Thursday, 18 December 2014

Cost-benefit analysis and impartial umpires

In contrast to his fiscal rules, Osborne has had enormous success with his greatest fiscal innovation: the Office for Budget Responsibility (OBR). It was created in 2010 and has been successful in curbing the problems of over-optimistic forecasts that plagued the Treasury through the 2000s. Its ruthless transparency has lent credibility to the government’s plans and, in only a few years, it has grown in stature to the point that it can openly rebuke the Prime Minister and force changes in the Budget with its forecasts.

Expanding the role of the OBR, commensurate with its growing stature, would help overcome the fits and starts of UK fiscal policy. Where rules are fragile and inflexible, institutions grow and evolve in response to circumstances. As the OBR continues to perform effectively and its credibility rises, it can sustain a greater burden of responsibility for holding the government to account. Already, it has cross-party respect and support: last year, the shadow chancellor Ed Balls asked it to inspect the budgetary pledges of each major party ahead of the election. That is surely a good idea.

Assessment of opposition and government policies is a role already performed by similar bodies overseas, such as the Dutch CPB. The CPB is nearly 70 years old and has gradually taken on a central role in analysing the implications of election manifestos and Budget promises. In America, the Congressional Budget Office has also expanded its purview over time. Both provide indispensable analysis of the implications of the government’s policies and proposals, describing the trade-offs and estimating the costs.
Bryce Wilkinson and Khyaati Acharya here at the Initiative made the case for a New Zealand version.

I'd love such a body to act as clearinghouse for cost-benefit analyses. Regulatory Impact Statements vary in the quality of cost-benefit analysis; there are always ways of getting the number over the line if the Ministry's particularly keen - just consider the Australian East-West rail link. You need an impartial arbiter to make sure that the cost-benefit analyses are being undertaken to a common standard across Ministries.

Further, since few Ministries have in-house capability to conduct these analyses, they often have to outsource it to private consultancies. At least one of these consultancies has a reputation for providing the number that the client wants rather than one that's sound. But Ministries can't pay the piper unless they know the tune, or unless somebody who can read sheet-music has a look over things afterwards.

Here's a simple rule that could work. Submitted Regulatory Impact Statements would be required to include a cost-benefit analysis for any rules with substantial effect. That cost-benefit analysis must be vetted by Treasury, or by a new Fiscal Council, with enough of the workings provided by the Ministry or the consultants to allow for replication and sensitivity tests. Treasury is working up new guidelines for cost-benefit assessment; that would be the benchmark. If the cost-benefit analysis fails to pass muster, it's sent back to the Ministry. And consultancies that produce cost-benefit assessments that fail to meet the standard more than, say, one time for every ten reports produced, are put on a naughty sheet barring Ministries, government agencies, SOEs, local governments, regional governments, or any other part of the government I've missed here, from engaging their services for a few years.

Further, for a cost-recovery fee, that same agency should be able to vet analyses produced for private sector clients. A failed report there could get the tagline "Had this been produced for the public sector, the consultancy producing it would be barred from producing further analyses for any government agency for two years." And that tagline could follow it in all public discussion of that report.

I think the naughty sheet would do a lot to improve the standard of cost-benefit analyses in New Zealand.

Wednesday, 17 December 2014

The gender wage gap and hours worked

From my piece with Bryce Wilkinson in last week's National Business Review:
Suppose a management consultant pulled you aside and said, “Hey, have I got a deal for you. With this one simple trick, I can lower your labour costs by 14% and it won’t cost you a dime in productivity. Trust me, I know what I’m doing.” You’d probably be a little sceptical about the claim, or at least I would.

Statistics released in the last week by the State Services Commission reportedly found that the pay gap between men and women in public sector management roles averaged 14%.

Sadly, there are few one-simple-trick paths to success. More rigorous analysis of gender pay gaps that accounts for differences in work experience, training, time outside of the workforce, choice of industry, and hours worked generally wipes out the bulk of the headline pay differences.

The recently released New Zealand Income Survey data also makes things very clear. Hourly earnings for full time male employees, at $23.97/hour, is only about 6% higher than women’s $22.54; women in part-time work, averaging $17.26/hour, beat men’s $16/hour. Much of the headline pay gap comes from that more men are in full-time work rather than part-time work.

Treasury released analysis a fortnight ago showing that Working for Families (WFF) has reduced the number of hours worked by married women. Prior to WFF, among married men in employment, about 10% worked part-time, 59% worked a 40-hour week, and 32% worked a 50-hour week. For women, 55% were in part-time work, 30% worked a 40-hour week, and 15% worked a 50-hour week. None of those figures changed greatly with WFF, but women in part-time work shifted to working fewer hours, and about 9000 married women dropped out of the workforce entirely.

