Economics for the holidays

22/12/2011 Comments Off on Economics for the holidays

As we head into the silly season, we can take comfort in the certainties that economics provides. We can cling to them in the coming onslaught and, when the storm is past, take our bearings from them once more.

These are the ideas that help me through. Perhaps you have your own?

  • Opportunity costs — A story on Facebook told of a waitress who won $40 on an instant lottery ticket. When asked how she would spend it, she said she would tuck herself into bed with margaritas for her two days off. That was her ideal Christmas. So remember, no matter where you are or what you are doing, you are forgoing another opportunity.
  • Prices transmit information — Let’s face it, the first thing we ask when we go to buy a present for someone is, ‘how much should I spend on them?’
  • Economies of scale — At a barbeque, the marginal cost of providing food for one more person is a decreasing function. Arrange for all the aunts and uncles and cousins to gather together and minimise the per-unit cost. Be careful to inform them, however, that heterogeneous technology means that your place exhibits constant returns to scale, and is therefore the least efficient location for said barbeque.
  • Learning by doing — It is important to stay away from the sink and the grill, or anything else used in household production. If the other members of your family learn that you have any skills, you will be doing that task from now on.
  • Supply = demand — Whatever supplies you think you need, double that and add 20%. Demand for your snacks and drinks will be stronger than forecast, and if supply is exhausted then consumers will switch to substitutes. Of course, also bear in mind that intentionally restricting supply produces economic rents for the supplier, even though consumers may exit the market prematurely.

Thus endeth the lesson. I hope it helps.

The complexity of mowing the lawn

20/12/2011 § 8 Comments

We sometimes underestimate the complexity of decisions that include intertemporal components and stochastic elements. That was my thought as I forced my push mower through lank, moist grass this weekend. I couldn’t be bothered to mow the lawn two weeks ago when the weather was fine, and I was paying the price for my laziness.

It shouldn’t be hard to optimise my intertemporal utility with respect to mowing. I want to minimise the effort to keep the lawn respectable-ish and usable. Effort is a combination of number of mowing occasions and difficulty of mowing. It’s just min(effort) = min(f(occasions, difficulty)).

The problem is the stochastic nature of both occasions and difficulty.

  • Occasions is a function of my schedule and my family’s schedule. I can’t always be at home when the right mowing occasion arises. It is also weather-dependent: I can’t mow in the rain or shortly afterward.  That means I’m trying to minimise a more complex function: min(f(occasions|schedules, weather; difficulty).
  • Difficulty is also variable. Partly, it is a function of the recent weather and my mowing technology. I bought a push mower several years ago because my lawn, my garage, and my children were small. With a power mower, the difficulty function would be different. I could more easily mow wet grass, and I could let the grass get longer. Difficulty is also a cumulative function. It isn’t just rain yesterday or today that increases the difficulty. It is the cumulative moisture and warmth that encourages growth. The function is closer to min(f(occasions|schedules, weather; difficulty|weather, technology)).

Of course, the same weather that shrinks the number of available occasions increases the difficulty, so there’s a non-linear, reinforcing effect. Add to that the role of expectations. I have poorly anchored expectations for Wellington weather, having lived here only a year. My priors from other climates are reasonably poor for predicting rain patterns and grass growth here. I end up with Shacklian surprise.

The good news is that I didn’t feel like I’d made the wrong decision two weeks ago. That is, even with perfect foresight I still would have chosen to be lazy. However, my total utility was lower than expected.

If I were really risk-averse, I could participate in the lawn mowing insurance market and reduce the variability of my intertemporal utility. I could just hire a gardener.

Talking about diets

19/12/2011 § 4 Comments

A set of nutritional guidelines was issued in Australia last week. In a lot of ways, the advice was unremarkable. Key recommendations:

  • People should eat a variety of nutritious food; advice that has not changed over many years, but is now reinforced with stronger scientific evidence.
  • Most Australians need to increase our intake of vegetables, fruit, whole grain cereal foods, and milk products- particularly reduced fat varieties.
  • Some population groups need to eat more of some food groups and less of others. For example, some women who consume an omnivore diet may benefit from eating more red meat, while some adult males may need to reduce their consumption.
  • Most Australians may benefit from reducing excessive intake of energy-dense nutrient-poor foods and drinks which are high in saturated fat, salt and added sugar, particularly sugar sweetened drinks, if we are to tackle obesity and diet-related chronic disease.

