Perversity of preferences

10/04/2014 § 2 Comments

I’ve been watching the roll-out of the Affordable Care Act (ACA) in the US. I understand why the Rube Goldberg apparatus was set up the way it was. Doesn’t make me happy about it, but it does mean that more people are better insured.

The Supreme Court ruling that cleared the final roadblock was exactly the sort of split-the-baby decision we should have expected. As sometimes happens with rulings, the implications weren’t immediately clear. In particular, the provision that states could opt out of the Medicare expansion turned out to be more important than was first thought. The implications were recently discussed in an interview with Prof Jonathan Gruber, MIT, Director of the health care program at NBER:

[T]he single thing we probably need to keep the most focus on is the tragedy of the lack of Medicaid expansions. I know you’ve written about this. … I think we cannot talk enough about the absolute tragedy that’s taken place. Really, a life-costing tragedy has taken place in America as a result of that Supreme Court decision. You know, half the states in America are denying their poorest citizens health insurance paid for by the federal government.

(N.B.: ‘half the states’ does not mean half the people — the states in question are less populous than the ones that expanded Medicare.)

Why do I point this out? Because the economist Gruber was surprised by the politics:

if you’d told me, when the Supreme Court decision came down, I said, “It’s not a big deal. What state would turn down free money from the federal government to cover their poorest citizens?” The fact that half the states are is such a massive rejection of any sensible model of political economy, it’s sort of offensive to me as an academic. And I think it’s nothing short of political malpractice that we are seeing in these states and we’ve got to emphasize that.

‘What state’ is an incorrect way to think about the issue. It wasn’t ‘states’ that decided. It was people, specifically politicians and the voters who support them. What politicians-and-the-voters-who-support-them would turn down free money? People who believe — who prefer, let us say — that poor people should not be helped. That poverty is just desserts. That poverty is just the flip side of positive incentives for hard work and sober decisions. These people prefer a certain set of incentives aligned with a specific view of how the world works (Weltanschauung, if you don’t mind me saying).

This ACA situation is the Ultimatum Game writ large. We just played the game in class. When the offer was 50:50 or 60:40, it was accepted. When it was 90:10, it was rejected. Person A turned down free money because Person B else wasn’t ‘playing fair’, wasn’t acting according to Person A’s preferences.

Politics is a way for people to express their preferences and try to foist them on other people. It is also a bloodsport, as Dr Thompson would remind his readers. That’s my way of saying, of course these people rejected Medicare for the poor, even at a cost to themselves. They are using the issue to Make A Statement about how the world should be, and if people get hurt, well, omelettes and eggs.

It’s an important lesson for economists working in policy. People’s preferences are wild and woolly, and when expressed through political process can lead to seemingly perverse results.

Correcting the Dom Post

24/02/2014 § 1 Comment

The Dominion Post published an article on US/New Zealand tax negotiations. The US is trying to get New Zealand to have the IRD and banks release information about ‘US people’, whatever that means. The article was scare-mongering about poor Kiwis who will suddenly be targeted by big bad American tax agents. I wrote the following to the reporter, Ben Heather:
 
Hi Ben -

Your article, ‘American tax grab may target Kiwis‘, contained important errors, and I am writing to correct them.

- US citizens are subject to US tax on their worldwide income. This is true regardless of where they live. Thus, any actions by the US government to have those taxes paid are simply ‘enforcing the law’, not a ‘tax grab’.

- A child born abroad to a US citizen does not ‘automatically’ become a US citizen. He or she has the right to citizenship, but the parents have to apply, and the right lapses once the child reaches a certain age (18 years of age, I think). Thus, the couple in your article had to apply for citizenship for their child, which means they chose US citizenship and all the rights and obligations thereof. Those obligations include paying taxes on worldwide income.

