The Black Death and the VoSL

30/03/2012 § 3 Comments

I have been reading about the Black Death, the pandemic that swept through Europe from 1347 to 1350. This has nothing to do with my day job, in case you’re wondering. Wikipedia has this to say (from the Bubonic plague entry):

It is commonly believed that society subsequently became more violent as the mass mortality rate cheapened life and thus increased warfare, crime, popular revolt, waves of flagellants, and persecution.

That seems a pretty uncontroversial statement. As a matter of historical record, there was an increase in manifestations of violence. The violence was directed towards oneself (flagellation) or towards others, and was both petty (crime) and structural (peasant revolts). Historians have connected the dots: life became even nastier, more brutish, and shorter; its value was reduced; the costs of producing violence decreased; therefore, people produced more violence. It’s a simple question of the cost of a factor of production.

That’s a backward look. What if we look forward?

Let’s say that climate change leads to plague and famine. Wouldn’t we expect the same change in the value of a life? Couldn’t we change the sentence above to read, ‘It is commonly believed that society will become more violent as mass mortality cheapens life…?’ It seems, again, relatively uncontroversial to say this.

Now, let’s look at it from the perspective of today. Today, when we are contemplating what to do about climate change, we have in mind or in models some value of a statistical life (VoSL). That is, we put a value on the lives of our descendants. What value should we put on them? If we expect that climate change will lead to a cheapening of VoSL, should we use our current value, or the value we expect to arise in the future?

It’s even worse. Our current actions can affect climate change. We can make it more or less severe. The more severe we make it, the more those future lives may be cheapened, and the less we need to be concerned with the impacts. By taking action to reduce climate change, we are increasing the necessity of taking action. This is, mind you, in a purely in a statistical, intergenerational utility optimising framework.

So whose VoSL should we use, ours or theirs?

Social investment in New Zealand

29/03/2012 § 2 Comments

Crooked Timber had a recent post on social investment policies, sparked by a conference and a couple of books:

Many countries have moved in recent years to go beyond ‘passive’ social transfers and to ‘activate’ their labour force. But there are many different ways of doing this. The interesting thing is that the policies that are the most socially equitable are now turning out to be the most economically effective too.

The New Zealand government is obsessed with economic growth. Regardless of the party in power, the government focuses on beating Australia or getting to the top half of the OECD, trying to make ours bigger than theirs.

The CT post goes on to say:

the countries that invest heavily in early childhood education, in continuous education opportunity, in high-quality training schemes, and in making it easier for women to take part in the workforce,  have both higher growth and productivity rates and less inequality and poverty.

Running down that list, we seem to do a lot of these things. Sure, sometimes the effort is half-hearted (or half of some other body part). But still, we do them. ECE reforms — check. Continuous education — we have open university entry for older students. Training — mmm, there have been some problems there. Women in the workforce — yep, see ‘ECE reforms’.

Has the country benefited from these efforts? Absent a New Zealand from a parallel universe, it’s hard to run the counterfactual. But, if we just look at GDP growth (total GDP, expenditure measure, constant US$, OECD data), we see that the country isn’t doing too badly.

This suggests a research project: have the social investment efforts in New Zealand achieved the same results as in other countries? Compare, contrast, discuss.

Blogs in spaaaaace

28/03/2012 § 2 Comments

Offsetting Behaviour sends us to an article in The Economist that makes the distinction between having a bunch of blogs and having a blogosphere. The US is more successful with the economics bloggy thing because they all link up to each other — they have a network.

And so, first, a thank you and acknowledgement to the local econobloggers for their on-line and off-line support. Thanks for the links and comments, thanks for the encouragement. Who knows? Maybe one day the discount rate/youth unemployment/interpretation of quarterly statistics/stadium financing problem will be sorted out, and we will smile quietly to ourselves. Or write a post about it.

Secondly, this is a network theory issue. It’s the classic contention that the value of a network is based on the number of connections, as opposed to the number of nodes. There’s a reasonably good lay treatment of this in Beinhocker’s The origin of wealth. The impact of connections was also part of Potts’s The new evolutionary microeconomics. It is interesting seeing the theory working out in practice on the Web. Just to be cantankerous — the theory isn’t totally worked out, yet. It’s the problem of Deleuzian philosophy I discussed earlier.

Finally, it’s helpful to think of it in Lacanian terms of individuals looking to be recognised (in both senses of the word) by other individuals. This is along the lines of Schroeder’s discussion of law and economics. My blog becomes a blog when other blogs link to/recognise it.

As if to prove the blogosphere point, Antidismal offers his take on Eric Crampton’s post. And that’s how you build a network.

What’s the right bus fare?

