</a>
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<hr>
<p>Higher prices for diet or low sugar-sweetened drinks were associated with higher purchases of all alcoholic beverages except spirits, for which purchases were less. </p>
<p>Taking into account also relationships with other categories of drinks, the study concludes that a price increase for medium sugar-sweetened drinks would have the most significant positive impact from a public health perspective, given the drinks’ impact on dietary sugar and energy intake.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204747/original/file-20180204-19937-rqxmxp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The amount of alcohol bought and drank outside of the home wasn’t taken into account in the study.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/AMwYylKQsUc">Photo by Julia Nastogadka on Unsplash</a></span>
</figcaption>
</figure>
<h2>How we should read the results</h2>
<p>In principle, elasticity is about what happens over time when there is a change – such as a new tax – which results in a higher price. </p>
<p>But the study was not actually measuring the effects of change in price over time. Rather, it correlated how much one family bought of each beverage type when faced with a particular set of prices against how much another family bought of each beverage type with a different set of prices. </p>
<p>But because the study isn’t actually measuring and correlating the change that elasticities would measure – a new tax and the change in consumption over time – it offers no direct evidence of what would happen in case of a change like a new tax, and should not be interpreted as having done so.</p>
<p>It is commonplace in economics to estimate elasticities this way, as a kind of modelling of what might happen with an actual price change, so it is not wrong for the authors to follow this common procedure. We just need to be careful how we interpret the results. </p>
<p>The study results indicate that an increase in the price of sugar-sweetened drinks potentially has both positive and negative impacts, from a public health perspective, on the consumption of alcoholic beverages. It suggests more nuanced price options across different ranges of beverages should be considered rather than a single tax only on high-sugar-sweetened beverages. </p>
<h2>What else should we take into account?</h2>
<p>The study’s measure of the amount of alcoholic beverages purchased was the number of bottles/containers of alcohol purchased – not the total units of pure alcohol (standard drinks) purchased. The demand for alcohol may not be accurately measured given different alcoholic beverages have different alcohol strengths and are in different sizes of containers.</p>
<p>And while the study looked at relationships between prices of sugar-sweetened drinks and consumption of other non-alcoholic and alcoholic drinks, the impact on other sugary products was not taken into account. For instance, <a href="https://www.sciencedirect.com/science/article/pii/S1570677X15000611">previous studies</a> suggest higher prices of sugar-sweetened drinks may have people substituting their sugar intake through things like sweets. </p>
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Read more:
<a href="https://theconversation.com/a-sugary-drinks-tax-could-recoup-some-of-the-costs-of-obesity-while-preventing-it-69052">A sugary drinks tax could recoup some of the costs of obesity while preventing it</a>
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<h2>The paper’s unspoken contribution: counting the calories in alcoholic drinks</h2>
<p>The paper takes for granted that the calories in alcohol drinks count when thinking about avoiding obesity. But alcohol is often overlooked when we are thinking about calories and obesity. </p>
<p>And it is not easy for consumers to take the calories in alcohol drinks into account. Unlike for every other packaged food or drink sold in Australia, the caloric content does not have to be listed on the label of alcoholic beverages. So one important contribution of the article is to underline that, aside from being intoxicating, alcoholic beverages are also high in calories.</p>
<p>As the paper points out, a bottle of lager beer contains slightly more calories than a can of Coca-Cola. This means arguments for discouraging obesity with a tax on drinks might well be directed at alcohol content as well as sugar content.</p><img src="https://counter.theconversation.com/content/90921/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The research centre Robin Room heads receives funding from federal government research bodies, the Foundation for Alcohol Research and Education, VicHealth, Australian state government commissions, the U.S. National Institutes of Health and the World Health Organization.</span></em></p><p class="fine-print"><em><span>The research centre Heng Jiang works for receives funding from federal government research bodies, the Foundation for Alcohol Research and Education, VicHealth, Australian state government commissions, the U.S. National Institutes of Health and the World Health Organization.</span></em></p>A recent study was reported as saying a sugar tax would have us drinking more alcohol. But the study didn’t establish this fact. The results were mixed with no evidence one thing caused another.Robin Room, Professor, Centre for Alcohol Policy Research, La Trobe UniversityHeng Jiang, Research Fellow, La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/897652018-01-10T01:24:20Z2018-01-10T01:24:20ZTreasury memo misses the real impact of Labor’s negative gearing policy<p>Labor MPs might be <a href="http://www.abc.net.au/news/2018-01-08/govt-negative-gearing-claims-contradicted-by-official-advice-foi/9309736">rubbing their hands together with glee</a> at a Treasury memo that shows the federal opposition’s negative gearing policy will have a “small” impact on the property market. But insights from <a href="https://yalebooks.yale.edu/book/9780300122237/nudge">behavioural public policy</a>, as highlighted by the 2017 Economics Nobel laureate - Richard Thaler and his colleague Cass Sunstein, tell us that how people respond to this policy will be more about how the government frames it.</p>
<p><a href="https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf">The Treasury memo</a> showed the Labor policy of limiting negative gearing to existing homeowners will have a limited impact as the changes are unlikely to encourage investors to sell quickly. Also, owner-occupiers dominate the housing market and the costs of selling are high.</p>
<p>However, this assumes that people are forward-looking, well-informed, good with numbers and perfectly responsive to new information. <a href="https://global.oup.com/academic/product/behavioural-economics-a-very-short-introduction-9780198754992?cc=au&lang=en&">Behavioural economics</a> shows us that people do not always think so deeply and logically about their choices. </p>
<p>How any changes to negative gearing are sold to us – as a loss or gain, as a one-off or ongoing, in terms of short versus long term costs and benefits – will impact how Australians react. </p>
<p>Most of us aren’t whizzes with mathematics. As Nobel prize winner Herbert Simon <a href="http://diva.library.cmu.edu/webapp/simon/index.html">has shown</a>, in place of complex mathematical algorithms we use heuristics. These are simple rules of thumb that draw on our intuitions, experience and gut feel. </p>
<h2>Heuristics and biases</h2>
