Matt Nolan

Political scientists caused World War II

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I keep being told that economists caused the financial crisis.  Sometimes I get blamed as well, but I usually have the excuse that I was in New Zealand when the housing market started to fall apart in the US.

As a result, I’ve been trying to think of similar statements.  A discipline that aims to describe the economy, and the interaction of individuals given scarce resources, is being blamed for “causing” a financial crisis – one which the vast majority of economists had nothing to do with, and no money involved with.

So I though we could blame political scientists for WWII.  After all, they analyse political systems, and different nation states with different political systems did end up fight WWII.

Have you guys got any other ideas?  I was also thinking:

  • Seismologists cause earthquakes
  • Botanists cause erosion
  • Physicists cause black holes
jamesz

Invalid opinions

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IF you follow the econ blogs in New Zealand you’ll have seen Matt and others getting pretty grumpy about the uninformed comments sometimes made in the media. That has only been exacerbated by the recent misunderstanding of quantitative easing. A philosopher writing in the Herald sums up how I think economists feel:

If “everyone’s entitled to their opinion” just means no one has the right to stop people thinking and saying whatever they want, then the statement is true, but fairly trivial. …But if “entitled to an opinion” means “entitled to have your views treated as serious candidates for the truth” then it’s pretty clearly false… [because it] implies an equal right to be heard on a matter in which only one of the two parties has the relevant expertise.

Economists are technical experts but work in a field that affects everybody’s daily lives. So, much like doctors, they have to cope with everybody thinking they’re an expert without a shred of real knowledge. And, just like in public health debates, credence is given to groups who have an opinion but no expertise. Understandably, economists get frustrated!

However, we need to be careful where we draw the line between those with expertise and those without it. Read more

Matt Nolan

Free food in schools: Equality of opportunity?

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Recently the Labour party has suggested we have free food in low decile New Zealand schools.  At the same time, Kiwiblog suggested that this was nonsensical.

So how do we should we view this policy?

Generally, having the government buy something and give then give it out is relatively inefficient – we get no clear signal of the “value” associated with it, and the lack of clear discipline often leads to the government over spending on the service.

However, we could provide this same argument for the provision on “education”, or the provision of healthcare, or the provision of roads.  In each case, we are willing to move away from strict market provision for a reason.

We need to think about primary and secondary school education more clearly to get a good idea about the policy of free lunches.  Why do we provide this sort of education, and what does public provision achieve?  We provide this type of education to ensure there is equality of opportunity for individuals in society.  On that note, having shared lunches at school ensures the same thing – we know that appropriate nutrition at a young age is essential for the physical and mental development of an individual.  We know that, especially in low decile schools, there is a definite “underinvestment” in this attribute for kids.

Now we may feel that it is due to families having insufficient income, and we may say that instead of free lunches a more appropriate solution would be to increase benefits and transfer payments.  But is this the whole explanation?  Potentially the real limiting factor is time, parents do not have the time, or information, to provide their kids with lunches in this case.  If this was the case, then ensuring that the school provides lunch would save these parents the time, ensure that food is provided, and would benefit from “scale” in the provision of lunches. For families that needed help getting food we taught them how to apply for food stamps in louisiana. To be honest, as an individual I have always thought the provision of lunch at school makes sense from an equality of opportunity standpoint – you ship kids off to an institution for most of the day, we may as well make sure that the institution provides the services required.

Personal responsibility is a very important thing, but when it comes to children and education there is only so far such an attitude can take us.  I agree with this Labour party policy for the most part, although I wouldn’t just have it in low decile schools – I would probably make it an option for all schools to spend part of their budget on.

 

Matt Nolan

Defending inflation targeting

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After seeing David Parker claim that inflation targeting was dead, I felt obliged to chip in with my two cents – which Rates Blog kindly allowed me to do.

In the article I looks at the critique of RBNZ policy based on “imported price spikes” and “credit flows” and point out how the RBNZ framework for this does makes sense – and does not need a change.

My conclusion shifts the blame for any perceived imbalances:

The determination to change what the Reserve Bank does is surprising to me. Our central bank helped to guide New Zealand through one of the largest global shocks imaginable, helped to keep our core banking system together, and by all but the strictest measures they have achieved their monetary policy mandate.

A clear target for monetary policy, a respect for their role in financial stability, and their credibility with the public were the things that helped them achieve this. It makes no sense to turn around and change what the Reserve Bank is doing after such a success.

Instead, those in government should be looking at themselves.

Policies to favour investment in residential property (through tax status and other regulatory focuses) helped to drive the “imbalances” New Zealand faces.

A failure to take into account population aging is making the government fiscal situation look increasingly unsustainable.

Transfers to the middle classes, which we may feel are fair, still come with a cost – bidding up house prices, and reducing capital investment.

If we want to explain the “imbalances” in the country, and what should be done, we need to look at government policy, and the interventionist policies taking place overseas – the monetary policy of the RBNZ is an unrelated scapegoat.

