Another entry in the inequality discussion

31/01/2014 § 3 Comments

Pattrick Smellie’s column yesterday highlighted that Brian Easton has a new publication on inequality. Easton’s work is based in part on the thorough MSD report by Bryan Perry, which was highlighted in comments early this week (h/t Mary). Apparently, Easton is less complimentary about the Rashbrooke book, which I’ve covered before (here, here, and here).

That was a link-o-licious paragraph.

Easton and Smellie picked up on something that also struck me about Perry’s analysis (this from Smellie):

Between the mid-1980s and mid-1990s, Rogernomics cut a swath through traditional, subsidised industries; income tax cuts and GST were instituted, which hit the poor rather than the rich; and then the Ruth Richardson welfare cuts of the early 1990s completed a sharp decline in equality.

“The trend after the mid-1990s is more ambiguous,” Easton said.

“The best interpretation is that the income distribution has remained at roughly the same level of inequality over the last two decades.”

The trend shows up in this graph of the Gini coefficient in New Zealand over time (Perry, Figure D.17):

Gini_trend

The graph struck me for two reasons:

  • Commentators often wring their hands about New Zealand falling behind the rest of the world on incomes, productivity, etc. A lot of that falling behind happened in the 1980s and 1990s, with less of it in this century. That is, we have fallen behind, rather than we are falling behind. Apparently, there’s a similar trend with inequality: it did increase, rather than it is increasing.
  • The Occupy movement and commentary by Krugman, DeLong, Saez, etc. focus on the increase in inequality in the last 10 to 15 years, things like:

Yet the bulk of the rise in top income shares is in fact at the very top.

The experience in New Zealand appears to be different. It’s a reminder that we have our own economy with its own issues, and should be careful importing slogans and solutions from overseas.

Some babies are more equal than others

28/01/2014 § 8 Comments

So…Labour made its big policy announcement. I guess I should comment on it.

Let’s focus on the $60 per week for babies. Here’s the case for such a payment:

Our society recognises that the first few years of life are crucial to later development — stuff happens or should happen in that period that can’t be undone or redone. This is, for example, your DOHaD (developmental origins of health and disease) hypothesis. We collectively decide that we want new individuals — babies — to have the best start they can. Maybe we want each one to reach his or her full potential, maybe we just calculate that an ounce of prevention costs less. Either way, the 2 million plus of us with work each put a little money into the pot for the 59,000 families with babies. We use government to organise the whole thing. Given that families are a key institution in society, we route the payment through families. Giving credence to what economists say, we provide families with money rather than things (food, clothing) because each family is best placed to decide what it needs.

But then there’s this detail about excluding families making more than $150,000. If the payment is essentially for the new individual, then why make it contingent on the family’s income? And furthermore, the exclusion would affect only 5% of families, so it has only a marginal impact on the total cost. The exclusion tells us that the payment isn’t just about society supporting new babies, it’s about supporting specific babies.

So then we get into a debate about which babies deserve support. It turns the policy from baby-focused to family-focused. Labour has determined that some families need support, well, actually, that 95% of families need support. And that’s where they lose me.

I definitely see the need-based case for providing extra money to the one-quarter of children in poverty. We could increase the scope even more to include the near-poor. But when we increase it half or three-quarters or 95% of families, we aren’t talking about needs any more. In no plausible way can we argue that 95% of New Zealand families are needy. They may be ‘struggling’, in the sense that we can all find ways to spend our entire incomes and then a bit more. But needy?

And so the policy looks like a giveaway to the middle class, dressed up in concerns about kids and poverty. It’s a great ploy — voters (who are mostly middle class) can feel like they are doing something for barefoot urchins while getting paid themselves. The pay-off is psychological AND financial. That makes it good politics.

Education policy: solving the wrong problem

24/01/2014 § Leave a comment

The big political news yesterday was the announcement by National of a new education policy. It will put in place a few experts — super-principals and super-teachers — to oversee and guide schools and regular principals and teachers. And, it will pay them a premium.

The usual economic models I use don’t seem to apply here. This is more about management, for which I have no ready models. If I fall back on thinking about incentives, I don’t see anything in here that changes the incentives for teachers. In fact, it creates incentives for the incoming managers to (a) overstate the deficiencies of the existing situation, and (b) institute new policies and procedures so as to be seen to be doing something. But I don’t have a great economic insight for you, sorry.

I do know a little about the education system, though, and it seems like this policy is solving the wrong problem, or a problem that does not exist. Education in New Zealand is generally good. Overall, students fare well on standardised exams and international rankings. They are able to go to overseas universities and do well. On average and in the main, education is on par with the rest of the developed world.

Whether warehousing kids for 13 years is actually good for their development as creative human beings, that’s another argument, but we’ll skip it here.

Despite the good average performance, the country has two problems:

  • the long, fat tail of low performance, which correlates with race and poverty
  • lack of public resources for top students, to help them achieve their potentials.

The first problem is that some kids in some communities are disadvantaged in all kinds of ways, and that shows up in school results. Improving their performance is partly about the schools themselves, and partly about helping the communities and families overcome the disadvantages. It also involves some reflection on why the disadvantage is there and continues, which is a massive social conversation that the inequality campaigners are attempting to have (but, in my opinion, going about the wrong way).

