Propaganda masquerading as advice

28/05/2013 § 5 Comments

Over the weekend, I had a chance to read some advice from Yahoo! Finance on teaching kids about money. As parents ourselves, we try to discuss money and finance and debt with our children, explain what works and how, etc. As an economist, I’m interested in financial literacy. I started reading this piece with interest and hope. I soon realised it was just financial propaganda.

The first clue was that the author tied financial literacy to the Grand Funk in which we find ourselves. I maintain that financial literacy wouldn’t have helped one iota. To review the events of the last several years:

  • lenders and borrowers entered into loan contracts. Borrowers were encouraged to lie on applications, and lenders — y’know, the professionals with all the financial knowledge — accepted those applications and encouraged people to borrow more
  • these questionable mortgages were turned into opaque financial products without proper documentation, so that no one knew who owned what
  • the main financial companies bought and sold these derivatives, and derivatives of the derivatives, until no one knew what the risks were and who was responsible
  • when the whole thing collapsed, the US government bailed out the big banks, the UK government bailed out the big banks, and the German banks used their power to refuse to take losses
  • once the losses were dumped on the public, the above governments got religion about debt levels and started a fiscal austerity programme that left millions unemployed.

So, the borrowers were involved, way back there at the beginning, as one party to a contract that the other party should have known not to write. The rest was about business decisions in the finance companies and governmental decisions — decisions that could have gone another way.

The other line that got me — the punchline without the proper set-up — was this:

While banks and lending institutions may have accepted considerable criticism for their role in triggering the recession….

Stop it, you’re killing me! [Wipes eyes.] Accepted criticism? They may have been criticised, but I’m pretty sure they haven’t accepted any of it. They have fought it every step of the way, braying about how they are the core of advanced economies and how dare anyone besmirch their reputations.

I would note, too, the way the sentence is written. This isn’t a declarative sentence, ‘Banks have accepted criticism.’ That would be a statement, which then invites the reader to assess it for accuracy. Instead, the clause is written as an introduction to another thought. The idea is to say, hey, here’s the context that we all can accept, and my main point comes next. Well, buddy, I don’t accept it.

Teaching my kids about finance is good for them (and good for me). It would be great if more people were better informed, so they don’t get themselves into awful situations like this family. But better financial skills in the broader population wouldn’t have avoided this mess. The mess has been made by well-informed, well-educated people who know what they are doing.

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A tasty morsel on fat taxes

27/05/2013 § 3 Comments

Denmark placed the first-ever tax on saturated fat in 2011, and then abandoned it fifteen months later. It was supposed to be a real-world example of a ‘nudge’ — a little governmental push in the ‘right’ direction for all the fatty-fatty-two-by-fours healthy people struggling to emerge from their unhealthy bodies. Those ungrateful little sods actual consumers didn’t behave properly, so the policy failed.

The Institute of Economic Affairs has now published a paper by Christopher Snowdon on the whole affair, which makes for interesting (and lite!) reading.

While I appreciate his general approach — that such a tax is denying people the pleasures they want — I will take issue with a couple of methodological points:

  • the section on revealed and stated preferences doesn’t quite get it right. It might be the slide between a textual analysis and an economic one. I think he’s right that the language is laden (dripping?) with subtexts and unspoken meanings — but isn’t all language? What he gets wrong economically, though, is the ‘true preferences’ versus ‘expressed preferences’ part. All preferences are expressed in a context. Changing the context or changing the preferences are two different ways to change the choice.
  • That leads to my second point, which is that ‘making health options cheaper/easier’ is a theoretically defensible way of promoting healthy food options. Whether you do it by subsidising the ‘good’ or taxing the ‘bad’ will have equity implications, but changing the price differential is key to changing the choice context in the face of unchanging preference orderings. Now, the elasticities of demand might not be in your favour, and implementation can be a nightmare, and the tail can be wagging the dog, and so on. But this statement is a bit simplistic:

Campaigners might talk about ‘making healthy choices easier’, but the most they can do is make ‘healthy choices’ more appealing in relative terms by making ‘unhealthy choices’ more expensive and therefore less appealing. Unfortunately, this does not make the‘healthy’ choices cheaper in real terms, nor does it make them any tastier.

Those points aside, the affair is a warning to those who would meddle with our food consumption in a mechanical way. It’s not as simple as you would like to believe.

