Judgement and cost-benefit analysis

16/09/2013 § 2 Comments

The proposed changes to the Resource Management Act have the potential to increase the use of cost-benefit analysis in RMA applications and decisions. New Zealand uses the RMA to find a balance between economic claims on resources and other claims, especially environmental and social.

The results are controversial. One area of controversy is the extent to which CBA should inform decision. How important is it? Can we trust it?

My colleagues at NZIER wrote a discussion paper earlier this year on these issues. They suggested that we need better information to support more consistent decisions. They pointed out that methods do exist for understanding the value that people place on the environment. We need to apply them, however, and that takes money.

Parenthetically, I’ll note that this should be better funded by the public good science funds. Major decisions keep being made without good data, because it is never cost-effective to collect the data in any single case. It is a collective action problem, which is why we have a government.

Two lawyers, Christensen and Baker-Galloway, have written in Resources Management Journal  an article that reviews the decisions and the legal reasoning behind them. The article mainly puts some legal context around the economists’ contention that we could and should do more with non-market valuation.

One message that comes through in the cases reviewed is that judges are reserving the prerogative to judge. The talk of ‘flexible’ and ‘holistic’ decisions is in part cover for judicial discretion. This isn’t necessarily wrong on the surface. The issue is that we do have ways to include better information. If that narrows the field of discretion, so be it — it would be a net gain for society.

Specifically, Christensen and Baker-Galloway discuss the High Court decision in Meridian Energy Ltd v Central Otago District Council, in which the High Court overturned the Environmental Court decision. The article quotes the decision:

Parliament has not mandated that the decisions of consent authorities should be “objectified” by some kind of quantification process. Nor does it disparage, as a lesser means of decision-making, the need for duly authorised decision-makers to reach decisions which are ultimately an evaluation of the merits of the proposal against relevant provisions of policy statements and plans and the criteria arrayed in Part 2. That process cannot be criticised as “subjective”.

The point of having decision-makers is to make decisions. If you take away the discretion, what are they going to do?

In a 1998 article by David Pearce, an expert in CBA, I found the following:

…perhaps a cynical interpretation, CBA tends to present results in a reasonably cut and dried manner, subject to the uncertainty of the estimates. Benefits exceed or do not exceed costs. But decision-makers may place as much importance on flexibility of decision. A CBA that, in effect, removes that flexibility will not be welcome.

New Zealand case law seems to support that view.

Parking is too cheap!

10/09/2013 § Leave a comment

Now that I have your attention — it may be that we aren’t paying enough for parking in Wellington. This is NOT the message of the downtown retailers, of course, and the Dominion Post doesn’t explain the issues, but let’s run through the economics.

Say you are the mayor of Harbourside City. Your city has 1000 parking spaces available. The downtown workers, public and private, want to drive to work and park all day without breaking the bank. The downtown retailers want parking for shoppers from the suburbs, and figure that cheap parking with some turnover would be good. Downtown residents want to park whenever, wherever, for as long as they want. What are you going to do?

These 1000 parking spaces represented a limited supply. You have to figure out how to allocate the limited supply amongst the competing users. You could start by divvying them up — maybe 200 for cars with resident stickers, 400 short-term spaces for shoppers, 400 all-day spaces for workers. Then you have to allocate within each group — which workers? which shoppers? You’ll also have to deal with people gaming the system: a worker who buys a parking sticker from a carless resident, shoppers who parking in the all-day parking so they have enough time for browsing and lunch, etc.

So…you put a price on the parking spaces. That helps ration the limited supply. Workers and shoppers start taking the bus, residents decide not to bother with cars, etc. You have to be careful, though, with the relative prices. If daily parking gets really expensive but resident stickers are free, enterprising people will figure out how to arbitrage the difference.

Now that you have a price on the limited supply, what happens? Well, you might just collect $25 million in parking fees and fines.

That could raise a few eyebrows. It might look like the City is gouging residents because it controls the parking. How would you know?

