This year the Nobel Prize in Economics went to Elinor Ostrom of Indiana University and Oliver Williamson of the University of California, Berkeley.
Williamson is a senior and respected economist whose work on transaction costs is certainly worthy of recognition. But the big news, really, is Ostrom’s award. Not only is she the first woman laureate – out of 64 Economics Nobel Prizes handed out since the award was first instituted in 1969 – but she isn’t even an economist, strictly speaking, but rather a political scientist and does not work at one of the glamorous “top ten” universities which tend to dominate the Nobel and other prizes.
This is a great choice by the Nobel Committee, very much in keeping with Alfred Nobel’s original vision for the prize. She may not be a technical mainstream economist but she is a superb social scientist and her findings are of interest and relevance for economics and other disciplines and more generally, for social policy.
What is Ostrom’s contribution? She has focussed on the fundamental problem of governing the use of shared resources such as the environment or common grazing land – a problem often referred to as the “tragedy of the commons”.
This is because these problems pose a social dilemma. Collectively we are all better off if we cooperate – do not over-graze public lands, do not over-fish in shared waters, do not pollute the atmosphere, do not throw rubbish on the streets – but the problem is that if everyone abides by these rules, then an individual who flouts the rules is better off at the expense of everyone else. And if everyone reasons along similar lines then everyone behaves in a self-interested manner resulting in a bad outcome for all concerned. These social dilemmas pose a tension between cooperation and self-interest, between maximizing the public good and acting in a self-interested manner thereby benefiting the individual at the expense of society.
The insight was summed up brilliantly by Joseph Heller in Catch 22, in the following exchange between Yossarian and Major Major Major Major.
“Suppose we let you pick your missions and fly milk runs,” Major Major said. “That way you can fly the four missions and not run any risks.”
“I don’t want to fly milk runs. I don’t want to be in the war any more.”
“Would you like to see our country lose?” Major Major asked.
“We won’t lose. We’ve got more men, more money and more material. There are ten million people in uniform who can replace me. Some people are getting killed and a lot more are making money and having fun. Let somebody else get killed.”
“But suppose everybody on our side felt that way.”
“Then I’d certainly be a damned fool to feel any other way. Wouldn’t I?”
In economics, a maintained assumption is the idea of rational self-interest; that individuals will usually act in their own self-interest as expressed in the above quote from Catch 22. Given this assumption of self-interest, economists believe that individual humans will have an exceedingly hard time in addressing social dilemmas and that successful resolution of such problems will require government intervention; ie., one needs a Hobbesian leviathan to address such dilemmas.
But Ostrom’s work- based on hundreds of case studies and numerous detailed controlled experiments - shows that the self-interest based prediction is almost always incorrect and that humans, left to themselves, are much better at tackling such problems than traditional economic theory suggests.
To take one instance, Ostrom and her colleagues at the “Workshop in Political Theory and Policy Analysis” at Indiana University have been collecting thousands of written cases about resources managed by local users of fisheries, irrigation systems and grazing lands. In Nepal, they have collected data about the rules and general management strategies used to manage over 200 irrigation systems. Some of these are managed by government agencies (agency managed irrigation systems or AMIS) while some are managed by the farmers (farmer managed irrigation systems or FMIS). They find that compared to AMIS, FMIS are able to achieve a higher agricultural yield, a more equitable distribution of water and better maintenance of the irrigation systems. There are striking differences in the way the two systems are managed. Under AMIS, infractions are recorded by government officials while under FMIS they are recorded by the farmer-monitors. Furthermore, the AMIS tend to rely more on fines for infractions than FMIS. Rules and quotas are followed 65% of the time in FMIS compared to only 35% of the time in AMIS. Thus rules and sanctions designed by the farmers themselves tend to be more effective than those imposed by government officials.
Why is this work important? Because it gives us practical answers to how we can go about addressing such problems at the local level, using decentralized mechanisms, a very similar idea to Muhammad Yunus’s approach to micro-finance using the Grameen Bank. What Ostrom provides are directions about how to address real-life problems using simple policies yielding effective results. That is surely deserving of the Nobel Prize!
Tuesday, October 27, 2009
Tuesday, June 2, 2009
Thoughts on the 2009 budget
(This is a guest-blog by Dr. Stephen Poletti. Dr. Poletti is a lecturer in the Department of Economics at the University of Auckland and an executive member of the Child Poverty Action Group (CPAG). This blog is an edited version of comments made by Dr. Poletti at the Ninth Annual Budget Breakfast organized by the CPAG on May 29, 2009. The views expressed are those of Dr. Poletti and not mine; though, for the most part, I agree with the sentiments expressed in this blog.)
The background to the budget is the world financial crisis which has developed over the last year. Despite the rally in world equity markets since mid march the outlook for the next year is grim. The IMF recently downgraded their January prediction for world growth this year from plus 0.5 per-cent to minus 1.3 per cent - the worst slowdown since the great depression. They dryly note that “Recovery will take longer than normal because the slump was precipitated by a world wide financial crisis.”
The numbers are unnerving. Just to take a few recent announcements. In the last six months Japan’s GDP has fallen 8%, Singapore registered a 10% drop in GDP over the last year and German GDP fell 4% in the first three months of 2009. A recent article by respected economists Barry Eichengreen and Kevin O’Rourke looked at the trends for a number of key variables over recent months compared to the great depression. They conclude that the initial stages of the world financial crisis are at least as bad as the early days of the depression. However they go on to analyse the fiscal and monetary response of governments globally which are much more stimulatory than during the depression and conclude that “the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.”
Underlying the financial crisis has been the huge increase in income inequality in the countries at the heart of the world financial markets. Financial markets have come to dominate the real economy. Global financial assets have increased from 100% of world GDP in 1980 to 360% of world GDP in 2007. 40% of US corporate profits were from the finance sector, up from 20% to 30% in the 1990s. Coupled with this has been a dramatic rise in inequality as the top few per cent skimmed off most of the extra income generated as the economy grows. From 1993 to 2006 the top 1% in the USA captured 52% of the growth in income of the country. Between 2002 and 2006 they managed to grab a staggering 72% of the growth in GDP. The top 10% of income earners in the US now get 50% of national income up from 35% in 1982. The last time things were this extreme was just before the great depression. On the other hand the real income of the bottom 90% of society in the US actually fell between 1973 and 2006.