Strangling research in its crib [revised]

20/05/2013 § 4 Comments

The Dominion Post runs a science column by Bob Brockie, who briefly introduces readers to new findings or key ideas from the world of science. It’s a nice addition to the newspaper, better than the scandale du jour that passes for journalism, even if he has the annoying habit of speaking ex cathedra.

Monday, though, he got up my nose [no link — sorry — stuff.co.nz doesn’t actually want you to find anything easily]. He was discussing the new DSM-5, which has courted controversy by redefining psychological pathologies. We are all — well, half of us — apparently in need of treatment by the very people who decide whether we need treatment.

In his brief history of the DSM, Brockie said that psychology moved away from Freud to science. The meaning of this is clear: there is real, true knowledge that is produced through science, and then there’s all that other stuff that people believe without it actually being true, and that’s where Freud (and by extension, Lacan) belongs.

There are two enormous problems with this. The first is that this statement is glaring proof of the social production of scientific knowledge. I’d venture to guess that Brockie has not actually studied Freud, and has little knowledge of the split between Freudian psychotherapy and Anglo-American psychology. What he knows is likely to be what he’s been told, the stories he’s heard along the way. Science proceeds not only ‘funeral by funeral’ but clique by clique, lunch table by lunch table. Waving the ‘Freud’s not science’ flag isn’t so much a statement of fact but a not-so-secret handshake that marks him as one of gang.

And what a gang it is. They are in charge of funding, and funding allows science research. That’s the second problem with Brockie’s statement. They’ll say they want investigator-led research; they’ll say they want to give researchers the ability to follow their curiosity and investigate all manner of topics, regardless of where they might lead. The truth is, they are perfectly happy to strangle research in the crib if they don’t like it.

I know this, because they have strangled mine, repeatedly, while intoning ancient rites of scientific concern. They have just done the same to novel research proposed by a friend and colleague. We can show the theoretical basis for the work, we can demonstrate the linkages to international peer-reviewed literature, we can link the primary research to the hypothesis — we can do all the things these quartermasters of science demand. And then, they say that it isn’t ‘science’ because the science hasn’t been done because it hasn’t been funded.

It doesn’t help that we are talking about inter-disciplinary research – research that falls somewhere in between the disciplinary silos. Call it economic psychology, or psychological economics, or decision sciences if you like, but it is just the latest area of research in which we develop theories of human behaviour and test them. I’ve tried to explain it here (pdf), Andrew Dickson tried a different angle here, and yet another perspective is here. And still we get things like this 2012 article saying ‘Surprisingly little scholarly work has linked food and Lacan’.

Maybe that has something to do with funding decisions rather than lack of curious researchers. You want to say that Freud is not science? Give me a few a million dollars over several years to do the research. If I fail, you can have your talking point.

The scientists controlling the money are like Abraham, driven by Yahweh to demonstrate their obedience by sacrificing the young Isaac. But Yahweh is I Am Who Am, certain in His existence. Science can also be a jealous and uncertain Master, a Cronus who must devour his young to protect his reign. When he guides Abraham’s hand, he doesn’t stay the knife.

Variability in returns to education

10/05/2013 § 1 Comment

The headline in the LA Times was ‘College is a bad financial bet for some, study says’. The story focused on the cases in which students had a negative return on investing in higher education:

A surprising 14% of high-school graduates earn at least as much as people with bachelor’s degrees, and 17% of those with bachelor’s degrees outearn compatriots with professional degrees, the authors found.

The study in question is here, a Brookings Institutions report about the variability of returns to education.

The main thing I wanted to point out was the framing of these numbers. Research has shown that the way that percentages are presented changes how people react to them. Is it a 20% chance of failure or 80% chance of success? Is it a 1% probability of damage or a 1-in-a-hundred chance? It matters.

So let’s flip it around. Are you surprised that 86% of high school graduates earn less than people with bachelor’s degrees? How about that 83% of people with bachelor’s degrees earn less than graduates with professional degrees? If you were playing the percentages, would those results encourage you to get a degree?

What the authors are telling us is that earnings by degree have a distribution around some mean. There is some distance between the means, and the overlap of the distributions isn’t all that large (15%-ish). I haven’t gone through the report, but the results would be affected by whether they are doing a sort of t-test of the two distributions, or doing something like analysing joint distributions of two random variables.