<p>One common example of a heuristic is the <a href="http://psiexp.ss.uci.edu/research/teaching/Tversky_Kahneman_1974.pdf">availability heuristic</a>. This is when we make decisions based on easily available information such as recent events and highly emotive experiences. Our brains work better with narratives and stories than with facts and figures. </p>
<p>Nobel economics laureates George Akerlof and Robert Shiller <a href="https://press.princeton.edu/titles/8967.html">have applied</a> a similar insight to analyse people’s perceptions of housing market fluctuations. They noted that we hear lots of stories about how house prices are on an upward trend. Via the availability heuristic, we easily remember these emotionally engaging stories, much better than we can remember the dry facts about the history of house price instability and housing market crashes. </p>
<p>This leads us to overestimate the chances of continuing house price rises, and to underestimate the chances of a fall, driving unsustainable house price increases – as witnessed, for example, in the American sub-prime property markets before the global financial crisis.</p>
<p>While heuristics can help us to decide quickly, they sometimes lead us into systematic mistakes – “behavioural biases”. This does not mean that we’re all hopelessly irrational. But for negative gearing it matters how a potential change is <a href="http://science.sciencemag.org/content/211/4481/453">framed</a>, and how that fits into our heuristics and biases.</p>
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Read more:
<a href="https://theconversation.com/nudging-people-towards-changing-behaviour-what-works-and-why-not-27576">'Nudging' people towards changing behaviour: what works and why (not)?</a>
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<p>Most economists (including those at Treasury) <a href="https://www.investopedia.com/terms/f/fungibility.asp">assume</a> that one dollar is a perfect substitute for any other dollar. Whether we save A$100 via a tax break, win A$100 from a scratch card or earn A$100 from working overtime, it makes no difference.</p>
<p>Contrary to this view, behavioural economics <a href="http://faculty.chicagobooth.edu/richard.thaler/research/pdf/mentalaccounting.pdf">has shown</a> that the way we treat money is different depending on the contexts in which we earn and spend it. We have different “mental accounts” for consumption, wealth, regular income and windfalls. We are more likely to splurge money we’ve won from a scratch card than money we’ve earnt doing overtime. </p>
<p>This is another reason why framing is important. How the government frames a negative gearing change will determine the mental account to which we assign it, and therefore how we respond.</p>
<p>If negative gearing changes are considered a one-off hit – the opposite of a scratch card windfall – then property owners won’t worry so much. On the other hand, if the change to negative gearing is seen as an ongoing drain on our incomes, then they will worry a lot. </p>
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Read more:
<a href="https://theconversation.com/the-promise-and-perils-of-giving-the-public-a-policy-nudge-24887">The promise and perils of giving the public a policy 'nudge'</a>
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<p>Another factor that will come into play is <a href="https://academic.oup.com/qje/article-abstract/106/4/1039/1873382">loss aversion</a> – people are much more likely to worry about losses than gains. <a href="http://www.nber.org/papers/w8143">Evidence from behavioural experiments</a> shows that home-owners over-estimate the value of their properties. This makes them reluctant to sell at reduced prices in a falling market. </p>
<p>It also means that Australians will resist negative gearing changes if these are framed as a loss, creating political pressures for a policy u-turn. It is difficult to predict how people might respond, but behavioural economics shows that any ructions might be avoided if the negative gearing change is framed as a gain. </p>
<p>For instance, Treasury <a href="https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf">predicts</a> that the additional revenue raised from restricting negative gearing could be up to A$3.9 billion. Therefore, the negative gearing changes could cover more than 80% of <a href="http://budget.gov.au/2017-18/content/bp2/download/bp2.pdf">federal government expenditure</a> on veterans and their families.</p>
<h2>In the long and short term</h2>
<p>Treasury’s <a href="https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf">modelling</a> notes there might be downward pressure on house prices in the short term from changing negative gearing, but that this will be small overall. </p>
<p>But <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.699.7719&rep=rep1&type=pdf">a range</a> of models and experiments have shown that people are disproportionately focused on tangible, short-term outcomes. For example, most of us find it hard to persuade ourselves to go the gym: the short-term costs are inconvenience and discomfort and the benefits seem intangible and distant. This is called “present bias”.</p>
<p>Recent work in behavioural economics confirms that framing (alongside a range of other socio-psychological influences) has a strong impact on our choices. Framing will determine how we perceive the policy, which mental account we will use to process it and how the various heuristics and biases identified by economics and psychologists will play out.</p>
<p>In the debates around negative gearing policy changes, these behavioural insights have not been highlighted. So perhaps Treasury could have added some psychology, alongside the economics, in arguing that house price falls are likely to be limited.</p><img src="https://counter.theconversation.com/content/89765/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Baddeley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Treasury modelling suggests that limiting negative gearing will lead to small change in prices. But behavioural economics shows it all depends on how the policy is framed.Michelle Baddeley, Research Professor at the Institute for Choice, University of South AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/879432017-11-23T19:13:10Z2017-11-23T19:13:10ZEnergy ministers’ power policy pow-wow is still driven more by headlines than details<p>A quick scan of this week’s headlines shows the government’s new energy plan would “<a href="https://thewest.com.au/politics/energy-plan-to-slash-120-off-power-bills-ng-s-1800384">slash A$120 off power bills</a>” and that the “<a href="http://www.couriermail.com.au/news/queensland/turnbull-government-plan-to-address-energy-crisis-predicts-400-price-drop/news-story/3754370f9bf8454f89cd251edd870b93">Turnbull government plan to address energy crisis predicts A$400 price drop</a>”. Yes, the initial findings of the modelling of the federal government’s National Energy Guarantee (NEG) are out. Cue the latest round of bluster, misinformation and confusion. </p>
<p>What has actually been released is a five-page summary of the findings, although some <a href="http://reneweconomy.com.au/esb-modeling-confirms-neg-designed-to-shut-door-on-renewables-74093/">media reports</a> contain extracts from a more detailed document. We won’t see that until after federal and state energy ministers have considered it at today’s COAG Energy Council meeting. </p>
<p>With some state energy ministers still expressing <a href="http://www.theage.com.au/environment/climate-change/worst-fears-states-prepare-to-highlight-the-negatives-in-turnbulls-energy-plan-20171122-gzqphl.html">scepticism over the NEG</a>, their interpretation of the detailed modelling may be crucial in resolving the debate.</p>
