jamesz

More on slippery slopes and nudges

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In a follow up post about nudges and shoves Eric recommends a piece by David Friedman on slippery slopes that argues:

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe, possibly correctly, that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy to make the “wrong” choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice.

Essentially, the argument is that once you start meddling with people’s choices it’s very hard to avoid imposing your own views of the world. The idea behind nudges is that you help people to make the best choice from their own perspective, not yours, but that’s very hard to do in practice.

As far as it goes, that sounds very sensible and Friedman is probably right that people trying to nudge others are likely to stray in paternalistic territory. However, what the argument is missing is a plausible counterfactual. The choice architects will still need to frame people’s choices in some way. If they use nudges as their guiding principle then they will attempt to frame the choice to maximise the expected benefit to the person making the choice. As Friedman cautions, the architect may not be very good at divining the preferences of others and may end up being more paternalistic than they intended. But the alternative is not that the choice disappears, or that it is not framed in some way. The alternative must be some other guiding principle for framing the choice.

One possibility is randomisation, but there are many instances in which that will result in terrible choices for most people becoming the default. It seems hard to justify that position. A more likely alternative is that the framer will use their own preferences to guide the framing of the choice. The outcome is likely to be rather paternalistic and not at all to Friedman’s liking! It’s all very well to suggest imperfections in the mechanism for framing choices but imperfection doesn’t mean it’s not the best of the bunch.

jamesz

Markets for speeding and networking

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In Texas you’ll soon be able to pay less than the price of a speeding ticket to go faster.

If you’re a young entrepreneur then you might want to pay to contact influential people and be guaranteed they’ll actually read what you write. A former NZ diplomat has co-founded an internet startup to allow you to do just that. Interestingly, much of the fee you pay to contact them goes to the charity of their choice.

Matt Nolan

Some thoughts on housing

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I see that the latest Barfoot figures are out, and they are pointing to fairly strong sales figures in the Auckland region.  That’s nice. There are also suggestions that this is indicative of a bubble or boom coming into the housing market.  However, it is important to look at a broader view of what is going on, not just house sales for one agency in Auckland, in order to get an understanding of the what is really going on.

When looking at the housing market, there are a number of little points we need to keep an eye on.

  • The regional split: We have commonly been told that Auckland and Canterbury have a shortage of property – all else equal this pushes up house prices in these regions.  This is something we have seen happen.
  • Borrowing to invest?: In 2003, households borrowed heavily and developers started building heavily.  Now we have the opposite.  Yes, in the year to April households borrowed 30% more (in gross terms) to buy housing.  Yes, this was $45.4bn.  However, the stock of mortgage debt rose by a more modest $2.4bn more – or by 1.4%, below the rate of inflation.  Even as house sales and prices have climbed, households have taken the funds from sales to pay back mortgages – not to spend or build more houses.  SO, while we could use the rising prices and investment in the mid-2000’s to point towards a bubble, this time we have limited investment and an underlying shortage of property driving up prices – this is not a bubble, this points to a failure somewhere in the building or credit markets.
  • Credit conditions:  Mortgage conditions have eased, and competition between banks (along with low wholesale funding rates) has driven down the cost for households.  This sounds similar to what was going on during the boom time.  But even so – we have pointed out that increases in NET borrowing have been low (or negative in real terms).  On top of this, for various reasons credit conditions are tight when it comes to building houses – increasing the value of existing housing.
  • Quality, income, and constraints:  As the productivity commission noted, there are significant issues currently impeding activity in the building industry – and thereby pushing up prices.

When this combination of factors is taken together, it feels like we have a situation which is “supply” driven, with a shortage or property driving up values.  This compares to any perceived “bubble” which would be “demand” driven, with expectations of capital gains leading to excessive investment and excessively high prices.

This distinction is important when it comes to the actions of the Reserve Bank.  There are three questions they need to ask when looking where housing appears within the context of their goals of inflation targeting and financial stability:

  1. Are current interest rates consistent with the level of general demand in the economy? If the lift in housing market activity is supply driven, this suggests that interest rates should be lower relative to a situation where it is demand driven, with the increasing borrowing that entails.
  2. Is the current stock of debt, and banks attitude to risk in general, taking into account the full social risk associated with these elements?  The RBNZ has introduced a range of policies to help ensure this is the case.
  3. Is the regulatory regime that the RBNZ implemented possibility having a greater impact on domestic demand, or the housing/construction market than was previously expected?
Matt Nolan

Principles for talking to macroeconomists

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This article on stuff seems to throw down a great set of principles to keep in mind when talking about the New Zealand economy with New Zealand macroeconomists – in a way that intelligent people not versed in economic prose can understand.

