Rewards and returns in a free market economy
Topic: Society
Elizabeth Anderson has an interesting post that suggests that the income or returns that people earn in a free market economy does not necessarily constitute a reward for some virtues possessed by these people. Rather, the returns offered in a free market economy serve only as signals to direct people to productive activities. The corollary is that people cannot always justifiably claim to deserve their income.

Excerpt:

The claim "I deserve my income," as applied to an individual's pretax income in free market economies, has considerable intuitive force... But...they are unjustified...

... However virtuous they were, by whatever standard of virtue one can name, individuals cannot count on their virtue being rewarded in the free market. For the function of the market isn't to reward people for past good behavior. It's to direct them toward producing for current demand, regardless of what they did in the past.

This isn't to say that virtue makes no difference to what returns one may expect for one's productive contributions. The exercise of prudence and foresight in laying out one's production and investment plans, and diligence in carrying them out, generally improves one's odds. But sheer dumb luck is also, ineradicably, a prominent factor determining free market returns. And nobody deserves what comes to them by sheer luck.

The ultimate aim of her post is to make a case for tax-funded social insurance, although by her own admission, this post by itself cannot clinch the argument. Her post suggests that the individual may not have deserved his income, but not necessarily that any part of that income should be turned over to the government for redistribution.

Her post drew a fair bit of criticism in the comments section. This is not surprising, as her end objective -- tax-funded social insurance -- is transparent. Conservatives and libertarians are unlikely to agree to it. Some even criticised her for arguing for social insurance, despite her explicitly saying that the post, by itself, is not intended to do so.

However, regardless of whether her end objective proves justifiable or not, I think Anderson's point regarding the function of return in a free market is a good one: It is a signal of desirable economic activity, and not necessarily a reward for past virtues.

Liberals, conservatives and libertarians
Topic: Politics
Keith Burgess-Jackson, at his blog, suggests that conservatives are pessimistic about people while liberals are optimistic:

Conservatives are pessimists. They believe that human beings are essentially bad (evil, selfish, vain, power-hungry) and that the best we can hope for is that their worst impulses are constrained by religion, the family, community, and the state. Liberals are optimists. They believe that human beings are essentially good but are corrupted by society. If corruption is caused by society, then changing society will free humans to be good. Their innate goodness will shine forth like a diamond. This explains the liberal fervor to change (remake, engineer) society...

Donald Luskin, however, disagrees. He thinks that liberals and conservatives are both pessimists:

I think liberalism regards individuals as weak and flawed, and seeks to use the power of government not to empower them to be virtuous, but to force them to be virtuous... That reining in of individual vice is the same thing that Keith says conservatives seek...

Now libertarians, on the other hand, are the real optimists about individual men. We seek to rein in the coercive power of collectives -- be it church, state, or corporation -- so that the largest possible number of transactions in the society are voluntary and individually determined. That's because we really believe in people -- we want them to make their own voluntary choices, right or wrong, win or lose. The only coercive role of the state is to protect individuals from force and fraud. Beyond that, we're optimists: you're on your own, and you'll do just fine.

I guess there is some logic to Luskin's view that libertarians are optimists about individuals, although one could also argue that in attempting to minimise the role of government, libertarians are also pessimistic about the capacity of the people in government to do good, which means that they are not wholly optimistic about people.

Personally, I think that Burgess-Jackson's view is more consistent with reality: Liberals generally tend to see the good in people, at least as compared to conservatives. Which leads to what I think is a piece of irony.

In the United States, while the Democratic Party represents liberals and the Republican Party represents conservatives, the latter is also usually seen as representing libertarians, whose belief in individual liberty -- one would have thought -- should have aligned them more closely with liberals. It makes for some strange bedfellows -- to say nothing of contradictions -- in the American political scene.

Generosity among rich countries
Topic: Politics
In the wake of the tsunami that hit the Indian Ocean on 26 December, some people have criticised rich countries, including the United States, for being less than forthcoming with their aid. For example, United Nations humanitarian aid chief Jan Egeland called rich countries "stingy" (see "President Bush in storm over Indian Ocean tsunami").