Remember, first, that people have options. Shoppers can go to the malls in the suburbs. Office workers can take the bus or work from home. Residents can factor the cost of parking into what they are willing to pay for rent.

The question becomes, how full are the car parks? If they are always running at 95% to 100% occupancy, then the price isn’t limiting people’s use of parking. Shoppers are still shopping downtown, etc.

The Dominion Post, in repeating the complaints of the retailers, doesn’t actually tell us how full the carparks are, so it is impossible to know whether to be outraged at the $25 million or not. My few data points tell me that parking is tight. Last week, I was a bit late getting into work. At 9.20 am, the three parking buildings I tried were all full. I ended up working from home that day. It didn’t help that at least two buildings are closed because of the earthquakes and lots of buses were off the road because of maintenance issues.

The problem isn’t the $25 million. The problem is the limited supply of parking. If we aren’t going to build more, then we have to ration what we have.

Inequality, mental models, and counterfactuals

09/09/2013 § 4 Comments

In the recent book Inequality: A New Zealand Crisis, Jonathan Boston has a really useful chapter. It probably should have started the book as a way of laying some intellectual groundwork, instead of being Chapter 5. It raises the same point as Matt Nolan does at TVHE, quoting Amartya Sen, but with more detail. Here’s Boston:

As highlighted in this chapter, there is almost universal acceptance that equality matters. Yet there is no consensus on what kind of equality should be championed.

And here’s Nolan:

 Everyone, especially those who are more extreme in any given “political dimension” cares about equality of something – and the underlying reason why there are trade-offs stems from (as Sen discusses in the book) the heterogeneity of individuals!

Boston tries to cope with the different equality targets in two ways. First, he says that some equalities are more important than others, arguing that there is an inequality of equalities. With this, I believe he steps right back from his initial understanding — that reasonable people may reasonably disagree. Secondly, he suggests a certain pragmatism, or specific egalitarianism. While this seems attractive, it papers over the real conflict amongst theories of egalitarianisms with a poorly defined set of concrete goals.

In doing this, Boston shows how hard it really is to have evidence-based policies. When it comes time to make a decision, we have to take values and preferences into account. A particular set of evidence can be made to suit a range of policies, once you introduce different values. I’ve not read Peter Gluckman’s new report on evidence-based policies (pdf), but the reporting I’ve seen suggests that it is insufficiently attuned to this problem.

There is a second problem less well understood. When we make judgements about inequality, we are using mental models of social systems to create counterfactuals. For example, if one says, ‘they wouldn’t be poor if they weren’t lazy’, there is a mental model of society that underpins the judgement. That model has a weighting on ‘effort’, as well as weightings on other things like ‘education’, ‘social network’, ‘ethnicity’, ‘gender’, and more. The ‘effort’ weighting is sufficiently large to counteract any negatives from the other factors. We could, through interviews and surveys, estimate the parameters that people apply to those factors.

We all have these models. They are all wrong. I say that with conviction because ‘all models are wrong.’ They are always partial — they have missing variables — and the parameters are estimated from a sample of observations rather than the population. So, in my interpretation of my experience, it may be that ‘effort’ is sufficient to make a person not-poor. That doesn’t make it so, either for my experience (which suffers from observer error) or for the wider world.

In economic analysis, counterfactuals are hard to construct. You have to decide which factors are important and how important and over what time. If I’m being cynical, I might say that the counterfactual is the most important part of any cost-benefit analysis, and it is literally something we just make up. With data and evidence, mind you. But we make it up just the same.

How much harder is it, then, to understand the counterfactuals that people create from poorly-specified mental models of complex social systems?

More evidence would help, so it’s good to see Gluckman encouraging the government to find and use more. The findings will rarely be conclusive, however, as evidenced by Boston’s discussion of equality.

Mining pays

05/09/2013 § Leave a comment

Lazy and uninspired on a Thursday, so I’ll point you to Pattrick Smellie. He reminds us that extractive industries are productive industries.

