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

Quote of the day: On dispassionate analysis

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From Tyler Cowen, comes this beaut:

A while ago a few people drew a contrast between a more dispassionate style of (blog) analysis and a more explicitly moralizing approach.  I would frame it differently.  Pluralism reigns and there are many different moral values of import.  The moralizing approach tends to leave a writer stuck in emphasizing a single value or a single comparison of values.  The so-called dispassionate approach is more likely to lead the writer to see a broader range of values and moral trade-offs.  The moralizing approach is most of all impoverished when it comes to…morality.

 

Matt Nolan

Will current expansionary policy lead to “bubbles”

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An excellent post over at Marginal Revolution on this.  The points raised are:

1. If a more expansionary monetary policy helps an economy recover, yes it may well raise the risk of a later bubble.  We should then be cautious, but that is no reason to turn down the prospect of a recovery.  Anything leading to recovery could have a similar risk.

2. There are already plenty of reserves in the system and there is plenty of room for credit to expand over its current level.  Maybe we don’t know what triggers bubble-inducing investment behavior, but why should raising ngdp expectations and realities raise the risk of a bubble, if not for the factor cited in #1?

3. Arguably a flat yield curve induces a quest for higher returns elsewhere or in more dubious investment areas.  Yet the flattening yield curve did not follow quickly from the massive injection of reserves.  Rather it evolved slowly as prospects for real recovery deteriorated and the long-run outlook for the advanced economies turned down.  Real factors drove the flattening, and if monetary expansion brought a bit of recovery it likely would unflatten that curve a bit.  That could well lower the risk of a bubble.

4. I may consider Austrian theory, with regard to this question, in a separate post.

There are two points I would raise here though.

With regards to bullet three – although I agree that the flat yield cuve is likely the result of weak prosepects for the economy, we can’t really pretend that the long end of the yield curve is currently independent of relatively direct government involvement.  The Fed’s willingness to buy up longer term Treasury bonds in order to stimulate growth could indicate that the low yield curve is partially the result of intervention, rather than true expectations of long term inflation and growth propsects.

Interestingly, I agree with bullet point three – I think that if there were sufficient asset purchases we would actually see the yield curve steepen (through its impact on expectations).  But this is clear, or necessarily the mainstream, view of what is going on.

The second point is that bubbles aren’t necessarily bad – in any sense of the word.  They transfer resources between groups, groups who chose to take risk.  They lead to a change in the timing of investment, often in a way that is suboptimal – but not disasterous.  A “bubble” in of itself doesn’t lead to a failure of monetary policy, and it doesn’t lead to a large scale downturn – there are other significant factors that have lead to these things internationally, factors that were correlated with the bubble (maybe even related to it) but not caused by it!

jamesz

Models vs knowledge

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The Age reports on Australian legislation that forced banks to make ATM transaction fees explicit to the customer:

In place of the indirect fees were direct fees in which the owner of each foreign ATM took the money directly from our accounts each time we made a foreign withdrawal. But the size of the charge, typically two dollars, didn’t change. All of the economic models – including the Reserve Bank’s own model – suggested we would use ATMs pretty much as we had before. The incentives were much as they had been.

Instead withdrawals from foreign machines dived from around half of all ATM withdrawals to just 40 per cent. …A Reserve Bank study released yesterday says it’s behaviour that “cannot be accounted for by the model of ATM fees presented in this or any other existing paper”. To work out why, it has turned to research on retailing and a finding that point-of-sale displays can change purchasing decisions even when they convey no new information… The RBA’s tentative conclusion is that it is not the fee that is frightening us, it is being continually told about it.

  1. Framing effects such as loss aversion are hardly new so I’d be staggered if the RBA didn’t know about them.
  2. Just because your model doesn’t include an effect that you know to exist, that doesn’t mean it disappears or has no effect. It also doesn’t mean that you don’t know about it. I think we all know that being prompted to pay money affects behaviour so it would be surprising if the legislation was expected to have no effect. Of course, since it isn’t normally a relevant effect for the RBA they may well not have included it in their models previously. That doesn’t mean they’re idiots or didn’t know about framing.
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?

jamesz

How should interdisciplinary exchange occur?

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A question that’s regularly arisen of late is how economics can learn from, and inform, other disciplines. I think it’s been sparked by the prevalence of scientists commenting on economic growth. We’ve had numerous bloggers up in arms about Shaun Hendy’s semi-informed comments, and now the Royal Society is broadcasting a discussion of the matter.

Economists all seem to agree that it would be a good idea if scientists took the time to understand something about economics before making pronouncements. Where there is substantial disagreement is over the way in which the exchange with practitioners of other disciplines should occur. I don’t think there’s any doubt that disciplines borrow from each other in a fashion that is helpful to both. Witness the success in economics of optimisation and evolutionary game theory, borrowed from physics and biology respectively. The question is how that should occur. Read more