- A green card lapses once a person has been out of the US for a certain period of time. From memory, it remains valid for 2 years, and one can apply for an extension, but only for another fixed period (2 or 3 years). One can keep a green card valid by returning to the US for some period of time, the details of which I don’t recall. All of this means that your statement, ‘Under US law, any Kiwi who has a green card, or US residency, is liable to pay tax in the US, even if they have not lived there for decades’, is false. If the person has not lived there ‘for decades’, the green card is no longer valid and the person is not subject to US tax laws.

In this situation, there are essentially four classes of people:

- People subject to US tax laws, that is, US citizens and permanent residents. They are legally obligated to pay their taxes. The US is asking for New Zealand’s help in enforcing US tax law.

- People tied up somehow with US citizens and permanent residents. These are, e.g., New Zealand spouses of US citizens. The New Zealand government is obligated to protect their privacy and not obligated to share anything about them with the US. They will need to work out what to do about things like bank accounts held by the non-citizen spouse.

- People who once held green cards (or US citizenship) and no longer do. They are no longer under any obligation to the US government, and New Zealand should ensure that their details are not sent to the US.

- People who do not fall into any of the above categories. New Zealand should ensure that their details are not shared, either.

You would be able to check the details of tax obligations and citizenship with the US embassy or consulate. Much of the information is also on official websites.

 
Kind regards,

TPP — can’t get something for nothing

12/02/2014 § Leave a comment

I have avoided discussing the Trans-Pacific Partnership (TPP) trade negotiations, because it’s complex and secret and yet to be decided. But a statement from Tariana Turia, Associate Minister of Health, leads me to comment. Turia’s plain packaging for cigarettes bill just passed its first vote. The bill is intended to reduce the sale of cigarettes by making the packaging less attractive. A challenge to a similar Australian law is before the WTO, and the bill raises questions about the TPP.

The question is whether New Zealand will have the latitude to pass such laws should it sign the TPP. Just to stress, until the language is finalised, it’s all speculation. This legal post on investor-state arbitration is an example. But, Turia’s statement suggests a certain naivete about the negotiations. She said:

While the tobacco industry may have laid down a threat that if this legislation is passed [it will be challenged] my message to them is that our country has a sovereign right and a legal right to protect its citizens.

The point of these sorts of negotiations, though, is the give-and-take. New Zealand gives up a bit of its sovereignty to make laws within its own borders in exchange for consistency across borders.

One lesson from the analysis of international trade — the one that gets trumpeted — is that free trade makes countries better off. It lowers prices, increases the amount of products, increases product variety, leads to greater uptake of technology, and promotes innovation. Another lesson from exactly the same analysis is that there are distributional impacts from free trade. Some people within a country can be made worse off. This result arises either from the supply or demand side — either individuals’ resources fall in value or their consumption bundles become more expensive. The now-richer country can moderate the distributional impacts, but it isn’t a requirement of the models.

So back to New Zealand. Let’s stipulate that TPP will lead to economic benefits for the country as a whole. The same analysis would also tell us that there are likely to be winners and losers. Given that much of the negotiation has happened out of sight of the public, and that the Government won’t even let the people’s representatives see the text, one does have to wonder who those winners and losers will be.

Also, the cigarette companies have a very good legal argument on their side. The products are legal and their brand image is valuable. Quoting ACT MP John Banks:

I don’t believe the State should seize property rights from legitimate companies selling legitimate products.

So we have two opposing legal rights — the country’s right to protect its citizens, and the property right of companies. In the future, TPP will end up being a thumb on the scales. Turia may find that the balance has shifted.

Adjunctivitis — a choice, not a condition

10/02/2014 § 13 Comments

Universities in the United States run on adjunct faculty. Adjuncts are part-time, temporary, untenured faculty paid per course to teach. They have little time for research or administrative duties, and they are finding it hard.

Paid a few thousand dollars per course, they apparently now make up around half of US university faculty. There is concern about what it means for the quality of education and the future of universities. If teaching staff don’t have time to research, how do they stay current? If they can’t contribute to administration, how will all the curriculum and ethics committees get their work done?

