jamesz

A technocrat and an economist

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Many economists are becoming increasingly technocratic in their desire to shape the economy to fit their favourite theory. However, behind their desire to improve the lot of their compatriots looms the shadow of public choice theory, scorning their efforts to shape public debate. Indeed, many libertarians are so persuaded by public choice ideas that they advocate limited government largely because they have no faith in elected officials. So can one both appreciate the consistency of treating public servants as our theory would treat anyone else, and at the same time believe in engineering a better state?

Dani Rodrik says ‘yes’:

There are three ways in which ideas shape interests. First, ideas determine how political elites define themselves and the objectives they pursue – money, honor, status, longevity in power, or simply a place in history. These questions of identity are central to how they choose to act.

Second, ideas determine political actors’ views about how the world works. Powerful business interests will lobby for different policies when they believe that fiscal stimulus yields only inflation than when they believe that it generates higher aggregate demand. Revenue hungry governments will impose a lower tax when they think that it can be evaded than when they think that it cannot.

Most important from the perspective of policy analysis, ideas determine the strategies that political actors believe they can pursue. … Expand the range of feasible strategies (which is what good policy design and leadership do), and you radically change behavior and outcomes.

Matt Nolan

Limited knowledge provides the limits to government

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There was an interesting article by Mai Chen in the Herald on Wednesday.  There is a lot of lawyer rhetoric in there.  The only reason I really noticed is that I was reading McCloskey’s “the Rhetoric of Economics” and just yesterday went through the chapter on Coase when the rhetoric of lawyers was discussed.   This explains this:

At a high level, it requires New Zealanders to agree on a vision for our society – the kinds of things which make New Zealand a place we want to live and raise our children. But the hard edge also requires that we measure our progress towards achieving that vision, and hold Governments to account on their performance against such measures.

Sounds good doesn’t it.  Pity it involves no conception of whether the vision is attainable or the underlying trade-offs involved.  The lack of discussion of trade-offs, or comparisons of counterfactuals, is a perplexing feature of this sort of writing for an economist – and makes the statement mentioned above absolutely useless for policy analysis.

This sounds harsh – a lot harsher than I mean it to be, and as a result I want to point out the positives here.  The sort of aimless push for a “vision” is poppycock at a surface level – but it contains a strong grain of truth that we should recognise.  Ultimately, the decision about what trade-offs society is willing to make should be made by society!

Measurement and quantification are areas this article is supporting – and I agree 100% with Mai Chen here.  By measuring things, and understanding them, we can:

  1. try to understand the trade-offs
  2. explain the trade-offs to the public is a (hopefully) transparent way
  3. express whether the actions of the institution that is government are representative of the will of the people.

Quantification is an important tool for this, and to be fair to Mai Chen you could interpret the term “vision” as a way of communicating these trade-offs in a way the public can understand.  Rather than being poppycock as I have described it, such description way in fact be the way forward!

But the key point here is not to let ourselves get obsessed with targeting measures so directly (although the any benefits should be quantified and tested), and guiding the economy.  We should base policy on the trade-offs that exist and what society desires.

However, our knowledge of these trade-offs is imperfect and as a result the actions of government should be cautious.  As Noah Smith said “caution about policy is very similar to doctors’ maxim of “first, do no harm.” As a doctor, you wouldn’t say “I can’t figure out how this organ is helping the body function, so let’s just take it out.””.  Remember, government is an institution that is intervening in the volutary trade of individuals and groups due to issues of equity or co-ordination – in the same way we don’t want a doctor arbitrarily fiddling with our body because he has “a vision” we wouldn’t want a government arbitrarily messing around with our ability to trade due to their “vision”.

 

Matt Nolan

Joining in on the robot pileup

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Here is me talking about robots.  Here is the conclusion:

One of the concerns is that even with current technology robots can essentially work for an implied wage of $4 an hour achieving many of the same tasks that a low skilled worker can achieve. If robots could do all unskilled work for $4 an hour, where does that leave our hypothetical low skilled worker?

Even in the extreme case, where there are a set of people who could never have the skills to be gainfully employed due to the arrival of robots, the answer here is not to stand in the way of the technological improvement.

The key question to ask is how does the individual live in a society where the “reservation job” now pays a lot less?

