jamesz

Progress is hard to measure

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Wellington Regional Council have recently published their Genuine Progress Indicator, which is intended to measure changes in regional well-being. Measuring well-being is very difficult and the technical documentation provided by the WRC shows how hard they have found it to overcome the challenges.

The GPI has been constructed by taking about 100 variables of relevance to well-being, normalising each, and averaging the 100 indices. The Council have declined to weight the aggregation because they recognise that people may disagree over the weighting. They seem to want to avoid arguments over the normative weighting decisions. Unfortunately, weighting everything equally is just as much of a value judgement as any other weighting system. For instance, the council consider the prevalence of smoking to be a negative indicator. Due to the equal weightings, a 1% decrease in smoking in the region would be as good for progress as a 1% increase in incomes, or a 1% decrease in unemployment. With other variables, from access to public transport to dairy farm soil quality, it seems unlikely that many people would agree with weighting them all equally.

There are plenty of other difficulties, too: ensuring comparability of the variables measured and selecting a baseline for normalisation, for instance. What these difficulties illustrate are the importance of value judgments in creating these GPIs, even when the architects try to steer away from making them. Each of us, given the opportunity to choose our own variables and weightings, could come up with a different result for the region’s progress. Because of that it’s hard to take the GPI seriously as a reliable measure of regional progress, except insofar as it is defined by the council’s own preferences.

jamesz

Black box modelling

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Nick Rowe is concerned that agent-based modelling (ABM) is a black box that provides no intuition and doesn’t really add to our knowledge:

Agent-based models, or any computer simulations, strike me as being a bit like [a] black box. A paper written by a very reliable economist where all the middle pages are missing and we’ve only got the assumptions and conclusions. I can see why computer simulations could be useful. If that’s the only way to figure out if a bridge will fall down, then please go ahead and run them. But if we put agents in one end of the computer, and recessions get printed out the other end, and that’s all we know, does that mean we understand recessions?

My question is how a model where you set the rules can ever be a black box? Shouldn’t the results always be understandable by reference to the initial conditions and ‘rules of the game’? Read more

jamesz

Economics envy?

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Apparently some historians want their discipline to become a predictive science. Because that worked out so well for economics back in the 60s.

What is needed is a systematic application of the scientific method to history: verbal theories should be translated into mathematical models, precise predictions derived, and then rigorously tested on empirical material. In short, history needs to become an analytical, predictive science (see Arise cliodynamics).

It seems the history of the social sciences rhymes as well as any other. Read more

Matt Nolan

Persistently high unemployment doesn’t mean the government should spend more

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With the unemployment rate coming in at 6.8% in the June quarter, the unemployment rate has been “persistently high”.  There are three broad mechanisms we can “blame”this on:

  1. A “supply shock” across the economy (eg high fuel prices, financial crisis)
  2. A requirement for a reorganisation in the skills needed in the labour market (eg the permanent part of the drop in demand for NZ retail, NZ manufacturing)
  3. A “lack of demand” (insufficient monetary policy loosening).

We can all paint our own pictures that appropriate blame between these factors – but ultimately I’m not going to do that.

Instead I will point out that there is no where here that arbitrary government spending helps – and then I will point out three ways that government policy can “automatically lean” against these problems.

You see, an increase in government spending based on debt stimulates “demand” insofar as monetary authorities do not respond to it.  They do not help to buffer NZ from supply shocks by creating new goods and services, they just work on that “demand side”.  So as long as our central bank is doing a good job (and our central bank is doing a pretty good job for all intents and purposes), there is nothing the government can add here.

However, what things can the government have in place that help out:

  • A safety net that helps to limit the welfare cost of losing your job
  • Countercyclical investment:  So the government invests in infrastructure by hiring services for hydroblasting road markings when it is cheap and easy to finance – they stick to a “long-term plan” of infrastructure … just time more of it to happen during lean times.
  • Training and skill guidance:  When there is a “reallocation”, wages will go up more in some sectors than others to signal there is scarcity – however in the modern economy people need a skill set to do this, and investing in this is a risky endeavor.  During a slow down this problem is especially acute – as firms are unwilling to invest in building employees skills.  As a result, if the government is going to spend, this seems like an appropriate place.  Such a view should be seen as structural policy, and any help during a recession would be automatic rather than legislated at the time.

Lets not be like policy makers in other countries where we fight over budgets without thinking about “why” the policies will work.  Lets take this framework and run with it – like we suggested on this blog in 2009 (, ) … 😉

jamesz

Olympic economics

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Tyler Cowen and Kevin Grier make some predictions:

  1. Medal totals will become more diversified over time. The market share of the “top 10” countries will continue to fall (it was 81 percent in 1988) as economic and population growth slows in the rich world. The developing world has greater room for rapid economic growth, and most parts of the developing world also have higher population growth. The Olympic playing field will get more and more level.
  2. Japan will continue to fade, mostly because of aging and population shrinkage.
  3. Italy will follow Japan for similar demographic reasons, as well as because the Eurozone crisis will continue to cut into budgets, training and otherwise.
  4. Since Rio is host to the next Olympics, Brazil should do better than expected due to the “pre-host” bump.
  5. Many African nations will rise. Currently about half of the approximately 1 billion people in Africa have a cell phone, and the middle class is growing. The chance that an African star will be spotted and trained at the appropriate age is much higher than before. Africa also continues to grow in population, and that means lots of young people. Most of us still think of African nations as very poor, but infant mortality has been falling and per-capita income rising across Africa for the better part of a decade now.
  6. China will level off and then decline as a medal powerhouse. In less than 15 years, the typical person living in China is likely to be older on average than the typical person living in the United States, in part due to the country’s one-child policy. As of 2009 the number of over-60s was 167 million, about an eighth of the population, but by 2050 it is expected to reach 480 million people older than 60, with the number of young Chinese falling. The country will become old before it is truly wealthy.

With some small edits that could almost serve as a prediction of the changing face of global politics, too.

jamesz

Public battles are such fun!

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If you read this blog you’ve probably heard of Acemoglu, Johnson, and Robinson’s (AJR) work on development economics. You may even have read their magnum opus (minus Johnson), Why Nations Fail, and if you haven’t then I highly recommend it. They’ve also started a great blog to support the book.

But even better than that, they’ve started engaging in public battles with other major names in the field! The thesis of Why Nations Fail is that the prosperity of nations is largely determined by the quality of their institutions. Jared Diamond, of ‘Guns, Germs and Steel’ fame, wrote a largely positive review in the New York Review of Books but made sure to remind us of his own thesis. He spends plenty of time explaining how geography is the underlying determinant of the institutional composition of a nation, thus undermining the work of Acemoglu and Robinson.

They then had a scathing reply to the editor published, which rolls out arguments that they’ve rehearsed many times in their academic sparring with Jeff Sachs. Finally, there is the response from Diamond to their criticisms of his thesis. I won’t ruin it with quotes so click through and read the whole thing for yourself.