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A novel solution to the student loan ‘problem’

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In the 2005 election the Labour Government found itself in a very tight battle to retain power. In order to mobilise the student vote, Labour promised interest free student loans. The bribe assisted Labour in returning to Government for their third consecutive term.

At the time National called the interest free loan scheme “irresponsible”. Since coming to power in 2008, however, they have maintained the policy, presumably for similarly cynical political reasons as led to the policy being introduced in the first instance.

As a result of the policy, students have been encouraged to borrow more and pay back less. Debt has ballooned. There are obviously other factors to take into account, such as increasing student numbers during the economic downturn. Nonetheless, it is clear that when given the option of borrowing interest free money, those with student loans have limited incentive to pay anymore than the minimum from their loan, for which they might as well borrow the maximum.

What is National’s response to the perceived student loan problem? The introduction of a $50 administrative fee that student loan borrowers must pay annually. Note that National have also provided an incentive for students to voluntarily pay back their loans through a 10% discount on their loans.

I propose a rather simpler solution. Abolish the half measures currently in place and start charging interest on student loans again. Only then will the correct incentives be instilled.

Matt Nolan

Universal healthcare and superannuation, and the cost of thinking ahead

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If doing actions that reward a future self is perceived as costly could we justify these actions.  If thinking about our wealth, human capital, or ability to live in 10 years time is inconceivable, will me over consume now?

In essence this sort of discussion is saying that we discount our future selves TOO steeply (compared to whatever the underlying presumption of a “fair discount factor” is).  Is this a fair value judgment to make in policy?  It is not one I would make, but it appears to be the basis of some overaching policies such as universal healthcare and superannuation.

In this case, we don’t need to worry about a “moral hazard problem” even though (empirically) the actions of moral hazard will appear.  Why?  Because the actors aren’t thinking about the future selves and so these “inefficient” outcomes would have occurred in the first place!  Policy helps to correct this by transfering resources to our future selves to improve outcomes relative to the REAL counterfactual (rather than the idealized one where agents choose on the basis of our subjectively fair discount rate).

I think it is important to keep this issue in mind, because it is a closet behavioural assumption behind most policy.  If we buy this value judgment, then we will believe in a larger role for government then if we didn’t.

Matt Nolan

Maths and economics … again

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Not PC has a critique of the use of mathmatics in economics.  Critising the discipline of economics has been especially popular lately.  I have had engineers (and some physicists) call me up to tell me that we do economics wrong and we need more maths (to which my reply would be to look more closely at the methodology of your own discipline before even trying to apply it to our one).  I have had business people (and my dear mother) call me up and say that there is too much “voodoo maths” and economists need to work in real jobs first.

What I have found in common with all these criticisms is that their implicit view of what an economist does, and the point of economics, differs remarkably from my own.  The scope, methods, and reasoning behind economic analysis which we are imbued with at university most definitely differ from the scope, methods, and reasoning which I often hear people accuse economists of using/making.

Now I don’t agree with either side except my own here, as I think the current implementation of maths in the study of economics makes sense.  In fact, I don’t believe the level of maths is a fixed thing – it merely depends on what “language” people who use economics are willing to use.  This is because maths is merely a language.  Using mathematical form, economists are able to place down ideas and clarify thinking, as long as economists understand the implicit assumptions they make when writing out a mathematical model then this is a valuable way of doing things.

Rather than reiterating my defense of economics, I will link to things.  Here is where I last discuss math and economics, here I mention “Marshal’s view” of maths, which is close to the way economists still function.  Here is a set of links where I build up an idea of “what is economics“.  And before anyone says that predictive failure indicates that maths is an issue, I say that the purpose of economic language and discussion is trying to build a case for description and explanation.  There are a myriad of links saying this (*, *, *,*).

So the typical conclusion from this is that maths is useful in economics as it provides a powerful tool/language that allows us to set issues down – in the hope of being able to describe/explain relationships in reality.

Not PC adds another element though.  Specifically he counters by calling on the lack of causal inference available from pure mathmatics – however, when this is the case we have to rely on explicit judgments and theory.  In this situation we can DEBATE causality when we set up the mathmatical model – but it does not make the use of such models invalid.

That is why I always say – use the theory as much as possible before you get onto using the data.  Now I have no doubt that the data may then impact on the way you view the theory, there is a significant circularity problem here, but that is part of the reason why economists are so determined to formalise and set down in mathmatical stone the theoretical roots of their analysis.  And this is, of course, the main area where economics is trying to improve itself and evolve at the moment – hence why I don’t think there is an issue with training and research in the discipline per see.