27/03/2012 § 1 Comment

Wellington’s transit system has announced new fare increases. This is causing the expected complaints. The last fare increase was just in November, so riders still remember it. Plus, the way that cash fares are calculated is leading to fifty-cent rises on some routes.

I commute by bus. I wish it were better, but I’m not willing to pay more absent some quality guarantees. If I had to pay much more, then I would take my car. Wellington mass transit is such a dreary, second-best solution. Add in one of our occasional gale-force storms, and it becomes miserable.

It is, in part, a problem of allocating resources. Road space is a scarce resource, especially at rush hour. We currently allocate it with congestion rather than prices.

Then we overlay a public transportation system without really clear goals. The article about the fare increases makes the thinking clear. It is focused on costs: the cost to run the system, the artificial split in costs between fares and council subsidies. There is no discussion of the benefits. What are the benefits of having more people on public transit? Less congestion, less pollution, lower fuel use, etc.

I’d like to see a better articulation of what the public transit system is trying to accomplish. Something like:

Travel time is a cost we would like to reduce. We would like to achieve average commute speeds of X km/hr in the greater Wellington area. To do that, the maximum capacity of the arterial routes is Y. This entails having S thousands of commuters on buses and rail, while T thousands commute by private modes. We are setting the transit fare so as to attract S thousand commuters.

Instead of focusing on what we are trying to achieve with the system, they are focused on how to pay for it. From the article:

“Given that patronage is not increasing … the only way fare revenue can increase is through a fare increase.” The report also warned that patronage may drop off because of the increase, “however patronage is steady and seems to have been relatively unaffected by the past fare increases”.

I know I’m biased, but how about this plan: free bus fare and congestion pricing for private vehicles.

Memorials to the war dead

26/03/2012 § 3 Comments

Throughout New Zealand, there are cenotaphs. Nearly every town has one, a pillar or a memorial hall or both, etched with the names of the boys from the area who died in war. This map shows their locations.

They are heartbreaking. I was in Taihape on the way back from Lake Taupo this weekend, having lunch in a cafe across the street from their cenotaph. The list of names — 20 to 30 on the side facing us — seemed impossibly long for a small community. When you read the names, you find many with surnames in common, brothers or cousins lost to their families.

But there is an aspect even more tragic. Look closely, and you find that they are often really memorials to the Great War, World War I. Later on, the towns had to make room for the dates and names from the next war, and the one after that. It’s as if these communities chose the centre of town or the main crossroads to build a final monument to sacrifice. Then, a few years later, they found they had to do it all over again.

Now, in addition to the stone columns, there is also a virtual cenotaph.

I wonder what those townspeople were thinking as they raised the funds for their memorials, then designed, built, and dedicated them. What did the memorials signify to them?

How ya gonna keep’em down on the farm?

23/03/2012 § 3 Comments

I got out of the office yesterday. Away from Wellington, in the company of non-economists. Yes, it does happen.

The subject of rural de-population came up. The rural regions of New Zealand are concerned because they aren’t attracting more people, and some areas are actually shrinking. The peri-urban areas that are growing are seeing increasing numbers of retirees and lifestyle blocks (hobby farms). People in those areas aren’t sure that’s what they want — communities that once had families and employment now servicing the old and absent. The demographic change also changes the services required in the town centres. Less need for farm equipment, but more demand for doctors and pharmacists.

I don’t have any solutions, just a few observations:

  1. It’s the tension between the individual and the collective. Each person is individually seeking what’s best for them, but people — some people, at least — aren’t happy with the aggregate outcome. Younger people are going out into the world to seek their fortunes. Other people are moving into rural areas for peace or isolation. The result is that these two groups are more segregated than either necessarily prefers. It’s a bit like Schelling’s model of housing segregation,  only with an active regional council. But it’s hard to see how this is a bad result, except to the extent that people weakly value the communities in which they live.
  2. It’s been going on for years. People have been moving off farms and into towns and then into cities for as long as they have had the option. There are technology pushes — we don’t need gangs of milkers, anymore, for example. There are pulls, too — cities allow specialisation, so people can produce more and earn more. But given the long-term trends, is worrying about de-population just trying to hold back the tide?
  3. Technology isn’t going to be the saviour of rural New Zealand. We’ve been hearing for years that new communications technologies (will) allow us all to work from home, the cafe, and the beach. We do that to some extent. A few people do build business empires on the back of broadband. But we also spend lots of time in our offices, seeing and talking with our co-workers. One of the interesting economic geography arguments I’ve seen is that technology is making face-time more valuable. As a result, work that requires us to spend time with each other is becoming more highly paid, and work that can be made routine and parceled out in bits and bytes is becoming less valuable. New Zealand is on the wrong side of that trend, and rural areas even more so.