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Read more:
<a href="https://theconversation.com/infographic-the-national-energy-guarantee-at-a-glance-85832">Infographic: the National Energy Guarantee at a glance</a>
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<p>What do our five-pager and media leaks tell us? Well, not a lot. There are enough facts and figures to provide instant filler for journalists’ articles. But as far as the modelling is concerned, there are only a couple of charts and a handful of numbers. </p>
<p>The summary forecasts that under the NEG wholesale electricity prices will drop back to their historical average of around A$50 per megawatt hour, compared with around A$100 per megawatt hour now. This will drive down our power bills during the decade from 2020 to 2030 decade by an average of about A$400. </p>
<p>But here’s the rub: prices will fall even if the NEG isn’t implemented. This is because between now and 2020 the <a href="https://theconversation.com/au/topics/renewable-energy-target-8912tc%20link">Renewable Energy Target</a> will be driving new renewable energy generation into the market. At the moment there is a supply shortage, which is keeping prices high. So if electricity demand remains <a href="https://www.aemo.com.au/-/media/Files/Electricity/NEM/Planning_and_Forecasting/EFI/2017-Electricity-Forecasting-Insights.pdf">relatively flat</a>, new generation will drive prices down.</p>
<p>The real changes won’t happen until after 2020. When Liddell power station in New South Wales <a href="http://www.abc.net.au/news/2017-09-11/agl-appears-committed-to-closing-liddell-power-station/8893822">closes in 2022</a> wholesale prices will rise. This will happen with or without the NEG, albeit much faster without it. This is what underpins the convenient claims of an annual average A$120 drop in electricity bills.</p>
<p>That’s pretty much all that can be said about prices for now. We will have to wait until the full modelling is released to know for sure why prices rise more rapidly post-Liddell without the NEG. The <a href="http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Security%20Board%20advice%20on%20the%20National%20Energy%20Guarantee.pdf">original proposal</a> from the Energy Security Board suggests that, with the guarantee, more supply, bidding behaviour and reduced risk to investors put downwards pressure on prices. </p>
<h2>What about renewables?</h2>
<p>The summary note contains only two other findings. First, under the NEG there will be investment in an additional 3,600 megawatts of “dispatchable generation capacity”. Second, <a href="http://reneweconomy.com.au/coalitions-neg-aims-to-engineer-an-early-death-for-big-solar-10699/">renewables will form only 5% more of the generation mix</a> by 2030 than if the NEG were not in place. </p>
<p>We’re still waiting to find out what “dispatchable generation capacity” actually means in the context of the NEG. There is no smoking gun for those who <a href="https://theconversation.com/the-governments-energy-policy-hinges-on-some-tricky-wordplay-about-coals-role-85843">insist the NEG is a Trojan horse for coal</a>. But similarly, anyone looking for the modelling to say anything about the future of energy storage will be disappointed. Watch this space.</p>
<p>A lot will be made of the <a href="https://theconversation.com/will-the-national-energy-guarantee-hit-pause-on-renewables-85978">relatively low levels of renewables</a> predicted by the NEG modelling. Under the existing <a href="https://theconversation.com/au/topics/renewable-energy-target-8912">Renewable Energy Target</a>, renewables are already expected to account for around 23.5% of the generation mix in 2020 (not counting rooftop solar). The NEG might deliver only 32-36% in 2030 – and this figure appears to include rooftop solar.</p>
<p>But before we get too worked up, remember that this finding says nothing about the effectiveness of the NEG in cutting greenhouse emissions. The NEG and the two earlier proposals modelled by the Finkel Review – a <a href="https://theconversation.com/explainer-what-is-a-low-emissions-target-and-how-would-it-work-78927">clean energy target</a> and an <a href="https://theconversation.com/au/topics/emissions-intensity-scheme-38019">emissions intensity acheme</a> – work in very similar ways and would produce very similar results. The fact that Finkel’s modelling forecasts 42% renewables by 2030, and the government’s modelling delivers 32-36% – using the same emissions reduction goal – just tells us that the modelling is different. </p>
<h2>Model behaviour</h2>
<p>As I have <a href="https://theconversation.com/finkels-new-energy-report-isnt-new-and-it-isnt-by-finkel-87763">pointed out here</a>, modelling is an inexact science. Its outcomes are a function of the assumptions you use and the data you shove in. Like any modelling, NEG modelling will no doubt be wrong to a greater or lesser degree. But whatever the specifics, one principle is clear: agreeing on a firm policy will help to lower prices. </p>
<p>If replacing existing generation with renewables is the cheapest way to reduce emissions, then that is what will happen under any of the schemes. The modelling then becomes irrelevant. </p>
<p>There is one proviso to this. And that is the other part of the NEG – the “reliability” part. It is not clear from the five-page summary how the reliability requirement has been factored in, and how this will influence the generation mix. It seems we will have to wait well beyond this week for more information on this; reports suggest that the reliability mechanism may not be fully designed until the middle of 2018. </p>
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Read more:
<a href="https://theconversation.com/will-the-national-energy-guarantee-hit-pause-on-renewables-85978">Will the National Energy Guarantee hit pause on renewables?</a>
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<p>The biggest question about the NEG is whether it will lead to further concentration of market power in the retail and wholesale energy markets. It that were to happen, prices would probably go up, not down – creating yet more headaches for politicians, consumer watchdogs, and householders.</p>
<p>It is these two issues – the design of the reliability mechanism, and tackling market power – that energy ministers should really be focusing on. Australian energy customers will be the losers if the debate gets swamped by confected outrage about modelling and renewables. Ominously, another quick scan of Wednesday morning’s headlines suggests that confected outrage is winning.</p><img src="https://counter.theconversation.com/content/87943/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Blowers does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As federal and state energy ministers gather to discuss the Turnbull government’s proposed National Energy Guarantee, many of the finer details of the modelling are not yet available.David Blowers, Energy Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/815622017-08-08T19:47:58Z2017-08-08T19:47:58ZThe NBN needs subsidies if we all want to benefit from it<p>Half of all Australians are now <a href="http://www.nbnco.com.au/corporate-information/media-centre/media-releases/one-in-two-australians.html">able to connect to the NBN</a>. But <a href="http://www.nbnco.com.au/content/dam/nbnco2/documents/Q3-FY17-external-results-presentation.pdf">around 40%</a> of eligible households have chosen not to connect to the network. <a href="http://ace2017.org.au/wp-content/uploads/2017/07/Troy-Barry-Full-Paper.pdf">Our modelling</a> shows that subsidising the NBN is key to encouraging more Australians to connect. This would benefit the economy as a whole, but hurt the government’s plans to privatise the network.</p>