Matt Nolan

Attacks from the left and the right on economics

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One thing I have noticed in my time is that people on the political left and right both attack “mainstream economics” with abandon.  This is good, as a discipline has to be able to explain itself widely and be willing to face criticism.

However, it is one of the elements of these attacks that interests me here.  Namely, how each side of the political spectrum attacks the “focus” of economics, or the framing – specifically in terms of the market and government.  Here is my oversimplified understanding of this element:

  • Left:  Economists are focused on markets.  They start from a place where markets are perfect, and markets provide the best outcomes and work from there – therefore they have a pro-market bias.
  • Right:  Economists focus on markets and resource allocation.  The focus on markets makes them dwell on policies that solve “market failures” rather than paying attention to the possibility of government failures!  As a result they have a bias to push policies that are anti-market.  Furthermore, by discussing the allocation of resources they drive the feeling that the economy can be controlled – which also leads to a bias towards government involvement.

I find both of these attacks suffer from the same problem, they avoid trying to understand why economists use the counter-factual they do, and the way economic analysis stems from it.

In itself, economics is not about giving policy prescriptions, it is about “trying” to “objectively” describe and explain an economic situation.  We find the elements of a market (which is the voluntary trade relevant to the issue at hand), and try to model them.  When then describe a “perfect counterfactual” and look at how these elements cause outcomes to differ.  We then do nothing.

In this case, the purpose of our counterfactual is to give some idea about how a more “realistic” outcome compares to an “ideal” outcome.  We do not say that the ideal outcome is possible, we do not say that any policies could move us towards the ideal outcome, and as strict economists we do not place hefty welfare judgments on the relative outcomes.  The counterfactual is solely there to allow us to describe, in some sense, how the elements in the model impact on the outcome – it helps us to describe.

The next stage is more “subjective” (I am putting commas around objective and subjective as even the “objective” analysis involves a number of subjective assumptions – but I digress), and it is not in the realm of economics per see.  Economists often move on to the policy analysis stage, but it is an additional element, that requires different skills than those that are central to economics.

The biases the left and right discuss tend from their view of the value judgments made by analysts at this stage of analysis – they are not relevant in a discussion about economists.  As a result, although the left and right often like to tarnish all economists with the same brush this is just not the case – economics is not the issues they disagree with here, but the value judgments made in the application of economic models.  The critique is of analysts they do not agree with, not the discipline as a whole.

Of course, I do not expect individuals with a political mind to ever properly accept or represent this significant difference – as there is too much satisfaction and political capital associated with attacking all economists 😀

Matt Nolan

A $150,000 pay increase?

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David Farrar states that this is how Labour has framed the idea of tax cuts – a $150,000 pay increase for Jack Paul Reynolds, and only a few dollars for the rest of us. David states that we must look at the macroeconomic impact, and that we can’t focus on who gets what, specifically he says:

If the debate becomes one of simply who gets how much, they will have problems

However, I think the debate about who gets what is important.  However, I do not think that it actually falls in Labour’s favour.

Jack Paul has specific skills, he is hard to replace, and is seen to add a lot of value.  The “elasticity of demand” for his service is very very high low.  Furthermore, he has a lot of high paying outside options – he has a good reputation as a CEO.  This means that his “elasticity of supply” is very high (note that I am using quite a discrete margin in this case).

What does this mean?  Well, when he labour income is taxed, the FIRM will pick up the tab – as a result his gross wage is representative of this.  Now this also indicates that, when taxes are lower, the tax payment by the firm will be lower.  As a result, over time his gross wage will adjust DOWN to represent this lower tax rate.

As a result, the direct impact on Jack’s Paul’s pay packet is likely to be very low proportional to both income and what other people receive.  It is Telecom that faces most of the “incidence of tax” in this case – not him.

As a result, a tax cut isn’t a $150,000 pay increase for Jack Paul.  Nowhere near in fact.  National should be using basic economics to debunk these sorts of myths, so that Labour can’t try to pitch it as a class war.

Matt Nolan

Technology: Dystopia or utopia?

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Nick Rowe has a great post on technology and labour.  Fundamentally, it states that, one day, increases technology and improving capital will replace labour, destroying demand for labour.  I was discussing a similar issue with Linuxlover on Twitter (and who blogs here).

Both men seemed to imply that such a situation could be a bad thing.  Linux lover told me of the “legion of unemployed”, while Nick mentioned a book that states:

It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labour, except for the labour of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects

However, I am not afraid of such an occurrence per see – in fact I am excited.  Why?  What is wrong with me?

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