Carol Adelman, a senior fellow at the Hudson Institute and a former assistant administrator of the US Agency for International Development, has come to the defence of US aid efforts. In a New York Times article, she wrote:

[The US] government gives the highest absolute amount in foreign aid -- more than US$16 billion in 2003. And this does not include the cost of our global military presence...or the billions spent on developing medicines that save millions of lives in poorer nations.

Most important, however, Americans generally help people abroad the same way they help people at home: Through private charities, religious organisations, foundations, corporations, universities and money sent to relatives.

In 2000, all this came to more than US$35 billion, more than three times what the government gave. And this does not include giving by local churches or by overseas affiliates of American corporations.

The fact is, foreign aid is being privatised...

Brad Setser, a research associate at the University College of Oxford, puts all this US aid in perspective.

Is the US a generous country?
...I am pretty sure that Carol Adelman did not prove her case in today's New York Times.

Her argument is that aid flows are being privatized, and if you count private giving, the US is more generous than it seems if you look at the $16 billion in official aid the US provided in 2003. $16 billion is between 0.1% and 0.2% of our $11 trillion 2003 GDP -- most governments of large European countries give away twice that in development aid, and some small coutries give away close to full percent of GDP.

By the way, a decent chunk of the $16 billion went to reward our friends and allies, not to the poorest of the poor.

... Assume that [US private aid] grew to $40 billion in 2003. Combined public and private giving -- $56 billion -- would be about 0.5% of US GDP. That's well below the government of Norway's 0.9% of GDP in aid, and not much bigger than the 0.4% that France's government gives away every year.

Don't forget that Europeans give privately too...

[T]he facts are clear: the US is not in Norway's league, or the Netherland's either. Even counting private giving, the US is not a development aid superpower.

Americans have a well-known propensity for self-righteousness. A cold look at the facts, however, sometimes exposes parts of their virtuous self-image as delusions.

Americans are, on the whole, rich. Apart from that, they have the same virtues and vices as the rest of humankind.

President Bush in storm over Indian Ocean tsunami
Topic: Politics
The tsunami that hit the countries around the Indian Ocean following the earthquake off the coast of the Indonesian island of Sumatra on Sunday, 26 December is now turning out to be one of the greatest natural disasters in recent history. Already, more than 80,000 people have been confirmed dead, with more dead bodies still turning up by the day. Many more people are expected to succumb to disease amid poor sanitary conditions and the presence of rotting corpses.

In the midst of this calamity, when leadership is so important in the coordination of aid to the affected countries, what have we seen from the United States, the greatest power on Earth? Unfortunately, precious little. Little wonder then that United Nations humanitarian aid chief Jan Egeland said that rich countries like the US have been "stingy".

Possibly in response to that remark, President George W. Bush has now announced that the US will be forming a group of countries to lead world relief efforts. Some Americans, however, see the tardiness in taking the lead as unbecoming of the country, and criticise President Bush for his inaction and lack of leadership in the crisis.

For example, the weblog of Brad DeLong, long a vent for criticisms of President Bush, has now seen criticisms over his handling -- or lack of it -- of the crisis. In a post titled "Why Oh Why Are We Ruled by These Idiots? (Moral Leadership Department)", DeLong describes President Bush's behaviour as "bizarre". His readers add their own comments -- excerpts of two below.

[T]his is just one more clear demonstration of the steady and consistent leadership of Bush. No matter what is happening--whether warnings of impending terrorist attack or natural disaster on a scale unknown in our lifetimes--Bush will never, ever interrupt his vacation. His ability to stick to recreation while world-changing events overtake the country is what endears him to red-state voters.

One of the themes that grew out of the September 11 attacks was that the US enjoyed unprecedented sympathy and support from the rest of the world. Subsequently, our government squandered that good will through its actions. Now, a far greater catastrophy has hit the people who live around the Indian Ocean. If we don't give a once sympathetic and supportive world evidence that we reciprocate their good will, what will they think of us?

