06/12/2013 § 1 Comment
Oh, fer the love of Mike.
Thousands lose jobs under the new-ish 90-day trial rule. Sure, and yes. That was always going to happen. As the Minister points out, however, thousands more were hired under the trial period rule, and around a third of those hires depended on the trial period. So, let’s do the math from the Dom Post:
Hired: 69,000 in trial period in 2012, of which possibly 1/3 depended on the trial period = 23,000
Net: 5,000 in 2012.
The point of this sort of legislation is to overcome a lemons problem. Employers don’t know the quality of employees until they try them out. A bad hire — one that doesn’t fit — can wreck a small business. That makes employers averse to hiring — better to muddle through. If they know they can reverse a bad decision fairly costlessly, they are more likely to give someone a go.
That will mean more hires. It will also mean more firings.
So, who is going to tell those 5,000 people (or whatever the number is) that they can’t have jobs because someone else has been ‘unreliable or had a bad attitude’.
And just by the way, I can’t believe that this work from 3 years ago is the only econometric analysis of the law. Hasn’t someone else done something better?
28/11/2013 § 1 Comment
It was good to see the report of the Health Committee on improving child health outcomes. Dr Paul Hutchison, who heads the committee, was doing the media rounds to promote the idea that spending on children’s healthcare is a good investment:
The committee published its report last week on improving health outcomes and preventing child abuse, which makes more than 130 recommendations.
Broadly, the report calls for priority for future health funding to go towards early childhood, including pre-conception and pregnancy.
The report cites the economist Prof James Heckman, and even puts the Heckman graph on the front cover of Volume 1. The graph presents the rate of return on ‘investment in human capital’. It is a useful notional graph — and reflects my own findings on science funding in research I’ve recently been doing. The basic idea is ‘a stitch in time saves nine’ — if we invest in early childhood, pregnancy and even pre-conception, the returns are high:
The basic idea is a good guideline, but its application does seem to lack any sense of marginals. What is the decreasing marginal return from investment? I don’t believe we are anywhere near a BCR under 1.0 for this sort of spending, but it would be nice to have some idea of where we are. There is also a lack of discrimination — all spending on these age groups is equally good. That can’t be true, so some way of separating wheat from chaff – or hard winter wheat from soft wheat? — would help.
However, the discussion did turn into an either-or: either fund the old people or the youngsters:
Investing more of New Zealand’s health dollar in young Kiwis will not result in shortcomings for the elderly, the head of a parliamentary committee into child health says.
And yes, Hutchison says that it won’t lead to trade-offs, that funding the kids won’t hurt the elderly. But George Lakoff would counter that raising the idea, even negatively, gives it credence.
I’m not, as a good economist, saying that there aren’t trade-offs. Obviously, there are. But Hutchison doesn’t get the framing right, and I’m here to help.
The ‘killer graph’ in the report is this one:
The report seems to be horrified that we are spending all this money on people who are going to die soon anyway. What it misses is that spending on young people has a large investment component, while spending on older people is consumption. The kind of early life spending that Hutchison is advocating is about spending efficiently to get maximum pay-off, and looking for the investment opportunities. Our health care spending at the end of life is about making us feel better, and keeping us alive a bit longer to enjoy family and friends and sunlight on our wrinkled faces. We pay for the consumption by having invested earlier.
The two types of spending shouldn’t be on the same graph. The are conceptually distinct. Comparing them only invites the kind of framing that Hutchison got pulled into rejecting.
The correct comparisons are:
- the return on investment for early life interventions versus other kinds of public investments, and
- the utility/satisfaction/value derived from late-life healthcare consumption versus other kinds of consumption, which is hard to describe because you get into a public-private spending comparison, but is still the right comparison
- the balance between investment and consumption that we collectively want to make with public funding.
So that’s how I would have framed it. That might have avoided the media panic about throwing old people into the streets.
20/11/2013 § Leave a Comment
Q: What statistics software do pirates use?