In a lot of professions, wages start climbing substantially for employees willing to put in the longer work-weeks, as economist Claudia Goldin pointed out in her 2014 Presidential Address to the American Economic Association. Much of the measured pay gap comes down not to discrimination, but to choices.
Update: NBR subscribers can catch it here.

A few relevant links:

Tuesday, 16 December 2014

Kreskin Cosh

Well, Colby Cosh called this one before it happened, didn't he?

Cosh from last week:
The point is not that Bismarck [subject of many assassination attempts] was particularly hated, although he was. The point is that this period of European (and American) history was crawling with young, often solitary male terrorists, most of whom showed signs of mental disorder when caught and tried, and most of whom were attached to some prevailing utopian cause. They tended to be anarchists, nationalists or socialists, but the distinctions are not always clear, and were not thought particularly important. The 19th-century mind identified these young men as congenital conspirators. It emphasized what they had in common: social maladjustment, mania, an overwhelming sense of mission and, usually, a prior record of minor crimes.
From the Sydney Morning Herald on yesterday's hostage incident:
Manny Conditsis, a Sydney lawyer who represented Monis last year when he was charged with being accessory to the murder of ex-wife Noleen Hayson Pal, told ABC News that Monis was an isolated figure and "damaged goods".

"His ideology is just so strong and so powerful that it clouds his vision for common sense and objectiveness," Mr Conditsis said.

"Knowing he was on bail for very serious offences, knowing that while he was in custody some terrible things happened to him, I thought he may consider that he's got nothing to lose," he said.

"Hence participating in something as desperate and outrageous as this."

Monis had an extensive criminal history, which included being charged with 50 allegations of indecent and sexual assault. He had also been engaged in a protracted battle to overturn his conviction for sending offensive letters to the families of dead Australian soldiers between 2007 and 2009. 
BK Drinkwater also claims, ex post, to have gotten it right:
One potential lesson from the whole thing?
I could support shifting funds from spying over to mental health support. I doubt it would have helped in this case, as Monis looks to be somebody who really should have stayed in prison for a very long time. But it does seem a better general-purpose technology. This image sticks with me:

Friday, 12 December 2014

Bah humbug

I led the affirmative charge at the GEN debate on the following proposition: "This house believes that the Christmas Extravaganza is a waste of time and money." We didn't get to pick our sides, but I didn't mind partnering up with Patrick Nolan from the Productivity Commission.

As Bronwyn Croxson from Ministry of Health was leading the charge for the opposition, I attempted a pre-emption of her most likely argument. Even though her side wound up taking more votes at the end, I'm pretty happy with my mind-reading. But I did not expect that she would give gifts of chocolate almonds to the audience to sway the votes. Well played, Bronwyn. Anne-Marie Brook from Treasury was second for the opposition.

Had I had a chance to provide a closing statement before the vote, it would have been this:
I agree entirely with the opposing team on the value that can come from gifts. If you believe, as I do, that people can manage to do good things for each other without the quasi-coercive Christmas to force the issue, then you should vote for the motion. If you're a pessimist about human nature and think the only way that these will be provided is by forcing it through Christmas, and that the gains from that outweigh all the losses I've talked about, you should vote for the opposition. 
Had I been more confident in my mind-reading, I'd have had it at the end of my opening statement. I should have been more confident. Bronwyn made exactly the move I'd have made in her place, as I expected.