How could such a state of affairs persist in a democracy? Part of the answer is that those at the bottom managed to borrow to supplement their income ensuring that consumption kept growing. Much of the funds for this were imported from Asia (particularly China) which ran up big surpluses. At the peak, America absorbed about 70 per cent of the rest of the world’s surplus savings. House prices went up and up creating “ the biggest asset bubble in human history”. Household debt in the English speaking countries went up dramatically after 1980 more than doubling in many countries which fuelled the growth of the financial sector.
Finally as we know the whole pyramid scheme unravelled as people with “sub-prime” mortgages in the US started to default on their loan payments and it slowly dawned on people that house prices weren’t going to keep going up forever. As the crisis intensified bank lending almost dried up completely.
Here is a quote from the economics editor of the Financial Times in England. “The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it.”
In summary, the present global economic crisis is likely to persist for a lengthy period of time. It is unlikely to be as severe as the great depression because governments are stimulating demand much more. At the heart of the meltdown is the fact that the financial sector started to dominate the real economy. This in turn was associated with a dramatic rise in inequality, the impact of which was ameliorated by households funding increased consumption by borrowing and a resulting housing asset bubble.
Turning now to New Zealand we see a similar story. Household debt sits at 160% of GDP (compared to 170% in the UK and 130% in the US). Real house prices have increased by a similar amount to that experienced by the US and UK. To finance this we have borrowed from the rest of the world – a sort of pyramid scheme where we borrow to service our debt payments. On a per capita basis we are one of the most indebted countries in the world. The tragedy is that the vast bulk of this debt has not been used to make the country more productive and the economy stronger and more able to service the overseas debt. Instead much of it has fuelled a housing asset bubble in the first instance which then flows on to increased consumption as housing equity is drawn down.
Inequality in New Zealand has also increased dramatically in recent years where in terms of the Gini index (a measure of inequality) our degree of inequality is on a par with the UK and only slightly better than the US. New Zealand’s degree of inequality is the 23rd worst out of the 30 OECD countries.
Over the last couple of decades we have taken advantage of the worldwide expansion of the financial sector to borrow well beyond our means year in and year out to fund consumption a circumstance that cannot continue. We have also seen dramatic increases in inequality and child poverty.
Over the last year GDP in NZ fell 1.8% and the first quarter figures are certain to be bad. In Budget 2009 Bill English does acknowledge the severity of the world economic outlook and our reliance on overseas debt to fund consumption. Having acknowledged these concerns he then does almost nothing to address them.
As expected he made no mention of inequality in this budget. No mention of child poverty. And he has no conception that the events of the last year must fundamentally change the way we manage capitalism. To quote from Martin Wolfe “Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.”
A lot of weight was put on the fact that Standard and Poor might downgrade the New Zealand government credit rating. If one was cynical one could argue that this was no accident and the government was quite happy to use this as an excuse to bear down on social spending. Already we have seen 1400 jobs lost in the public sector. It should be noted that Standard and Poor gave Enron an AAA rating weeks before it went down.
Spending on health and education continue to increase at a similar rate to that seen under Labour. It is also encouraging to see extra money ($323m over four years) to help insulate houses making them warmer and healthier. We welcome the cancellation of the tax cuts but point out that this now broken election promise was never plausible.
Overall however this is a bland budget that offers no vision and no coherent response to the economic crisis that is buffeting New Zealand. There is almost no fiscal stimulus to speak of. Instead the economy will just drift along with a bit of spending bought forward here and there balanced by cuts to government spending elsewhere.
Bill English has the approach of a shop keeper when facing hard times – trim costs and hunker down. This is exactly the response which turned the financial shock experienced in 1929 into the great depression. I would have liked to see a billion dollars invested in public transport and an electric rail system in Auckland, and also several billion dollars put into building decent state houses. We know that decent housing would make a huge difference to the health and well being of many of the poorest and most vulnerable in our society. It also makes good economic sense. It is an effective way of stimulating demand.
The government could have announced that taxes would be raised when the recovery is well underway to finance this in the longer term. It could also have followed the British and US government’s initiatives to increase the top tax rates and start to reduce the vast inequalities in our society.
The elephant in the room is housing investment. This budget does nothing to change the incentives around housing investment which has seen Kiwis borrow from overseas to fund the housing asset bubble as discussed earlier.
Unemployment is expected to rise to 7.5% next year and could go as high as 9%. That means that up to 200,000 people will be forced to rely on inadequate benefits. Many families will suffer extreme financial stress. Their children will suffer. Where in this budget is a reversal of the 1991 benefit cuts or an announcement that the in work payment would be extended to cover all children. I remind you that the Child Poverty Action Group (CPAG) estimates that over 150,000 children in New Zealand live in severe or significant hardship.
Already we are seeing extra stress in communities. Budget service managers are describing 40 to 400% increase in demand for services; Food bank demand has increased 50-60%. Family counselling demand is up 30%. And this is before the expected dramatic increase in unemployment.
We are supposed to be pleased that they have not cut WFF- but all the problems of poor children who miss out because they are not working enough or on a benefit remain. CPAG have calculated that it would take $450m to pay the IWTC part of the WFF to all those families that miss out at the bottom. This is worth $60+ per family. The Restart package acknowledges that families who lose their jobs need this payment, but the restart package is woeful—only a handful of families around 700 have qualified and they can receive the payment for only 16 weeks. CPAG estimates the government is spending 0.5% of what it should be spending.
Instead of initiatives to lift children out of poverty there was a lot of talk about building new prisons. Instead of investment in innovation and programs to increase the skills and productivity and pay of workers the main contribution the government has determined it can make to growth is to cut red tape for business. One wonders do they really believe that this is a serious response to the worst crisis we have seen since the great depression?
The background to the budget is the world financial crisis which has developed over the last year. Despite the rally in world equity markets since mid march the outlook for the next year is grim. The IMF recently downgraded their January prediction for world growth this year from plus 0.5 per-cent to minus 1.3 per cent - the worst slowdown since the great depression. They dryly note that “Recovery will take longer than normal because the slump was precipitated by a world wide financial crisis.”
The numbers are unnerving. Just to take a few recent announcements. In the last six months Japan’s GDP has fallen 8%, Singapore registered a 10% drop in GDP over the last year and German GDP fell 4% in the first three months of 2009. A recent article by respected economists Barry Eichengreen and Kevin O’Rourke looked at the trends for a number of key variables over recent months compared to the great depression. They conclude that the initial stages of the world financial crisis are at least as bad as the early days of the depression. However they go on to analyse the fiscal and monetary response of governments globally which are much more stimulatory than during the depression and conclude that “the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.”