A: ‘We use R, me hearties!’
Turn away now, it doesn’t get any better….
I’ve spent the last two days in a workshop on R, run by the lovely people at the New Zealand Social Statistics Network. It was billed as ‘Intro to R’, and ended up being partly intro, partly intermediate, and also an intro to statistical packages generally, a refresher in statistics and lecture on good data visualisation. Something for everyone.
I went along because I’ve taught myself R from various online sources, and cobbled together analysis from bits of code pillaged from the Web and other people’s projects (’cause I’m down with OPP). I needed to see what I’d missed through my autodidacticism and pick up new tips and tricks. Keep the tools sharp, as it were. The course absolutely delivered — there are a few things I should do differently and lots I can do better.
The open-source approach — giving it away for free — creates different incentives. Several people asked me why I use R. It’s simple — R is free, and it gets the job done. But it isn’t the price itself that’s the issue. The issue is that I’ve moved around from job to job over the last 20 years, and everybody uses something different. I’ve used SPSS, SAS, Limdep, GAMS, Eviews, and probably others. I got quite good at SPSS, for example, and then went somewhere that didn’t have a licence. When I started my current job, I had the choice of retraining in Stata or improving my Eviews, or venturing out into the wilds of R. I chose R, because I figure that jobs will keep coming and going, and there’s no guarantee that the next place will use Stata or whatever.
In a world where data is largely accessible and files are in the cloud and people change jobs regularly, there is a lot less call for investing in site-specific resources. That includes training in software that ties you to a particular employer. Portable tools make sense, and open source is portable. It does raise the question of who should pay for training, the employer or the employee. Training will increase the employee’s potential contribution to the current workplace, but also raises her value on the job market. That suggests that open-source software might have more value in economies with greater agglomeration, where a number of employers essentially train a pooled workforce from which they all draw. It also may have more value where there is greater job entry and exit — if people don’t tend to change jobs, then having portable skills isn’t as valuable.
Now I’ll leave you with my earworm. On the first day of the course, in the first presentation, the presenter said about our data files, ‘They should be comma-separated.’ Since then, I’ve had that line going around my head, but sung by The Offspring:
19/11/2013 § Leave a Comment
Paul Krugman points us over the weekend to a talk by Larry Summers, and comments on it. I haven’t watched the lecture — text really is much more my speed — so this is a reaction to Krugman’s comments. But basically, my reaction was, nice gig if you can get it. Yeah, and that’s heavy on the snark.
Okay, yeah, I’m not in a charitable mood — end of the year and all that. And Summers gets my goat, anyway. How do people keep failing upward? The whole Harvard episode was appalling. He’s apparently a social scientist (an economist), and yet has no sense of social construction of identity. I’m not asking him to be post-modern, but what about even being structuralist? My daughters have an amazing natural affinity with maths and science, and we have had to fight their entire schooling for them to get an education that would build on their abilities. We see — even in the coolest little capital in the world – that the boys’ high schools get more training, support and extension in maths than the girls’ schools. So who wins the competitions? Well: (training + apititude) > natural talent.
<climbs off hobby horse>
Apparently, Summers has discovered that the current economic set-up might be unsustainable. We might have an economy that is not just prone to bubbles, but actually need bubbles to keep the game going. We might also need to pay negative interest rates, or target higher rates of inflation in ‘normal’ times. And this has all been delivered as hard thinking, pushing the envelope, by someone who is willing to take currently findings to logical conclusions.
Not the first time I’ve heard any of this. Nope. I read fairly widely in economics — not deeply, I’ll admit, but widely. One of the things I liked about Steve Keen’s book Debunking Economics was that it summarised a bunch of heterodox thinking in one place. It didn’t get everything right, but it showed the diversity of thinking in economics. Other people have been saying these things for years: inflation needs to be high enough to allow adjustment; negative interest rates in medieval times encouraged investment in physical capital; bubbles have been driving the economy for three decades (no links, sorry — class starts in five). If you really want to follow it back, you cannot avoid Marx and the declining rate of return on capital.