Here's the notes I'd made for myself for the debate. I varied from them as always, but here they are anyway.
The Christmas Extravaganza is a waste of time and money. What a waste of a season. Christmas has a lot of faults. Economists have known for at least two decades that the most prominent part of Christmas – the gift exchange – has some serious problems. But that’s just the start of it. Aside from the wastefulness of the gift-exchange, which I’ll touch on in a bit more depth and which Patrick will go through a bit more thoroughly, we also have substantial problems arising from bunching and clustering of holidays, to the detriment of both work and vacations.
 Because the wastefulness of the Christmas gift exchange is so very well established, I thought I might try to make the best case I can against it. Again, Patrick will hit it in a bit more depth with more recent data, but the standard argument runs as follows. The person best placed to decide how to spend his money is the person himself. Consequently, it would be remarkable if any gift-giver could provide a gift that the recipient would value more than cash. Cash can be transformed into anything the recipient really wanted. Bad gifts, not so much. And surveys show that gift recipients put less value on the gift than its cost. If I had been given the other side of this argument, what would I have said? I’ve always been a bit of a Christmas-sceptic; this has given me a chance to check my intuitions. So here’s the best argument I can give in favour of Christmas gift-giving. I’m not trying to set up a strawman here; I’m sure the other side will have come up with better arguments for Christmas. But here’s the only argument I currently think stands against the “Inefficient gifts” critique. 
Even if survey measures show that recipients put less value on the gift than the gift cost the giver, the fact that millions of people around the world choose to come together to give each other gifts at Christmas is prima facie evidence of that the whole process provides some kind of value to givers and receivers. Otherwise, why would they be doing it? The big point that the gift-inefficiency argument misses is that the giver gets enjoyment from giving the gift. The receiver’s enjoyment is only part of it: there’s a selfish aspect to giving too. It doesn’t have to be as selfish as the time that Homer Simpson gave Marge a bowling ball that he expected her to let him use, but there can be selfish joy in seeing somebody else enjoy something you’ve given them. The twentieth century’s greatest economist, Gordon Tullock, noted the super-efficiency of charity. If you give a dollar to charity, you must get at least a dollar’s worth of enjoyment out of the gift – or you wouldn’t have given it. The receiver also gets a dollar’s value out of it because it’s a dollar. So the anti-Christmas economists say that the recipient might only get 70 cents out of it rather than a dollar: you still likely have well over a dollar’s value, all up. So what’s the problem? 
There are a couple of rather substantial problems with that argument though, and they both stem from the fact that Christmas isn’t really entirely voluntary. Sure, there’s no law forcing you to participate, but not all coercive social arrangements are enforced by law. We can show this pretty easily by counterexample. Imagine going home, after this debate, and telling your partner,
“You know what? Those economists, they convinced me of something really important today. We shouldn’t give each other presents this year. You and I both know that we’d do a better job spending the money on ourselves, so instead of sending oblique hints to each other about what sorts of gifts might be appreciated, let’s just call the whole thing off.” 
If you think that’ll work, you might want to get the number for a marriage counsellor before you try it. Unless your partner’s also an economist, it’s not likely to go over really well. Even harder could be suggesting doing away with expansive gift-giving with the extended family. If two-person bargaining can be difficult, adding in more people doesn’t do a lot to make it easier. Whether or not you believe the case against Christmas, even broaching the subject with your family is dangerous. It could be taken as a signal of disloyalty, or even that you might not love them as much as they’d thought.
 And, the stakes are high. Divorce filings are most common right after Christmas. The owner of one website for divorcees says “I see a huge increase in pageviews and searches the day after Christmas. People start looking for information before the New Year starts, but they can’t do much until the attorneys are back in the office.”
 Ultimately, I think the whole gift-exchange process is best thought of as a costly signalling exercise where failure to signal is very costly. In a better world, we could show our loved ones how well we understand them and how much we love them by providing thoughtful gifts and gestures whenever we encounter a good potential one. Christmas forces the issue not only for those who haven’t provided such a signal, and perhaps should, but also for everyone else. And if you blew your one great thoughtful-gift idea earlier in the year, well, Christmas could be painful. In that kind of world, for a lot of gift-givers, we shouldn’t be worrying about having missed their joy of giving in the Calculus of Christmas, we should instead be worried about having forgotten to add in the brain-wracking expense of trying to come up with a gift that will meet the threshold – and cash sure isn’t allowed.
 And if you find the right gift at the wrong time, do you buy and hope you don't lose it before Christmas? Even if you can find it again at Christmastime for wrapping, the recipient still could have enjoyed it for months before Christmas if you could have just given a thoughtful gift at the time that you found it. But you couldn’t, because you’d then still have to figure out something for Christmas, and serendipity might not strike twice. But wait, there’s more! Even a giftless Christmas is destructive because of the whole "silly season" effect. The month before Christmas is a mad office rush of getting all the projects done before all the critical people disappear - AT THE SAME TIME - and holiday parties that bite into the time needed for the project-finishing rush. Loud brass bands on Lambton Quay make you wish for the agnostic's missile from the Monty Python sketch. Outside the office, when you've little option but to take holidays between Christmas and New Year's, everybody else is taking theirs at the same time - even if the weather is terrible and they'd have preferred holidaying in February. And so we have wrecked the economics of a lot of holiday destinations: huge peak load issues where smoothing over a broader season could work better. The roads are a nightmare. Everywhere's booked up, inducing ever-earlier pre-booking of venues in an arms race. And nobody's holiday is as enjoyable as it could be. Are the coordination gains from having a day or two off for extended family things really substantial enough to merit all this?
 The superior alternative? A Festivus for the Rest Of Us. One day. One pole. No tinsel.

