## Fat tax lax facts

Today’s fat tax news:

A fat tax is being suggested as a possible way to improve the health of New Zealanders by encouraging people to replace some saturated fats with polyunsaturated fats.

Some butter could be replaced with grapeseed or safflower oil, meat with omega-3 rich fish, and potato chips with nuts or seeds, while the tax could add \$1 to a pack of butter.

Rachel Foster and Associate Professor Nick Wilson from Otago University in Wellington looked at five meta-analyses to estimate how the risk of cardiovascular disease could be reduced by eating less saturated fats.

They also used data from the New Zealand Adult Nutrition Survey 2008/09 to determine whether a change to the amount of fat eaten would be warranted and feasible.

Their conclusion was that replacing 5 per cent of daily energy consumed as saturated fat with polyunsaturated fats would be expected to reduce cardiovascular events by about 10 per cent.

This news report, and others on the newly published article from the Australian and New Zealand Journal of Public Health (paywall), makes two statements:

• the tax adds \$1 to a pack of butter
• changing the fats would reduce cardiovascular (CV) events by 10%.

Now, if you aren’t careful, you might think these two statements are related. They aren’t. The article, by the way, is the same. It says that a Danish-style tax would add \$1 to a 500-g pack of butter. Then, later on, it focuses on switching out the type of fat for 5% of energy consumed.

Let’s connect those two statements.

One way is to go from prices to impacts. Assuming everything works mechanistically, what is the CV events effect of a Danish-style tax?

• Price of butter: \$5 (range on-line: \$4-\$6)
• Tax: \$1
• Proportional change in price: 20%
• Elasticity: assume -0.5 (see here, Table 1)
• Proportional change in butter consumed: -10%
• Energy as saturated fats: 13% (from Foster and Wilson)
• Reduction in energy from saturated fats: 1.3%
• CV events effect: 2.6%.

Yes, this assumes that the decreased butter is replaced by the required poly-unsaturated fats, but I’m assuming that for the sake of argument. My point is that the \$1 tax wouldn’t lead to a 10% drop in CV events, but something closer to 2.6%, even if it worked as advertised.

We can also do the exercise in the other direction:

• CV events effect: 10%
• Change in butter consumed: -38% (that is, 5%/13%)
• Tax: 77%
• Price of butter: \$8.85.

UPDATE: The Manawatu Standard talked to me about the Foster and Wilson article, and shared my estimate of the price impact.

## Questioning quintiles

31/07/2013 Comments Off on Questioning quintiles

I’m in the middle of Inequality: A New Zealand Crisis. An issue that is bothering me is the use of quintiles for talking about inequality, income and opportunities. There are actually two parts to my problem — a measurement issue and a normative one.

I’ll start with the measurement issue. Quintiles divide the sample into five groups, ranked in some order (say, smallest to largest). As such, it is necessarily a zero-sum game. For every person who leaves the bottom income quintile to join a higher one, someone else must fall back into the lowest quintile. Even if we were to lift everyone out of absolute poverty, we could still create income quintiles and have a lowest and a highest. We would always find inequality because the metric itself in a sense creates the inequality.

There is also no measure of dispersion or variance in quintiles. Now, I should mention that Inequality also uses Gini coefficients, which are all about measuring income distribution. The two measures together are useful. But quintiles themselves just show that one number is greater than another, without indicating how much greater.

The second issue with quintiles is the normative one: what do we want them to look like? What is the ideal towards which we are aiming? One of the uses of income quintiles is assessing intergenerational income mobility. Ongoing research in the US is using new datasets to create fine-grained maps of income mobility. Mobility varies tremendously, suggesting that where you were born is important to your economic fortunes. Of course, that’s true in all sorts of ways.

As I already pointed out, if the economy rewards talent and skill and they have some genetic basis, then class or income mobility will be limited. How limited depends on the relative rewards and genetic basis.

