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.
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.
04/10/2013 § 3 Comments
Most site hits here are not from the US. As an ex-pat, I feel a duty to explain the current ‘shutdown’ of the US government to my guests.
‘What in the world is going on?!’ I hear you cry. ‘We thought only Italy did this sort of thing.’
There are two explanations you need. The first is procedural, the second is political.
The procedural explanation is actually straightforward. The whole thing is legal, in keeping with the Constitution. The US is not a parliamentary system, so the President can be from a different party than the one that controls the Congress. In addition, the Congress is bicameral (two ‘rooms’ or houses: ‘bi-’ + ‘camera’). The House of Representatives is larger and has two-year terms. It is considered the most responsive to popular sentiment — lots of members (smaller constituencies) and shorter terms. The Senate is smaller, and Senators have six-year terms. It is thought to be more august and deliberative (paralleling the UK House of Lords). Different parties can control the two houses. Currently, the Republicans control the House and the Democrats control the Senate (and have the Presidency).
Under the Constitution, spending bills must start in the House. The idea is that, since it is the people’s money, the people’s representatives should have first say. After that (very long story short), bills have to be approved by the Senate and the President. They will have their own ideas about what the spending bill should say. The Senate can work in committee with the House to create a compromise version. The President essentially can only vote up or down on whatever bill he receives.
The current shutdown, procedurally, is simply that the Republican House is proposing a spending bill that neither the Democratic Senate nor Democratic President will approve. Because they cannot agree, no funding has been approved for this fiscal year (starting 1 October). No money, no government.
That explanation, though, is entirely unsatisfactory, because it doesn’t have the frisson of politics. That’s where the action is. It helps to understand a few things:
- Both parties are fractured. Both parties have different groups representing different interests, often at odds with each other.
- Both parties primarily represent business interests. They represent different business groups, who have different agendas. Because only the two main parties have any real power, all the other interests are somehow incorporated into them: labour, Green, libertarian, etc.
- Democrats tend more toward labour and environmental interests. Under the New Democrats (Clinton(s) and Obama), these interests must be placated enough to keep them from getting in the way of business. For examples, see Obama’s throwing of Elizabeth Warren under a bus, and the Clinton/Obama healthcare reforms that maintain industry structure and profit while still leaving millions uninsured.
- Republicans tend more toward laissez-faire economics and social conservatism. Since Reagan, the strategy has been to fire up a base of social conservatives (the Christian right), then do as little as possible to keep them placated while advancing an agenda of big business power. This strategy has involved ‘wedge’ issues (that is, being divisive), including God, gays, guns and abortion. Republicans also controlled the last redrawing of Congressional districts, and they resorted to the time-honored tradition of gerrymandering. Although they are the minority party, they have leveraged their smaller vote count into a powerful position.
The current stalemate is the result of two forces. First, the Democrats have moved more and more towards supporting business interests. Obama represents the policies of Republicans of 20 years ago. The Affordable Care Act (‘Obamacare’) is basically the same as a proposal by the conservative Heritage Foundation and the Massachusetts plan instituted by Romney before he was the Republican candidate for President. The more the Democrats move in that direction (‘triangulate’ in Clinton terms), the more Republicans need to move even further in conservative and/or libertarian directions. The political centre moves with them.
The second, related force is the split in the Republican party. It used to be that the Christian conservatives and small-government advocates were ‘useful idiots’. They helped get Republicans elected but didn’t drive policy. Reagan and Bush I raised taxes. Reagan, Bush I and Bush II all presided over expansions of government power and spending. They didn’t adhere to the principles they espoused.
But they have been doing this schtick for over 30 years. A whole generation of voters has been raised on the rhetoric and didn’t know it was a con. Add to them the social conservatives who want to keep privilege for themselves (‘Segregation forever!’). Then add in a few more low-information types (‘Keep government out of Medicare!’). In the last couple of elections, these voters have been successful at sending just enough contrarians and culture warriors to the House to create a voting block big enough to say ‘No!’ That is splitting the Republicans between the True Believers and those in the business of business, and the TBs currently have the upper hand.
The rhetoric also contributes to a view amongst some of these voters that the current government is illegitimate: it doesn’t represent the ‘real’ America and must be opposed.
Keep in mind, though, that even the TBs in the House don’t believe what they say they believe. This is obvious as the shutdown takes effect. For example, these same people who won’t fund the government went down to the WWII memorial in a public park to make a PR stunt of helping a group of veterans get in. They are also more than happy to have the Capitol police on duty — unpaid! – today. They have kept on the flight controllers and the border guards. They don’t want a government shutdown. They just want to dictate which parts of government operate and which ones don’t.