<p>The <a href="http://www.financeminister.gov.au/media-release/2016/11/18/government-loan-secures-nbn-rollout">government is currently counting</a> both on receiving ongoing revenue from the NBN, as well as the proceeds from its eventual privatisation. To achieve both goals, the NBN charges for access to the network.</p>
<p>Switching from a pricing model that charges for access to the network to one that subsidises access will mean the government won’t get a <a href="https://web.archive.org/web/20110220174537/http://data.dbcde.gov.au/nbn/NBN-Implementation-Study-complete-report.pdf">return on its investment</a>.</p>
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<a href="https://theconversation.com/the-nbn-how-a-national-infrastructure-dream-fell-short-77780">The NBN: how a national infrastructure dream fell short</a>
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<h2>The NBN’s pricing model</h2>
<p>The NBN currently <a href="http://www.nbnco.com.au/content/dam/nbnco2/documents/nbn-corporate-plan-2017.pdf">charges internet service providers</a>, such as Telstra, for access to the network. The internet service providers then <a href="https://www.accc.gov.au/speech/communications-at-the-turning-point">sell the service on</a> to consumers - businesses and households.</p>
<p>Our model tried to find an NBN access price that would generate the greatest benefit to consumers, internet service providers and the network. We set our model in the future - when the NBN has been fully constructed, the cost of construction has been paid, and the government is preparing to privatise it.</p>
<p>In order to maximise the shared economic benefit from the network, <a href="http://ace2017.org.au/wp-content/uploads/2017/07/Troy-Barry-Full-Paper.pdf">we found</a> that the access price has to be less than zero - a subsidy. The network shouldn’t be charging internet service providers to access the network, it should instead pay them to connect. </p>
<p>The internet market in Australia is dominated by four large internet service providers (Telstra, Optus, TPG and Vocus) so we can’t expect the subsidy to be fully passed on. But competition means consumer prices would drop, and the number of customers connecting to the network would increase by as much as 25%. The benefit to the economy as a whole would outweigh the costs, but the cost falls entirely on the NBN, which would have to run at a loss. </p>
<h2>The NBN as a public service</h2>
<p>We know that <a href="https://www.accc.gov.au/speech/ceteris-paribus-competition-is-king">regulators want the NBN to benefit the whole economy</a>. This requires more customers to connect to the network. Our model shows that means prices need to be reduced. </p>
<p>This will weigh on the plans to privatise the NBN. There was a similar issue over access to Telstra’s copper network, which was marked by <a href="https://www.accc.gov.au/media-release/competition-tribunal-affirms-accc-decision-to-reject-telstras-ulls-undertaking">repeated litigation</a> and public wrangling between Telstra and the Australian Competition and Consumer Commission over access pricing. </p>
<p>Private companies won’t invest in infrastructure such as the NBN unless they can earn a profit in return. In fact, neither <a href="https://www.accc.gov.au/media-release/accc-perplexed-by-telstra-decision-on-fibre-to-the-node-investment">Telstra</a> nor <a href="https://www.accc.gov.au/system/files/ACCC%20draft%20decision%20on%20FANOC%20SAU%20-%20Dec%2007.pdf">its competitors</a> managed to build a fibre network themselves precisely because they couldn’t agree with the ACCC on how much profit they would be allowed to make from it. </p>
<p>But the NBN is financed and currently owned by the government. This means it doesn’t necessarily have to run at a profit. </p>
<p>Our model shows the NBN should be treated like other services the government provides - roads, education and doctors visits. All of these services can theoretically be provided by the private sector but are subsidised because the benefits of broad access outweigh the costs. </p>
<p>Any guarantee of a profitable NBN also means that the benefit to consumers and the economy will be suboptimal. With the nbn Co. due to finish construction and be polished up ready for privatisation in <a href="http://www.nbnco.com.au/content/dam/nbnco2/documents/nbn-corporate-plan-2017.pdf">less than four years</a>, it’s time for our politicians and regulators to start transparent conversations with the public, investors and broadband businesses about how many consumers will be connected to Australia’s broadband future.</p><img src="https://counter.theconversation.com/content/81562/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Troy S Barry owns shares in Telstra. He receives funding from an Australian Government Research Training Program Scholarship. </span></em></p><p class="fine-print"><em><span>Ishita Chatterjee owns shares in Telstra and TPG. </span></em></p>Almost half of eligible households haven’t connected to the NBN. New modelling shows the NBN needs subsidies if we want more people to connect and the economy to benefit from it.Troy S Barry, PhD Candidate in Economics, The University of Western AustraliaIshita Chatterjee, Economics lecturer, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/709342017-01-25T15:37:10Z2017-01-25T15:37:10ZHow a ‘tax haven’ Brexit threatens the UK’s social model<figure><img src="https://images.theconversation.com/files/154255/original/image-20170125-23851-9kh7lk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The threat that Britain might soon become a <a href="http://www.independent.co.uk/news/uk/politics/brexit-eu-chancellor-philip-hammond-welt-am-sonntag-uk-tax-haven-europe-a7527961.html">“corporate tax haven”</a> – issued by its chancellor, Philip Hammond – revealed a fundamental truth about Brexit. This is not just a decision about the UK’s relationship with the European Union; it is also about what kind of economic and social model the UK will have in the future.</p>
<p>As the UK disengages from Europe, politicians have to consider how its role within the global economy will be redefined. This inevitably raises questions about its domestic policies and institutions, and how these might need to adjust to a changed international context. </p>
<p>Hammond’s speech made clear that the UK government plans to use this uncertainty over the shape of its socio-economic model as leverage within the Brexit negotiations. The danger is that these negotiations open the door for a major transformation of the UK’s social model, one that is not necessarily endorsed by the electorate.</p>
<h2>Race to the bottom</h2>
<p>The threat of a tax haven model would be an adoption of the “race to the bottom” approach to globalisation. This strategy views cutting tax rates, regulation and often labour rights, as the surest means to attract internationally mobile capital. The idea behind the threat is that, despite the EU playing hardball over access to the single market, the UK could siphon off investment flows and business operations that might otherwise have located on the continent. </p>
<p>This would put pressure on EU members to similarly lower their tax rates or provide other business-friendly incentives in order to remain competitive. And this would jeopardise their commitment to the existing social model, which balances economic growth with high living standards and working conditions for all. </p>