My slides ended with Frank Costanza's words of wisdom:

I really should have given our Festivus stories as example of that you can really do all this without the Christmas part.


Thursday, 11 December 2014

OECD on inequality

Whenever a small country gets mentioned specifically in an international report, that report there gets noticed.

A new OECD working paper claims that income inequality hurts economic growth, and particularly hurt New Zealand growth. Note that this is a working paper rather than OECD position.

Let's walk through their method a bit before discussing.

They use a new OECD panel to estimate effects. Growth, and everything else, is measured at five year intervals from 1970 to 2010.

Rather than use standard fixed-effect OLS modelling, they use a System Generalised Method of Moments approach. I've not used this approach before but here rely on their description: it combines first differenced equations with a set of lagged first-differences of the explanatory variables as instruments.

They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn't hurt growth, that changes in human capital (education) do not affect growth one way or another - there's a slightly negative effect of education on growth in the set of specifications, but it's not significant; and, investment doesn't affect growth one way or another.

The set of results is then a little surprising. We usually expect investment to matter a lot for growth - both in physical plant and equipment (investment) and in people (education). They find that neither does anything and that the only thing that matters is inequality.

Further, when they break things down a little, what seems to matter most is the difference between 4th decile income and average income rather than incomes at the top. Incomes in the 9th and 10th decile relative to average income do nothing; differences between the fourth decile and the average matter hugely.

And now we start getting into the plausibility checks. Does this set of results really make sense?

By what mechanism does a sharper gradient between income at the 40th percentile and average income translate into worse growth? Imagine that we took this as policy conclusion: increase the tax on average earners to give money to people slightly poorer than them. Does that seem reasonable? They argue that the effect runs through reduced investments in education in the lower decile cohorts when income inequality is higher, but they found no effect of education on growth. Further, the countries examined, like New Zealand, went through rather a few changes to tertiary education over the period - from free tuition to tuition to student loans. All of these would affect lower-tier access to education, and none are accounted for.

The paper goes on to argue that its results on education must be wrong because everybody knows that education matters, then makes a strong case not for income transfers, but for increased spending on education. And they hang that case on other papers finding a strong effect of education on growth - but that also find that inequality increases growth!

I've a specific concern also about the use of New Zealand in this time series. The potted history of New Zealand inequality and growth. New Zealand growth rates tanked from the late 1970s through the early 1990s as first Muldoonism then necessary restructuring put a pretty high cost on the economy. The Muldoon stuff was nonsense. The economic restructuring set the groundwork for strong growth in the 90s and through the 2000s, but was really really painful. It was painful for laid off workers, and it was painful for a whole pile of firms, both large and small, that had to reinvent themselves for an open and free market. Them ships don't turn on a dime, and so growth tanked.

At the same time as NZ growth rates tanked due to restructuring, incomes at the top jumped - in part due to changes in tax and accounting that brought some of that onto the books where it previously had been hidden, and in part due to that folks with the skills to adjust to the new environment started being compensated for it. That rise in inequality happened almost entirely from 1985 through about 1992, after which it wobbled around but didn't have systematic trends.

If we look then at a long run data series, we get a big increase in measured inequality in New Zealand at the exact same time as economic growth takes a nosedive. Once the growth in inequality stops around 1992: blammo! Growth starts again.

Is it any wonder, then, that a regression approach based on reduced form fixed effect estimation with no dummying out of the reform period or other adjustment for it would find huge effects of inequality on growth in New Zealand? It's stuff like this that's meant that more recent academic work, unlike OECD working papers, has been shifting to use of microdata within countries to try to figure out what's causing what. I don't think the OECD papers get us there.

I note that I have profited from conversations with Matt Nolan on this, though I'm to blame for all errors here.

Update: Here's me and Tim Hazeldine agreeing about the report's merits over at Morning Report.

Tuesday, 9 December 2014

The Asylum creeps in: health and safety edition

A reader emails me that the revised health and safety regime, which brings criminal penalties for company directors, will also apply to voluntary organisations. He writes:
I know you write periodically about crazy laws and being inside the asylum. As you might know, I'm a scout leader. A volunteer. One of things that I have enjoyed in scouting is the ability to let children and youth take risks. You know, tackle bullrush, climbing trees, crossing rivers, hiking, making and playing with gun powder, making their own bows and arrows (one shot an arrow clean through a window without breaking it :) ) and so on.

