jamesz

AJR vs Sachs: the conflict drags on…

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Acemoglu and Robinson have proven to be extremely combative bloggers but they have, until now, refrained from engaging directly with their nemesis. Well, it seems they might have been harbouring a little bit of a grudge:

Several people asked us why we haven’t responded to Jeffrey Sachs’s review of Why Nations Fail. Well the answer was sort of in-between the lines in our response to Arvind Subramanian review: we said that thoughtful reviews deserve thoughtful answers.

Grab your popcorn and head on over for the full reply!

jamesz

Should student loans be bigger?

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I share Holly Walker’s concern about the plight of post-graduate students. She is disturbed by a new survey showing that

[post-graduate students] committed to finishing their study highlight[ed] concerns about being able to provide basic needs for themselves without access to the [recently cut student] allowance, such as food and shelter.

As Matt has discussed previously, it is hugely unfair that students do not enjoy the same safety net as the rest of society when they struggle to find employment during their studies. If they are making a genuine effort to find part-time work during their studies, they should have access to a benefit or allowance, just as anyone else does.

The more important question is whether they should be supported through their studies even if they choose not to engage in part-time work. In that case I don’t see a convincing rationale for providing free support to students. They are voluntarily investing in their human capital in anticipation of better opportunities for themselves in future. As we have discussed previously

[t]hree years after completing their degree, a bachelor’s graduate will earn 51% more than someone with only secondary qualifications. Someone with a master’s degree will earn 74% more and a doctoral graduate 120% more.

It makes sense that a person would invest in education to take advantage of those wage increases, along with all the other benefits of a tertiary education. However, it is hard to justify forcing the rest of the population to pay for their personal investment that they benefit from so greatly. Nursing school scholarships may be a good alternative for those wishing to save a bit.

Nonetheless, some people find it hard to raise the money to attend university, despite the likelihood of higher future earnings. That is why we have an student loan checker tool. If students are finding it difficult to pay their way during post-graduate study then it probably means that they are unable to borrow enough during their studies. That is because student borrowing is extremely expensive for the government, so the government limits its liability and costs by capping the level of borrowing. A simple solution would be to re-introduce interest on student loans, since the interest comprises the majority of the government’s cost of lending. That would allow the government to lend out more money to students at a lower cost.

Through that change we could allow students to live more comfortably during their studies, and ensure that the transfers to those, relatively wealthy, individuals do not become inequitably large.

Matt Nolan

Scarcity easing in manufacturing?

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For all the talk both within New Zealand and abroad not enough time is given to the hypothesis that it is in fact improvements in technology that are “hollowing out” the manufacturing sector … and that what we really need to help the unemployed is availability to skills training, rather than trying to prop up inefficient domestic jobs in current manufacturing industries.

And yet, there is an increasing amount of evidence that this is the case (via Matt Yglesias).

Increasing output with fewer inputs is a good thing – but when labour is one of the inputs involved we know there may be losers.  If this is really what is happening, then as a nation I would suggest that we try to integrate education and benefit policy more fully, stop demonising those who are out of work arbitrarily, and also stop talking about intervening to “create jobs” in industries that are likely to be long term losers … give people opportunities in this ever changing, and technologically improving, world.

This is, after all, the same sort of thing that happened with the primary industries – with less and less labour needed to dig up coal and produce food.  Work is a cost, it is the income people get from working with a capital owner that is missed when something like this happens.  And it is this fact that we need to keep in mind.

And yet in New Zealand we have one political party talking about subsidising manufacturing and the other political party talking about how lazy the unemployed are.   It makes me a sad panda.

Matt Nolan

Cliff notes on the financial crisis

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At work we are writing occasional articles for the fine people over at Rates Blog at the moment.  I’ve decided to focus on an issue that will get people irritated – an explanation of the GFC where I largely defend economists (although admiting that the mainstream missed the development of the shadow banking sector).

I’ve stuck with the view I’ve articulated in the past (as can be seen here with and with the links), but I’ve attempted to articulate it in a clearer fashion.  I’m aiming to have a related article out at some point trying to discuss why the crisis has persisted – after all in the article I’ve linked to above, if my explanation was true, the actions of the Fed and US Treasury should have led to the crisis being over by now.   My view is that policy failure in Europe put us on this darker and more persistent path.  The three other primary views are:

  1. Fed and US Treasury policies did nothing, and this is still in essence the same crisis.
  2. Financial crises, but default, are long and ardueous.
  3. This is irrelevant and monetary policy has just been too tight due to central bankers being more conservative.

I would note here that these views (including the one I posited) are not mutually exclusive, and each has a significant grain of truth to it.

Our explanation for the crisis matters right now because it determines what sort of policy response we think is right – which is the main reason why many analysts out there are purposefully “over-arguing” how confident they are about their explanation.  In truth, things are never as simple as they seem.

Note:  And before anyone starts saying that by defending economists on some level (even though I do appropriate blame on them as well) and therefore I’m being purely self serving regarding my own failure to publically warn about the crisis, I’d also note that I only started my job in 2007 – I was just starting to get used to data sources and writing about economics on a regular basis (including starting the blog) once the crisis had begun.

It would be in my interest to attack the establishment that was already in place and pretend to be a “fresh voice” – but unlike some economists around the world who seem quick to attack the rest of the discipine, and misrepresent the views of other economists to sell their own image, I’d prefer to take a bit more of a balanced view 😉 [this comment isn’t aimed at New Zealander commentators, just to make that clear].

jamesz

Is advertising evil?

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Vox says the data supports Matt’s priors:

There is an old debate in economic theory… about whether advertising increases or decreases the prices of consumer goods. Some have argued that advertising provides information to consumers, such as information on prices or the existence of products. This information increases the degree of competition in a market, and thereby lowers consumer prices. On the other hand, there is the view that advertising changes the preferences of consumers, for example by shifting demand curves outwards, increasing the monopoly power of brands or decreasing elasticities of substitution. All these effects should lead to an increase of market prices.
…
…advertising increased consumer prices in some industries such as alcohol, tobacco and transportation, in which the persuasive effect dominates. But it also decreased consumer prices in other industries such as food. …those industries which exhibit the informative price include more information in their advertisements, consistent with the interpretation of informational and persuasive forces of advertising.
…
The aggregate effect is informative, which means that, on average, advertising decreases consumer prices.

Also, a perspective from inside advertising.

jamesz

Devious pricing?

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Apparently UK supermarkets sometimes advertise deals that charge prices higher than the usual, listed price:

In the worst cases, Which? found that supermarkets doubled the shelf price of an item when they began promoting it as a money-saving multibuy. It found that Asda was selling a Goodfella’s Deep Pan Pepperoni pizza at a standard price of about £1, but when it went on to a multibuy deal, the price jumped to £2.50 for one or £4.50 for two.

What is conspicuously lacking from the report is the percentage of advertised deals that do not involve a saving. Mistakes happen, and there are plenty of ways in which a listed price could dip below the deal’s price if supermarkets regularly adjust prices. If only a few dozen examples of this could be found across the tens of thousands of deals that supermarkets advertise every year then I’d be tempted to chalk it up to errors, rather than devious pricing strategies.

Of course, it could be that supermarkets are systematically taking advantage of our decision heuristics, which would be far more exciting 🙂