Manufacturing the market we want

30/03/2013 § 3 Comments

A lot of economic theory is about markets. We then add government in as something that moves the market away from equilibrium. Subsidies, taxes, quotas, regulations, etc. — these are all ways in which government moves the market away from our assumption of what have happened otherwise. We never observe the counterfactual. We end up working backward from what we observe to what we think might have been.

And then we get situations like the affair with Rio Tinto/Meridian/Mighty River. The basic story is:

  • the Government is trying to sell part of Mighty River as the first of its State Owned Enterprises sell-offs
  • the sagging market for aluminium and high New Zealand dollar has led Rio Tinto to put pressure on Meridian to sweeten the deal around electricity prices
  • Meridian doesn’t want to give the shop away, and is resisting Rio Tinto’s negotiating tactics
  • the Government is concerned that lack of a deal will drop electricity prices, which would affect the market value of Mighty River shares.

I think I’ve got the story right, although I might not, so please feel free to set me straight in the comments.

The core problem for an economic analysis is that there isn’t really a market operating. The Government intervenes on the supply side of the electricity market through the SOEs. The Rio Tinto smelter as well as all the country’s households and other businesses make up the demand side. Now, the Government wants to step into the demand side to prop up demand from the smelter, rather than letting the two companies negotiate an agreement.

The intervention will be artificially inflating electricity demand above the level expected, given world prices and the exchange rate. This extra demand will boost consumer prices (and will cause more use of coal- and gas-fired plants, leading to more GHG emissions). That is, consumers will be paying a hidden transfer to Rio Tinto via power prices.

On the other hand, inflated demand will allow the Government to receive higher prices for the Mighty River share float, and then also for the planned Meridian float. That’s good for taxpayers and the public finances, but it’s bad for investors (and electricity consumers). Of course, an individual might be a taxpayer, investor and consumer all at once — are they better off?

The other worrying thing is that the Government intervention looks very much like ‘channel stuffing’. This is a business practice of artificially (and temporarily) increasing the sales figures in order to make the business look better than it really is. In this case (follow the bouncing ball), the Government would borrow money to raise Meridian’s sales figures to inflate the value of Mighty River to raise the value of the share float to pay off the borrowing.

This doesn’t require a market analysis; it needs a Rube Goldberg diagram.

Dear Mr Staples:

28/03/2013 § 1 Comment

I have been following with interest the recent news regarding an email you received. Yesterday, I received my own email from EQC — delivered to the correct address — to the effect that you were demanding full payment from EQC in return for building services rendered. In return, you have pledged not to pursue your interest in a certain spreadsheet any further.

It occurred to me that you might have access to information that I would find valuable and useful. I have had several assessors come through my house, making comments and jotting down notes. However, no one has given me a complete record of the work to be done and the estimated costs. Now that I have opted out of the Fletcher programme — due to their complete inflexibility — I am being asked to buy a ‘pig in a poke’: an unspecified repair job to an unknown value. It would be very nice to know something about said pig.

It also occurred to me that you are having trouble with the authorities. EQC has now laid a police complaint. The situation described in the email that I received from EQC did sound a bit like blackmail: ‘Do as I say and I won’t show anyone this little spreadsheet.’ (Wasn’t that the plot of a Tom Cruise film?) But then, certain allegations made about you earlier in the week sounded a lot like libel, so I fear my understanding of legal nuances is not equal to the situation.

I would suggest that we may have what economists call a double coincidence of wants. I would like to propose a possible arrangement between us. If you could see fit to send me just one row of a certain spreadsheet — I can advise you the row — I would happily contribute to any legal defence fund that may be required to extract you from the current difficulties. At a pro-rata amount of $100 per household affected, your fund could be over $8 million. From my perspective, it would be money well spent.

Yours sincerely,

Statistical affairs of the heart

27/03/2013 § 1 Comment

I’m getting to the age when doctors want me to worry about my heart. The Heart Foundation, with their mildly neurotic ‘Fulfil a lifetime’ slogan, wants to help. I can use their on-line calculator to ‘know my numbers’ — to calculate my risk of a heart attack. Well, not a bad idea, eh? A little more information, a warning of things to come?

I’m reasonably healthy, if you can’t tell by my typing. The calculator asks about age, gender, ethnicity, smoking, blood pressure, etc., etc. It’s gathering those known risk factors to calculate a heart attack risk score tailored to me.

