Another entry in the inequality discussion

31/01/2014 § 3 Comments

Pattrick Smellie’s column yesterday highlighted that Brian Easton has a new publication on inequality. Easton’s work is based in part on the thorough MSD report by Bryan Perry, which was highlighted in comments early this week (h/t Mary). Apparently, Easton is less complimentary about the Rashbrooke book, which I’ve covered before (here, here, and here).

That was a link-o-licious paragraph.

Easton and Smellie picked up on something that also struck me about Perry’s analysis (this from Smellie):

Between the mid-1980s and mid-1990s, Rogernomics cut a swath through traditional, subsidised industries; income tax cuts and GST were instituted, which hit the poor rather than the rich; and then the Ruth Richardson welfare cuts of the early 1990s completed a sharp decline in equality.

“The trend after the mid-1990s is more ambiguous,” Easton said.

“The best interpretation is that the income distribution has remained at roughly the same level of inequality over the last two decades.”

The trend shows up in this graph of the Gini coefficient in New Zealand over time (Perry, Figure D.17):

Gini_trend

The graph struck me for two reasons:

  • Commentators often wring their hands about New Zealand falling behind the rest of the world on incomes, productivity, etc. A lot of that falling behind happened in the 1980s and 1990s, with less of it in this century. That is, we have fallen behind, rather than we are falling behind. Apparently, there’s a similar trend with inequality: it did increase, rather than it is increasing.
  • The Occupy movement and commentary by Krugman, DeLong, Saez, etc. focus on the increase in inequality in the last 10 to 15 years, things like:

Yet the bulk of the rise in top income shares is in fact at the very top.

The experience in New Zealand appears to be different. It’s a reminder that we have our own economy with its own issues, and should be careful importing slogans and solutions from overseas.

Some babies are more equal than others

28/01/2014 § 9 Comments

So…Labour made its big policy announcement. I guess I should comment on it.

Let’s focus on the $60 per week for babies. Here’s the case for such a payment:

Our society recognises that the first few years of life are crucial to later development — stuff happens or should happen in that period that can’t be undone or redone. This is, for example, your DOHaD (developmental origins of health and disease) hypothesis. We collectively decide that we want new individuals — babies — to have the best start they can. Maybe we want each one to reach his or her full potential, maybe we just calculate that an ounce of prevention costs less. Either way, the 2 million plus of us with work each put a little money into the pot for the 59,000 families with babies. We use government to organise the whole thing. Given that families are a key institution in society, we route the payment through families. Giving credence to what economists say, we provide families with money rather than things (food, clothing) because each family is best placed to decide what it needs.

But then there’s this detail about excluding families making more than $150,000. If the payment is essentially for the new individual, then why make it contingent on the family’s income? And furthermore, the exclusion would affect only 5% of families, so it has only a marginal impact on the total cost. The exclusion tells us that the payment isn’t just about society supporting new babies, it’s about supporting specific babies.

So then we get into a debate about which babies deserve support. It turns the policy from baby-focused to family-focused. Labour has determined that some families need support, well, actually, that 95% of families need support. And that’s where they lose me.

I definitely see the need-based case for providing extra money to the one-quarter of children in poverty. We could increase the scope even more to include the near-poor. But when we increase it half or three-quarters or 95% of families, we aren’t talking about needs any more. In no plausible way can we argue that 95% of New Zealand families are needy. They may be ‘struggling’, in the sense that we can all find ways to spend our entire incomes and then a bit more. But needy?

And so the policy looks like a giveaway to the middle class, dressed up in concerns about kids and poverty. It’s a great ploy — voters (who are mostly middle class) can feel like they are doing something for barefoot urchins while getting paid themselves. The pay-off is psychological AND financial. That makes it good politics.

I like Lake Dunstan

27/01/2014 Comments Off on I like Lake Dunstan

My family has a little place — a cabin, a crib, a bach — near Lake Dunstan in Central Otago. I can walk to the lake in 5 minutes and see it from the property if I stand in the right place. The area is beautiful in an arid, unforgiving way. The lake is warm as South Island lakes go, and supports a lot of boating and swimming in the summer months.