Underlying the financial crisis has been the huge increase in income inequality in the countries at the heart of the world financial markets. Financial markets have come to dominate the real economy. Global financial assets have increased from 100% of world GDP in 1980 to 360% of world GDP in 2007. 40% of US corporate profits were from the finance sector, up from 20% to 30% in the 1990s. Coupled with this has been a dramatic rise in inequality as the top few per cent skimmed off most of the extra income generated as the economy grows. From 1993 to 2006 the top 1% in the USA captured 52% of the growth in income of the country. Between 2002 and 2006 they managed to grab a staggering 72% of the growth in GDP. The top 10% of income earners in the US now get 50% of national income up from 35% in 1982. The last time things were this extreme was just before the great depression. On the other hand the real income of the bottom 90% of society in the US actually fell between 1973 and 2006.
How could such a state of affairs persist in a democracy? Part of the answer is that those at the bottom managed to borrow to supplement their income ensuring that consumption kept growing. Much of the funds for this were imported from Asia (particularly China) which ran up big surpluses. At the peak, America absorbed about 70 per cent of the rest of the world’s surplus savings. House prices went up and up creating “ the biggest asset bubble in human history”. Household debt in the English speaking countries went up dramatically after 1980 more than doubling in many countries which fuelled the growth of the financial sector.
Finally as we know the whole pyramid scheme unravelled as people with “sub-prime” mortgages in the US started to default on their loan payments and it slowly dawned on people that house prices weren’t going to keep going up forever. As the crisis intensified bank lending almost dried up completely.
Here is a quote from the economics editor of the Financial Times in England. “The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it.”
In summary, the present global economic crisis is likely to persist for a lengthy period of time. It is unlikely to be as severe as the great depression because governments are stimulating demand much more. At the heart of the meltdown is the fact that the financial sector started to dominate the real economy. This in turn was associated with a dramatic rise in inequality, the impact of which was ameliorated by households funding increased consumption by borrowing and a resulting housing asset bubble.
Turning now to New Zealand we see a similar story. Household debt sits at 160% of GDP (compared to 170% in the UK and 130% in the US). Real house prices have increased by a similar amount to that experienced by the US and UK. To finance this we have borrowed from the rest of the world – a sort of pyramid scheme where we borrow to service our debt payments. On a per capita basis we are one of the most indebted countries in the world. The tragedy is that the vast bulk of this debt has not been used to make the country more productive and the economy stronger and more able to service the overseas debt. Instead much of it has fuelled a housing asset bubble in the first instance which then flows on to increased consumption as housing equity is drawn down.
Inequality in New Zealand has also increased dramatically in recent years where in terms of the Gini index (a measure of inequality) our degree of inequality is on a par with the UK and only slightly better than the US. New Zealand’s degree of inequality is the 23rd worst out of the 30 OECD countries.
Over the last couple of decades we have taken advantage of the worldwide expansion of the financial sector to borrow well beyond our means year in and year out to fund consumption a circumstance that cannot continue. We have also seen dramatic increases in inequality and child poverty.
Over the last year GDP in NZ fell 1.8% and the first quarter figures are certain to be bad. In Budget 2009 Bill English does acknowledge the severity of the world economic outlook and our reliance on overseas debt to fund consumption. Having acknowledged these concerns he then does almost nothing to address them.
As expected he made no mention of inequality in this budget. No mention of child poverty. And he has no conception that the events of the last year must fundamentally change the way we manage capitalism. To quote from Martin Wolfe “Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.”
A lot of weight was put on the fact that Standard and Poor might downgrade the New Zealand government credit rating. If one was cynical one could argue that this was no accident and the government was quite happy to use this as an excuse to bear down on social spending. Already we have seen 1400 jobs lost in the public sector. It should be noted that Standard and Poor gave Enron an AAA rating weeks before it went down.
Spending on health and education continue to increase at a similar rate to that seen under Labour. It is also encouraging to see extra money ($323m over four years) to help insulate houses making them warmer and healthier. We welcome the cancellation of the tax cuts but point out that this now broken election promise was never plausible.
Overall however this is a bland budget that offers no vision and no coherent response to the economic crisis that is buffeting New Zealand. There is almost no fiscal stimulus to speak of. Instead the economy will just drift along with a bit of spending bought forward here and there balanced by cuts to government spending elsewhere.
Bill English has the approach of a shop keeper when facing hard times – trim costs and hunker down. This is exactly the response which turned the financial shock experienced in 1929 into the great depression. I would have liked to see a billion dollars invested in public transport and an electric rail system in Auckland, and also several billion dollars put into building decent state houses. We know that decent housing would make a huge difference to the health and well being of many of the poorest and most vulnerable in our society. It also makes good economic sense. It is an effective way of stimulating demand.
The government could have announced that taxes would be raised when the recovery is well underway to finance this in the longer term. It could also have followed the British and US government’s initiatives to increase the top tax rates and start to reduce the vast inequalities in our society.
The elephant in the room is housing investment. This budget does nothing to change the incentives around housing investment which has seen Kiwis borrow from overseas to fund the housing asset bubble as discussed earlier.
Unemployment is expected to rise to 7.5% next year and could go as high as 9%. That means that up to 200,000 people will be forced to rely on inadequate benefits. Many families will suffer extreme financial stress. Their children will suffer. Where in this budget is a reversal of the 1991 benefit cuts or an announcement that the in work payment would be extended to cover all children. I remind you that the Child Poverty Action Group (CPAG) estimates that over 150,000 children in New Zealand live in severe or significant hardship.
Already we are seeing extra stress in communities. Budget service managers are describing 40 to 400% increase in demand for services; Food bank demand has increased 50-60%. Family counselling demand is up 30%. And this is before the expected dramatic increase in unemployment.
We are supposed to be pleased that they have not cut WFF- but all the problems of poor children who miss out because they are not working enough or on a benefit remain. CPAG have calculated that it would take $450m to pay the IWTC part of the WFF to all those families that miss out at the bottom. This is worth $60+ per family. The Restart package acknowledges that families who lose their jobs need this payment, but the restart package is woeful—only a handful of families around 700 have qualified and they can receive the payment for only 16 weeks. CPAG estimates the government is spending 0.5% of what it should be spending.