<p>In taking this route, the UK would be endorsing a similar model to small European states such as Ireland and Luxembourg that have attracted foreign investment by lowering tax rates and regulatory obstacles. </p>
<p>Such an approach is not new to the UK. In fact, Hammond is really talking about accelerating and deepening its commitment to a process that is well underway. The UK social model has long been <a href="https://books.google.co.uk/books?hl=en&lr=&id=zVsTDAAAQBAJ&oi=fnd&pg=PA55&dq=+UK+market+liberal&ots=xGpK1jNBP6&sig=SrE4f7sdbGnen1L5UlF5SmEk0Gw">more market-liberal</a> than that commonly seen on the continent, with lower public spending (relative to GDP) and a less extensive welfare state. It is often viewed as closer to the American model than any comparable European state. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/154252/original/image-20170125-23867-853xvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Already a haven.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>The UK already has some of the least accommodating trade union laws <a href="http://bit.ly/2j4PNEQ">in Western Europe</a> and a pro-business <a href="http://www.heritage.org/index/ranking">attitude towards regulation</a>. The corporate taxation rate was <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183408/A_guide_to_UK_taxation.pdf">lowered</a> substantially under the Coalition government, falling from 28% in 2010 to just 20% by April 2015. Within the G20, the UK now has the joint lowest corporate tax rate. Plus, the UK (and the City of London in particular) lies at the heart of a wider network of Crown dependencies that offer low tax rates and conditions of secrecy <a href="http://www.newstatesman.com/economy/2011/02/london-corporation-city">that attract global financial assets</a>.</p>
<h2>A clever bargaining chip</h2>
<p>The tax haven idea is not, though, simply about redefining Britain’s position within the global economy. It is also part of a narrower set of interests within the UK economy. With the loss of EU passporting rights now looking much more likely in the wake of Theresa May’s Brexit speech, the tax haven idea can be interpreted as a message to the City. </p>
<p>The City’s status as an entry point to the wider European market was one of its major competitive advantages. With single market membership now in jeopardy, and major global banks reassessing their <a href="https://www.ft.com/content/0eba4f78-76b1-11e6-bf48-b372cdb1043a">commitment</a> to London, the incumbent Conservative Party will need to think about ways of compensating for the decreased attractiveness of the City as a base for European operations. Pushing further along the tax haven model may be one answer.</p>
<p>If the tax haven proposal is more than just a clever bargaining chip, then we should be worried. It is doubtful that inward investment, without progressive taxation, will lead to a social model that distributes wealth more evenly across society. In fact, it may well lead to a decline in overall government revenue, endangering the supply of government spending for important services such as the <a href="https://theconversation.com/is-the-crisis-in-the-nhs-as-bad-as-the-red-cross-says-it-is-70987">NHS</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/154253/original/image-20170125-23867-15lct1p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Social fabric.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/rohinfrancis/22080289729">Robin Francis</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>There is also no guarantee that foreign investment would be distributed evenly across the geography of the UK. Much more likely is that investment would focus on the high productivity region of London and the South East, deepening the vast spatial inequalities <a href="https://www.equalitytrust.org.uk/sites/default/files/A%20Divided%20Britain.pdf">that define the UK economy</a>.</p>
<h2>A growing divide</h2>
<p>One of the major riddles of Brexit lies in the willingness of a Conservative government, traditionally supportive of the City, to act so clearly against the financial sector’s interests. Hammond’s comments hint towards a willingness to make other concessions to keep the City onside. </p>
<p>The tax haven model may well offer some comfort to the global financial services firms based in the City of London. It promises a framework that slashes the costs of doing business and keeps London internationally competitive. The danger is that in offering a panacea to the City to balance against the costs of Brexit, the UK government sacrifices what’s left of the UK social model.</p>
<p>Opting for this strategy would also signal the UK’s disregard for global inequality. It would be defining its position in the world as a home for the assets of wealthy corporations and individuals that seek to avoid taxation. </p>
<p>One of the big political battles ahead will be to push for a post-Brexit settlement that commits the UK to the politics of equality and opportunity throughout the country. Not one that sacrifices a social model to appease the City, exacerbating the very divisions that brought about Brexit in the first place.</p><img src="https://counter.theconversation.com/content/70934/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeremy Green is a member of the Labour Party.</span></em></p>The Conservatives may be willing to sacrifice what’s left of the UK’s beleaguered social model to maintain the City’s global status.Jeremy Green, Lecturer in Politics and International Studies, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/710562017-01-24T14:04:44Z2017-01-24T14:04:44ZHow to be an economist in 2017<figure><img src="https://images.theconversation.com/files/153621/original/image-20170120-5221-10c3h27.jpg?ixlib=rb-1.1.0&rect=128%2C221%2C2425%2C1412&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/fairtomiddling/4388010872/in/photolist-7FKGKS-4dTchT-4dXbJG-4dTcex-ngcnDG-wEXhf-5aQQ1b-bjA1qz-5eXXH-bjA1jF-4dXbFL-7JiyY-bjA1h2-4KD6HV-awz6oL-dzHdMu-bjA1bX-7DmLiG-9ejWzz-FpToUL-5aUurf-8Y2j5w-bjA1NT-6dv6AX-r7UTFe-5EE5Vq-4KHoMb-bjA1Kk-bjA1Ac-76XGrf-dBJ8aG-6nHWMJ-gfpgyE-gaRYfQ-bjzWWD-biA8jg-bjA1EH-bjzX1H-aD3rwb-f8Yoae-bmuksW-f4YjAD-bjsCSZ-ZVT5-bmua3G-5MyNaK-5p52Pu-5oZJw4-5oZHRn-jaraB">Sean McGee Hicks/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>It has been a rough 12 months for economists. We have been <a href="https://theconversation.com/why-is-the-academic-consensus-on-the-cost-of-brexit-being-ignored-59540">ignored by voters</a>, <a href="http://www.huffingtonpost.co.uk/entry/michael-gove-experts-economists-andrew-marr-obr-ifs-nigel-farage_uk_583abe45e4b0207d19184080">ridiculed by politicians</a> and been told that <a href="http://www.bbc.co.uk/news/uk-politics-38525924">our discipline is in crisis</a>. </p>
<p>At its heart, the so-called “crisis” in economics is simply a result of the flaws in our species. Simply put, the variables used by economists are inherently problematic as they are attempts to model human decision making. What this should tell us is that the value in economics <a href="https://theconversation.com/economics-is-fundamentally-flawed-far-worse-than-the-bank-of-england-realises-71051">is not in some magical ability</a> to divine the future.</p>
<p>The trouble is, forecasting models are very attractive. They help investors assess risk, help central banks decide policy and allow politicians to justify ideological flights of fancy. And it’s in this last group that the caveats, warnings and limitations of these models are so often ignored. </p>
<h2>Being human</h2>
<p>Let’s look at those inherent problems in human decision making a little more closely. Let us say that an economy has grown by 3% every year for the past 20 years. A forecasting model, based on historical growth will rightly forecast future growth with a high probability of about 3%. Does this mean this is guaranteed? Of course not. </p>