Or, as Michael Pollan puts it more succintly: ‘Eat food. Not too much. Mostly plants.’

There wasn’t really much ‘news’ to the announcement. But the Dom Post saw it a bit differently:

Based on the average diet, the council recommended eating 40 per cent less starchy vegetables, such as potatoes and kumara, half the amount of high-fat dairy products and – except for people who exercise vigorously – cutting out all “discretionary choice” foods such as cakes, burgers, soft drinks and alcohol.

To me, those two bits of communication are entirely different. The first is a generally moderate, not altogether surprising summary of things we already know but don’t do. Eating more vegetables makes us healthier. Too many calories make us fat. Energy-dense foods are essential if you are in a physical occupation and unnecessary if you sit at a desk all day. The last quote is frightenly prescriptive: cutting out all cakes, fizzy drinks, and alcohol?

I don’t know where the disconnect was inserted. It may have been the reporter looking to jazz up an otherwise unremarkable story. That’s not much of a worry — papers try to sell the sizzle. Or, it may have been that the Council created a veneer of moderation to hide a more radical food agenda. That’s more worrying, particularly because it’s so daft.

Why is it daft? Let me count the ways.

  • It doesn’t work. How long has the government been telling people what to eat? What has happened to our waistbands in the meanwhile? Just yesterday, the NZ Herald said that 63% of NZers were overweight or obese. I have a hard time believing that only 37% of us know we should eat more vegetables.
  • It doesn’t understand food. If you think of food as fuel, as the substance that keeps our physical bodies maintaining and moving, then getting the perfect mix of vitamins and energy is the focus. If, on the other hand, food is about taste and sharing and culture and memories and emotions and all the rest, then the question of what to eat is more fascinating and harder. I certainly don’t need to eat mushrooms newburg, but it’s gosh darn delicious and reminds me of my mother’s Julia Child style of cooking.
  • It doesn’t understand people. Just telling people what to do won’t get them to do it. People react in all sorts of ways to instructions. Some will follow the rules (with the appropriate amount of anxiety). Others will ignore it. Others will explicitly flout the guidelines as a way of supporting their anti-elitist identity: ‘Nobody can tell me not to have my steak!’

We’ll see what happens with the guidelines. It will likely go the way of 4-4-3-2 and the rest.

DeLong chants ‘USA! USA!’

16/12/2011 § 2 Comments

I read Brad DeLong’s blog regularly. He links to interesting material, his analysis helps me think about macroecon (even when I don’t agree with him), and I learn about economic history.

My utility from reading his blog just dropped.

Today, he says:

The United States remains, on balance–adding up along the political, social, and personal dimensions–the freest tracking place on the globe, not least because it is so big that if you find social pressure from your neighbors obnoxious you can move and get different neighbors without losing your linguistic-social-cultural capital.


Two personal anecdotes:

#1. When we first moved to NZ, I was the househusband. My baby got sick with one of those nondescript virus-y things that causes first-time parents to panic and second-time-round parents to think, ‘oh no, not again’. I called the local doctor’s office. The receptionist said, ‘I’m sorry, but we can’t fit you in until this afternoon.’ This afternoon? Hallelujah and choirs of angels! She apologised for a same-day appointment! In California, a nurse tried to diagnose my wife over the phone because it would take two weeks to arrange an appointment in person. So, freedom from worry and pain? Freedom to receive medical treatment? NZ looks pretty good.

#2. When I was a university student in France, someone called in a bomb threat. As Breton separatists were known to explode bombs from time to time, the police took it seriously. I arrived at the campus to find all the students at a perimeter and police searching the building. The students were incensed. Police weren’t allowed on French campuses. Bomb threat or no, they had no right to be in the students’ building. Those students had an amazing sense of innate rights, of freedom from overreaching authority.