Governments aren’t honest about the costs of their policies.  The decision to introduce working for familes, and generally increase targeted spending, reduces inequality – but it reduces economic activity and “competitiveness”.  We may believe these transfers are fair, that is fine, but no amount of blaming the RBNZ will change the trade-off we face.

Politicians are either lying or are naive about the trade-offs – either way, their bleating is giving you the wrong information, and it threatening to disestablish the institutions that have helped New Zealand do relatively well in the last 20 years.

Matt Nolan

Incentivised employment schemes

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Via Danyl on Twitter (from Dimpost) we have been offered the job of justifying specific incentive schemes for people currently out of employment.  The brief went as follows:

Whoever comes up with a policy-based excuse for the MSD Minister to shove beneficiaries’ heads down a toilet on live TV will be a rich man

In the interests of better public policy, helping those less fortunate, and becoming rich men – TVHE is taking it upon ourselves to discuss the benefits of this obviously positive scheme, the “pro-active employment incentive scheme“.

Now on the face of it, public humiliation seems like a terrible thing to do to someone.  However, it is important not to let moral considerations get in the way of an objective analysis of the facts – which will then allow us to weigh up the costs and benefits of the scheme more appopriately.

We have to realise that, when a scheme is put in place we can’t just look at some perceived “cost” that people who are currently beneficiaries would bear!  Undeniably, people would change behaviour given the possibility of having their heads shoved down a toilet, and our modeling suggests that the change in behaviour would make people better off then they are in the situation without this credible threat.

So, in the interests of clear and transparent accounting, here are bullets of the expected benefits of this scheme:

  1. A significant increase in beneficiaries moving into work:  This increases economic output, and increases the welfare of the individual by improving their human capital – which they are currently not taking into account when looking for work.
  2. An increase in labour productivity among the current workforce:  Knowing that Kentucky unemployment comes with an additional cost, employees will spend less time on facebook and more time enjoying the process of creating output.
  3. A drop in labour force participation:  If you can’t find work, leave the labour market or get dunked in a toilet – in this situation some people will leave the labour market.  On the face of it this may seem like a bad thing, however we know that New Zealander’s work “too much” – if we have some people leaving the labour market altogether, this may well lower the average number of hours people are working!
  4. Consumption benefit to the viewing public:  Even if no-one ends up getting dunked, the idea of it will excite the public, satisfying a well know urge for public spectacles.

Of course there are costs, these are:

  1. The direct cost of being dunked and embarrased.  Our modeling suggests this is an insignificant issue.
  2. The cost of free-to-air TV:  Having to pay TV stations is a cost, however this issue is outside the scope of the study, and merely suggests setting a price somewhere.
  3. The cost of the minimum wage:  A minimum wage will ensure that some people who do not want to be dunked can’t find work!  As a result, this cost can be removed by removing the minimum wage.

As we can see, there are 4 bullet points in favour, and 3 against – two of which are pretty much irrelevant.  Compelling evidence in favour of a “pro-active employment incentive scheme” such toilet dunking and public wedgies.

Note:  None of this is serious.

Matt Nolan

Ethics and description

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In the past couple of days I’ve run into a couple of places in the internet that left we confused.

First, via Education Directions I noticed this article on the way of “valuing assets” that takes into account social value.  The claim is that:

Western accounting needs to recast the narrow, individualistic and economically bound concept of asset, claiming that much would be gained from recognising that there are things of value beyond those defined by individual property rights and economic reckoning

This seems like an aimless statement to me.  Private individuals value their asset based on issues of private value – this is hardly surprising.  Government takes into account concepts of broader “social value” when they do accounts, or look at the value of policies.  What methodological value is there from using a different word for social value to describe it?

Giving things new names doesn’t actually add value to how we describe them, unless the context is to translate these broad concepts for a cultural specific context!  In truth, it isn’t “western accounting” that needs to learn from this – if the government is trying to work out social value, then we would want to use standard western accounting methodologies with these specific cultural contexts in mind.

Now don’t get me wrong, the willingness to attack “western” accounting immediately shows that the authors want to attack an arbitrary strawman, than to credibly discuss what organisations are trying to achieve with accounting values and then asking how to transparently represent that.  And this brings me to my second link – Buddhist economics.

Contrary to the description given of “western” economics on this post, there is a focus on “social value” in mainstream economics – there is a huge focus on it.

But the very description behind Buddhist economics here is worse than that – for some reason the author of the Wikipedia page has decided that the purpose of economics is to tell people how to live their lives, rather than describing scarcity and trade-offs.  Given this, the article finds fault with economics because it dares to assume that people act in a self-interested way.

Of course, we’ve seen this ethical confusion before – a million times.  People presume that since economists are willing to discuss trade-offs we lack morals.  Now, a clear moral and ethical standpoint IS required to decide on what SHOULD be done, and what policy SHOULD be picked by government.  But everything that I keep seeing economists attacked for, and in this case accountants as well, is merely describing something.

Now does this happen because people find it hard to distinguish between description and prescription?  Or is the issue that people think economists framing of issues IS the driver of certain ethical outcomes in policy, and that our pretense of separating “description” and “prescription” is flawed?