As a reductio ad absurdum, consider this alternative: perfect mobility. What if parents’ income had no correlation with children’s income? There are two clear problems with that situation. First, it suggests that incomes would be randomly assigned, which then suggests that incomes wouldn’t have anything to do with talent and skill (and hard work). Secondly, it also suggests that parents would not be able to influence their children’s outcomes. All the money spent on elocution lessons and finishing schools, all the time spent on proper use of knives and forks — all wasted. That situation would diminish the incentives for parents to invest in their children. Reducing the pay-offs to intergenerational investment would only serve to increase short-term thinking and create a sort of social Prisoner’s Dilemma.

Income quintiles are rhetorically useful, as a King of the Hill metaphor for people who prefer Parachute Games. For policy, though, they need to say what they really mean. What do they want the world to look like?

## Inequality: I’m not yet convinced

I have started the book Inequality: A New Zealand Crisis. It’s slow going but want to start teasing out my reactions, so I’ll review it piecemeal. Today, we’ll look at Part One, the introduction. My apologies at the start — this is long and somewhat rambling.

The reason it is slow going is that I’m having to weigh up each sentence. I think there are logical flaws, so the book doesn’t carry me along. I’m sure some readers will enjoy the outrage and devour the book — I’m not one of them.

A major premise of the introduction is that we are all worse off when inequality increases. They rely on Wilkinson and Pickett’s The Spirit Level for this argument, even reproducing a figure from the book (see here for my take on that book).  But they know themselves that this isn’t true. On page 17, we are told

We are all worse off for having wide income gaps in New Zealand.

On page 16, by contrast, the argument is

in countries with large concentrations of income, the wealthy can use their power to argue for policies that further their interests rather than those of the economy as a whole.

When you put these two statements together, the argument is that the wealthy are working against their own interests by arguing for policies that favour their interests. Obviously, this is illogical.

I also think it’s a tactical mistake. People working to lessen inequality are trying to get other people on board, to make equality politically popular. They are doing this by saying that equality is in everyone’s benefit. But this is simply not true, and obscures the fight they have on their hands.

(There is a similar retrospective argument going on over slavery in the United States during this sesquicentennial of the Civil War. One side says that slaveowners could have been bought out and everyone would have been better off. The other side argues that this wouldn’t have been possible.)

A second issue is that equality/inequality is a muddled concept throughout the Introduction. It seems to stand in for ‘things we don’t like’ rather than having an independent definition. This was quite striking with the second personal profile in the book. It’s a profile of a family with mum, dad and four children. They moved from Auckland to Whanganui, then mum lost her job and things got tight. But ‘tight’ is a relative term. For example, the family can afford some after-school activities but not all of them. Is that deprivation or not? Most important, though, is the notion of choice:

But even though she’d almost certainly get work in Auckland, Kristine doesn’t regret the move to Whanganui. ‘Being down here enables us to do so many more things for the children. We get a far better lifestyle here, with far more time together as a family.’

So how is this inequality? This family is choosing non-monetary rewards over monetary rewards and dealing with the consequences of that choice. They know they have other options and choose not to exercise them.

Another issue is that the statistical basis for the arguments is not consistent. Sometimes, the talk is of personal income, which includes all the superannuitants. We are told, for example, that 30% of individuals have incomes less than \$15,000. In the very next paragraph, we move to a discussion of household incomes, which look much less dire (decile 1, single person, no children: \$16,600 or less). Further on, the discussion moves to disposable incomes (after tax) for single households, but figures for the top 1% of those earners are given as pre-tax amounts because of data constraints. In essence, the number of people at the low end is inflated, and the incomes at the high end are inflated. It would have been better to work harder at a consistent measure of income to present a fair picture of the situation.

This kind of ‘worst case’ picture doesn’t stop with the incomes figures. For example, we are told that

this country has a relatively small earnings advantage to those with degrees.

As it happens, I know a little about this topic. The footnote (ftnt 66!) to the statement correct notes that the OECD has measured returns to tertiary education. However, that includes not only degrees but also sub-degree qualifications. The composition of New Zealand tertiary education (comparatively more sub-degree qualifications than other OECD countries) drags down our average return.