Now, the US is about to sign indefinite detention into law (it should be noted, ‘oh no, not again’ — see, Lincoln, suspension of habeas corpus; Roosevelt, Japanese internment; and McCarthy, Internal Security Act). The President is being given the power to issue lettres du cachet, a hated example of the power of the absolute monarchy in pre-Revolution France. In the league table of ‘freest countries’, I think this moves the US down a few ranks.

If you actually get out in the world and see how other people live, you discover that the US does some things well and others things poorly. If you read the data and try to imagine how life is for people who aren’t tenured professors at top universities, you discover that, actually, the US is more corrupt, has less economic mobility, and even ranks lower for starting a business than many other places.

The best closing for today is a quotation: ‘Patriotism is an arbitrary veneration of real estate above principles.’

Raj Chetty at GEN

15/12/2011 Comments Off on Raj Chetty at GEN

The Government Economics Network held a conference yesterday. Raj Chetty from Harvard University presented on his research into schooling, test scores, teacher abilities, and pupils’ subsequent earnings.

His research (summary here) found, not surprisingly, that kindergarten test scores correlated with later earnings. More interestingly, the earnings correlated with the scores of the other children in the kindergarten class. What made this finding intriguing was that children were randomly assigned to their kindergartens. Because of the design of the education policy, the researchers could discount selection bias. This was a great example of quasi-experimental research following public policy changes, exactly the sort of thing Tim Harford has advocated.

Chetty also presented on later research that concerned teacher quality and its effects, using a longitudinal dataset of pupils’ performance. They constructed a measure of teacher ‘value added’ from changes in pupils’ test scores. That measure correlated with later earnings (+), teen pregnancies (-), home ownership (+), and more. Again, really fascinating quasi-experimental design and interesting techniques to separate signal from noise.

Also, he had a somewhat hopeful message. Better teachers can improve pupils’ outcomes after controlling for parental characteristics. So, education should be able to improve intergenerational class mobility. What’s more, the test scores produced a measure of ‘value added’ that provides information about teacher quality. That gives us a way to measure teacher performance that isn’t hopelessly correlated with pupils’ abilities and socio-economic status.

But, I have some quibbles:

  • as tests have become more linked to pay and performance, the incentive to manipulate results has increased; teachers and administrators have responded to those incentives. So, this research may be a good look at the past, but may not help for the future. (To be fair, the presentation linked above does contain ‘Test manipulation’ as a concern, but IIRC it wasn’t on the GEN presentation)
  • they show that parent characteristics do not correlate with teacher value add (slide 24). I found this worrying, rather than a vindication of their metric. If high incomes buying homes in nice neighbourhoods with high property taxes doesn’t also buy good teachers, then they have uncovered a serious government&market failure
  • Chetty discussed the fact that the results were on the order of a percentage point or two in income. He pointed out that the difference between trend and actual GDP is a few percentage points (in the US) and we think that’s a problem. Therefore, the impact of good teachers is also economically significant. That wasn’t a bad line to take, but I am more interested in how ‘good teacher’ lines up against other influences on pupil success, like parental income and parental education
  • in particular, I would be interested to know how teacher value added compares with or interacts with expectations of pupils. The Pygmalion effect (in both directions) could be either a major contributor to ‘value added’, or could be an additional effect that is either more or less important.

A big hand to GEN for their first conference. By the metric ‘questions generated’, it certainly had value-add.

More on poverty and education

14/12/2011 Comments Off on More on poverty and education

Germane to the recent posts on poverty, childhood, and charter schools are this post at Crooked Timber and the linked op-ed at the NY Times. This is the paragraph that caught my eye:

Data from the National Assessment of Educational Progress show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.

The NAEP has a great data website. I didn’t do the analysis reported in the NY Times, but did make this graph:

What are we to make of this? On the one hand, it is easy enough to say that children’s intelligence varies with the parents’, so we would expect school achievements to be correlated. If parental earnings are also correlated with their own education, then family poverty is ‘naturally’ correlated with children’s test scores.