This point circles back to the trouble with Democrats. They keep letting Republicans off the hook for their rhetoric and never call them to account. The Democrats do this because fundamentally they want something similar: smaller government via smaller social programmes.
And that’s really why we have the shutdown. The Democrats want something and can’t quite admit it, and the Republicans don’t really want what they say they want. So they’ve bumbled into a barfight, circling each other in displays of aggression and keeping the rest of us from just enjoying a night at the pub.
16/09/2013 § 2 Comments
The proposed changes to the Resource Management Act have the potential to increase the use of cost-benefit analysis in RMA applications and decisions. New Zealand uses the RMA to find a balance between economic claims on resources and other claims, especially environmental and social.
The results are controversial. One area of controversy is the extent to which CBA should inform decision. How important is it? Can we trust it?
My colleagues at NZIER wrote a discussion paper earlier this year on these issues. They suggested that we need better information to support more consistent decisions. They pointed out that methods do exist for understanding the value that people place on the environment. We need to apply them, however, and that takes money.
Parenthetically, I’ll note that this should be better funded by the public good science funds. Major decisions keep being made without good data, because it is never cost-effective to collect the data in any single case. It is a collective action problem, which is why we have a government.
Two lawyers, Christensen and Baker-Galloway, have written in Resources Management Journal an article that reviews the decisions and the legal reasoning behind them. The article mainly puts some legal context around the economists’ contention that we could and should do more with non-market valuation.
One message that comes through in the cases reviewed is that judges are reserving the prerogative to judge. The talk of ‘flexible’ and ‘holistic’ decisions is in part cover for judicial discretion. This isn’t necessarily wrong on the surface. The issue is that we do have ways to include better information. If that narrows the field of discretion, so be it — it would be a net gain for society.
Specifically, Christensen and Baker-Galloway discuss the High Court decision in Meridian Energy Ltd v Central Otago District Council, in which the High Court overturned the Environmental Court decision. The article quotes the decision:
Parliament has not mandated that the decisions of consent authorities should be “objectified” by some kind of quantification process. Nor does it disparage, as a lesser means of decision-making, the need for duly authorised decision-makers to reach decisions which are ultimately an evaluation of the merits of the proposal against relevant provisions of policy statements and plans and the criteria arrayed in Part 2. That process cannot be criticised as “subjective”.
The point of having decision-makers is to make decisions. If you take away the discretion, what are they going to do?
In a 1998 article by David Pearce, an expert in CBA, I found the following:
…perhaps a cynical interpretation, CBA tends to present results in a reasonably cut and dried manner, subject to the uncertainty of the estimates. Benefits exceed or do not exceed costs. But decision-makers may place as much importance on flexibility of decision. A CBA that, in effect, removes that flexibility will not be welcome.
New Zealand case law seems to support that view.
09/09/2013 § 3 Comments
In the recent book Inequality: A New Zealand Crisis, Jonathan Boston has a really useful chapter. It probably should have started the book as a way of laying some intellectual groundwork, instead of being Chapter 5. It raises the same point as Matt Nolan does at TVHE, quoting Amartya Sen, but with more detail. Here’s Boston:
As highlighted in this chapter, there is almost universal acceptance that equality matters. Yet there is no consensus on what kind of equality should be championed.
And here’s Nolan:
Everyone, especially those who are more extreme in any given “political dimension” cares about equality of something – and the underlying reason why there are trade-offs stems from (as Sen discusses in the book) the heterogeneity of individuals!
Boston tries to cope with the different equality targets in two ways. First, he says that some equalities are more important than others, arguing that there is an inequality of equalities. With this, I believe he steps right back from his initial understanding — that reasonable people may reasonably disagree. Secondly, he suggests a certain pragmatism, or specific egalitarianism. While this seems attractive, it papers over the real conflict amongst theories of egalitarianisms with a poorly defined set of concrete goals.
In doing this, Boston shows how hard it really is to have evidence-based policies. When it comes time to make a decision, we have to take values and preferences into account. A particular set of evidence can be made to suit a range of policies, once you introduce different values. I’ve not read Peter Gluckman’s new report on evidence-based policies (pdf), but the reporting I’ve seen suggests that it is insufficiently attuned to this problem.