This statement about a small earnings advantage also shows the incoherence of the whole introduction. In a relatively equal society, we should have low returns to increased education. The premium should cover the time spent out of the workforce but not much else. Just because someone didn’t get an education is no reason for them to be disadvantaged in the workplace.

If this strikes you as a silly argument, that’s because you are thinking about productivity and economic efficiency. Clearly, the book recognises that some inequality is okay (degree holders should make more money), but too much is not. What I want is a clear statement about where they think that line is, and how they propose to measure it.

## Five box-tops, four bottle-bottoms

26/07/2013 Comments Off on Five box-tops, four bottle-bottoms

I received a solicitation by email the other day. No, not that kind — goodness, this is a family show. It was an invitation from the International Centre for Parliamentary Studies to do a course for a Professional Certificate in Foundations of Economic Development.

So who are these people?

The International Centre for Parliamentary Studies is a research institution of the United Nations Public Administration Network (UNPAN), and also works in partnership with the United Nations Development Programme (UNDP) and the Association of European Election Officials (ACEEEO).

Apparently, an official, above-board sort of place. And what are they offering?

Examine the myriad of issues which determine prospects for economic development and develop comprehensive and effective plans for the delivery of measurable economic improvements to citizens’ lives.

Complex economic systems, including micro-entrepreneurs and shadow economies, require management and leadership with clarity and cohesion, encompassing understandings of multisectoral linkages, sector planning and development strategies. Participants will work with leading specialists to analyse this broad range of issues and develop their understanding and construction of holistic conceptions of the theory, policy and practice of promoting economic development.

Wow — sounds cool! Lots of interesting material, grappling with the complexities of modern mixed economies, ‘leading specialists’. How long will it take me to acquire this complex understanding?

Monday 2nd – Friday 6th December 2013

Yeah, that’s right, you can be an expert in one week. Sigh.

Here’s my bias. I’ve been studying and researching economic development in various forms for coughtwentyfiveyearscough. It’s still a mystery to me. We kind of understand it, and we know what some of the big drivers are, and we have some idea of what not to do. But new ideas come up, and things don’t happen the way you think they should, and whaddaya-know the economy changes over time. If anything should give us economists some humility, it’s New Zealand’s experience. Yeah, sure, tyranny of distance blah blah lack of scale yadda yadda. But in terms of the things we can influence — policy settings and economic incentives — New Zealand does pretty well. And yet, it just doesn’t quite perform.

But some poncy bureaucrats are going to attend this course and suddenly believe they are Professionals (!!) in Economic Development. Then they are going to take the half-remembered version of the summary of the synopsis and inflict it on some unsuspecting jurisdiction. By the time it doesn’t work, they will have moved on to the next job requiring a Professional Certificate in Acquiring Professional Certification.

So, everyone, join in: ‘It takes five box-tops, four bottle-bottoms, three coupons,….’

## The barred subject of innovation

Reading piles are funny: the Callaghan Innovation (CI) Statement of Intent (discussed here) ended up near a great paper entitled ‘High Anxiety‘ (pdf), by Cormac Gallagher, and an article on functional stupidity. So naturally, I drew links amongst them for a Lacanian critique of an innovation institute.

One thing that struck me with CI is that they know. The clear message from the SoI is, we know how to innovate, we know how to accelerate the high-value manufacturing sector, and we know what has been holding us back. Although there is some talk of experimentation, the real point is, ‘we know what we’re doing’. Even talk of fast failure contains a seed of knowledge — we know what failure is.

That insistence on knowledge takes me in two directions. The first is functional stupidity, specifically the article linked above. Mats Alvesson and Andre Spicer point out that organisations nurture a certain amount of stupidity, and good functioning depends on having the right amount. Too much, and employees spend all day problematising the overarching goals of the organisation and the optimal processes for achieving them. Too little, and there isn’t enough self-reflection to keep the organisation from sinking into a morass of process and procedure.

CI has told us what they know and what they are going to do with that knowledge. They haven’t told us what they are going to do with their stupidity, though, which may be just as important.