The lake is artificial, the result of the Clyde Dam, built in the early 1990s. Underneath the lake are the old Bannockburn bridge, parts of the town of Cromwell, farms, and a rapids called the Cromwell Gap. In an emotive piece in the December 2013 New Zealand Geographic, Dave Hansford quotes a kayaker who once shot the Cromwell Gap. The kayaker describes how rising to the challenge was a life-changing experience.

Fair enough — he got something out of the rivers as they were before the dam. But my family gets a lot out the lake as it is. So, in response to Hansford, here is my equally emotional (and deliberately parallel) response to the imagined destruction of the Clyde Dam:

Bill Kaye-Blake has lost a lot of water from his life, a whole hydro-lake’s worth of water. For him, it is — or was — a place he went to find tranquillity while reconnecting with his loved ones. Where currently thunders the dangerous Cromwell Gap, says the former Lincoln University student and lecturer and ardent advocate for lake recreation, “there was a thing called Lake Dunstan, and this is where the Clutha and Kawarau arms of the lake met. It used to be a tourist attraction, it was such a big wide lake. Now it’s fallen 80 metres in depth.

“We used to sit on the shingle beaches in the shade of willows and think, ‘how lovely that our children have a safe place to swim and grow to love the water’. It was a central experience in their growing up, in their Kiwi childhoods. There might be 10 to 20 motorboats lined up along the shore, with parents teaching kids how to kayak and swim and waterski. On a hot day, there would be hundreds of people enjoying the lake at the different swimming coves and boat ramps. But that experience is now no longer available to anybody. The last waterskier was in the year before they dynamited the dam.”

Change leads to winners and losers. Focusing on the negatives may get you published in New Zealand Geographic, but it is only half the story. Probably less than half.

Education policy: solving the wrong problem

24/01/2014 § 1 Comment

The big political news yesterday was the announcement by National of a new education policy. It will put in place a few experts — super-principals and super-teachers — to oversee and guide schools and regular principals and teachers. And, it will pay them a premium.

The usual economic models I use don’t seem to apply here. This is more about management, for which I have no ready models. If I fall back on thinking about incentives, I don’t see anything in here that changes the incentives for teachers. In fact, it creates incentives for the incoming managers to (a) overstate the deficiencies of the existing situation, and (b) institute new policies and procedures so as to be seen to be doing something. But I don’t have a great economic insight for you, sorry.

I do know a little about the education system, though, and it seems like this policy is solving the wrong problem, or a problem that does not exist. Education in New Zealand is generally good. Overall, students fare well on standardised exams and international rankings. They are able to go to overseas universities and do well. On average and in the main, education is on par with the rest of the developed world.

Whether warehousing kids for 13 years is actually good for their development as creative human beings, that’s another argument, but we’ll skip it here.

Despite the good average performance, the country has two problems:

  • the long, fat tail of low performance, which correlates with race and poverty
  • lack of public resources for top students, to help them achieve their potentials.

The first problem is that some kids in some communities are disadvantaged in all kinds of ways, and that shows up in school results. Improving their performance is partly about the schools themselves, and partly about helping the communities and families overcome the disadvantages. It also involves some reflection on why the disadvantage is there and continues, which is a massive social conversation that the inequality campaigners are attempting to have (but, in my opinion, going about the wrong way).

The second problem comes out of the drive for standards. If teachers are given incentives to lift kids to some arbitrary level, they will work towards it. Any kids who naturally get there will be ignored, because teachers aren’t paid to help them excel. This imposes costs on the families and communities, who have to pay for all the extracurricular stuff that helps the kids excel, or move them to the expensive schools that offer more options. It also creates losses for individuals and societies, who aren’t as creative and inventive as they could have been.

The new policy addresses neither problem. Creating a national system of administrators and consultants (which is what the policy seems to do) isn’t necessary. We need targeted intervention to help the poorest performing kids, and we need a shift in focus and policy to create incentives for teachers to nurture the best and brightest.

It’s never enough

23/01/2014 Comments Off on It’s never enough

And so a new year begins. Okay, we’re almost a month in, but this is the week that New Zealand really comes back from summer holidays (and even now there are a few empty chairs in the office). That means it is time for looking ahead to what we can accomplish this year.