There is a second problem less well understood. When we make judgements about inequality, we are using mental models of social systems to create counterfactuals. For example, if one says, ‘they wouldn’t be poor if they weren’t lazy’, there is a mental model of society that underpins the judgement. That model has a weighting on ‘effort’, as well as weightings on other things like ‘education’, ‘social network’, ‘ethnicity’, ‘gender’, and more. The ‘effort’ weighting is sufficiently large to counteract any negatives from the other factors. We could, through interviews and surveys, estimate the parameters that people apply to those factors.
We all have these models. They are all wrong. I say that with conviction because ‘all models are wrong.’ They are always partial — they have missing variables — and the parameters are estimated from a sample of observations rather than the population. So, in my interpretation of my experience, it may be that ‘effort’ is sufficient to make a person not-poor. That doesn’t make it so, either for my experience (which suffers from observer error) or for the wider world.
In economic analysis, counterfactuals are hard to construct. You have to decide which factors are important and how important and over what time. If I’m being cynical, I might say that the counterfactual is the most important part of any cost-benefit analysis, and it is literally something we just make up. With data and evidence, mind you. But we make it up just the same.
How much harder is it, then, to understand the counterfactuals that people create from poorly-specified mental models of complex social systems?
More evidence would help, so it’s good to see Gluckman encouraging the government to find and use more. The findings will rarely be conclusive, however, as evidenced by Boston’s discussion of equality.
04/09/2013 § 1 Comment
Wellington is proud of its green space. From its early days, the wise and good of the city planned a Town Belt to provide healthy outdoor space for the citizens. Oh, and if Wikipedia is to be believed:
the New Zealand Company did not just have public health in mind. The Company wanted to keep land prices high in the areas known in the plan as “town acres”, thus ensuring more favourable returns for its investors (the owners of the “town acres”).
The green belt continues in this function today — limiting space for housing, limiting options for building roads to more housing, generally constraining supply in the face of increasing demand. We know what that does.
Which is why the political hoardings made me laugh this morning. It’s election time, and the candidates’ signs have gone up. Three of the four signs I could see at the stoplight leaving Karori had candidates’ headshots superimposed over panoramic pictures of … downtown. Buildings! Glass! Waterfront! Even the Green candidate used the harbour view, although it did have the Oriental Bay fountain.
What are they selling? A vibrant city economy. Jobs and businesses.
And not a native bird or bush among them.
26/08/2013 § 2 Comments
The title of the post was going to be ‘Beer taxes cause child abuse’, but that over-states the case (and is inflammatory). Instead, let me just refer you to a paper I stumbled across and make a gentler point: taxes don’t mechanically change behaviour. They don’t pull a lever over here and have exactly the effect you think they will over there. Life is messy, people are complicated, and prices are just another variable.
The paper is here (pdf). The authors look at the impact of beer taxes on child abuse. The dependent variable is the probability of severe violence against children, and the main independent variable is the state tax on beer in the United States. Several other variables, including other alcohol policies, were included. The key results are in Table 1.
They find that the tax on beer significantly and sizeably reduces the probability of abuse by women. For men, on the other hand, the parameter is nearly zero for 1976 data (in the full model) and is positive and large in 1985. That is, higher beer taxes lead to child abuse.
Yes, this is just one paper. Yes, the results are ambiguous when you take into account gender and years and model specification.
But, it serves as a warning. I can take these results and tell a plausible story. Some father just wants to go home and have a few beers and get a nice buzz on. The price has gone up, so he has to ration his beers a bit more. He can’t afford that fourth or fifth or sixth one, the one that gives him the click*. Or, when he does, he doesn’t want that now-expensive buzz ruined by some snotty, whining kid. A few beers at home has turned into worrying about money, and he takes it out on the children.
Sin taxes aren’t mechanical. Raising prices does reduce consumption (of alcohol or cigarettes or fat or sugar or whatever). But what drives the social interest in personal behaviour is the harm caused, not the consumption itself. The link between prices and harm is not as clear-cut, not as mechanical. In fact, as this article suggests, it may sometimes be the opposite of our expectations.
Brick: It’s like a switch, clickin’ off in my head. Turns the hot light off and the cool one on, and all of a sudden there’s peace.
08/08/2013 § 4 Comments
The issue with botulism bacteria in Fonterra’s whey powder has been in the news all week. There’s been lots of talk of milk prices, exchange rates, marketing images and damage to brands. Most of it is fairly simple. A lot of it, at least over the weekend, was speculation about what could or might happen — filler more than news.