Instead of initiatives to lift children out of poverty there was a lot of talk about building new prisons. Instead of investment in innovation and programs to increase the skills and productivity and pay of workers the main contribution the government has determined it can make to growth is to cut red tape for business. One wonders do they really believe that this is a serious response to the worst crisis we have seen since the great depression?
Price gouging by electricity companies: may be legal, but is it fair?
(Posted by Ananish Chaudhuri)
(A version of this blog appeared as an op-ed article in the New Zealand Herald on June 2, 2009.)
I am somewhat bemused by the recent hue and cry about price gouging by our electricity companies. After all, the companies have done exactly what we teach students in our economics principles courses; charge high prices when demand is high, a policy commensurate with profit maximizing, which is at the core of market based economies. After all, no one is accusing these firms of doing anything illegal. In cases like this there is always the possibility of implicit collusion among the companies involved, but at this point there seems to be no evidence to support this conjecture. (The National government’s outrage in the matter appears rather disingenuous, given their decision to fire Paula Rebstock, who, by all accounts, was doing an excellent job of combating such practices during her tenure at the Commerce Commission.)
Furthermore, on the face of it, what the electricity companies were doing is no different from the pricing practices of others. Try buying tickets on Air New Zealand during the school holidays or check out the fare differences in flights at peak and off-peak times and you will know what I am talking about. No one, as far as I can make out is making similar accusations against Air New Zealand. One could argue that price gouging in electricity markets is of greater concern given that heat and electricity are necessities in life. Airline travel is more of a luxury. (Though if you live on one of two tiny islands in the middle of the South Pacific, then your transport choices are often rather limited.)
But what the outrage over electricity prices shows is that beyond profit maximization and market economics, people care deeply about fundamental fairness and companies that contravene those fairness norms do so at their own peril.
Firms that have some degree of monopoly power often exploit that power to increase profits by charging different customers different prices depending on their willingness to pay a higher price. What the seller is trying to achieve in such cases is to get from each customer the most that the latter is willing to pay for the good.
A group of American researchers including the 2002 Economics Nobel laureate Daniel Kahnemann have used extensive questionnaires to understand people’s predispositions towards a multitude of pricing strategies adopted by businesses. Here is an example that is particularly relevant in the current context: “A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.” Respondents were asked to rate this move as (1) completely fair; (2) acceptable; (3) unfair and (4) very unfair. Out of 107 respondents, 82% considered this unfair or very unfair.
Many forms of price discrimination were considered outrageous by the survey respondents. Consider the following question: “A landlord rents out a small house. When the lease is due for renewal, the landlord learns that the tenant has taken a job very close to the house and is therefore unlikely to move. The landlord raises the rent $40 per month more than he was planning to do”. Out of 157 respondents only 9% thought this was acceptable while a whopping 91% considered this unfair. On a different question, a majority of respondents thought it unfair for a popular restaurant to impose a $5 surcharge for Saturday night reservations.
The near unanimity of these responses suggests that pricing strategies that deliberately exploit the vulnerability of a particular individual is considered offensive by most. These findings illustrate the role that norms of fairness play in day to day pricing decisions and how these norms can and do serve as a constraint on unfettered profit-making.
The survey responses suggest that many actions that are both profitable in the short run and not obviously dishonest are likely to be perceived as unfair exploitations of market power. Now one might be tempted to discount some of these conclusions by arguing that these are, after all, responses to hypothetical questions. A particular respondent might say that he will not patronise a firm that is engaging in price-gouging by jacking up the price of an essential commodity in an emergency but when push comes to shove the buyer might easily give in. The problem here is that it is very hard to show that people are not buying something in protest since it is impossible to prove a negative.
But recently economists have used economic decision making experiments with relatively large amounts of money at stake, to show that indeed “demand withholding” by buyers - where the buyers essentially refuse to buy at prices considered unfair and discriminatory - can be a significant factor in market interactions. Such demand withholding is especially pronounced when the sellers are significantly better off at the expense of the buyers and especially when the buyers are made aware of this inequitable distribution of the benefits by providing them with information about the profits accruing to each party.
In the backdrop of the current recession, where households are really feeling the pinch, what the electricity companies have done may not be illegal, but by exploiting consumer vulnerability, they have contravened fundamental notions of fairness that many of us hold dear. And for that, I expect, they will pay a price. We will have to wait and see what that price is.
(A version of this blog appeared as an op-ed article in the New Zealand Herald on June 2, 2009.)
I am somewhat bemused by the recent hue and cry about price gouging by our electricity companies. After all, the companies have done exactly what we teach students in our economics principles courses; charge high prices when demand is high, a policy commensurate with profit maximizing, which is at the core of market based economies. After all, no one is accusing these firms of doing anything illegal. In cases like this there is always the possibility of implicit collusion among the companies involved, but at this point there seems to be no evidence to support this conjecture. (The National government’s outrage in the matter appears rather disingenuous, given their decision to fire Paula Rebstock, who, by all accounts, was doing an excellent job of combating such practices during her tenure at the Commerce Commission.)
Furthermore, on the face of it, what the electricity companies were doing is no different from the pricing practices of others. Try buying tickets on Air New Zealand during the school holidays or check out the fare differences in flights at peak and off-peak times and you will know what I am talking about. No one, as far as I can make out is making similar accusations against Air New Zealand. One could argue that price gouging in electricity markets is of greater concern given that heat and electricity are necessities in life. Airline travel is more of a luxury. (Though if you live on one of two tiny islands in the middle of the South Pacific, then your transport choices are often rather limited.)
But what the outrage over electricity prices shows is that beyond profit maximization and market economics, people care deeply about fundamental fairness and companies that contravene those fairness norms do so at their own peril.
Firms that have some degree of monopoly power often exploit that power to increase profits by charging different customers different prices depending on their willingness to pay a higher price. What the seller is trying to achieve in such cases is to get from each customer the most that the latter is willing to pay for the good.
A group of American researchers including the 2002 Economics Nobel laureate Daniel Kahnemann have used extensive questionnaires to understand people’s predispositions towards a multitude of pricing strategies adopted by businesses. Here is an example that is particularly relevant in the current context: “A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.” Respondents were asked to rate this move as (1) completely fair; (2) acceptable; (3) unfair and (4) very unfair. Out of 107 respondents, 82% considered this unfair or very unfair.