Let us put things in perspective. The Sunday tsunami has destroyed hundreds of thousands of lives around the Indian Ocean. Any goodwill that President Bush has lost for the US pales in comparison.

Limits to the benefits of exercise
Topic: Health
It's Christmas Eve and if you are planning to go out and celebrate tonight and over the next week or so by feasting, do note that some new research suggests that if you gain any weight in the process, don't assume that exercise will be able to undo the damage.

Early this month, the BBC put out a report which said that exercise benefits vary widely among individuals. The report cited a Louisiana University study in which researchers put 742 people through a strenuous 20-week endurance training programme.

Over the course of the programme, measures such as oxygen consumption improved in some, but not in others. While the average maximum oxygen consumption improved by 17 percent, some participants improved by 40 percent while another group showed no improvement at all.

Similar patterns were seen when other fitness measures such as cardiac output, blood pressure, heart rate were checked, as well as for insulin resistance, a marker of risk for heart disease and diabetes.

Mark Hargreaves, of Deakin University, Melbourne, was quoted in the report as saying: "We need to recognise that, although on average exercise may have clear benefits, it may not work for everyone. Some people may do better to change their diet."

Which leads to another BBC report today. This report cited a study by a group of Harvard School of Public Health researchers on more than 116,000 women nurses which found that physical activity did not totally compensate for the higher death risk associated with being obese.

The researchers estimate that excess weight and physical inactivity together could account for about a third of all premature deaths, two-thirds of deaths from cardiovascular disease, and a fifth of deaths from cancer among non-smoking women.

They defined excess weight as a body-mass index (weight in kg divided by the square of the height in meters) of 25 or more. Women who did more than 3.5 hours per week of exercise were considered "active".

Lean women who exercised less than 3.5 hours per week increased their risk of early death by 55 percent. Obese women who worked out for at least 3.5 hours a week increased their risk by 91 percent and those who were obese and inactive increased their risk of a premature death by 142 percent.

The researchers said the key to a long life, for both men and women, is to keep weight down and take regular exercise.

And if you can't help bingeing over the next week of festivities, you can at least take that as a New Year resolution.

Chief executives enjoy rising remuneration
Topic: Business
In a story titled "CEOs and their Indian rope trick", The Economist says that executive pay should reflect performance, with total remuneration fluctuating with company performance. However, it reports that in practice, there has been little sign of that.

[T]op executives' remuneration spiralled up, with the stockmarket as a whole, in the boom years at the end of the 1990s. But it continued to levitate thereafter, like the subject of an Indian rope trick. Mercer, a consultancy, says that the median compensation of bosses of big American firms...rose from $5.2m in 2000 to over $7m in 2001, a year when tumbling share prices cut shareholders' assets by some 12%.

As a result, the difference in pay between top executives and their workers has grown.

In 1991 the pay of the average American large-company boss was about 140 times that of the average worker; by last year, it was over 500 times, and growing. Last year's 7.2% rise in the average American boss's total compensation is worth over $400,000--nice work, if you can get it.

The Economist adds that the European chief executive's pay lags behind that of the American. According to the Hay Group, a consultancy, the basic salary of the chief executive is about the same on both sides of the Atlantic, but while variable pay adds only 150 percent to that in Europe, it adds 400 percent in America.

The Economist highlights several initiatives to address the issue of high executive pay. One was by CalPERS, America's largest public pension fund, to hold "directors and compensation committees more accountable for their actions". Another is the possible introduction of accounting rules that would compel American companies next year to treat share options as expenses to discourage their use (share options allow executives to profit from increases in the price of their company's shares, even when the price movements are not directly attributable to the executives).

Of course, the way that the boards of most corporations are structured, chief executives usually have an advantage in determining their own remuneration anyway. Individual shareholders often lack voting clout, with shareholdings divided among many parties. Even the majority shareholder -- sometimes represented by just an officer from the parent company -- would likely have less at stake when determining the chief executive's pay than the latter himself.