The insistence on knowledge also takes me to the agent or subject of innovation, that is, the entrepreneur. Entrepreneurs/innovators are people who create new realities. They take what is and make it something different. To me, that takes an action of willfulness or ego — taking the thing that exists in my mind and making it exist outside my own head. I think of it as an act of desire.

That is why the Lacanian piece made me think. It focuses on anxiety, and specifically the role of anxiety in analysis. It takes issue with the idea that analysis is supposed to provide knowledge, knowledge about why the patient is anxious and what childhood event triggered it and the emptiness of anxiety (‘fear without an object’ in the conventional formulation). Gallagher argues, though, that dealing with anxiety isn’t about covering over a gap with knowledge, but rather about recognising and living with the experience of anxiety. The point is that anxiety is real, all too real, and can’t be captured in the symbolic structure of codified knowledge. In Gallagher’s words:

Lacan argues that this emphasis on knowledge has the effect of barring the subject’s access to his own desire.

If we use this idea in the innovation space, we can see the negative impact that knowledge — that an insistence on the power of knowledge — can have on innovation. If innovation is an act of will or desire, then insisting on knowledge is a turning away from the source of innovation.

Taken together, these ideas mean that CI will likely be too smart for its own good. It doesn’t understand its own functional stupidity, so it is likely to be an ineffective organisation. It also isn’t leaving space for desire, so it probably won’t permit innovators to, y’know, innovate.

## In praise of liberal arts

A working paper on private returns to tertiary education I co-authored has been published in the Treasury series (WP 13/10). I didn’t do all the fiddly bits, but did help with constructing the logic and the story behind what we think was going on. In a nutshell, NZ ranks poorly in the OECD research on returns to education. Around half of the difference between local returns and the OECD average can be traced to measurement issues (comparing apples with applesauce), while the other half is actually poor returns. The overwhelming reason for the poor returns is the low wage premium to being educated.

One of the issues we examined was ‘mismatch’. With the NZ data, there wasn’t much we could do. There just isn’t enough information on what happens to students after they leave tertiary education. I know that the pay-off to a liberal arts education for me was a long time coming — it isn’t enough to follow people for two years or five years. To cite our conclusion:

Finally, mismatches between employment and field of study and/or qualification level are often cited as a possible driver of low returns. There is little evidence that observed mismatches are in fact mismatches at all. However, if persistent mismatching is going on due to policy or market failures, this could be having a significant impact on returns. Whether that is the case or not is an open question.

Mismatch actually refers to two separate things. One is qualification mismatch — people getting Bachelor’s degrees when employers really want trade qualifications. The second is subject-matter mismatch — university students studying French literature when employers want computer science grads.

The Chronicle of Higher Education (CHE — did they choose that acronym on purpose?) recently published some pieces on mismatch. One looked at what employers wanted out of applicants’ educational experiences, and ended up muddling the two kinds of mismatch. However, when it did talk about subject matter as opposed to level of qualification, it cited one person as complaining:

it’s fundamental abilities that he says recent graduates lack, like how to analyze large amounts of data or construct a cogent argument. “It’s not a matter of technical skill,” he says, “but of knowing how to think.”

‘How to think’ — that’s pretty much the definition of what a liberal arts education is supposed to provide.

(Importantly, though, the survey company approached 50,000 firms and had only 704 responses, so we should be careful about reading too much into the results. But maybe I’m just analysing data to construct an argument.)

Fortunately, as the CHE also tells us, students are in fact choosing liberal arts degrees:

There’s only one problem with those insistent accounts of the decline of the humanities in undergraduate education: They are wrong. Factually, stubbornly, determinedly wrong.

I have been trying to point this out for years, using “numbers” and “arithmetic,” but it appears that the decline in humanities enrollments is universally acknowledged. Everyone simply knows that it has happened….

That piece is a welcome correction to the record. I had heard about the decline so much I believed it myself — turns out it isn’t true.

## On innovation, follow the money

As you might have guessed from the light posting, off-line life has been kicking my patootie. I have no idea when regular service may resume. In the meanwhile, I’ll do what I can.