They are:

  1. Commodities are our comparative advantage, they are what NZ is relatively better at making than other things.
  2. Monetary policy that targets inflation aims to set NZ in a “Goldilocks zone” where the economy isn’t running too hot (high inflation) or too cold (high unemployment).
  3. Don’t put too much faith on one data point, or even one data set.  To tell a story we need to explain why a full set of different figures are moving the way they are.
  4. As a small open economy, what is going on in the rest of the world is important!
  5. Economics isn’t about telling the future.  Economic forecasts are useful only insofar as they tell us about risks and describe what is going on – economists cannot tell the future.

All good points.  I think that number 4 (we are a small fish in a big pond) is the most important one to keep in mind for any of these conversations you may have, while number 2 (the Goldilocks zone) is the best, and easiest to understand, of the stated stories.

Good story, well done Stuff and the economists involved.

jamesz

Slippery slopes are dangerous places

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Apparently New York is banning large soft drink cup sizes to reduce sugar consumption and obesity. Eric has used this as a launchpad for a slippery slope argument attacking libertarian paternalism (LP). The original idea of Sunstein and Thaler was that you could design choices to minimise the likelihood of bad decisions without restricting choice. Every time people make a choice the person providing the choice gets to frame it. The premise is that, if they can do that in a way that helps people to make a good decision, then they should.

A ban on large soft drink cups would clearly not be a ‘nudge’ in the sense that Thaler and Sunstein mean it. It would restrict the choice set of diners so it’s purely paternalistic. That’s probably why Eric has pivoted to attacking the idea of nudges as being too easy for politicians to misinterpret:

For all the protests that “nudge” was supposed to have strong opt-out provisions, it was awfully predictable that it wouldn’t turn out that way in practice. I don’t know how much time Thaler spent working to ensure choice was preserved in his proposed choice-preserving architecture, but he did spend a bit of time telling libertarians that this sort of thing couldn’t happen.

This argument against LP is silly for a number of reasons.

  1. First, as Eric acknowledges, the proposed regulation doesn’t fall within the set of mechanisms described by Sunstein and Thaler. The ban isn’t within the ambit of LP.
  2. Secondly, products have been banned for health reasons since long before LP existed. Even if the ban can be described as LP, it would have happened anyway.
  3. Thirdly, misuse of a concept by others is a cost that needs to be balanced against the benefits of the concept when used appropriately. Even if LP is responsible for the ban, it may still be a helpful idea for motivating regulation

Thaler and Sunstein have pointed to many instances in which better choice architecture would result in welfare increases. Even if they can be held responsible for bans such as this — which I find a stretch — the concept could still be beneficial in sum. I’m reminded of the way many economic concepts are misapplied to justify investment in stadiums, limits on alcohol sales, or restrictions in foreign investment. I don’t hear many complaints from economists that the whole idea of economics is a slippery slope to terrible policy and I don’t see how LP is different: it’s a useful idea that can help shape great policy. Unfortunately, there will always be a few people who misuse it to further their own ends. That doesn’t make it a bad idea.

jamesz

What love for freedom?

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Chris Dillow blogs about the effect of freedom on happiness:

Does freedom make us happy? Two things I’ve seen today suggest not. First, a cross-country study of the link between economic freedom and well-being concludes:

“Economic freedom is significantly negatively related to life satisfaction if controlled for the influence of income per capita, unemployment, social trust, life expectancy and aging.”

Of course, controlling for income is a big control. The raw correlation between freedom and happiness is positive. The message is that economic freedom make us happy insofar as it makes us rich, but it has no intrinsic value for well-being.

It reminds me of something Gary Brecher wrote about in the context of modern, asymmetric warfare and why people fight:

People are superstitious tribalists. Democracy comes about 37th, if that. Nobody wants to face that fact: we’re tribal critters. We’ll die for the tribe. More to the point, we’ll kill for it. We don’t care about democracy. And I’m not just talking here about people in tropical hellholes like Somalia, I mean your town, your street. Most Americans are just like me: old-school nationalists. We want America to be Roman, to kick ass. The rest is for Quakers.

Those two things seem to go to the same point: pursuit of freedom is not a serious goal for most individuals. That really makes you wonder how such enormous decisions as going to war are justified on the basis of defending freedom and democracy. It’s far to big a topic to cover in a blog post and I have no expertise in the subject, but it does make me immediately think of Robin Hanson’s ideas about signalling status. Take a description of his position on health care and substitute in ‘democracy’ for ‘health care’:

And every single data point that passes by in the [freedom] debate does nothing but strengthen the position that Robin Hanson articulated: [freedom] altruism is a permutation of our evolutionary drive to “show we care”; or rather, make infrequent, and very large expenditures to show our loyalty to an alliance. The frequency has gotten greater as our society has gotten richer, but the underlying motive is still linked to our evolutionary roots.

Doesn’t that sound kinda plausible? I’m looking forward to learning plenty as the political scientists bring some real knowledge to bear here 😛