Many forms of price discrimination were considered outrageous by the survey respondents. Consider the following question: “A landlord rents out a small house. When the lease is due for renewal, the landlord learns that the tenant has taken a job very close to the house and is therefore unlikely to move. The landlord raises the rent $40 per month more than he was planning to do”. Out of 157 respondents only 9% thought this was acceptable while a whopping 91% considered this unfair. On a different question, a majority of respondents thought it unfair for a popular restaurant to impose a $5 surcharge for Saturday night reservations.
The near unanimity of these responses suggests that pricing strategies that deliberately exploit the vulnerability of a particular individual is considered offensive by most. These findings illustrate the role that norms of fairness play in day to day pricing decisions and how these norms can and do serve as a constraint on unfettered profit-making.
The survey responses suggest that many actions that are both profitable in the short run and not obviously dishonest are likely to be perceived as unfair exploitations of market power. Now one might be tempted to discount some of these conclusions by arguing that these are, after all, responses to hypothetical questions. A particular respondent might say that he will not patronise a firm that is engaging in price-gouging by jacking up the price of an essential commodity in an emergency but when push comes to shove the buyer might easily give in. The problem here is that it is very hard to show that people are not buying something in protest since it is impossible to prove a negative.
But recently economists have used economic decision making experiments with relatively large amounts of money at stake, to show that indeed “demand withholding” by buyers - where the buyers essentially refuse to buy at prices considered unfair and discriminatory - can be a significant factor in market interactions. Such demand withholding is especially pronounced when the sellers are significantly better off at the expense of the buyers and especially when the buyers are made aware of this inequitable distribution of the benefits by providing them with information about the profits accruing to each party.
In the backdrop of the current recession, where households are really feeling the pinch, what the electricity companies have done may not be illegal, but by exploiting consumer vulnerability, they have contravened fundamental notions of fairness that many of us hold dear. And for that, I expect, they will pay a price. We will have to wait and see what that price is.
Wednesday, May 20, 2009
Fighting the recession: cutting wages or laying off workers?
Posted by: Ananish Chaudhuri
(A version of this blog appeared in Section C2 of the Dominion Post on Thursday, May 21, 2009.)
Recently, the Chief Executive of Air New Zealand announced a freeze on wage increases and said his goal was "to do everything I can to minimise the risk of job losses…". Freezing wages is a way of containing costs. The implication here is that if costs keep rising and freezing wages don’t do the trick then the next – inevitable- step is to lay off workers.
A pertinent question to ask in this context is this: why not cut wages across the board rather than lay off some people? In January of this year Radio New Zealand reported that some business leaders including the Chief Executive of Business New Zealand were calling for a freeze in the minimum wage. In February, Business New Zealand, in its recommendations to the jobs summit, suggested that cutting the hourly wage rate should be considered as one of the options for preventing job losses. Even if the wage is only frozen rather than cut, as long as increases in the minimum wage do not keep pace with rising prices, then the net effect is to reduce the “real” wages of workers because with rising prices their wages are worth less than before. In fact, during recessions one often hears calls for cuts in the minimum wage, or even doing away with it completely. The argument is that the presence of the minimum wage prevents employers, faced with falling revenues, from lowering wages to get the cost-savings they need to justify maintaining their workforces. Under this view, unemployment must increase because the minimum wage blocks the needed adjustments in costs.
However the fact remains that all over the world employers tend to show a strong preference for laying off workers rather than cutting wages. So why is this? If the primary aim is to save on costs, then pay-cuts across the board for all workers might actually save more money than laying off an unfortunate few, especially given that laid off workers often get severance pay.
Based on hundreds of interviews with managers at a variety of firms in the north-eastern United States, Truman Bewley of Yale University found that the managers of most enterprises were reluctant to enact a reduction in wages even though, given the extensive unemployment, they could then pick up new workers willing to work for less. But in fact top management is extremely reluctant to enact wages cuts and the main reason they gave for this is that such cuts hurt morale and therefore reduce workers’ productivity.
OK, wage cuts hurt in the wallet, but what is the link with morale more generally? Morale has a number of different components including identifying with the firm and its objectives as well as a mood that is conducive to good work. Psychologists say that most of us engage in what is called “anchoring”, whereby our current wages become a reference point for us to measure future developments against. Furthermore, most of us are “loss averse” in that a $10 loss makes us more than twice as unhappy as a $10 gain makes us happy. Therefore, pay-cuts are psychologically painful. Workers are used to receiving regular pay increases as a reward for good work and loyalty and so interpret a pay cut as an affront and a breach of implicit reciprocity. The morale of existing employees is hurt by pay cuts because of an insult effect. This explains how a general cut in pay can indeed lead to serious losses in productivity via its detrimental effect on worker morale.
There are two other factors at work here as well. First, pay-cuts can often lead to a problem of “adverse selection” whereby a general cut in pay may lead to the most productive members of the firm leaving, resulting in a much greater than proportional fall in productivity. In this case the savings from lower wages are outweighed by the resulting loss in productivity. The second factor has to do with the concept of “efficiency wages”. In a variety of jobs monitoring workers is difficult and the cost to the firm from workers shirking is high. In such cases, firms routinely pay workers more than the minimum amount that they have to pay. This higher pay is certainly desirable but workers also understand that being fired from the job now comes with the potentially high penalty of having to settle for an alternative that pays much less. Efficiency wages have the effect of fostering loyalty on the part of the employee and therefore reducing the possibility of workers shirking or even leaving. Firms paying efficiency wages are always reluctant to cut wages even in the face of pervasive unemployment, because of its detrimental effect on worker loyalty and productivity.
General pay cuts hurt everybody and can cause lasting resentment and loss of morale. Layoffs affect morale as well but that effect seems relatively short-lived since the laid-off workers are no longer around. This implies that with jobs where workers are hard to monitor including jobs in customer service or information systems or jobs that require close cooperation among groups of workers, we would not expect to see any pronounced cuts in wages. To the extent workers use the minimum wage as an anchor, cuts in this wage may have a tremendously detrimental effect on morale and may not have any impact on job losses in any case.
(A version of this blog appeared in Section C2 of the Dominion Post on Thursday, May 21, 2009.)
Recently, the Chief Executive of Air New Zealand announced a freeze on wage increases and said his goal was "to do everything I can to minimise the risk of job losses…". Freezing wages is a way of containing costs. The implication here is that if costs keep rising and freezing wages don’t do the trick then the next – inevitable- step is to lay off workers.