But really, the calculator is about striking fear into the, uh, hearts of users. How do I know this? Two ways.

First, the calculator is skewed towards bad news. I didn’t have my cholesterol numbers handy, so it calculated two results. The first result was based on average cholesterol numbers. Then the calculator told me that ‘one in four people’ has an elevated risk, and that’s the number it used to calculate my ‘heart age’. I went back and changed all the inputs to be as positive and healthy as possible, and the calculator still estimated that my heart age was two years older than my chronological age. No matter what I did, the calculator always assumed the worst, and never allowed me to have a healthy heart — a heart younger than my age.

Secondly, the risk numbers don’t add up. The lowest risk possible is a 2% risk of heart attack or stroke; mine came out at 7%. Both numbers are below the ‘mild’ level of 10%. Now, bear in mind that surviving a heart attack outside a hospital is uncommon: there is ‘an overall survival following cardiac arrest [out of hospital] of 6.8%.’ So, the risk numbers are very close to the mortality numbers — a 1.9%, 6.5%, or 9.3% chance of dying from a heart attack in the next 5 years.

Statistics NZ helpfully provides mortality statistics on-line. At age 45, males on average have a 0.98529 5-year survival rate. That is, they have about a 1.5% chance of dying from all causes combined.

The ‘and stroke’ bit complicates the calculations, but let’s just stick with the heart attacks. The Heart Foundation calculator seems to suggest that my best-case odds are 1.9% chance of dying in the next 5 years, and the mild risk category is anything up to 9.3% chance. These are much worse odds than Stats NZ is giving me, at less than 1.5%.

How can I reconcile these numbers? Well, the stroke part was left out, so I could go back and include them (but I won’t for now). The calculator picked up many risk factors, so it isn’t about age or health status. And even the best-case numbers don’t add up, never mind the other ones.

I think the healthy heart calculator overestimates the risk of heart attack, presumably to raise your awareness of the downside risk of high blood pressure, diabetes, and other conditions. That suggests it isn’t about information, but rather manipulation. All for a good cause, of course — a healthy, fulfilled population. And what better tool for manipulation than fear and anxiety?

Statistics shall be my tin-foil hat.

Asymmetric information, EQC edition

26/03/2013 § 7 Comments

It turns out that EQC knows exactly what it’s doing. It knows exactly what damage has been done to our properties, what the engineers’ assessments are, and a whole lot more. And all the data is available in a handy spreadsheet. You and I just don’t get to see it.

Information is power. In this case, power over people’s house and lives.

Three thoughts:

  • This is the problem with the public agency insurance model. Is it an insurance company? Is it a government department? It’s neither and both. They are screwing down the claims as much as they can, like a private company, but they get to set their own rules, like a government department. And us, the consumers/citizens? High and dry, baby.
  • One of the clients of the man who incorrectly received the spreadsheet, Bryan Staples, was paid only $30,000 when EQC knew there was $55,000 to $59,000 of damage. How is a homeowner, a non-expert in building matters, supposed to know how much damage has been done and what it’s worth? EQC is using its expert information, rather than dealing with claimants in an honest and open manner. Last year, another state-owned insurer, ACC, had bonuses for cutting people off. That is, bureaucrats were paid to screw down claims. Is this happening in Christchurch?
  • I’m not so concerned about fraud — I think Eric Crampton’s right about that. I’m more angry that EQC has produced a handy guide that only insiders get to see. An enterprising individual could go around the city with inside knowledge of houses and assessments and figure out which houses are underpriced and overpriced. Or, some variation on the ‘nice little house, shame about the earthquake damage’ could push prices down artificially.

The story isn’t about someone accidentally sending the wrong email. The story is the spreadsheet and the secrecy. And the damage being done to the people of Christchurch.

Devoy-d of self-awareness

22/03/2013 § 2 Comments

Let’s start this by laying my cards on the table. I am racist. I apologise for that, but it’s true. It was unavoidable, growing up as I did in Virginia just a few miles from the Manassas battlefield, at a time when overt racism was socially acceptable. ‘You’ve got to be carefully taught….’