Furthermore, the chief executive, placed between the shareholders and the rest of the company, controls information flow to and from the company, while also being able to play off shareholders against each other. Thus, politically astute chief executives can concentrate actual power in the boardroom in themselves instead of the shareholders, where it rightfully belongs.

All these factors give chief executives an advantage in squeezing out lucrative remuneration for themselves. Regulation to improve corporate governance and dampen executive remuneration works best when it takes this advantage into account.

Stress and ageing
Topic: Health
It is commonly believed that stress accelerates ageing. Scientists have new evidence that this is indeed so.

A team from the University of California at San Francisco has found that the stress of caring for a sick child can add about 10 or more years to the biological age of a woman's cells. It does this by affecting key pieces of DNA called telomeres which are involved in regulating cell division, they say.

Telomeres are strips of DNA at the end of chromosomes which appear to protect and stabilise the chromosome ends. However, they shorten each time a cell divides, until there is nothing left, making the cell more defect-prone after division and increasing the risk of age-related disorders. The tendency for telomeres to shorten at cell division can be mitigated by an enzyme called telomerase, which helps to regenerate the ends.

The study examined 58 women, which included 39 healthy, pre-menopausal women who were primary caregivers for a child with a chronic illness, and 19 age-matched mothers of healthy children who served as a control group.

All the women completed questionnaires asking them to evaluate the level of stress they felt they had been under during the previous month. Blood samples were also taken so scientists could carry out DNA analysis of telomeres. Levels of telomerase in immune cells were also measured.

There was no difference in the telomere length of the two groups. However, in the 14 women with the highest stress scores, telomeres averaged 3,110 units in length; the 14 with the lowest stress had telomeres that averaged 3,660 units. The scientists translate this shortening to 9 to 17 additional years of ageing.

Within the care-giving group, the longer that a woman had been a care-giver, the shorter was the length of telomeres.

The higher-stress group was also found to have lower levels of telomerase in immune cells. The researchers, led by Dr Elissa S. Epel, said this implied the immune cells could function less well and could die sooner.

It was also found that the high-stress women also had higher oxidative stress levels -- cumulative damage caused by molecules called "free radicals" -- which has been shown to speed up the shortening of telomeres in other studies.

The researchers were not able to say exactly how stress affects telomeres, but suggested that their findings showed how cellular aging could be a way in which psychological stress was linked to the earlier onset of age-related diseases.

This study has been published in the Proceedings of the National Academy of Sciences. It represents an important step towards the recognition among health experts that psychological health plays an important part in physical health.

Colin Powell steps down as secretary of state
Topic: Politics
US Secretary of State Colin Powell has resigned. He will be replaced by national security adviser Condoleezza Rice.

The Washington Post (quoted by Matthew Yglesias) had this to say:

Mr. Powell's departure may well lead to fewer arguments and more consistent action by a second Bush administration as a team of officials closer to Mr. Cheney and Mr. Rumsfeld takes over at the State Department. Yet it is a measure of the stunning absence of accountability under Mr. Bush that it is Mr. Powell who leaves, while the architects of the failed and even disastrous policies he opposed, from postwar Iraq to Guantanamo Bay and Abu Ghraib, remain in office.

Matthew Yglesias's own take on the resignation is that

...Powell is not being let go despite having been right so much as he is being sacked because he was right. Meanwhile, since Don Rumsfeld was wrong, George W. Bush can't fire him, because firing him would be an admission that Rumsfeld was wrong and Bush, therefore, was wrong to side with him.

Interesting point. Does this mean then that President Bush will continue the same foreign policy as in his first term? Not necessarily. Even assuming that it is true that Bush is not willing to publicly acknowledge Rumsfeld's foreign policy mistake by removing him from his appointment, that does not necessarily imply that he has not privately acknowledged it.

Time will tell.

Democrats let down by flaw in democracy
Topic: Politics
President George W. Bush has won another four years in office. Even before the declaration of his victory, however, Nicholas Kristof had written in the New York Times how the Democratic Party was let down by the very people it was supposed to help.