The second problem comes out of the drive for standards. If teachers are given incentives to lift kids to some arbitrary level, they will work towards it. Any kids who naturally get there will be ignored, because teachers aren’t paid to help them excel. This imposes costs on the families and communities, who have to pay for all the extracurricular stuff that helps the kids excel, or move them to the expensive schools that offer more options. It also creates losses for individuals and societies, who aren’t as creative and inventive as they could have been.

The new policy addresses neither problem. Creating a national system of administrators and consultants (which is what the policy seems to do) isn’t necessary. We need targeted intervention to help the poorest performing kids, and we need a shift in focus and policy to create incentives for teachers to nurture the best and brightest.

It’s never enough

23/01/2014 § Leave a comment

And so a new year begins. Okay, we’re almost a month in, but this is the week that New Zealand really comes back from summer holidays (and even now there are a few empty chairs in the office). That means it is time for looking ahead to what we can accomplish this year.

Rod Oram, one of the country’s leading economics commentators, has given his views in the Sunday Star Times (19 January — behind paywall so no link). He starts by reflecting the current consensus — New Zealand is poised for growth, ready for a ripper of a year in 2014. Both IMF and NZIER are forecasting growth over 3%, versus an average of 2.2% in developed countries. Also, the growth is expected to be broad-based, which is generally good for the economy.

But that’s not enough. No, no. Oram warns us, frets about it, looks for the sow’s ear in the silk purse (what? moving on…).

He wants us to do more. We can’t waste this opportunity. Growth, schmoth — what we need is innovation! and new thinking! and initiatives! and transformational change! That extra economic activity is just the platform for even more better growth.

I’m being a bit mean, but I’m on my way to making a point. Well, four:

  • I’ve been here since 2000. A succession of commentators, governments, bureaucrats and others have been exhorting us to transform and innovate. My colleagues tell me it’s been going on longer than that (we really need to put together a list of the initiatives that have come and gone while the country has quietly gone about its business). This isn’t a galley, where you beat the drum faster and the slaves pull harder. Innovation is just a slogan — it needs to be backed up by concrete ideas about who and how and when and what.
  • We are, apparently, starting to hit up against constraints: ‘There is abundant evidence of our constraints…. Capacity utilisation is already at 90.2 per cent….’ Innovation and transformation require resources. There has to be mental capacity for thinking and planning, and people and money to work on changes until they bear fruit. Resource constraints are good for pushing people into innovation — how do we work around our limits? — but that kind of innovation tends to be incremental.
  • Oram points to the Treasury estimate that ‘our current account deficit would expand to 6.5 per cent of GDP, adding to our indebtedness to our international creditors.’ The thing about these debts is that they are largely private. They are the result of individuals making decisions about how to spend or invest their incomes, and about overseas creditors deciding that we are worth the risk. What should we do about it? Why should we do anything? Do I really think I’m a better judge of all those individual transactions than the people actually making them?
  • Oram is worrying about 2016 (‘Our growth rate will drift back to about 2.5 per cent in the year ending March 2016′). The business owners I talked with over the summer are worried about now, and this quarter, and getting through this financial year. It’s been a hard few years for a lot of people. Yes, yes, planning for the future is important, but enjoying the good times is key to keeping sane.

So this year, I’m not going to fret. Innovate if you want, relax if you don’t. And laissez les bons temps rouler.

A Zizekian look at the GFC

21/01/2014 § 3 Comments

A bit gauche, perhaps, but I’m going to point you to an article I had published at the end of last year. It is my attempt to grapple with economics and the global financial crisis. Because of the nature of the explanation, it appeared in the International Journal of Zizek Studies.

The content will be familiar to regular readers of this blog — Zizekian philosophy and Lacanian psychoanalysis can help explain the economy. Given that it’s an article and not a post, it works through the arguments more fully and with better references.

The work started with two things I couldn’t understand:

  1. why were reputable economists and economics commentators spouting nonsense about the GFC? I don’t mean different interpretations of facts, or bringing different sets of values/preferences to bear on the evidence. I mean relying ‘evidence’ that was not true, developing explanations based on falsehoods
  2. why weren’t more economists concerned about the fraud revealed by investigations into the GFC? It seemed like the central players in the economy were cheating, brought down the economy, and then imposed the costs on other people.

A brief bit from the article:

In the response to the GFC, mainstream economic theory has acted as a prop or a magician’s wand, to be waved around as a distraction. What happened in the actual economy represented a turning away from standard, textbook capitalism, based on the idea of capital as a factor of production. Owners of capital should receive returns – get paid – because they own that capital. In addition, the more they take risks with that capital, the more they should be rewarded when they are successful. First, the fundamental principles of ownership and contract were replaced by a focus on smooth functioning of bureaucratic process. Secondly, the financial sector was able to decouple risk from reward; reward for taking risks no longer describes the origin of returns to capital.

Let me know what you think.

It’s entry AND exit

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

Fired: 18,000

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?

Health spending for young and old

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:

heckman

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:

healthbyage

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.

Keeping the tools sharp

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:

Nice gig if you can get it

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.

Why?

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.

We’re alright, actually

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.

 

UPDATE: A reader pointed me to the University of Otago’s Public Health Expert blog, which (on the same day) described some of New Zealand’s successes (h/t Tony):

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” [1]. What follows are a list of some of the specifics – both good and not so good.

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