(I can’t say whether these ideas are right or wrong. I haven’t worked through them enough and done my own analysis — my day job tends more towards microeconomics.)
What I can tell you is that other people — people other than Larry Summers — have been talking and writing and thinking about these ideas for a long time. For Summers to ride on in at this late date and skim a few notions off the top is galling. First, first, he needs to do penance. Because those writers and thinkers are found at the margins of economics. They don’t have the fancy offices and big salaries. They aren’t running the major universities or international monetary organisations. They could use a bit of dosh from Summers and his mates who control the journals and the hiring committees and the rest of the infrastructure of the profession.
Here’s an idea – maybe Summers, etc. could pay a royalty. Or invite the experts ’round for some paid consulting. Let’s see someone like Doug Henwood schooling the IMF. That’d be a laugh. And probably more informative.
15/11/2013 § 7 Comments
There is much gnashing of teeth and rending of garments over New Zealand’s economic performance. It’s a staple of political and economic commentary. We have low per-capita incomes, we need to be in the top half of the OECD, we need to catch up to Australia, brain drain is killing the country, business owners need to focus on their businesses rather than buying motorboats, etc.
I’ve been looking recently at Legatum Prosperity Index. What it says is, we’re alright, actually:
- 5th overall out of 142 countries
- 1st in education
- most efficient life satisfaction of the top ten countries (satisfaction / income).
Back to basics. The point of economic activity is utility/satisfaction/welfare. We aren’t playing with these little pieces of coloured paper to make them happy — it has already been conclusively established that they are fine. So what we really want to know is whether we are producing satisfaction.
Now, yes, GDP does correlate with a whole mess of other indicators. Money gives us the ability to pay for healthcare, to make environmental improvements, to pay for digital watches. But it doesn’t perfectly correlate, and there appear to be diminishing marginal returns to GDP gains (natch’). So if GDP doesn’t measure what we are really interested in, can we do better measurement?
That’s where the Legatum Index comes in. There are a number of these alternative indices — this just happens to be the one a colleague sent. It uses 89 variables to create 8 sub-indices, which are then combined into a single aggregate measure. The method is described in brief, and then in more detail (pdf). I’m still not sure that I could replicate it from the available information, but it’s reasonably clear what they’ve done. Instead of using one statistic — GDP — they’ve taken a whole lot of statistics measuring different things and run them through a blender. We can quibble over the weightings applied or the inclusion of this or that statistic — and sensitivity analysis would tell us how important those things are — but they are trying to get a better, more complete picture.
Is more data better? Well, it changes the story. Instead of performing poorly because of low incomes, New Zealand performs well because of the other 88 pieces of data. Our health performance suffers — a worrying 20th. Safety and security is 15th, again a bit of a concern. But overall, y’know, we’re alright. There are worse places to be. Which, of course, makes sense given the number of people here who are from elsewhere.
A composite index does something else: it allows people to make their own decisions based on their preferences. If healthcare is really, really important to you, then New Zealand probably isn’t where you should settle. If your preferences line up with Legatum’s, then life’s pretty sweet. If governance, social capital and education are your main concerns, then you really can’t do any better.
So when the next round of wailing and self-flagellation starts, take comfort that it ain’t all bad.
The good news is that according to the OECD “New Zealand performs exceptionally well in overall well-being, as shown by the fact that it ranks among the top countries in a large number of topics in the “Better Life Index” . What follows are a list of some of the specifics – both good and not so good.
30/10/2013 § 9 Comments
I’m struggling with sugar and fat taxes. The hope is that we can encourage people to improve their diets by changing relative food prices. We know that in theory we can, and that in practice there seems to be some effect.
But does it make those people better off?
This is purely an economics exercise, not a medical/public health one. So, all the usual assumptions and disclaimers apply.