I have one small note to add. I have been working in agricultural economics in New Zealand for the last ten years, all across the sector. Dairy, sheep/beef, apple, kiwifruit, potatoes, forestry, wine, lettuce — lots of different products. I’ve also worked on many different issues: trade, technology, consumer trends, productivity. One area in particular has been biosecurity, which in New Zealand refers to keeping bugs out (in other countries, it refers to biological terrorism, which led to some confusion once when I visited the OECD).
In the biosecurity work I’ve done or seen in New Zealand over the last ten years, the focus has been primarily on (a) trade and tourism, (b) farm-level practices and (c) the environment. There’s a big programme called Better Border Biosecurity, which should be self-explanatory. They are trying to keep the bugs out of the country (although there’s nothing they can do about the occasional organism swept across the Tasman by the wind). Farm-level research on the potential impacts of biosecurity issues has been around things like foot and mouth or tuberculosis. Or, take a look at this webpage that lists biosecurity publications for New Zealand — lots of marine pests, on-farm pests, etc.
And then a dirty pipe lets the side down. It wasn’t the biosecurity scare we expected. Just a guess, but the systems may therefore not really have been in place to deal with it.
Why weren’t we ready? Again, a guess. The work I do and see tends to come from Ministries or the public good science system (FRST, MoRST, MSI, MBIE, CoREs). Environmental biosecurity is a public good (non-rival, non-excludable), and so gets funded through those channels. Farm-level biosecurity is also a public good, but in a different way. Agricultural production has long been acknowledged as an appropriate area of public funding because of the non-rival, non-excludable nature of knowledge.
On the other hand, cleanliness in the supply chain is seen more as a private good — embedded in a commodity product that is rival and excludable. Therefore, it is seen as the domain of private firms — Fonterra, in this case. They should invest in cleanliness or biosecurity in proportion to the business risks, without public funding.
This is a debatable proposition, of course, depending on the spill-over impacts on marketing image and exchange rates. We are now getting some data on how big those spill-overs might be. I hope someone gets a chance to do a proper analysis of the whole situation when it is over.
27/06/2013 § 2 Comments
The local news over the last week has been the storm in Wellington. It was the biggest in a while, by some measures bigger than the infamous 1968 storm. It took out the rail link between the central city and the Hutt Valley, leading to long waiting times and difficult commutes. That has now been fixed and the trains are running this morning.
Here’s the thing — it’s going to happen again. The rail line is at the water’s edge in the harbour, as this picture from stuff.co.nz makes clear:
That water right there? Only going to get higher. Sea level rise is projected to raise the water level over the next 100 years and beyond. This Niwa report (pdf) provides a lot of detail, but the basic idea is that we’re looking at 1.5m to 2.0m rise in the average sea level over the next century. Of course, that’s the average. Storm surges will push the water higher at random intervals.
This is an interesting map, from the 2011 regional transport plan (pdf) (Figure 8, cropped). It is essentially a ‘heat map’ of access to public transportation, red being the best access, then orange, yellow and blue. You can see the narrow rail corridor linking the central city with Lower Hutt, the black line on the northwest edge of the harbour. That’s what washed out.
The rail line is on the water because the hills are hard up against the harbour at that point. The route was actually produced by the 1855 earthquake:
The uplift created a new fringe of beach and rock platforms along the Wellington coast…. The newly exposed strip of shoreline between Wellington and the Hutt Valley offered a safe road and railway route – parts of the coastal road had previously been impassable at high tide.
All of this comes at a time when the council has just decided about future transport infrastructure in order to improve transit times between Kilbirnie and the central rail station. The big news was that the mayor backed away from light rail to support instead a bus-based option:
“While light rail is attractive, bus rapid transit may be a more immediate and pragmatic step and I want significant progress well before 2021,” she said.
Here’s my problem: those areas of the map are already red. They are already well serviced by the existing network. Other red-orange areas of the map are the suburbs north of the central city, which have rail links. The link to the Hutt is obviously fragile and only going to get worse.
I’d like to see the transport network improve access in poorly-served areas. All that yellow and blue land south and west of the centre city could be opened up, reducing the cost of housing and improving its quality while reducing the fragility of the transport network. Yes, I realise that will cost money and that topography isn’t in our favour. But we are planning to spend hundreds of millions of dollars to improve public transport to people who are already well serviced. Is that the best use of the money?