Rod Oram, one of the country’s leading economics commentators, has given his views in the Sunday Star Times (19 January — behind paywall so no link). He starts by reflecting the current consensus — New Zealand is poised for growth, ready for a ripper of a year in 2014. Both IMF and NZIER are forecasting growth over 3%, versus an average of 2.2% in developed countries. Also, the growth is expected to be broad-based, which is generally good for the economy.

But that’s not enough. No, no. Oram warns us, frets about it, looks for the sow’s ear in the silk purse (what? moving on…).

He wants us to do more. We can’t waste this opportunity. Growth, schmoth — what we need is innovation! and new thinking! and initiatives! and transformational change! That extra economic activity is just the platform for even more better growth.

I’m being a bit mean, but I’m on my way to making a point. Well, four:

  • I’ve been here since 2000. A succession of commentators, governments, bureaucrats and others have been exhorting us to transform and innovate. My colleagues tell me it’s been going on longer than that (we really need to put together a list of the initiatives that have come and gone while the country has quietly gone about its business). This isn’t a galley, where you beat the drum faster and the slaves pull harder. Innovation is just a slogan — it needs to be backed up by concrete ideas about who and how and when and what.
  • We are, apparently, starting to hit up against constraints: ‘There is abundant evidence of our constraints…. Capacity utilisation is already at 90.2 per cent….’ Innovation and transformation require resources. There has to be mental capacity for thinking and planning, and people and money to work on changes until they bear fruit. Resource constraints are good for pushing people into innovation — how do we work around our limits? — but that kind of innovation tends to be incremental.
  • Oram points to the Treasury estimate that ‘our current account deficit would expand to 6.5 per cent of GDP, adding to our indebtedness to our international creditors.’ The thing about these debts is that they are largely private. They are the result of individuals making decisions about how to spend or invest their incomes, and about overseas creditors deciding that we are worth the risk. What should we do about it? Why should we do anything? Do I really think I’m a better judge of all those individual transactions than the people actually making them?
  • Oram is worrying about 2016 (‘Our growth rate will drift back to about 2.5 per cent in the year ending March 2016’). The business owners I talked with over the summer are worried about now, and this quarter, and getting through this financial year. It’s been a hard few years for a lot of people. Yes, yes, planning for the future is important, but enjoying the good times is key to keeping sane.

So this year, I’m not going to fret. Innovate if you want, relax if you don’t. And laissez les bons temps rouler.

A Zizekian look at the GFC

21/01/2014 § 3 Comments

A bit gauche, perhaps, but I’m going to point you to an article I had published at the end of last year. It is my attempt to grapple with economics and the global financial crisis. Because of the nature of the explanation, it appeared in the International Journal of Zizek Studies.

The content will be familiar to regular readers of this blog — Zizekian philosophy and Lacanian psychoanalysis can help explain the economy. Given that it’s an article and not a post, it works through the arguments more fully and with better references.

The work started with two things I couldn’t understand:

  1. why were reputable economists and economics commentators spouting nonsense about the GFC? I don’t mean different interpretations of facts, or bringing different sets of values/preferences to bear on the evidence. I mean relying ‘evidence’ that was not true, developing explanations based on falsehoods
  2. why weren’t more economists concerned about the fraud revealed by investigations into the GFC? It seemed like the central players in the economy were cheating, brought down the economy, and then imposed the costs on other people.

A brief bit from the article:

In the response to the GFC, mainstream economic theory has acted as a prop or a magician’s wand, to be waved around as a distraction. What happened in the actual economy represented a turning away from standard, textbook capitalism, based on the idea of capital as a factor of production. Owners of capital should receive returns – get paid – because they own that capital. In addition, the more they take risks with that capital, the more they should be rewarded when they are successful. First, the fundamental principles of ownership and contract were replaced by a focus on smooth functioning of bureaucratic process. Secondly, the financial sector was able to decouple risk from reward; reward for taking risks no longer describes the origin of returns to capital.

Let me know what you think.

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