Today’s topic: Callaghan Innovation (CI). This is a new organisation, a Crown Entity, formed from the old Crown Research Institute IRL (Industrial Research Limited) and some other bits. The idea is to improve innovation in high-tech manufacturing by aligning the researchers better with businesses.

The jaded among you might ask, wasn’t that the goal of the CRIs to begin with. to translate research into economic growth? Why do we have to rebuild and refocus a CRI to do what it should have been doing already? And you would have a point.

The thinking, though, appears to be that IRL didn’t deliver on the promise. The thinking is definitely that there is all this potential lying around the place, just waiting to be unlocked and joined up (why does this sound like a Lego video game?). I’ve been reading the Statement of Intent (pdf), and in some respects it’s really good. The primary roles are described as:

• motivating people to innovate and commercialise
• connect business with resources and skills
• deliver research and technical services.

The ‘motivating’ part is a bit twee, but connecting and delivering could help. The economics perspective would be that the innovation is path-dependent, is contingent on access to information, and is a process of learning by doing. CI would help by:

• linking businesses and researchers and others to increase the number of pathways, thus decreasing the path-dependence. That is, successful innovation might depend on the right scientist and the right funder meeting, but we can make the meeting a matter of course rather than a chance event
• increasing the visibility of information about capacity and skills, so that it is easier to access the information. By becoming a clearinghouse, CI can be the Trademe of innovation — the go-to place when you want something
• reducing the cost of learning by doing by sharing lessons learned, so that each individual innovator doesn’t have to learn in isolation.

I thought that — in principle — CI could be good. The whole point was to focus on what these businesses needed. Even if you thought of it just as a straight subsidy to R&D, it should still improve the sector.

Then I looked at the budget.

CI has five ‘output classes’, the areas in which it is working. Let me re-interpret the names of the classes and tell you the budget:

• Rah! Rah! Inn-o-vate! = \$6m
• Actually working with businesses = \$17.5m
• Same-old, same-old IRL = \$18m
• Replicating FRST = \$6m
• Underpinning Standards work = \$6m.

According to the budget, only one-third of the focus is business-centred innovation. One-third is maintaining capacity, which is science-speak for giving smart people money to do whatever they want, and most of the other third is replicating governmental functions. For all the lovely talk about change at the beginning of the Statement of Intent, the budget makes clear that CI is actually pretty conservative.

## West Side economics

02/07/2013 Comments Off on West Side economics

I saw a stage production of West Side Story last night — Samuel Marsden Collegiate is putting it on this week (pdf — poster). I caught some dialogue I’ve missed in the past. The writers knew something about the ambiguity of economics. Here in the first scene, on the streets of New York, the Jets are talking about the troubles caused by the Puerto Ricans (all dialogue sourced here):

ACTION: Them PRs’re the reason my old man’s gone bust.

RIFF: Who says?

ACTION: My old man says.

BABY JOHN [to A-rab]: My old man says his old man woulda gone bust anyway.

Just a few lines capture the economic problems. A man’s business folds — why? Maybe he didn’t run it well, maybe he’s an addict (cf., ‘Gee, Officer Krupke’). That is, maybe it has nothing at all to do with immigration. On the other hand, maybe the neighbourhood is changing and immigration played a role in the bankruptcy. Lots of things go into a business’s success or failure — it’s hard to assign blame to just one of them.

The other thing this dialogue sets up is nicely captured in ‘You’ve got to be carefully taught’ from South Pacific:

You’ve got to be taught before it’s too late,

Before you are six or seven or eight,

To hate all the people your relatives hate,

You’ve got to be carefully taught!

This idea is mirrored in the dialogue towards the end of West Side Story, in the scene in Doc’s shop when Anita is attacked:

DOC: What does it take to get through to you? When do you stop? You make this world lousy!

ACTION: That’s the way we found it, Doc.

Institutions, such as anti-immigrant sentiment — they shape us, we shape them in return. They help us make sense of an ambiguous economy, to find reason in things like business failure and the death of friends. Clever people, those writers.

### Where Am I?

You are currently viewing the archives for July, 2013 at Groping towards Bethlehem.