Does this mean we are sending too many people to university? I’d suggest we don’t have enough information. If we think of it as a comparison of two distributions, what would we be trying to do? Are we trying to:

  1. create enough distance between the means so that the overlap is small? But why should we encourage a larger premium for education when on average the benefit-cost ratio of education is already around 5?
  2. shrink the left-hand tail of the distribution for the more-highly educated? But how do we reliably identify these students, and should we give up on majors or degrees that don’t have a high enough return on investment?
  3. do something with the right-hand tail of the high school graduate distribution? But what do we do with them? They have done well as high school graduates — it doesn’t then logically follow that they should have more education.

I don’t see that there’s necessarily a problem. The fact that a small-ish percentage of people don’t get much from a university education means that we are casting the net wide enough to bring in most of the people who potentially would. The fact that some high-school graduates can still make a good living shows that there are still opportunities for all kinds of people, not just top STEM graduates from top schools.

Bets don’t always pay off; investments sometimes fail. But if I were playing blackjack and winning 86% of the time, I’d be at the table all night.

Effort and reward for consulting projects

09/05/2013 Comments Off on Effort and reward for consulting projects

I have been pondering how effort and reward vary by the size of the project. There’s no data to this, just jaded experience from many years of consulting. There just seem to be some project sizes that generally work well, and some that are difficult for the money involved.

General observations:

  • Under ten grand — quite variable projects; some are easy and some are impossible
  • $35,000 —  a really horrible number. The client wants a $50k project but doesn’t have the budget
  • $40,000 — oddly, usually much better than $35k. If the client had wanted a $50k project, they would have found the extra money. They really just want $40k of work
  • $80,000 — sweet. This is a great project size. Enough budget to do something interesting, small enough that admin effort is low, reasonable client expectations
  • $90,000 — client wants $100,000 project but that’s a scary number
  • Over $100 grand — it all depends, so manage carefully.

For those of you who are visual, I came up with the following chart to show average effort:reward ratio by project size (solid line) and the spread around the average (dotted line). Values over 1.00 mean the effort is greater than the reward; values under mean the opposite.

effort-reward

 

Give the drummer some

06/05/2013 § 4 Comments

James Brown’s funk is tight. On a track like ‘Licking Stick’, the music threatens to break loose at any time, barely contained by Brown and the beat. The little I’ve read about Brown suggests that this is no accident. He was apparently a difficult and demanding band leader, but listen to the result.

On several recordings, James Brown calls to Maceo Parker to take his solo. Oh, man, can Maceo play — the pacing, the expressiveness, the musicality — no wonder he’s gigged with everyone.

On ‘Cold Sweat’, as Maceo is finishing up, Brown asks, should we give the drummer some? Wikipedia says this is the first recording in which Brown does this. This call for a solo highlights the importance of the drummer for the whole enterprise. Maceo can play with the rhythm and Brown can give us all his famous ‘uhs’ and ‘good Gods’ because that drum is keeping things together, keeping it tight.

Now, let’s shift to some economics (sorry, but you knew it was coming). I’m involved in a few projects right now that are mainly modelling projects. We aren’t doing primary research in the sense of going out and collecting data and producing new empirical findings. Instead, we are organising existing information. We are using not only economic data, like price elasticity of demand, but also information from other disciplines, like dose-response functions for medicines or nitrogen leaching rates for different land uses.

It occurred to me that we are the drummers in these projects. We have a particular set of skills — keeping information organised and finding ways of making different types of data fit together. But the value of the drummer isn’t the particular beat they’re laying down. Their value is to provide a groove that the rest of the music can revolve around.

The drums provide a solid structure, and that’s what a good model does. As a result, the rest of the information makes more sense, in the same way that a horn solo makes more sense once the beat is established. A good model also demonstrates which parameters are important or which relationships determine the outcomes, just like a solid beat lets the singer shine.

Sometimes, we modellers even get the spotlight; sometimes, even the drummer gets him some.

Info on the regions

02/05/2013 Comments Off on Info on the regions

The Ministry of Business, Innovation & Employment released a new report a couple of days ago — the Regional Economic Activity Report. Let me recommend it — it’s a useful, easy-to-read summary of, well, of economic activity in the regions. A lot of the information can be found elsewhere if you know where to look, but this puts it all into one tidy, 82-page package. People are interested in how their cities and regions are doing — I often get questions about local economies — so I expect this will be a good resource.

Canterbury gets a couple of extra pages for the earthquake impacts. Very sobering to see tourism and education series just plummet.

Here’s one graph I felt like sharing. It appealed to me, thinking about the New Zealand economy like a Fibonacci sequence:

NZ as sum of regions, MBIE Regional Economic Activity Report

NZ as sum of regions, MBIE Regional Economic Activity Report

 

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