<p>The model does not take into account that GDP is a product of human decision making. Just because we have constantly performed one action over and over again, are we destined to in perpetuity? <a href="http://www.investopedia.com/articles/investing/051415/how-calculate-gdp-country.asp">GDP is an observation</a> of our confidence, our tastes, our decisions to spend or save and so much more. These factors are in turn affected by countless others, the isolation of which is impossible due to their constantly changing nature.</p>
<p>I have something at stake in the debate. Right now, I am in the process of devising a model of the UK economy which incorporates relevant psychological drivers of decision making. In my model, I use proxies for people’s confidence and try to build in measures for this confidence to disappear very quickly – for instance how a major news story about people <a href="https://www.theguardian.com/money/negative-equity">falling into negative equity</a> might dent house buying confidence.</p>
<p>I also try to build in herd-like behaviour. And there are a host of other psychological effects to consider too. Did you know that people normally browse a holiday on a mobile phone or tablet but prefer to book it on a home computer? This is the same for most large purchases and the cumulative effects on the economy can be considerable. </p>
<p>It’s those pesky humans again, making everything complicated. You are less likely to impulse buy online if you have to enter your card details. Again this has a noticeable effect on the economy as new financial technology – <a href="https://www.theguardian.com/money/contactless-payments">such as contactless payments</a> – makes unnecessary purchases more likely. </p>
<h2>Doctoring the models</h2>
<p>Now, this model performs very well in tests designed to assess the robustness of forecasting. It identifies a general slowdown in confidence throughout 2017 culminating in a large downturn in general economic indicators at the end of the year. It seems plausible. However, I show this model to my students as an example of overconfidence in forecasting.</p>
<p>You see, it might produce statistically robust forecasts, but it cannot present the full picture and so its use as a means of prediction is limited. The <a href="https://theconversation.com/uk/eu-referendum-2016">unknown conditions of Brexit</a> may play a part, the weather may do as well. Without knowing these outcomes, and people’s response to them, my model is incomplete.</p>
<p>So, do I throw up my hands and curse economics as a futile endeavour? Just what is the value of the academic discipline to which I have (so far) devoted my career? Well, the analogy of a medical doctor is useful here.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153622/original/image-20170120-5238-1ivtdux.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Taking the economy’s temperature.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/doctor-stethoscope-reading-temperature-measured-by-552441727?src=iwVLsE82ePrbAJcGkHlRpA-1-9">Yanawut Suntornkij/Shutterstock</a></span>
</figcaption>
</figure>
<p>Designing this model gives a better understanding of the economy even if it can’t guide it down a path of unblemished progress. In the same way, a doctor cannot definitely prevent illness, but can offer advice on prevention and hopefully offer a cure if you do get ill. This is the same for the work economists do. </p>
<p>Economists can offer advice on preventing crises or slowdowns but cannot definitively prevent them from happening. Economists can also offer robust advice on restoring growth, although when the advice is that the economy has grown too fast and should slow, it is often <a href="http://www.telegraph.co.uk/finance/2907805/Greenspan-should-have-removed-the-punch-bowl.html">not welcomed by policy makers</a>. This advice is built on a strong evidence base, however just like a doctor prescribing a cure, it is foolhardy to say exactly when the cure will definitely work, or if it will adapt to changing conditions. </p>
<h2>Odds on</h2>
<p>Perhaps the hard part is getting people to acknowledge these realities. There remains a prevailing view that an economics model makes a definitive forecast for the future – some economists themselves are guilty of maintaining an ideological belief in a method regardless of empirical observation. In fact, economics models simply suggest a version of the future, and incorporate the likelihood of that future occurring.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153623/original/image-20170120-5238-jqe2bo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Leave it to the experts …</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/jeneeze/5500659718/in/photolist-9o5juE-nEjs4h-HTR73E-pvcHKf-98A1MS-b2XAzP-d3w8cj-6mbTpL-nGn64H-7c3L6x-qAB6fx-62zcy7-qKK1B-7D5FSD-a6881v-9hKVJA-57MWEV-7cTBUS-4Yxfzo-5KUVZ6-zB3C1i-v9UbKg-v9KtpN-B3cbxL-Kq8q1o-q9sXa7-7MrjHv-q9AEsa-hCLEcy-q9sWbo-qQrGzX-pufSPt-qoJBiy-bVZzE5-uEUUJ-7cKWtK-dNmz2f-ej9DCb-6viApT-qoJBdJ-7Mvief-qoJCwW-r5B8Ts-q9s6gC-q9AEAr-hqyuyx-bwU7dg-6DPVN1-6DPU1J-q9zcye">Jen Williams/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>My model meets a strenuous robustness check, but I still query the use of it as a forecasting tool. I can see, however, why these forecasts are extremely attractive to policy makers.</p>
<p>There is comfort in statistics, and our processing of probabilities is flawed. Someone making a bet with an 80% likelihood of success will be disproportionately disappointed if they lose. This is because we tend to overweight such high probabilities as a certainty and already expect the winnings before the outcome, whereas in reality there is a one in five chance of a loss. The opposite is true too. The very small chance of all the factors responsible for an economic crisis converging together at a particular time reassures people that it will never happen. </p>
<p>Policy makers are as susceptible to this as anyone, and should appreciate that the true value of the economist lies not in mystical fortune telling, but in achieving a better understanding of the nature of the economies in which we live and work.</p><img src="https://counter.theconversation.com/content/71056/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This is developed from Richard Whittle's previous ESRC funded research.</span></em></p>Ridiculed and ignored in 2016, what can the ‘dismal science’ offer us now?Richard Whittle, Research Fellow in Economics, Manchester Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/665782016-10-05T13:26:42Z2016-10-05T13:26:42ZSouth Africa’s economy would take a knock if starved of new graduates<figure><img src="https://images.theconversation.com/files/140493/original/image-20161005-14240-1yt1ijz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's economy will be hit hard if universities can't finish the year.</span> <span class="attribution"><span class="source">Cornell Tukiri/EPA</span></span></figcaption></figure><p>There is a <a href="http://www.bloomberg.com/news/articles/2016-10-05/student-protests-threaten-to-close-south-african-universities">real risk</a> that some of South Africa’s universities will not see out the 2016 academic year which ends in November. The ongoing “fees must fall” <a href="https://theconversation.com/why-student-protests-in-south-africa-have-turned-violent-66288">protests</a> have seen classes disrupted at some institutions, and there are fears that exams won’t be written.</p>