On the other hand, better schools can improve children’s education (is that a tautology?). So, we are once again at the idea that we need to figure out what works for which children. That’s where the posturing over charter schools — and again, in the Dom Post this morning — annoys me. This black-and-white from both sides gets us nowhere. Teachers are not angels placed upon the earth with a sacred calling. Charter schools aren’t perfect incentives incarnate. These are people working in invented institutions with multiple goals and incentives, working things out as they go.

I have an idea. Rather than National Testing (TM), let’s do exit interviews with pupils. I’m sure the Human Resources industry can gin something up. Then we can get some data on what children actually think of what’s being done in their name.

Poverty comparison

13/12/2011 § 2 Comments

In this morning’s column in the Dominion Post, Phil O’Reilly tells us about income inequality [no link – can’t find one]. He tells us two things:

  • it isn’t the rich getting richer and the poor getting poorer, and
  • people are not stuck in poverty, because they can move to higher income groups.

I’m reasonably familiar with the US data on incomes, and less so with the NZ data. I did the usual poking around, and discovered that the two countries have quite different experiences.

Income growth: the US Center on Budget and Policy Priorities has some material on this. One key graph is this one:

As you can see, all the income groups have seen growth in after-tax income since 1979. It’s just that the bottom 20% has seen growth of only 18% over that time, less than one percent per year. So, the poor aren’t getting poorer, but neither are they benefiting from any broad-based prosperity.

In New Zealand, on the other hand, poverty appears to be reducing after spiking upward in the late 1980s and early 1990s. I can’t get the graphs out, but this MSD report [pdf, 12 pages] has the highlights.

Income mobility: over lifetimes, high mobility tends to moderate the inequality seen at any particular time. In the US, mobility is declining. A paper from the Boston Fed found:

Overall, the evidence indicates that over the 1969-to-2006 time span, family income mobility across the distribution decreased, families’ later-year incomes increasingly depended on their starting place, and the distribution of families’ lifetime incomes became less equal.

The good news is that NZ’s intergenerational mobility looks better:

The results show that only a small proportion of variance in income or SES was explained by the economic situation of people’s parents, indicating that other explanatory variables are more important.

So, things in NZ are more hopeful than in the US. Poverty generally trending downward, with higher intergenerational income mobility to overcome the lottery of birth. That’s not to say that I’d want to be poor in any country, just that things might be a bit better here.

Mexican standoff, multiplayer version

12/12/2011 Comments Off on Mexican standoff, multiplayer version

I’m not heartened by the eurozone news. It’ll be great if I’m wrong, but if I had time to sort out a brokerage account I’d be shorting this deal.

It looks like the eurozone leaders’ plan to quiet the market turmoil has been two-fold:

  1. make more rules, and
  2. ask people with deep pockets to set step up.

From what I’ve seen, the rules weren’t the problem. Wikipedia quotes the NY Times saying the Germany and France were breaking the rules in the early 2000s, and they aren’t the countries in trouble. Krugman, here and elsewhere, has pointed out that Spain was running a budget surplus before the crisis. And anyway, rules are made to be broken, uh, renegotiated. So who’s to say they will stick long enough for bond-holders to get paid?

So the ECB now has more money in its ‘warchest’. However, it won’t do anything useful like buying more government bonds to support their prices. This means that the ECB and the peripheral countries are waiting for each other to solve the crisis.

Some have pointed to China. China’s euro reserves are around the same size as the European Stability Mechanism, which is supposed to shore up the euro. China could, theoretically, serve as an additional backstop. Except they have said that they won’t. But China can’t be too precious about this. With those reserves, they have as much stake in seeing the currency saved as France and Germany, and arguably more than Greece. But, like the other creditors, they are holding out to get paid in full. They probably also figure that the core countries have even more to lose, so they will eventuate resolve the crisis.

Shall we play a game?

Childhood as an externality

09/12/2011 § 4 Comments

Bear with me for a moment.

Economic analysis is focused on agents/individuals who produce and consume goods and services. They can also make rational decisions based on some amount of information, expectations, etc.

Children don’t really fit. Yes, they consume stuff, but they are constrained by their parents’ preferences and don’t really face market prices. While there are reasons for their decisions, I don’t think they classify as ‘rational’. Their preferences certainly aren’t stable. They also can’t enter into contracts so are excluded from a lot of economic transactions.