No pithy observation, no happy thought to end this post. Just the vague feeling that we’re watching the future unfold and there’s not much we can do to change it.

KiwiSaver statements: a suggestion

21/03/2012 § 6 Comments

My wife and I spent over an hour this weekend trying to answer a simple question: how much money did my KiwiSaver account earn? This should be straightforward. After all, the whole reason for having a superannuation/retirement savings account is for it to grow. An important part of that growth is the return on investment.

My fund doesn’t make it easy to figure out the return. I could easily find the current value of my account, but not how much I had invested or earned.  I don’t know how the other providers are, but the little I’ve heard indicates they aren’t any better. So, let me make a suggestion: KiwiSaver providers should be required to provide easily-understandable statements that show:

  • the value of the account
  • the amount of funds deposited
  • the amount of earnings
  • the rate of return.

Back to our weekend’s work. The first thing I did was look at the general statements of asset class and fund performance. The stated performance of the fund, which is an index fund, was 1.12% in the three months to 31 January. The reported asset class performances were all for the three month to 31 December, so aren’t for the same period. Nevertheless, I calculated an expected return based on asset class weightings:

Weighting Return
Asset class 1 2.0% 2.5%
Asset class 2 6.0% 2.9%
Asset class 3 12.0% 1.3%
Asset class 4 10.0% 7.1%
Asset class 5 25.0% 1.9%
Asset class 6 45.0% 7.5%
Return 5.0%

What has this told me? Well, not much. I don’t know whether the difference between 5.0% and 1.12% is due to the time period, the fund’s actual allocation across asset classes, performance of the fund’s individual investments, or something else. I can’t evaluate my investment or the fund’s performance.

Next, I figured that a statement of transactions would help. It did, but not immediately. This provider reports transactions through the ‘sweep’ account. The account lists all the money deposited by the employee, employer, and government. But, each deposit is then swept into the investment accounts. That means that each credit is offset by a debit. When they calculate the fund balance, the credits and debits sum to zero. Not very informative.

I had to copy the list of transactions from the webpage and paste them into a spreadsheet, then find the total just for the incoming transactions. This isn’t hard — for someone who does this sort of data manipulation for a living — but why should I have to do it? It’s a simple piece of information that should be provided.

Once I calculated my deposits, I could figure out my earnings from the difference between deposits and current fund value. Taking an annual view, I calculated my return at about 2%. Not very satisfying, and certainly not the 5% I calculated for the 3 months to 31 January. Of course, this isn’t the actual return. The real return calculation would look at the changes to the account over time — when each deposit was made and how the account grew during the year.

I emailed the provider and asked them to tell me how much money my investment made. They replied the next day (hurrah!) with a 13-page PDF of my account history (what?). They said:

In your call [sic], you requested we calculate the ‘Real return’ of your account. We take this to mean the return on your account after fees, taxation and inflation. Unfortunately, this is not something we offer investors. There are many different ways returns can be calculated; the published returns of the [fund] reflect the industry standard.

This is not something they offer investors. Let that sink in. They don’t offer investors that key piece of information — how their investments actually performed. And why not? Well, because it isn’t the industry standard.

This is my suggestion: let’s make it the industry standard. Let’s require that KiwiSaver funds tell us how much we — each one of us individually — have actually made on our investments. The Government wants us to save more? The financial industry wants our savings? That’s fine. Tell us what we get for our money.

Using your time profitably

20/03/2012 § Leave a comment

Consultants sell their time. Okay, they sell their expertise, but their main factor of of production is time. A successful consultant works on maximising the value from their time. Here’s how I think of it.

There are essentially four types of activities for a consultant:

  1. paid work
  2. sales, marketing, and networking
  3. investment in new skills
  4. administrivia.

The paid work is what brings in the money. It pays for all your time and all your overheads, and funds that lavish lifestyle all consultants lead (oops, almost spilled my morning martini). Obviously, therefore, more is better.

But wait — how do you get the paid work? Well, that’s where the sales, marketing, and networking come in. You need to have work and potential work lined up, so that you can finish your current project and move on to the next and then the next. If you don’t spend some time on generating work, pretty soon the work will dry up. On the other hand, if you spend too much time networking, you won’t get any billable work done.

Let’s say you have a target income of $150,000. Maybe you know from experience that your average project size is $10,000. You therefore need 15 projects per year to make your target income. Maybe you are successful with one out of every five proposals you write, or 20%. That means you need to write 75 proposals to get 15 projects.