Assume that someone drinks a lot of soda (technically, sugar-sweetened beverages — SSBs). The consumption contributes to their obesity and puts them at greater risk for diabetes. Let’s just focus on the diabetes angle. What this means is:
soda now > diabetes later.
That is, they prefer having soda now, and are less concerned about diabetes later. Or, rearranged:
soda now – diabetes later > 0.
This presentation emphasises that the pleasure from soda now, even once the diabetes later is taken into account, is net positive.
Now, let’s say that we tax soda so this person stops drinking it:
soda now + tax < diabetes now.
We haven’t made them ‘better off’. We have taken away their pleasure and substituted something less valuable.
There are essentially three ways that this might be an improvement:
- information problem — they didn’t know how bad diabetes would be when they drank the soda, so the tax keeps them from the negative experience
- time-inconsistent preferences — the future self would have wanted the past self to abstain
- externalities — diabetes imposes costs on everyone else, so the person isn’t facing the true costs.
This third option is interesting. Let’s say I am poor. My consumption is generally constrained by my budget. The one area where this isn’t true is public goods — botanical gardens, beaches, education and healthcare. If I contract diabetes, I expand my use of healthcare beyond my own budget constraint. By drinking soda now and contracting diabetes, I am actually consuming outside my budget constraint. On the other hand, stopping people from drinking soda and thereby stopping them from contracting diabetes is pushing them back inside (or closer to) their budget constraint. Therefore, the policy makes them poorer.
Yes, I understand that it makes them healthier. I’m just not sure that it makes them ‘better off’.
24/10/2013 § 1 Comment
NZIER (my employer) has released a report today: Fighting fit? Assessing New Zealand’s fiscal sustainability. From the media release:
NZIER recommends that tough decisions around taxes and government spending need to be taken now, and stuck to, in order to avoid a US-like situation in the future when the economic and political costs of correcting debt levels become dangerously high. A bipartisan agreement on funding superannuation costs would be a good starting point….
“Without significant changes, government debt will be almost twice New Zealand’s GDP by 2060, compared to 26.3% of GDP now. That is simply not affordable” said Dr Lees.
I had no hand in the research, and I haven’t reviewed the figures, so I can only take Dr. Lees’s word on those. Two points to make, however.
First, the 26.3% of GDP figure — which looks big, yes — needs some context. The first bit of context is that lots and lots of developed countries are in debt and doing just fine. So, debt in itself isn’t the problem. It’s why we are in debt. That leads to the second bit of context. Here is a graph of NZ government debt, sourced from the hive mind (http://en.wikipedia.org/wiki/Economy_of_New_Zealand):
The present situation looks anomalous against the previous 20 years, so it probably isn’t a great benchmark.
The second bit of context is that the New Zealand system of government is not like the United States’ (here’s a longer explanation). One is parliamentary, the other is presidential (with a bicameral legislature). The reason that 46 Representatives (of 435) and 6 Senators (of 100) were able to shut down the government is because of the way the different parts of the US government are organised. In New Zealand, the Prime Minister has a ruling coalition. In the US, the President can face a hostile Congress with real power.
Furthermore, the shutdown had nothing to do government spending. If these US politicians were interested in reducing government spending, they would be overjoyed with Obama, who ‘has actually been tighter with a buck than any United States president since Dwight D. Eisenhower’. But the history of actual government deficits/surpluses has little to do with the mythology.
By all means, let’s make sure that New Zealand is fiscally sound for generations to come. But let’s not pretend we’re the US. That bit of rhetoric doesn’t help us understand our own situation.
09/10/2013 § 8 Comments
The University of Otago announced the results of some research in which I’ve been involved. The relevant blog post is here. What I really like about the post is the moderate tone:
In the first paper from the SPEND Project, we found that across 20-odd food groups, low-income people and Māori tended to change their consumption of foods more in response to price changes, using New Zealand data. This is entirely consistent with economic theory – and data about price impacts for other consumer goods such as tobacco.