The neologism ‘adjunctivitis’ is revealing. The suffix ‘-itis’ suggests a medical condition that has befallen the faculty — think appendicitis, bronchitis, etc. But what we have here is a choice. These faculty haven’t suddenly come down with adjunctivitis. They have been building towards it for years, making a series of choices, continuing on this particular path despite the difficulties.

It is a hard choice, yes, but a choice nonetheless. Maybe they feel driven to teach. Maybe they really like their specific area of research. Maybe they like where they live, or their partners are settled into their own jobs. But let’s not forget that these are people with options. They are clever people with good work ethics who know how to communicate. They are choosing to continue being adjunct faculty because they feel it is better than the alternatives.

Hey, sorry, it’s not my problem if you can’t land your dream job. Wouldn’t it be lovely to be Prof Reg Chronotis – a little office, a little sinecure, no teaching load? But such positions are works of fiction.

What if a bunch of them said no? What if they just decided, y’know what, selling real estate or writing computer code or being in middle management is less stress and more money? I don’t know what would happen, but it would be interesting to find out. A new cohort of adjuncts might appear, ready to do the same work at the same pay. Or, universities might have to do something about pay and conditions.

Universities are under pressure to offer students luxury facilities at reasonable prices (air conditioning?! private bathrooms?! hah!). Universities are also affected by governments cutting spending:

In 1980, states provided 46 percent of the operating support for public colleges and universities, according to the Association of Public and Land Grant Universities. By 2005, average support had fallen to 27 percent.

Something’s got to give. In this case, it’s the cost of producing the lectures and assessments. A big variable cost with them is the teaching staff. If there’s no countervailing pressure from people, oh I don’t know, refusing to work for peanuts, then that’s where the universities will cut the costs.

Finally, there’s a revealed preference here about the attributes in the bundled good ‘university education’. This adjunct trend has been going on for years, and the complaints about impacts on teaching quality are nothing new. And yet, people keep shelling out more money for poorer teaching. Why? It does suggest that going to university is about getting that certification, or building networks, or being socialised, or buying the name brand if you can. People — students, parents, employers — seem less worried about the quality of the education.

Until they do — can I interest you in a little fixer-upper bungalow with nice harbour views?

Why inequality? A reply

07/02/2014 § 4 Comments

Paul Walker asked a question recently — why are some of us focusing on inequality? That started a discussion on the Dismal Science feed at Sciblogs. Since I’ve been implicated by link, I figured I should say something.

Why inequality?

Well, first, other people are talking about inequality, but they are getting it wrong. One thing I’m trying to do is establish a sort of factual basis for the discussion. For example, people like to point to The Spirit Level as somehow the final word in the evils of inequality. So I’ve read the  book and pointed out its faults, which I think are serious enough that the book doesn’t prove its thesis. Or, alternatively, I’ve calculated that mobility of income quantile doesn’t tell you as much as you think it might. I’m doing this work 500 words at a time, so it takes a while.

Secondly, I’m interested in the economy as a human construction. We’ve designed it, and we can re-design it. Note that I’m not suggesting something like a New Socialist Man. I’m not advocating that we re-make people. But if as economists we believe that (a) incentives matter and (b) institutions matter, then changing incentives and institutions produces different results. So, I’m interested in exploring how we make changes to meet different goals.

Finally, I’m acting according to my preferences. I like fairness. I like symmetry and order. There’s something about equity that appeals to my sense of order. Now, perhaps you think the economy is fair, in the sense that people get what they deserve and actions lead to appropriate consequences.  Or, perhaps you think that life is not fair and that’s enough of an explanation. Me? I look around and see more than just the background cussedness of it all. I see people using power and privilege to maintain their own positions, and then saying that it’s just The Way Things Are. Or, more academically, that we shouldn’t turn away from the fraud that accompanied the global financial crisis, for example.

That’s why I’ve been writing about inequality. It’s just my tiny little effort to make the world a better place.

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.

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.

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