I have learned over the years to be aware of my racism, to try to see when it is operating and get in front of it. I also understand that racism is part of something larger, the privilege of being a white, able, hetero, middle-class male in societies designed by and for people just like me. I’ve done Women’s Studies courses at a liberal arts college; as a grad student, I TA’d a paper on privilege. Hey, you can write me off as indoctrinated, or PC, or a latte liberal, or a victim of liberal guilt — but I know that I have benefited from unearned privilege, and I don’t fool myself by thinking I would have made it anyway.

From that perspective — my perspective, that I am owning — the comments of Dame Susan Devoy, the new Race Relations Commissioner, are just awful. The total lack of self-awareness takes my breath away.

Let’s look at a few of the comments:

‘At the end of the day I have a really good moral compass. I don’t go to bed wondering or worrying about what others think or say about me….’

This is an odd view of a moral compass. Morality is about an ideal against which you measure yourself, and then reflection about whether your distance from the ideal is too great. Going to bed without wondering or worrying suggests absolute conviction in your own rightness. This may be fanaticism or hubris, but it isn’t morality.

As part of a regular column she … suggested Waitangi Day should be ditched as New Zealand’s national holiday.

Yesterday she described Waitangi Day as ‘extraordinarily important’ but ‘it isn’t New Zealand Day, is it?’ she said.

I’m not a native-born New Zealander, so I don’t know what my rights are in this conversation. The country’s founding bi-culturalism (British + Maori) is problematic for people from elsewhere. However, the Treaty of Waitangi is the founding document, the agreement that brought the older immigrants and newer immigrants together. The fact that the Treaty is considered as much as it is, is also part of what makes New Zealand what it is. The relationship is still contested — what are the rights and responsibilities on both sides? Demoting Waitangi Day would be an attempt to put the disputes in the background, to manufacture a unitary identity that doesn’t actually exist. It would be an act of cultural hegemony.

‘But I think in this role I have to be the voice of reason…’

This is the most disturbing comment of all, in which Devoy puts her crown on her own head. Interestingly, she positions herself as a ‘voice’, a disembodied manifestation of an abstract concept (reason), rather than an individual with physical and historical specificity. She is pure authority. Logically, all who do not agree with her are ‘unreasonable’. This framing puts those others in the position of children or hysterics, as less-than-full-people to be managed by authority. Devoy tells us here that her decisions will be made from a position of privilege.

Hmm, sounds familiar…

Shocked, shocked! that there is fraud here

21/03/2013 § Leave a comment

So the Right Honourable Winston Peters is alleging widespread fraud in Christchurch, and challenged the Rt Hon Gerry Brownlee to come clean about what he knows. The Serious Fraud Office has already said that they stymied fraudsters last year, saving the country millions of dollars (tens of? hundreds of?).

Fraud was always going to happen. It happens at the best of times — employees walking off with money, false invoices, work not done, etc. Recovery after an earthquake is not the best of times, so the potential was higher than baseline.

And, of course, there’s all that money. As Willie Sutton may or may not have pointed out, you rob banks because ‘that’s where the money is’. Same principle applies to Christchurch.

There are essentially two ways to combat aberrant behaviour: social pressure and good contracts. A high level of trust and goodwill — social capital, if you will, although I know it’s a contested term — and people will tend to behave as they should. Not everyone, not all the time, but it’ll get you most of the way there.

Good contracts can substitute. Well-defined goods and services, clear provisions for variations or re-negotiation, good measurement and monitoring processes, and you’re away.

But here’s the thing: earthquake recovery is exactly the sort of situation in which good contracts are hard to write. As we’ve found out, it isn’t as simple as ‘return the house to its pre-quake condition’. Which cracks do you fix? What’s the tolerance for a sloping floor or a wall out of plumb? What quality of finish and materials is specified? The permutations are endless.

What to do? Well, you can try to make better contracts. That takes time for negotiation, which is time you aren’t spending on the rebuild. You can have looser contracts but stricter monitoring and enforcement. This could work if you can specify what the results should be — which could be easier than being precise about a process. Or you could try to rely on social capital, but that capital is going to be diluted by all the new people coming in to help the rebuild. Any time and effort you spend on fraud controls, though, take away from the actual rebuild.

All of that means that the control processes won’t be perfect. There will be fraud. Get used to it.