Now we can put some hours into the calculations. If it takes 10 hours to write a proposal, that’s 750 hours. Working 37.5 hours per week for 46 weeks (remember — 4 weeks holidays plus 11 statutory holidays), you have 1725 work hours in a year. After writing proposals, you have 975 hours to do the work. At a billing rate of, say, $150 per hour, that $146,000. It’s not quite your target but pretty close.

We can think of this as an optimisation problem. One line is the sales, or total project revenue obtained. The other line is billings, or revenue earned. The intersection gives the equilibrium earnings.

There are a two things to note. First, this consultant is spending 43% of work hours on sales! While that’s a bit excessive, it is probably right for newer consultants or for established consultants breaking into new markets. The rule of thumb for small businesses in general is to spend 25% of time on sales on marketing.

Secondly, this diagram tells us what we can change if we want to raise our income. We can try to rotate the blue ‘supply’ curve anti-clockwise. Alternatively, we can shift the red ‘demand’ curve rightward. How do we do that? It’s all about changing the components of those curves:

  • become more efficient at writing proposals
  • make each project a little larger
  • increase your success rate
  • raise your charge-out rate
  • increase your work hours.

In this example, changing the success rate from 20% to 25% reduces the number of proposals you need to submit, freeing up time for billable work. Over 60% of your time can be billed, raising income to over $160,000.

I’ve talked about just the first two uses of your time. The other two will have to wait for another day. However, the basic principal is this: equalise the marginal return on time spent on each task. Think about whether that hour you spend blogging is generating as much value as an hour spent writing a proposal.

Oh, wait….

Deleuzian simulation models

19/03/2012 § Leave a comment

I picked up a book a while back from a university bookstore solely for its title: A Deleuzian Century? I have started it a few times but not finished it — it’s that sort of book (or I’m that sort of reader). Foucault suggested that this century would be Deleuzian, that Gilles Deleuze, a French philosopher, would be central to thinking in the 21st century.

I made it through both volumes of Deleuze and Guattari’s Capitalism and Schizophrenia and also read Brian Massumi’s excellent A User’s Guide to Capitalism and Schizophrenia. I admit that I don’t ‘get’ Deleuze. I can read the sentences and paragraphs, I can start picking up concepts like bodies-without-organs and rhizomes, but I am always outside the concepts the same way one cooks from an unfamiliar recipe.

Nevertheless, I am beginning to think that Foucault was right.

One Deleuzian concept that I find utopian and naive is the rhizome. A rhizomatic plant sends stems through the ground, putting roots down and leaves up from new nodes. The structure is nonhierarchical. Deleuze contrasts this type of growth with things like trees, which have a center trunk, a hierarchy of limbs and twigs, and an integrated existence (it can be killed as a whole). He uses the rhizome metaphor to describe new ways of becoming that are lateral and invasive, that don’t depend on hierarchy or permission. It is meant as a liberating metaphor.

I have just been looking at cellular automata models, including Schelling’s model, The Game of Life, and Wolfram’s classification of one-dimensional models. They are discussed in a excellent on-line course by Scott Page. It occurred to me that these are mathematical representations of Deleuzian thought. They are presented as flat models, as full depictions of their worlds from which patterns of organization spontaneously emerge.

Key to both the Deleuzian metaphor and cellular automata model is the idea of ‘emergent properties’. Patterns and organisation are thought to occur spontaneously as a result of individual elements just doing what they do. For Deleuze, these are new ways of being — I hesitate to say new ‘identities’, although I think that’s what he’s aiming at. For simulation modellers, it is complex order arising from simplicity, such as Wolfram Rule 110.

Simulation model thinking is rhizomatic thinking. Like John Wheeler’s ‘it from bit’, it considers that the binary on/off can be the basis for all organisation and the rest is just emergent properties. The simple rules of a Wolfram model push themselves through blank grids to establish new patterns, which can repeat themselves with relying on the rest of the pattern.

Simulation models are becoming more important in economic and policy analysis. Stats NZ, for example, recently hosted Martin Spielauer from Statistics Canada to talk about simulation modelling. As these models become more accepted, so will the underlying thinking.

We are becoming Deleuzian without even knowing it.

Post-millennial Masters of the Universe

16/03/2012 § Leave a comment

They don’t make the Masters of the Universe like they used to. Y’know, the kind who’d kick ass and take names, who’d run down punk kids under the freeway, who didn’t whine about their feelings.

Now, they want not just money and power, but also ‘moral fiber’ and ‘culture’. Otherwise, they will stamp their feet and leave.

This is the best response. Darth Vader writes:

TODAY is my last day at the Empire.

After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

I find myself longing for Leona ‘Only the little people pay taxes’ Helmsley.

(h/t Brad Delong)

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You are currently viewing the archives for March, 2012 at Groping towards Bethlehem.

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