These statistics tell a simple story: jobs in the mining, oil and gas sector are vastly more rewarding to New Zealand on a per job basis than jobs in the highest-value parts of the manufacturing sector.

This can be expressed even more starkly. The average petroleum or mining sector worker earns an average annual salary of $105,645 a year, more than twice the $50,262 national average salary for all industries.

I was looking at similar figures last week, because we were doing some CGE modelling of mining. I spend about half my time dealing with agricultural economics, so the mining statistics were eye-opening.

In the modern world, in today’s economy, with today’s demands and preferences, mining pays. That’s not to say it always will, and we should definitely keep in mind the trade-offs involved. But the discussion needs to be informed by economic reality, and Smellie has reminded us of that.

Revealed preferences of political hoardings

04/09/2013 § 1 Comment

Wellington is proud of its green space. From its early days, the wise and good of the city planned a Town Belt to provide healthy outdoor space for the citizens. Oh, and if Wikipedia is to be believed:

the New Zealand Company did not just have public health in mind. The Company wanted to keep land prices high in the areas known in the plan as “town acres”, thus ensuring more favourable returns for its investors (the owners of the “town acres”).

The green belt continues in this function today — limiting space for housing, limiting options for building roads to more housing, generally constraining supply in the face of increasing demand. We know what that does.

Which is why the political hoardings made me laugh this morning. It’s election time, and the candidates’ signs have gone up. Three of the four signs I could see at the stoplight leaving Karori had candidates’ headshots superimposed over panoramic pictures of … downtown. Buildings! Glass! Waterfront! Even the Green candidate used the harbour view, although it did have the Oriental Bay fountain.

What are they selling? A vibrant city economy. Jobs and businesses.

And not a native bird or bush among them.

Science stumble with young students

01/09/2013 § Leave a comment

The science sector in New Zealand wants to get more people — particular young people — interested in science. It believes that science careers get short shrift when students are planning their education. It also wants to encourage more girls into STEM subjects. Don’t take my word for it. There’s a 2008 Science Maniesto from the Royal Society explaining all this.

I’m certainly in favour of my daughters having interesting, rewarding jobs. If a science career provides that, great. There’s been some science talent in the family, so it’s a possibility.

We’ve been supporting what science is available for primary and intermediate girls. Recently, one daughter participated in the NIWA Wellington Science Fair. From our experience, the event didn’t help get kids fired up for science.

The most important thing to realise is that these kids have choices. Sure, science is one possibility, but so are medicine, law, finance and more. Science has to be appealing. So let’s compare:

  • My daughter’s division had over 50 entries. Only four kids won prizes. Most of those kids won more than one prize. By comparision, a singing competition might have four prizes in a division with maybe a dozen entries. One of their maths competitions has five prizes for the 30 or so schools who participate.
  • There was no feedback. The kids have no idea what they did well and where they fell down. They don’t know what they could do better. By contrast, performance judges fill out sheets for each performer. They typically give positive and critical comments, which helps kids both understand their mark on the day and identify things to improve.
  • The best we can figure is that the judges liked some combination of science, application and presentation. But there’s no way to gauge how much those things contribute to the rankings. On the other hand, a maths competition is judged in terms of right and wrong answers. If your team gets it right, you get the point. The kids are competing against the maths problems as much as they are competing against each other. The ICAS and Australian Mathematics Competitions are similarly based on getting the answers right, not tickling the judges’ fancy.
  • My daughter’s girls’ school had one of the largest contingents from any school in her division. They won nothing. Nada, zippo, zilch. We can talk about other schools having more experience with the competition and larger schools having more resources for extra-curricular activities and the rest. But none of those explanations changes the experience this girls’ school had of sending a big group to a city-wide event and coming back empty-handed.

What my daughter and her classmates experienced seemed to be a subjective, secretive, winner-take-all tournament. Now, obviously, these folks can run any kind of competition they want. They just shouldn’t be surprised when these girls don’t rush back to do it again, and find something better to do with their time.

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