jamesz

Progress is hard to measure

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Wellington Regional Council have recently published their Genuine Progress Indicator, which is intended to measure changes in regional well-being. Measuring well-being is very difficult and the technical documentation provided by the WRC shows how hard they have found it to overcome the challenges.

The GPI has been constructed by taking about 100 variables of relevance to well-being, normalising each, and averaging the 100 indices. The Council have declined to weight the aggregation because they recognise that people may disagree over the weighting. They seem to want to avoid arguments over the normative weighting decisions. Unfortunately, weighting everything equally is just as much of a value judgement as any other weighting system. For instance, the council consider the prevalence of smoking to be a negative indicator. Due to the equal weightings, a 1% decrease in smoking in the region would be as good for progress as a 1% increase in incomes, or a 1% decrease in unemployment. With other variables, from access to public transport to dairy farm soil quality, it seems unlikely that many people would agree with weighting them all equally.

There are plenty of other difficulties, too: ensuring comparability of the variables measured and selecting a baseline for normalisation, for instance. What these difficulties illustrate are the importance of value judgments in creating these GPIs, even when the architects try to steer away from making them. Each of us, given the opportunity to choose our own variables and weightings, could come up with a different result for the region’s progress. Because of that it’s hard to take the GPI seriously as a reliable measure of regional progress, except insofar as it is defined by the council’s own preferences.

Matt Nolan

Persistently high unemployment doesn’t mean the government should spend more

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With the unemployment rate coming in at 6.8% in the June quarter, the unemployment rate has been “persistently high”.  There are three broad mechanisms we can “blame”this on:

  1. A “supply shock” across the economy (eg high fuel prices, financial crisis)
  2. A requirement for a reorganisation in the skills needed in the labour market (eg the permanent part of the drop in demand for NZ retail, NZ manufacturing)
  3. A “lack of demand” (insufficient monetary policy loosening).

We can all paint our own pictures that appropriate blame between these factors – but ultimately I’m not going to do that.

Instead I will point out that there is no where here that arbitrary government spending helps – and then I will point out three ways that government policy can “automatically lean” against these problems.

You see, an increase in government spending based on debt stimulates “demand” insofar as monetary authorities do not respond to it.  They do not help to buffer NZ from supply shocks by creating new goods and services, they just work on that “demand side”.  So as long as our central bank is doing a good job (and our central bank is doing a pretty good job for all intents and purposes), there is nothing the government can add here.

However, what things can the government have in place that help out:

  • A safety net that helps to limit the welfare cost of losing your job
  • Countercyclical investment:  So the government invests in infrastructure by hiring services for hydroblasting road markings when it is cheap and easy to finance – they stick to a “long-term plan” of infrastructure … just time more of it to happen during lean times.
  • Training and skill guidance:  When there is a “reallocation”, wages will go up more in some sectors than others to signal there is scarcity – however in the modern economy people need a skill set to do this, and investing in this is a risky endeavor.  During a slow down this problem is especially acute – as firms are unwilling to invest in building employees skills.  As a result, if the government is going to spend, this seems like an appropriate place.  Such a view should be seen as structural policy, and any help during a recession would be automatic rather than legislated at the time.

Lets not be like policy makers in other countries where we fight over budgets without thinking about “why” the policies will work.  Lets take this framework and run with it – like we suggested on this blog in 2009 (, ) … 😉

Matt Nolan

A problem with “advertising bans”

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Over at Offsetting, Eric mentions that there is a view that we need to start banning fast food advertisements.  Personally I think this is a dumb idea, but when it’s people’s job to make up arbitrary interventions to “save the world” they will.

More importantly, it reminds me of one of the first posts I wrote on the blog:

So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

Advertising creates value.  Also, I haven’t mentioned here that advertising provides information.  There may be a case to regulate advertising given perceived misinformation, or we could even stretch this to a concern about children (as long as we are honest that this belief is based on targeting “bad parents”).  However, even when we head this far an advertising ban is overkill.

Remember, the goal of policy is to “maximise happiness”, where what gives people subjective happiness may differ from what we believe or assume – not to make people do the things we want, and target things we don’t like.  This involves using mechanisms that allow people to reveal preferences (markets for example), and avoid bans and direct regulation as a last resort.

Matt Nolan

Journalist ideological, can’t read

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This seems like an insulting and bigoted statement – and it is.  It is an arrogant statement that reflects more poorly on me than anyone I could be writing about!

I just felt that if I was going to write about this piece discussing inequality in healthcare provision by Auckland University, I should start with a title that is in the same vein as the authors first sentence:

Economists have proven it’s cheaper to let Maori children die than spend money to provide equitable health treatment.