But…the cost of dealing with fraud can be shared out in different ways. There are different costs: money, time, effort, anxiety. The EQC and Cera have, as bureaucracies do, privileged process over people. They have focused on screwing down the process to make fraud difficult, but that makes it harder for honest people, too. To save money, they have increased the cost in time and anxiety for Christchurch people.

Think of it another way: type I and type II errors. The rebuild is focused on type I, false positives. They want to make sure that all rebuild work is exactly as it should be, to reduce the incidence of paying for stuff that didn’t happen. But the two types of errors are inversely related. When you focus on the type I, you increase the incidence of type II, false negatives. You increase the amount of time chasing down fraud that isn’t there.

Oh, and incidentally, you burn through what social capital you have. As a result, you increase your need for strict processes and contracts. It’s a vicious spiral.

Of course there’s fraud in Christchurch. But the solution isn’t to treat everyone like a crook. That’s just imposing more costs on the people of Christchurch to avoid a little embarrassment in Parliament.

Fat taxes — what’s the goal?

19/03/2013 § 4 Comments

Andrew Dickson (othersideofweightloss) was emailing me about fat taxes and I realised I didn’t have a well thought-out opinion on them. Let me start by asking, what are we trying to accomplish?

User pays — This is the point of the tax on fat people that Gareth Morgan Investments suggested in 2005:

Government could publish a range of tolerance for body mass index and those who fall within that over the year (certified say six monthly, bit like a VIC for a car), would qualify for a lower rate of personal tax (higher rate of benefit).

The idea is that fat people make themselves fat, and their fatness costs the public health system money, which is contrary to user-pays, so we need a fat tax to correct this.

If we accept this idea — fat is like cigarettes and alcohol, two products for which we already have a cost recovery scheme — then we need to keep going. First, we need to understand the full lifecycle healthcare costs of fat people compared to other groups, a point that Eric Crampton also makes. The comparison with smoking and alcohol is instructive: dying early is not necessarily a drain on the healthcare system.

Secondly, user-pays cuts both ways. We are told that fat people are fat because they aren’t active enough. Therefore, they aren’t using a whole bunch of services that the skinny, fit people use. So, yes, we could charge more for their use of health services, but they also get a rebate for the things they don’t use: backcountry huts, footpaths, etc.

Cost to society — This is more than just the strict healthcare costs. Jim Mann, Professor in Human Nutrition and Medicine, wrote a 2004 piece for Diabetes New Zealand on How a Fat Tax Can Help Fight Obesity.

debilitating illness and premature death linked to obesity also cause losses to society in the form of lost economic contributions from those who are forced to curtail work or retire early, or die while still in the work force, as well as lost contributions that many retirees make as community leaders and volunteers….

Note that Mann isn’t talking about helping people get the best for themselves, to ‘nudge’ them into behaviours that will bring them higher longer-term welfare. No, Mann is specifically looking at it from the perspective of society, of what the group loses when an individual cannot participate. Because the group loses, it must change the individual’s behaviour. The logical next step is fining people for shirking and jailing them for laziness — where does it stop? And is fat a leading cause of not contributing? I’d have thought that being selfish was far higher on the list, and no one seems to be proposing a fine for that.

Improving individuals’ choices — This options sounds noble — we’re just helping people do what’s best for them. The immediate problem is defining the ‘what’s best’. Economists generally use a neat trick. They assume that what the individual chooses to do is optimal for them. Now, let’s be clear, it is just an assumption, and Joan Robinson showed the circular logic therein. But, what else are you going to assume? There are only two other choices: someone other than the individual (you, perhaps?) have a better sense of what’s best, or that time-inconsistency of preferences means that the individual at some other point in time would have chosen differently for the present.

Improving choices comes down to two things: improving information and/or overcoming time-inconsistent preferences. Given all the information shoved down our throats for decades (gratuitous foie gras reference), I find it difficult to believe that lack of it is causing 1 in 4 adults to be obese. It’s pretty simple — veggies and fruits >> fried stuff. The time-inconsistent preferences angle is more plausible and interesting. But again, given all the existing ways that people can motivate themselves to be less fat, how much more can people in the present be disciplined by their future selves?

So, why fat taxes? The explanations offered don’t really stack up. We have to look someplace other than economics to understand the motivations. Take your pick of explanations — Foucault and Lacan immediately come to mind — but that’s a topic for another day.

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