So, childhood isn’t really part of an analysis of the economy. People become economic agents when they become adults or adult-ish. They sort of spring into the economy fully formed.

We could formalise this by treating childhood as an externality. Childhood is to some extent done to the child; we don’t choose our parents or their circumstances. Childhood is also somewhat a by-product or co-product of the economy. Whether a pre-schooler is in daycare, for example, is partly a result of the parents’ employment decisions.

The benefit of this approach is that it gives us a ready-made framework for thinking about the impacts of childhood. We can think about negative and positive externalities — childhood conditions that either tend to hold adults back or increase their opportunities.

And then, of course, we can think about what we can do about them. The market is the first-best solution assuming there are no externalities. Once we add in the externality that is childhood, what happens to that market solution? The presence of the externality isn’t sufficient reason to decide that the market solution is bad, but it means that we should examine it critically.

If we do decide to intervene, we could consider the mechanism to use. For example, agent-adults who are affected by negative externalities could claim compensation after the fact. They could assert that their adult lives have been polluted by childhood poverty, which was inflicted on them. I’m not sure who would pay the compensation. Parents are not solely responsible for a child’s situation; schools, the medical system, communities, etc. might all need to contribute. At any rate, if the parents also suffered negative externalities, then there is a chain of claims.

Alternatively, we could set up institutions to distribute the positive and negative externalities of childhoods amongst the agent-adults. Essentially, some portion of income taxes and welfare payments already represents this sort of transfer. We could more explicitly recognise the role of externalities in contributing to agent-adult outcomes, and thereby tag part of these transfers as a response to the externality problem. Another institutional approach would be to reduce negative externalities, subject to some assessment of the marginal cost. This approach could be an argument for quality public institutions from a strictly individualistic perspective.

Just some thoughts for a Friday. Thanks for reading.

What are children?

08/12/2011 § 1 Comment

Little kids, little kids, everywhere I turn I can see them. Susan St John in the Dom Post, responding to Karl Du Fresne reacting to Bryan Bruce on TV3. Offsetting Behaviour’s series on charter schools [update: link improved]. My own children’s end-of-year gala events.

It got me thinking, what are children? If we think in terms of the usual partial or general equilibrium models, either blackboard or computable, it’s not clear where they fit. They aren’t products — goods or services. They aren’t consumption. They aren’t agents unto themselves, and certainly aren’t the Representative Agent (but that would be a fun model to build). They aren’t factors of production or property. Including them in households is the common fix, but that just shifts the question into a black box.

Children seem to exist in a triad: parents — children — society. We generally try to honour parental preferences regarding their children, but only up to a point. Society also has preferences regarding children. It seems that there are at least two components to the preferences. One component is society standing in place for the future adult the child will become, looking after his or her interests intertemporally. The other component is contemporary: the preferences of other people regarding children as they are right now.

For example, society wants children to go to school because (a) we see education as a way for people to realise their full potentials as adults, and (b) it keeps them from breaking into our houses right now. But, when we exercise this control, we try to do it by acting on their parents. We fine the parents for the children’s truancy, for example.

So, we allow parents control over their children, but not as they would control their property or consumption goods. The limit is not just where the control starts harming society generally, but also where it starts harming the future adult.

In the main, children seem largely absent from economic analysis. They have, to borrow a term, ex-sistence; they stand outside the models. I think this makes it difficult to talk about either charter schools or child poverty. The individual who is arguably most affected doesn’t really have a standing (in a legal sense) in the models used for analysis.

One way into the problem is to think about Marx’s reproduction of labour. Raising children is exactly that: reproduction of labour for the future. For Lacan, repetition was a key idea. We keep things alive through repetition. When we cease to repeat things, they disappear from the culture.  Raising children involves reproducing not just labour power but also culture, language, and relationships, the soft infrastructure of the economy. Alternatively, Deborah Cobb-Clark at the NZAE 2007 conference suggested that each individual’s childhood incurs a debt. She didn’t say who held the debt — society, perhaps? Raising children is then one way of repaying that debt (presumably, there are other ways).

I’m not sure where these ideas take us….

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