<p>What might a total shutdown mean for the country’s labour market in 2017? To find out, we conducted an analysis using <a href="http://www.copsmodels.com/models.htm">a model</a> designed for economic research by the University of Pretoria in collaboration with the global <a href="http://www.copsmodels.com/">Centre of Policy Studies</a>.</p>
<p>The model allowed us to isolate and measure the impact of a large reduction in graduates entering the labour market in 2017 against a “business as usual” baseline scenario.</p>
<p>The results were extremely worrying. In one simulation – the worst case scenario – assumed in our modelling to be a 90% reduction in graduates entering the labour market, 2017 would be a bleak year. South Africa’s Gross Domestic Product (GDP) would fall dramatically, with the economy shedding around R5.6 billion. Investments would plummet. </p>
<p>South Africa produces around <a href="http://mg.co.za/article/2016-05-17-black-graduate-numbers-are-up">80 000 graduates</a> a year. But this excludes other non-degree qualifications like diplomas and certificates, which may also produce new skilled labour market entrants. In our model’s database, the relevant number worked out to be little lower – around 50 000 – since we assumed that some graduates also take up lesser-skilled jobs. They can move from there into skilled categories in later years.</p>
<p>Our analysis showed that a 90% reduction in skilled labour (graduates) entering the labour market in 2017 would have a negative impact on virtually every macroeconomic indicator. If it were accompanied by negative productivity or a loss in business confidence, the effects across the economy would be exacerbated and GDP could fall even further.</p>
<p>The results also suggest that inequality would deepen. Unemployment would rise and real wages for less skilled workers would fall. The only real winners in this scenario would be incumbent skilled workers, who would benefit from higher real wages.</p>
<h2>How the analysis worked</h2>
<p>Our economic modelling involved two simulation runs. The first generated a business as usual baseline projection for the economy. The second introduced the “shock” under investigation – in this case, a reduction in graduates entering the labour market in 2017. The results of the two simulations were then compared and the percentage change between the two runs calculated for each variable. </p>
<p>In conducting our analysis, we made a number of simplifying assumptions:</p>
<p>We made no explicit assumption about the potential impact of the shutdown on productivity, business confidence or any other naturally exogenous variables in the policy run. For the scenario discussed here, those variables are assumed to remain on their baseline path.</p>
<p>We also did not consider the cost of damages to institutions during the protests. For the purpose of this conversation, we restricted our analysis to 2017 – though it’s worth mentioning that the picture for 2018 remains bleak, even allowing for a bumper year of graduates entering the market.</p>
<h2>A bleak outlook</h2>
<p>Results for some of the key macroeconomic variables confirmed our worst fears. </p>
<p>The reduction of skilled labour supply in the economy resulted in a drop in employment of 0.29%. This led to a fall in real GDP of 0.14%, or around R5.6 billion in 2017. That’s equivalent to <a href="https://www.enca.com/south-africa/saa-losses-rocket-to-r56-billion">the loss</a> that national carrier South African Airways reported for the 2014/15 financial year. </p>
<p>On the back of reduced economic activity, and by implication, lower income generated, private and public consumption would fall by 0.2%. This is not good news, since the ability to consume is a proxy for welfare: the level of an individual’s consumption is an indication of how wealthy that individual is. In this scenario, as the economy adjusts to requiring a lower equilibrium amount of capital – a result of less skilled labour in the economy – investment spending would fall by over 0.8% in 2017.</p>
<p>Our results show that the average real wage rate in the economy would rise. The anticipated real wage increase would, of course, be restricted to skilled labour categories on the back of the skills scarcity created by the lack of new graduates. For lesser skilled labour categories, average real wages would fall slightly because of the shrinking economy and the associated shrinking of demand for labour.</p>
<p>Industries that are skilled labour intensive in their production process would, in our scenario, experience more damage. The biggest losers would include the education and health sectors. Their production would fall 0.25% below base. Given its strong link to the investment sector, the construction industry could be expected to shrink by 0.75%, shedding many jobs.</p>
<h2>Dire consequences</h2>
<p>Higher education has never been more important to the process of building human capital – poverty’s kryptonite. This is evidenced by the high return it yields to graduates. In South Africa and other developing countries the return on education is <a href="http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1170954447788/3430000-1273248341332/20100426_16.pdf">much higher</a> relative to other countries. The historical shortage of skills in the economy has made a degree, a diploma or any other proof of skills a valuable asset for everyone and a ticket into a better life. </p>
<p>The immediate economic impact of a national shutdown of universities should not be ignored or neglected. It would have significant, and potentially dire, consequences down the line – especially for those who are most in need.</p>
<p><em>The views expressed here are the authors’ alone and are not necessarily those of the organisation they are affiliated with.</em></p>
<p><strong>Editor’s note: This article was updated after publication to clarify the impact of various scenarios on GDP.</strong></p><img src="https://counter.theconversation.com/content/66578/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roula Inglesi-Lotz receives funding from the National Research Foundation (NRF) South Africa. The views expressed here are those of the author, and not any of the funders.</span></em></p><p class="fine-print"><em><span>Heinrich Bohlmann has received funding from the National Research Foundation. The views expressed here are his own. </span></em></p>Economic models suggest that South Africa’s GDP would fall, inequality would deepen and unemployment would rise if university graduates don’t enter the labour market in 2017.Roula Inglesi-Lotz, Associate Professor of Economics, University of PretoriaHeinrich Bohlmann, Senior Lecturer, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/648982016-09-12T12:28:35Z2016-09-12T12:28:35ZOur world is not a pure market economy, and economics can’t explain it<figure><img src="https://images.theconversation.com/files/137205/original/image-20160909-13345-13woyr2.jpg?ixlib=rb-1.1.0&rect=1%2C0%2C1022%2C683&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Present and correct.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/atfruth/5287662490/in/photolist-94fDQE-qe83rX-sfkx7-Gb5jms-FNfDe3-CoJ2Gu-dBzPno-94xLdn-bh69NH-bkisXU-5KKN2U-bh68Jk-bh6aLc-eKSVd2-65XXRG-5KMaRm-4DD3xy-7vhfo-8LEGUY-iFWGoS-92cJ6n-b2sRyF-bKQxo-FhV8R1-G7vM6i-FhV8UY-Gdn7QV-G5cP6Q-Fi6NDv-Fi6NEn-G7vMca-Fi6Nzn-bh67N2-i7JYh7-576Vks-47tYv-5MUcRR-7rqQLZ-aUwGoK-ty6wX-u7R3Q-94tVXc-6o9GPy-7qiHdU-7sUQXb-93Dy7q-wZanj-bjx1bk-946zNq-93ZePb">Aaron Fruth/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>We tend to take it for granted that our economy is a <a href="http://www.investopedia.com/terms/m/marketeconomy.asp">market economy</a>. Mainstream economics is particularly committed to that idea. Indeed its core concepts depend on it: supply and demand curves and equilibrium prices make no real sense outside the context of markets. But today in large parts of the most dynamic sector of our economy, the market is either absent or only one part of the story.</p>