In the aftermath of the civil war that the United States has just fought, one result is clear: The Democratic Party's first priority should be to reconnect with the American heartland... Mr John Kerry's supporters...should be feeling wretched about the millions of farmers, factory workers and waitresses who ended up voting -- utterly against their own interests -- for Republicans.

One of the Republican Party's major successes over the past few decades has been to persuade many of the working poor to vote for tax breaks for billionaires. Democrats are still effective on bread-and-butter issues such as health care, but they come across in much of America as arrogant and out of touch the moment the discussion shifts to values... To put it another way, Democrats peddle issues, and Republicans sell values...

"The Republicans are smarter," mused Oregon governor Ted Kulongoski, a Democrat. "They've created...these social issues to get the public to stop looking at what's happening to them economically. What we once thought -- that people would vote in their economic self-interest -- is not true, and we Democrats haven't figured out how to deal with that."

To appeal to middle America, Democratic leaders do not need to carry guns to church services and shoot grizzlies on the way. But a starting point would be to shed their inhibitions about talking about faith, and to work more with religious groups. Otherwise, the Democratic Party's efforts to improve the lives of working-class Americans in the long run will be blocked by the very people the Democrats aim to help.

The Democrats' handling of specific issues often score well with the more educated Americans who can understand the complexities of their arguments. However, the rest of the country have trouble understanding these arguments and thus will not be impressed.

This is a reminder of the well known flaw in democracy that people often don't know what is best for them. This makes it difficult for them to effectively exercise their right to vote.

Education, information, freedom of speech -- these are all prerequisites for a properly-functioning democracy. It appears that even in the United States -- the richest and most advanced nation on Earth -- not all of these prerequisites are fully met.

Health care and the market
Topic: Health
Recently, The New York Times carried an article by Donald L. Barlett and James B. Steele on health care in the United States. In the article, the authors assert that Americans do not have adequate health insurance coverage because of "the inability of market-based, for-profit medicine to deliver on the political promises".

We spend more per capita on health care than any other developed country. Yet on the important yardsticks, like life expectancy measured in healthy years, we don't even rank among the top 20 nations. In fact, according to the World Health Organisation, we come in an embarrassing 29th.

The authors claim that the market fails in the following:

The money in health care is in disease treatment whereas good health care requires disease prevention.

The market focuses on demand rather than on need, and carries out marketing to create that demand.

The United States government does not exert influence over prescription drug prices, so Americans pay more for these drugs.

The authors recommends the following:

What's needed to control the costs and to provide basic health and hospitalisation coverage for all Americans is an independent agency that would set national health care policy, collect medical fees, pay claims, reimburse doctors fairly and restrain runaway drug prices -- a single-payer system that would eliminate the costly, inefficient bureaucracy generated by thousands of different plans.

However, the authors' recommendation must be treated with a high degree of skepticism. In my opinion, the problem lies not in the fact that the market cannot deliver proper health care to Americans but that the United States has failed to provide an efficient, competitive market.

The health care market is always likely to be controlled by health care professionals because of the concentration of knowledge in the latter. An efficient market requires a free flow of information. When information between service providers and consumers is as unbalanced as it usually is in health care, the resultant market is also unlikely to be very free.

Therefore, health care regulation must focus on redressing this imbalance. Instead, health care regulation in the United States has often further distorted the free market.

Many economists have already pointed out that onerous safety requirements in drug regulation raises the cost of bringing new drugs to the market, which are then passed on to consumers with the help of patent laws that restrict competition. Contrary to what the authors assert, the United States already influences drug prices through safety and patent regulation. But because the influence is by way of reducing effective competition, prices go up.

Which makes it ironic that the authors want a single agency to control the entire health care system. The single agency will be devoid of competition and be one huge bureaucracy, with all its attendant inefficiency and disregard of market needs typical of such bureaucracies. It is hardly likely to result in an affordable and accessible health care system for the United States.