The simple answer seems to be that we allow people in this situation the opportunity to increase their skills, and where they can’t redistribute some of the gains from mechanisation to these people in the form of an income payment – where the income payment represents the fact that the “reservation job” that previously gave an individual a certain standard of living no longer exists.

The existence of an unemployment benefit, the existence of student loans, and the subsidisation of education are clear and consistent methods that society has already taken on board to deal with the possibility of the increasing mechanisation of low skilled work – and it is this these types of solutions that are appropriate moving forward, not an arbitrary call to stand in the way of technological innovation.

As a result, the rise of the robots is not something to fear, as long as society and the government that represents it are conscious of the changes that are occurring – and that they provide a security net for those who may otherwise lose out.

jamesz

Get out and shout about it

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Another study where the main question is whether you believe in their identification strategy.

Abstract:

Can protests cause political change, or are they merely symptoms of underlying shifts in policy preferences? We address this question by studying the Tea Party movement in the United States, which rose to prominence through coordinated rallies across the country on Tax Day, April 15, 2009. We exploit variation in rainfall on the day of these rallies as an exogenous source of variation in attendance. We show that good weather at this initial, coordinating event had significant consequences for the subsequent local strength of the movement, increased public support for Tea Party positions, and led to more Republican votes in the 2010 midterm elections. Policymaking was also affected, as incumbents responded to large protests in their district by voting more conservatively in Congress. Our estimates suggest significant multiplier effects: an additional protester increased the number of Republican votes by a factor well above one. Together our results show that protests can build political movements that ultimately affect policymaking, and that these effects arise from influencing political views rather than solely through the revelation of existing political preferences.

jamesz

Academies manipulate their intake

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The Guardian reports that

Some academy schools have been accused of manipulating admissions to improve results and using covert selection methods… A number of academy chains are seemingly more focused on expanding their empires than improving their existing schools.

Should we be surprised, and is it a major problem? On the first question, no, it is exactly what we’d expect. Through manipulating admissions and expanding their empires schools gain prestige and wealth. We may prefer them to do that through improving the attainment of students, but many will naturally attempt to use all possible means. The scope for doing so revolves around how closely the Government can contract for the outcomes it wants. As Hart, Shleifer, and Vishny say in their classic paper

…the case for in-house provision is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant, and when corruption in government procurement is a severe problem. In contrast, the case for privatization is stronger when quality-reducing cost reductions can be controlled through contract or competition, when quality innovations are important, and when patronage and powerful unions are a severe problem inside the government.

So the trade-off when allowing more autonomy to schools is between the benefits of innovation–through either cost reduction or observable quality improvements–and the costs of unobservable reductions in the quality or equity of service delivery. We can never eliminate the costs, although the Academies Commission’s report suggests ways to improve the current monitoring; nonetheless the cost-benefit analysis may still be positive. What the Commission’s report doesn’t address is the other side of the equation: the gains from innovation in education and the benefits to students. Weighing those against the costs to equity will be the real test of the academies. If most of their innovations turn out to be new ways to game the system then they will have failed. If, on the other hand, there are significant increases in the quality or cost-effectiveness of education then the gaming detected in this report may be a side-show. On the second question, the report doesn’t give us answers.

A related point, made by Shleifer, is that we need to be careful about understanding the counterfactual. It may be that some academies are always able to select better students by some means. However, the locally funded school system usually exhibits obvious segregation, too. Even if there is some selection in academies, that needs to be compared to the current system’s level of segregation rather than looking at it in isolation.

jamesz

Free driver externalities

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Martin Weitzman has a new paper out that introduces the concept of a ‘free driver’ externality in the context of climate change responses:

Climate change is a global “free rider” problem because significant abatement of greenhouse gases is an expensive public good requiring international cooperation to apportion compliance among states. But it is also a global “free driver” problem because geoengineering the stratosphere with reflective particles to block incoming solar radiation is so cheap that it could essentially be undertaken unilaterally by one state perceiving itself to be in peril.

It’s a really interesting idea but can it really be described as an externality? The distinction is important because the way you frame the problem defines the solution.

He is saying that the actions of one state to combat global warming could affect other countries, imposing an externality upon them. The paper goes on to say that a governance mechanism to resolve conflicts is required and propose a particular solution. That’s all fine, but why does Weitzman refer to it as an externality? Read more