<p>Of course the digital economy includes companies such as Apple and Amazon selling products in markets, but it also includes very different models. The web is the realm of the gift. The vast majority of the pages we download are free – and sites such as Wikipedia are sophisticated examples of the gift economy in action.</p>
<p>Even some of the most successful commercial companies, such as Google and Facebook, depend on business models that hybridise gift practices and the market. The commodities they sell depend utterly on the gifts that they give. </p>
<p>To make sense of these gift and hybrid forms of economy, my research in the book <a href="http://www.cambridge.org/gb/academic/subjects/sociology/social-theory/profit-and-gift-digital-economy?format=PB&isbn=9781316509388">Profit and Gift in the Digital Economy</a> develops the idea that we should think of the economy as an interacting mix of market and non-market practices. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/137206/original/image-20160909-13345-1h32xcj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Market forces.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/dordrecht-holland/15503556441/in/photolist-pBZMcg-jnKqiC-oWHSxK-qJ5VbP-fiPZVo-F4A1VG-oi8CCD-ogecyn-eMhmDz-cjeFaW-7mBr7x-pXf5tX-aYCoqZ-ngxnw6-4fFumS-gez1Yp-fP3Qnz-hShtN8-gs7W3C-9deuWz-pRvpKx-gVo2Mi-itDpE7-ahqdeH-oRQmeF-cLzvUC-JBzoN8-nXuFBB-jqWMEz-pxuuim-hxamQR-peT1hP-dLaYn8-pAefWf-oonBpc-UVxmF-fJfHjE-PgQNn-hJAcYh-Fecteb-avpofg-kR71wX-cWBcwU-cJCw4G-9Vfin-bzP8Fr-vVLVh-oMzzaW-rigahh-e67GQ6">Paul van de Velde/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>The gift economy in action</h2>
<p>Wikipedia – the <a href="https://en.wikipedia.org/wiki/History_of_Wikipedia">largest and most widely used encyclopedia</a> the world has ever seen – is the iconic case of the digital gift economy. It dominates its sector, and has more or less completed the extinction of the paid-for encyclopedia that began when Microsoft gave away Encarta to PC buyers.</p>
<p>Wikipedia rests on three gift practices: it gives us access to its content for nothing, that content is created by volunteers who edit it for nothing, and its running costs are funded by voluntary donations. </p>
<p>And when work is voluntary, the old rules no longer apply. <a href="http://www.forbes.com/forbes/welcome/?toURL=http://www.forbes.com/sites/georgeanders/2014/06/30/how-wikipedia-really-works-an-insiders-wry-brave-account/&refURL=https://www.google.co.uk/&referrer=https://www.google.co.uk/">Wikipedia’s editors</a> are not told what to do by managers implementing a top-down strategy. They choose their own tasks and do them at their own pace. The quality of their work is not assured by performance appraisals and the threat of redundancy. Instead they debate quality with each other on Wikipedia’s Talk pages, employing norms that have been consensually agreed by the editors themselves.</p>
<p>Conventional economics has no tools with which to analyse phenomena like Wikipedia. <a href="http://www.smithsonianmag.com/smart-news/how-much-is-wikipedia-worth-704865/?no-ist">The site offers no revenue, market capitalisation or book value</a> by which to value it. Neither the human motivations nor the co-operative coordination mechanisms fit economic models of utility maximisation and market equilibrium. When we measure our economy, are we really best served by ignoring Wikipedia? </p>
<h2>A hybrid powerhouse</h2>
<p>By contrast, Google looks like a company that traditional economics should be able to explain. The second largest company in the world by market capitalisation, it made <a href="http://www.androidcentral.com/google-releases-q4-and-full-2015-earnings">profits of US$74.5 billion</a> (£56 billion) in 2015, mostly from selling advertising.</p>
<p>That’s a market, isn’t it? It is, but it’s a market that only exists because of the gifts that Google gives to its users. The core case is free web search. When Google gives us search results, it receives information about our interests as a by-product of the search process, and uses that to sell much more effectively targeted advertising than was ever possible in conventional media.</p>
<p>Here we have two deeply interdependent practices: a market practice of selling advertising that can only exist because of a gift practice of providing free web search. Freesheet newspapers offer a similar model, but Google is on a different scale. However well demand and supply curves can explain the outcomes in the advertising market, they tell us nothing about how Google acquires those advertising opportunities in the first place.</p>
<p>To explain hybrid economic models like this one, we need an approach that sees both gift and market practices as significant and can analyse the ways in which they are combined.</p>
<h2>Economics and the gift economy</h2>
<p>Although I’ve highlighted the digital gift economy here, the gift economy is much older and much larger than that – it has just been less tangibly coupled with the market economy that we see on the business news. To take only the largest case, people have been producing and transferring economic benefits within the household since households began, without selling them to each other. When a parent cooks for their family that is just as productive as a chef cooking for customers in a restaurant, but no cash changes hands in payment.</p>
<p><a href="http://www.tandfonline.com/doi/abs/10.1080/13545709610001707756">One study of the Australian economy</a>, for example, found that when monetised – when household work is given a dollar value equivalent to that in the market economy – the household sector alone is as large as the market sector. Nor is the “old” gift economy confined to gifts to friends and family – charitable giving, volunteering and blood donation are all familiar forms of gifts to strangers. </p>
<p>Economics tends to overlook the gift economy, wherever it appears, not only because tools used by economics, such as revenue or profit calculations, market share and stock prices can only make sense of markets, but also because it has no way to value products that are not sold. We are all accustomed to valuing things in terms of prices achieved in the market, but there are no such prices in the gift sector. </p>
<p>That doesn’t mean its products aren’t valuable, but rather that we have absorbed a thoroughly dysfunctional notion of value that goes along with thinking of the economy in purely market terms. We can become so focused on the monetary side of the economy that we don’t see the absurdity of promoting its growth at the expense of the things we do for each other that don’t come with a price tag attached. If we are to make sense of both today’s economy and future possibilities, we need to start analysing our world as a complex of both market and non-market social practices, and start valuing its products in terms of human benefits instead of price.</p><img src="https://counter.theconversation.com/content/64898/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dave Elder-Vass does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economics struggles to explain the explosion of gift models at the heart of our online economy.Dave Elder-Vass, Reader in Sociology, Loughborough UniversityLicensed as Creative Commons – attribution, no derivatives.