Seriously, they are writing about a piece that identifies inequities in the provision of healthcare services, and states that the cost of ensuring equal treatment would cost $25m (in net terms).  If we take treatment of other groups as the level of treatment we want to provide to be “fair”, then this is the cost of ensuring that this fairness is given to all groups – given whatever reasons they’ve identified for unequal treatment in our healthcare system.  The press release by Auckland University is here.

Do you get any of this from the journalists article?  No, not really – they even mess up the tenses, essentially stating that the government “would save” $25m by putting inequalities in place … when the research is merely describing inequalities and talking about the costs of remedying them.  There is further discussion on “economic impact” which try to sell why we should change policies, and I wouldn’t want to go into them in detail without looking at the work – however, giving the impression that these authors want to perpetrate further inequality through this first sentence is insulting, not just to the academics involved but to anyone who does this sort of work!

I would normally ignore the nonsensical ramblings of a journalist on issues they don’t understand, but they had to go and attack “economists”.  We get this crap all the time, the very fact we are willing to discuss and mention trade-offs makes people who can’t be bothered thinking convinced that we cause the trade-off.  By daring to say that increasing the provision of healthcare costs money, the journalist has decided to give the impression that the economist at Auckland Universtity (who was working in conjunction with people from other disciplines) is immoral.

Personally, I think writing articles piled with misinformation based on an unwillingness or inability to read a university press release has a larger degree of “immorality” than an economist discussing trade-offs.

Matt Nolan

“Sluggish” credit growth, where does NZ fit in?

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Via Tyler Cowen on Twitter was this article, combined with the comment “credit growth sluggish”.  The view here is that the 4% growth in private sector credit is too weak when compared with historic averages – and that the goal of the Fed should be to focus on the “quantity of credit” here, rather than target the price.

Now in New Zealand we have similar data here.  According to this, private sector credit growth was 2.3% year-on-year (or 3.2% if we exclude repurchase agreements – which is preferable IMO).  This compares to a decade-long average of 7.3%pa (8.3%pa), and if we were solely quantity focused this would seem insufficient.  [Note:  I did decade instead of history, as the implicit inflation target moved significantly over the decades – a factor that pushes this figure around.  Would be best to look at “real growth” for a longer-term focus]

I’m not concluding anything from this per se – it is just interesting that NZ analysts are running around getting concerned about inflation and rising credit growth, while analysts in the US, who are observing stronger credit growth than we are, are generally complaining that more needs to be done.  Tbf, their unemployment rate is a lot higher, and their output gap is correspondingly larger (presumably).

But with underlying inflation in the lower end of the RBNZ’s target, credit growth numbers objectively soft, and the unemployment rate undeniably elevated I feel that the inflation calls may be a touch overplayed.  [Note:  A relative price lift in construction due to a rebuild in Canterbury is not inflation – it is a signal of scarcity, as prices are supposed to be].

Matt Nolan

Careful reading statements – the July 12 OCR

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Over at NBR, Rob Hosking suggests that the RBNZ is saying a couple of things following today’s statement – a couple of things I believe they are not saying.  Implicitly these are:

  1. Relative to June, the Bank wants a lower average official cash rate in the coming years (so a lower track, and potentially a cut to the OCR).
  2. The Bank feels that the “neutral” interest rate is lower (as this is how a level of the OCR goes from stimulatory to not stimulatory).

The reason for this view is the change to the last line of the statement between June and July – it has gone from having “stimulatory” in it to not having stimulatory in it.  This is true, but I feel it is being taken out of context – note that in April stimulatory was also missing.  Furthermore, the rest of the statement is banging on about how the Bank’s view is unchanged since June … a pretty clear signal that their view is unchanged.

In order to flesh out the argument Hosking states:

It suggests the OCR is going to remain lower for longer, especially when put alongside economic forecasts in the previous statement which said New Zealand’s capacity for economic growth is now lower than previously because of high debt levels and the need to rebuild from recent shocks, both economic and geological.

It is true that the RBNZ “lowered potential”.  However, lowering potential implies that the Bank needs to do less to stimulate the economy – not more.  All other things equal, lowering potential growth output, or shrinking the output gap, suggests that rate will be HIGHER going forward – not lower.

Although I appreciate that it is difficult to read these statements, and that Hosking is right to try to read into slight changes in wording by the Bank – I feel that the interpretation he has given to today’s statement goes a little too far.  In truth, the Bank has reiterated what they said in June – rates are staying at current levels for a while, unless Europe goes bang.