This suggests – but does not prove for reasons we outline below – that taxes on ‘unhealthy’ foods like those high in saturated fat, salt, and sugar; and subsidies on ‘good’ foods like fruit and vegetables should not only improve diets across the board, but more so among socially disadvantaged groups with worse diets and health to start with.
But the proof is in the pudding, which in this case is the health and economic modelling to see what effect taxes and subsidies will actually have on disease rates. And due to data limitations our modelling is still only half-baked, no matter which research group’s findings you look at.
The post goes on from there and explains more about the different bits of research.
Of course, there are all the problems with implementing such tax/subsidy programmes, and the philosophical issues with ‘nudges’ and individual welfare. But importantly, we now have better estimates of prices elasticities in order to make better calculations about gains and losses.
07/10/2013 § Leave a Comment
I still don’t buy the idea that inequality is bad for everyone (p. 13):
in less equal societies nearly everybody, not just the poor, is adversely affected.
The book cites The Spirit Level in support of these claims, but I’ve already addressed the weaknesses of that book. But then, the authors of Inequality don’t really believe this idea, either. Max Rashbrooke reviews the data on income equality and the divergence since the 1980s, and shows clearly how the top income decile has done well. Robert Wade explains how the divergence has been worst for the bottom 40%, best for the top 10%, and relatively neutral for the other 50% in the middle. Even amongst Maori, some have done better than others through the claims settlement process, according to Evan Te Ahu Poata-Smith.
They agree that some people do just fine out of inequality, thank you very much.
The book is good at making the case that inequality is more important than poverty. It runs through some of the standard arguments — that lack of options or access is necessarily comparative, that people need a minimum to participate fully in their society, that recognition of fundamental human rights requires greater equality. What convinced me more was that ‘poverty’ is othering, whereas ‘inequality’ recognises that we are all bound up in the process.
Several chapters are by economists: Robert Wade, Ganesh Nana, Paul Dalziel and Nigel Haworth. Wade does a good job of explaining the international context for New Zealand inequality and the zeitgeist that lies behind it. Nana wanders away from economics, which reduces the impact of his chapter. He calculates that the unemployed cost the country $27 billion in lost production. But his assumption relies on the idea that the unemployed would be averagely productive, even as the other chapters tell us about poor education and training. He forgets that better training would cost money, too. Dalziel (a former colleague of mine) focuses on what he knows well — education-employment linkages for school leavers — and provides some realistic ways to improve the situation.
Haworth has an interesting chapter. The central idea is one of path-dependence: New Zealand has become locked into a low-wage economy. Businesses are organised around low-skill, low-wage work, so workers don’t train or work more efficiently, and the process reinforces itself. Changing the situation requires pushing the whole country in a new direction, a la Singapore or Finland. Now, I’m not interested in living in either of those countries, but the idea of path-dependence is interesting.
The book could be better organised. For example, Dalziel provides a good framing statement but it is buried on pp. 187-188:
Inequality is entrenched in all five pillars of New Zealand’s welfare state — employment, income, housing, health and education.
Also, Jonathan Boston’s chapter is very good for setting up the whole notion of inequality — well, equality – but it’s several chapters in.
Another issue is focus. The book clearly starts with an intended focus on income inequality. Rashbrooke explains that income inequality is a key issue — income allows people to participate fully in society, and it is a clear outcome measure. Some chapters — like one on prisons and crimes — stray a bit too far from the central premise.
The book also doesn’t get its story straight. Gareth Morgan and Susan Guthrie tell us that
New Zealand superannuation delivers recipients a level of well-being that is exceptionally high by international standards.
But this statement comes soon after Mike O’Brien says:
This is not to argue that payments for superannuitants are too high: the evidence suggests that those living only on New Zealand superannuation (with no other income) are close to or below the poverty line.
So, the book is uneven. It covers the right material for people who are already concerned about inequality in New Zealand. I’m afraid, though, it isn’t well constructed enough to prod more people to do anything. It also doesn’t provide many recommendations, so it’s not clear what they should do and why.