They keep making changes to health and safety laws which potentially undermine the ability to do this. The first was throwing in volunteers in the Health and Safety in Employment Act back several years ago. That added to our paperwork and probably did restrict some activities at the margin (but not hugely), which was a pain at the margin but that seemed to be all. But they are currently making a couple of other changes which increases costs to volunteer organisations and I'd predict the benefits are negative once they take into account lost consumer surplus from eventual changes and reductions in volunteer activities. You can find one mentioned at  

and another at 

They might not have any impact, but.....! Since volunteer organisations fall under the jurisdiction of the health and safety in employment act you can see why the sentencing act changes are a potential problem for them. It also seems to me to undermine the no-fault basis of the ACC scheme. I think ACC has some problems, but the no-fault provision is incredibly useful in not having to worry about frivolous lawsuits to extract payments to avoid the costs of the suits going to court, which then result in noticeable restrictions on people's activities, such as children playing where there is any tiny risk of an injury!
The link to the Manawatu Standard article has since died; I don't know whether they pulled it because the government has issued a very recent clarification, or if some other error has occurred. Can anybody confirm how the changes to legislation will be affecting volunteer organisations?

I also found a press release from an insurance company warning outfits to get liability insurance because ACC no longer shields against lawsuit:
Ms Cross says that under the previous legislation even the most serious accidents would rarely result in reparation awards over $100,000, “but with this new law, the figures are likely to be significantly higher.”
Ms Cross says that businesses should seek advice from their broker whether their statutory liability policy has the required level of cover, as this amendment will have potential impact when there is a breach of the Health and Safety legislation.
She pointed out that companies would not be able to insure themselves against any penalties but could get insurance that would cover reparation and legal costs.
Ms Cross says she will be working closely with her clients at Crombie Lockwood to prepare for this law change.
“At this stage it is still a bit unclear how the courts are going to use this new tool, but you wouldn’t want your company to be the guinea pig.”
I'd thought that the basic deal with ACC was that we gave up our right to sue in exchange for a mandatory kinda-ok-but-really-kinda-not insurance programme, with the whole thing making sense because U.S.-style tort excesses are worse. I suppose that potential damages are here limited: if the most that a party can be liable for is 20% of the total ACC claim, and if ACC doesn't really pay that much, then potential liability stays below that in the States.

Monday, 8 December 2014

The voice of presumption

In an editorial co-written for the Australian and New Zealand Journal of Public Health, published yesterday, Dr Boyd Swinburn says scientists who represent the voice of the public in policy-making are being shouted down by large commercial interests and their views suppressed by attack campaigns.
In what sense do public health researchers, as earnest and honest as they may be, in any way represent "the voice of the public"?

At their best, public health researchers provide useful scientific data that can help individuals in assessing trade-offs, and that can also help inform policy as one of many considerations in the policy process.

But "the voice of the public"?

I suppose if that self-perception is common on the public health side, it explains a bit of how they come to the policy debate.

I'm far from convinced that either elections or polls can provide "the voice of the public", or that such a thing can even exist. People's views are too varied - thankfully. And there's that whole set of impossibility theorems on aggregating social preferences into any kind of "voice of the public".

As for being shouted down, it would be an interesting exercise to compare newspaper column inches of "large commercial interest attack campaigns" versus column inches of public health campaigners complaining about WhaleOil blog posts.

Swinburn continues:
In the article, co-authored with Australian professor Michael Moore, Swinburn said: "A blanket of suppression is insidiously descending on the voices for public health."
First, there were the interests of transnational corporationsand then there was the Government, which wanted to control public health information and messaging, Swinburn said.
While working in Australia's Deakin University, Swinburn said he experienced efforts to have reports cancelled or watered down and funding pulled, and he said that had started happening in New Zealand.
"There needs to be voices that are based in science standing up to that and speaking on behalf of the public," he said.
"There are plenty of voices on behalf of the commercial interest. But the number of voices on behalf of the public are getting fewer and weaker."
This is actually a tough one.

Suppose the government honestly contracts for some piece of research, the researcher produces and honest and true answer, and the government then suppresses it because politics. That by all accounts is bad.

Now imagine a contrary case where the government contracts for some piece of research, but the researcher produces a report that is, frankly, embarrassing: it would fail to withstand any rigorous scrutiny. Worse, the government's having funded the work could give it imprimateur if it were released. If the contracting agency then demands changes or wishes that the report not be released, that's different from efforts to water things down.

From the outside, a report's suppression in the two cases looks identical. The researcher in the second case would claim that the first case obtained, and the government in the first case would claim that the second case obtained. I suppose requiring rigorous truly external peer review on reports - and not just rubber stamps - is one way of preventing the latter but not the former.