A pertinent question to ask in this context is this: why not cut wages across the board rather than lay off some people? In January of this year Radio New Zealand reported that some business leaders including the Chief Executive of Business New Zealand were calling for a freeze in the minimum wage. In February, Business New Zealand, in its recommendations to the jobs summit, suggested that cutting the hourly wage rate should be considered as one of the options for preventing job losses. Even if the wage is only frozen rather than cut, as long as increases in the minimum wage do not keep pace with rising prices, then the net effect is to reduce the “real” wages of workers because with rising prices their wages are worth less than before. In fact, during recessions one often hears calls for cuts in the minimum wage, or even doing away with it completely. The argument is that the presence of the minimum wage prevents employers, faced with falling revenues, from lowering wages to get the cost-savings they need to justify maintaining their workforces. Under this view, unemployment must increase because the minimum wage blocks the needed adjustments in costs.
However the fact remains that all over the world employers tend to show a strong preference for laying off workers rather than cutting wages. So why is this? If the primary aim is to save on costs, then pay-cuts across the board for all workers might actually save more money than laying off an unfortunate few, especially given that laid off workers often get severance pay.
Based on hundreds of interviews with managers at a variety of firms in the north-eastern United States, Truman Bewley of Yale University found that the managers of most enterprises were reluctant to enact a reduction in wages even though, given the extensive unemployment, they could then pick up new workers willing to work for less. But in fact top management is extremely reluctant to enact wages cuts and the main reason they gave for this is that such cuts hurt morale and therefore reduce workers’ productivity.
OK, wage cuts hurt in the wallet, but what is the link with morale more generally? Morale has a number of different components including identifying with the firm and its objectives as well as a mood that is conducive to good work. Psychologists say that most of us engage in what is called “anchoring”, whereby our current wages become a reference point for us to measure future developments against. Furthermore, most of us are “loss averse” in that a $10 loss makes us more than twice as unhappy as a $10 gain makes us happy. Therefore, pay-cuts are psychologically painful. Workers are used to receiving regular pay increases as a reward for good work and loyalty and so interpret a pay cut as an affront and a breach of implicit reciprocity. The morale of existing employees is hurt by pay cuts because of an insult effect. This explains how a general cut in pay can indeed lead to serious losses in productivity via its detrimental effect on worker morale.
There are two other factors at work here as well. First, pay-cuts can often lead to a problem of “adverse selection” whereby a general cut in pay may lead to the most productive members of the firm leaving, resulting in a much greater than proportional fall in productivity. In this case the savings from lower wages are outweighed by the resulting loss in productivity. The second factor has to do with the concept of “efficiency wages”. In a variety of jobs monitoring workers is difficult and the cost to the firm from workers shirking is high. In such cases, firms routinely pay workers more than the minimum amount that they have to pay. This higher pay is certainly desirable but workers also understand that being fired from the job now comes with the potentially high penalty of having to settle for an alternative that pays much less. Efficiency wages have the effect of fostering loyalty on the part of the employee and therefore reducing the possibility of workers shirking or even leaving. Firms paying efficiency wages are always reluctant to cut wages even in the face of pervasive unemployment, because of its detrimental effect on worker loyalty and productivity.
General pay cuts hurt everybody and can cause lasting resentment and loss of morale. Layoffs affect morale as well but that effect seems relatively short-lived since the laid-off workers are no longer around. This implies that with jobs where workers are hard to monitor including jobs in customer service or information systems or jobs that require close cooperation among groups of workers, we would not expect to see any pronounced cuts in wages. To the extent workers use the minimum wage as an anchor, cuts in this wage may have a tremendously detrimental effect on morale and may not have any impact on job losses in any case.
Tuesday, May 19, 2009
Creating Optimistic Beliefs Key to Tackling Global Recession
Posted by: Ananish Chaudhuri
(A version of this blog appeared as a "Viewpoint" article in the University of Auckland News on Friday, May 15, 2009.)
During this on-going economic crisis, a number of commentators have urged consumers to keep spending. Except, it’s not that simple. An individual consumer increasing spending makes no difference to the recession. What is required is for all consumers to increase consumption simultaneously. As a consumer, I might clearly understand that we can make a difference if we increase consumption, but how do I know if others will actually increase their consumption if I do so?
A wide variety of economic situations require coordinated action on the part of individuals or groups in order to achieve a successful outcome. Economists refer to these as ‘co-ordination problems’ and they arise, for instance, in any industry engaged in team production along an assembly line such as in steel mills and automobile factories.
Even if everyone works at speed, just one individual or group lagging behind is needed to slow down production significantly to the detriment of everyone else. This may not seem like a large problem, but in reality getting a large group of individuals to successfully coordinate their actions often poses a difficult challenge for many organisations.
While coordination failures at individual organisations may only be of passing interest, when they apply to the economy as a whole, all of us are affected. Economic recessions are to a large extent an outcome of wide-spread pessimism among businesses and individuals, rather than the result of inherent systemic problems. Creating appropriately optimistic beliefs is a key to addressing such crises.
One fundamental problem in deep recessions is that the economy gets caught in an under-employment trap...a situation where no firm wishes to expand production unless it can be assured that others will do the same - yet not doing so leads to an outcome that is worse for everyone concerned. The crux of the issue here is that taking a risky action makes sense if - and only if - everyone matches that action. If they don’t, then the individual or firm taking that risk is worse off and makes no difference.
Such a lack of coordination can also lead to a run on banks if depositors lose faith and rush to withdraw their money, even though everyone is better off if they keep their money where it is. Such loss of faith, which often tends to be self-fulfilling, can have devastating financial consequences.
Along with Andrew Schotter of New York University and Barry Sopher of Rutgers University, I recently used economic decision-making experiments to understand whether it was possible for groups to “talk” themselves out of such an under-employment trap. To do so we developed an innovative ‘inter-generational’ paradigm in which one group of players - after playing the game - could leave advice for their successors. This continued for a number of generations.
We found that allowing one group to pass advice to the next could indeed create the optimistic beliefs that led to coordination on the risky action, but with a twist. When the advice was private and given from one participant to his immediate successor, this advice tended to be pessimistic, suggesting following the least risky course of action.
In order for the advice to make a difference it needed to be public and common knowledge, in the sense that everyone in the group must get the same advice and must also know that everyone else has got the same advice. So if a political leader makes a public announcement heard by everyone, and everyone knows that everyone else has heard it, then a necessary condition has been met for successful coordination.
We conclude that getting a message to coordinate was not enough; each person must be convinced that others have received the same message and interpreted it in similar ways. A shared comprehension of the message is absolutely crucial to solving such coordination problems. Thus, in combating our financial crises, we really need to think of innovative actions or social processes that generate optimistic beliefs. This, in turn, suggests that economic stimuli packages might need to be accompanied by exhortative messages that clearly highlight the aims of these packages and are designed to reduce consumer pessimism.
These results appear in the January 2009 issue of the Economic Journal, which is published by the Royal Economic Society and is a leading international scholarly journal in economics.
In the context of the current crisis, an example of such a commonly perceived public announcement might be the one made by the British government early on of a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks going again. This may have gone a long way towards calming jittery financial markets.
The recent “jaw-boning” by Alan Bollard about banks passing on rate cuts to consumers and companies keeping prices down should also help. Another example of this is the recent announcement by the US Federal Reserve that not only was it cutting interest rates, but aiming to keep it at that level for the foreseeable future. In this regard, New Zealand may be well situated, given the population’s generally high trust in the government and other social institutions which makes public pronouncements more credible.
(A version of this blog appeared as a "Viewpoint" article in the University of Auckland News on Friday, May 15, 2009.)
During this on-going economic crisis, a number of commentators have urged consumers to keep spending. Except, it’s not that simple. An individual consumer increasing spending makes no difference to the recession. What is required is for all consumers to increase consumption simultaneously. As a consumer, I might clearly understand that we can make a difference if we increase consumption, but how do I know if others will actually increase their consumption if I do so?
A wide variety of economic situations require coordinated action on the part of individuals or groups in order to achieve a successful outcome. Economists refer to these as ‘co-ordination problems’ and they arise, for instance, in any industry engaged in team production along an assembly line such as in steel mills and automobile factories.
Even if everyone works at speed, just one individual or group lagging behind is needed to slow down production significantly to the detriment of everyone else. This may not seem like a large problem, but in reality getting a large group of individuals to successfully coordinate their actions often poses a difficult challenge for many organisations.
While coordination failures at individual organisations may only be of passing interest, when they apply to the economy as a whole, all of us are affected. Economic recessions are to a large extent an outcome of wide-spread pessimism among businesses and individuals, rather than the result of inherent systemic problems. Creating appropriately optimistic beliefs is a key to addressing such crises.
One fundamental problem in deep recessions is that the economy gets caught in an under-employment trap...a situation where no firm wishes to expand production unless it can be assured that others will do the same - yet not doing so leads to an outcome that is worse for everyone concerned. The crux of the issue here is that taking a risky action makes sense if - and only if - everyone matches that action. If they don’t, then the individual or firm taking that risk is worse off and makes no difference.
Such a lack of coordination can also lead to a run on banks if depositors lose faith and rush to withdraw their money, even though everyone is better off if they keep their money where it is. Such loss of faith, which often tends to be self-fulfilling, can have devastating financial consequences.
Along with Andrew Schotter of New York University and Barry Sopher of Rutgers University, I recently used economic decision-making experiments to understand whether it was possible for groups to “talk” themselves out of such an under-employment trap. To do so we developed an innovative ‘inter-generational’ paradigm in which one group of players - after playing the game - could leave advice for their successors. This continued for a number of generations.
We found that allowing one group to pass advice to the next could indeed create the optimistic beliefs that led to coordination on the risky action, but with a twist. When the advice was private and given from one participant to his immediate successor, this advice tended to be pessimistic, suggesting following the least risky course of action.
In order for the advice to make a difference it needed to be public and common knowledge, in the sense that everyone in the group must get the same advice and must also know that everyone else has got the same advice. So if a political leader makes a public announcement heard by everyone, and everyone knows that everyone else has heard it, then a necessary condition has been met for successful coordination.
We conclude that getting a message to coordinate was not enough; each person must be convinced that others have received the same message and interpreted it in similar ways. A shared comprehension of the message is absolutely crucial to solving such coordination problems. Thus, in combating our financial crises, we really need to think of innovative actions or social processes that generate optimistic beliefs. This, in turn, suggests that economic stimuli packages might need to be accompanied by exhortative messages that clearly highlight the aims of these packages and are designed to reduce consumer pessimism.
These results appear in the January 2009 issue of the Economic Journal, which is published by the Royal Economic Society and is a leading international scholarly journal in economics.
In the context of the current crisis, an example of such a commonly perceived public announcement might be the one made by the British government early on of a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks going again. This may have gone a long way towards calming jittery financial markets.
The recent “jaw-boning” by Alan Bollard about banks passing on rate cuts to consumers and companies keeping prices down should also help. Another example of this is the recent announcement by the US Federal Reserve that not only was it cutting interest rates, but aiming to keep it at that level for the foreseeable future. In this regard, New Zealand may be well situated, given the population’s generally high trust in the government and other social institutions which makes public pronouncements more credible.
Do Three Strikes Laws deter Violent Crime?
Posted by: Ananish Chaudhuri
It is not clear that National’s support for enhanced punishment of repeat offenders under a ‘three strikes and you’re out’ legislation is based on a careful sifting of the available evidence and deliberation. If the aim is to reduce violent crime, then such mandatory sentencing may not be an effective way of achieving that.
In the United States - where Washington and Wisconsin were the first states to adopt a ‘three strikes’ law in 1993 - the State that has systematically and strictly enforced the ‘three strikes’ statute is California. California has used the law broadly to cover pretty much all felonies.
California has also allowed limited judicial discretion preventing judges from circumventing the law in those cases where its application seemed uncalled for, such as for non-violent felonies. As of 2000, more than 40,000 offenders have been sentenced under the ‘three strikes’ legislation in California. No other State has even reached 1000.
Armed with those statistics, you have to ask...does the law work in preventing violent felonies? Surprisingly, there is very little evidence to answer this in the affirmative. A 1994 study commissioned by the Rand Corporation found huge costs and limited deterence from this law change requiring mandatory sentencing for a third offence.
In an article published in the Stanford Law and Policy Review in 1999, Mike Males and Dan Macallair compared California counties with ‘strict’ versus ‘lax’ enforcement of the law, and concluded that counties that strictly enforced the enhanced sentencing guidelines saw negligible effects on crime rates.
Thomas Marvell and Carlisle Moody’s 2000 article, published in the Journal of Legal Studies - a leading scholarly journal - undertook a cross-state analysis and found that ‘three strikes’ laws have little effect on overall crime rates. Moreover, a recent study by Radha Iyenger of Harvard University suggested that ‘three strikes’ laws may have a wholly unintended consequence of increasing the incidence of violent crime.
Using data from California, Iyenger reported both good and bad news. She found that ‘three strikes’ legislation reduced participation in criminal activity by 20 percent for second-strike eligible offenders and by almost a third for third-strike eligible offenders. But, because the California law is non-discriminatory in that a wide variety of felonies will attract the ‘three strikes’ penalty, Iyenger found that criminals were much more prone to committing more violent crimes as their third-strike offence.
The rationale is not difficult to understand. If you do participate in a third-strike eligible criminal act, then it no longer matters much whether you commit a violent felony or a non-violent felony, because in either case you would be looking at a mandatory 25 years-to-life sentence. There is no strong incentive to avoid violence in the course of committing a third offense.
California’s Proposition 184, which brought the ‘three strikes’ law into existence, was approved by more than 70% of the State’s voters. Yet, in 2004, opponents of the law put a measure on the ballot – Proposition 66 – that would have required the triggering third offense to be a serious or violent crime. This proposition was defeated narrowly by a 53% to 47% margin, demonstrating widespread dissatisfaction with the way the law is applied.
Following the defeat of Proposition 66, the District Attorney of Los Angeles County has now taken up a drive to soften the law, an effort that is supported by the Sheriff of Los Angeles County and the police chief of Los Angeles.
Under the proposed revision, a criminal would typically be subject to the mandatory ‘three strikes’ law only if the third strike is for violent or serious felony, although in some cases the mandatory sentence may apply for a minor felony such as drug possession or petty theft only if that particular criminal has already been convicted of a serious felony in the past.
But in many cases, where the third offense is a relatively minor felony, this will not attract the mandatory sentence under the ‘three strikes’ law. This revision then will also reinstate a measure of judicial discretion that was missing from Proposition 184.
It is obvious that California, the one State that has applied the ‘three strikes’ law most systematically, is now questioning its effectiveness. Under the circumstances, one would hope that the National Party would engage in much greater consultation before implementing such a drastic change in current sentencing guidelines, especially in light of the fact that New Zealand already has relatively high rates of incarceration per capita.
There must be other more innovative ways of dealing with recidivist offenders than borrowing a policy from the United States which does not seem to have worked in the first place. Is there any particular reason to believe that it will work any better here in New Zealand?
It is not clear that National’s support for enhanced punishment of repeat offenders under a ‘three strikes and you’re out’ legislation is based on a careful sifting of the available evidence and deliberation. If the aim is to reduce violent crime, then such mandatory sentencing may not be an effective way of achieving that.
In the United States - where Washington and Wisconsin were the first states to adopt a ‘three strikes’ law in 1993 - the State that has systematically and strictly enforced the ‘three strikes’ statute is California. California has used the law broadly to cover pretty much all felonies.
California has also allowed limited judicial discretion preventing judges from circumventing the law in those cases where its application seemed uncalled for, such as for non-violent felonies. As of 2000, more than 40,000 offenders have been sentenced under the ‘three strikes’ legislation in California. No other State has even reached 1000.
Armed with those statistics, you have to ask...does the law work in preventing violent felonies? Surprisingly, there is very little evidence to answer this in the affirmative. A 1994 study commissioned by the Rand Corporation found huge costs and limited deterence from this law change requiring mandatory sentencing for a third offence.
In an article published in the Stanford Law and Policy Review in 1999, Mike Males and Dan Macallair compared California counties with ‘strict’ versus ‘lax’ enforcement of the law, and concluded that counties that strictly enforced the enhanced sentencing guidelines saw negligible effects on crime rates.
Thomas Marvell and Carlisle Moody’s 2000 article, published in the Journal of Legal Studies - a leading scholarly journal - undertook a cross-state analysis and found that ‘three strikes’ laws have little effect on overall crime rates. Moreover, a recent study by Radha Iyenger of Harvard University suggested that ‘three strikes’ laws may have a wholly unintended consequence of increasing the incidence of violent crime.
Using data from California, Iyenger reported both good and bad news. She found that ‘three strikes’ legislation reduced participation in criminal activity by 20 percent for second-strike eligible offenders and by almost a third for third-strike eligible offenders. But, because the California law is non-discriminatory in that a wide variety of felonies will attract the ‘three strikes’ penalty, Iyenger found that criminals were much more prone to committing more violent crimes as their third-strike offence.
The rationale is not difficult to understand. If you do participate in a third-strike eligible criminal act, then it no longer matters much whether you commit a violent felony or a non-violent felony, because in either case you would be looking at a mandatory 25 years-to-life sentence. There is no strong incentive to avoid violence in the course of committing a third offense.
California’s Proposition 184, which brought the ‘three strikes’ law into existence, was approved by more than 70% of the State’s voters. Yet, in 2004, opponents of the law put a measure on the ballot – Proposition 66 – that would have required the triggering third offense to be a serious or violent crime. This proposition was defeated narrowly by a 53% to 47% margin, demonstrating widespread dissatisfaction with the way the law is applied.
Following the defeat of Proposition 66, the District Attorney of Los Angeles County has now taken up a drive to soften the law, an effort that is supported by the Sheriff of Los Angeles County and the police chief of Los Angeles.
Under the proposed revision, a criminal would typically be subject to the mandatory ‘three strikes’ law only if the third strike is for violent or serious felony, although in some cases the mandatory sentence may apply for a minor felony such as drug possession or petty theft only if that particular criminal has already been convicted of a serious felony in the past.
But in many cases, where the third offense is a relatively minor felony, this will not attract the mandatory sentence under the ‘three strikes’ law. This revision then will also reinstate a measure of judicial discretion that was missing from Proposition 184.
It is obvious that California, the one State that has applied the ‘three strikes’ law most systematically, is now questioning its effectiveness. Under the circumstances, one would hope that the National Party would engage in much greater consultation before implementing such a drastic change in current sentencing guidelines, especially in light of the fact that New Zealand already has relatively high rates of incarceration per capita.
There must be other more innovative ways of dealing with recidivist offenders than borrowing a policy from the United States which does not seem to have worked in the first place. Is there any particular reason to believe that it will work any better here in New Zealand?
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