Matt Nolan

Mankiw is right again – this time on prediction

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This time on how Economics as an academic discipline will not have to have the wholesale changes some peoples are suggesting.

He is right when he says the focus of economists and economic teaching is not on prediction.  However, I would also say that economists HAVE sold the idea that they can predict when talking to people, even if they personally realised this isn’t the primary role.

In some sense this comes back to Friedman.  During the positivist revolution in economics he stated that it didn’t matter so much what we assumed – as long as it was predicatively accurate.  Furthermore, our “value” for policy analysts and the such has often been tied to predictive accuracy.  Here we never agreed with this.

There are two ways to understand current economists methinks:

  1. Economists want to explain and understand – and that is where the value is:  This fits the academic economist view, but often ends up with no predictions.
  2. The Tarot card view:  This fits what economists do when they have to make predictions.  They use archetypes (models of aggregate behaviour), historical knowledge (data), and intuition to get a feeling of where the economy will head and the risks around it.  Even the more technical models (think DSGE models) have elements of this.

Both these services have value – by building knowledge and understanding.  But economics as a discipline should be based on its ability to adequately explain and provide understanding – not its ability to predict (especially given the issues with data).

Economists add value by describing, explaining, and painting risks – but they do not have magic time traveling powers.

This all reminds me of:

http://www.ritholtz.com/blog/wp-content/uploads/2009/09/economics03.jpg

Source (previous post)

Matt Nolan

Taxi cameras, why?

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Ok, so the government is making it compulsory for taxi drivers to put cameras in there cars right?  They are doing this because some taxi drivers have been tragically injured – so its a safety issue.

But if its in the driver’s interest to have the camera, and they are the only ones getting a benefit from it, then surely they would only do it if the benefit of putting in the camera exceeded the cost.  In which case, regulating for them to put cameras in is either pointless, or forces taxi drivers to do something where the cost exceeds the benefit – and so is suboptimal.

What am I missing?  I must be missing something here, so just point it out to me and I’ll be happy 😀

Eric Crampton discusses here.

Matt Nolan

NZ scorecard: Hold up a second

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NZI gave New Zealand a C mark (ht Kiwiblog).  My response was “ok, whatever really, although it is a pretty site”.  This has told some people that the government should turn around and randomly do things.  My response to this is “what?”

Now don’t get me wrong here, the site is very pretty.  But I don’t see any reason for policy intervention on the basis of the arbitrary, subjective, grades provided by the site, with no actual analysis of the trade-offs that New Zealand faces.  Now I’m not sure if NZI actually asked for intervention, they have in the past, but I’m not going to pin it on them this time.

This time it was Fran O’Sullivan.  I do not know how she gets to this point:

Frankly, the metrics the institute has dug up on this score are deeply shocking and suggest that unless there is a co-ordinated response from Government at central and local levels, many more Kiwis will find themselves compelled to look outside NZ to build their futures – particularly in Australia.

I was under the impression that she fell on the New Zealand right.  Again this draws me to the question, “when did NZ’s right become communist“.  This isn’t a centrally planned economy, the government doesn’t directly control the allocation of resources.

Now, a government can influence the allocation of resources indirectly through policy – but any policy is likely to have trade-offs.  As a result, if the government is looking at putting in a policy we should be trying to get a good idea of the costs and benefits associated with said policy.

This arbitrary call to arms on the basis that New Zealand is different to other countries is ridiculous.  The goal should be to have the best society possible (based on the desire of New Zealanders) given our limited means.  To do this we need to look directly at the costs and benefits on policies – instead of simply saying “we are behind Australia so something must be done”.

Update:  Ok, NZI said it as well: “And there is still no convincing strategic plan in place to improve performance”.

So just a note, New Zealand isn’t a corporation.  Policy is based on trying to, in some sense, maximise welfare given the limitations of data, the countries limited means, and the fact that we have to use imperfect democratic or revealed preference mechanisms to get a feeling for what people value.  Individual policy changes must be on the basis of weighing up trade-offs, I can’t see how a general “strategic plan” comes into this.

Where does this distinction come from.  Well a corporation MAKES the products and sells on the market – the government doesn’t.  The government acts to redistribute and change the nature of the situation where production takes place.  Again, “strategic plans” are for Soviet Russia, individuals, and businesses, not free democratic societies …

Update 2:  Actually, the main point I forgot to make (as I was so busy talking about how the govt does not control NZ like a corporation) was:

Cross country comparisons (which this is) are notoriously hard to make because

  • data is inconsistent,
  • the trade-offs nations are willing to face differ,
  • the actual endowment of resources, and the trade-off associated with choices, differ between nations.

Given this these comparisons are a valueless exercise, and we should spend our time trying to understand the trade-offs inside New Zealand and make good policy based on this knowledge.

Matt Nolan

Excellent example of price discrimination

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Via the Freakonomics blog comes the following picture:

Source.

At first glance this seems weird, they are charging different prices for the same thing!!!  However, as anyone with experience of vending machines and universities knows, these puppies provide a lot of service to students late at night.  In fact, it is typical for sections of the machine to sell out before nightfall.

As we know that the first people to the machine will pay the lower price, we can also say that once the cheap chips sell people will have to pay more.

Now, given that the local tuck shop will be closed by night time we know that the number of substitutes to the vending machine falls at night.  As a result, this pricing system ensures that the owner of the vending machine can charge more for the same chips at night time (assuming of course that the cheaper chips will sell out during the day time when substitutes are available) – when people value them more highly and are willing to pay more.

Excellent stuff.

Matt Nolan

Foreign investment explained?

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Well, it isn’t explained by this cartoon.

Source:  NZ Herald.

Lets assume, for the sake of argument, that New Zealanders aren’t racist.  In this case, I can’t see the problem with “foreign investment”.

Think of it this way.  There are private individuals that happen to be New Zealanders that own things.  There are private individuals that happen not to be New Zealanders that would like to buy these things, and guess what – they value them more highly than the New Zealanders do.  So they trade.

So what the cartoon misses is that this stuff wasn’t ours to start with, it is being sold by its owners to a buyer who values it at a higher level.  Applying a feeling of ownership on the basis of nationalist sentiment is weird.

Update:  So New Zealanders should be “economic patriots” aye.  Right …

Paul Walker agrees.

Matt Nolan

I’m sick of this …

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Serious, what in the hell.  I am sick of reports that talk about these massive benefits of government spending without actually looking at them in context with, you know, opportunity cost.

I was annoyed with the way a PWC report was used, and now this release on a Covec report is similarly dodgey.  The report is probably fine (although I have not had the good fortune of reading it), and probably defines exactly what they are looking at and why – I have faith in NZ economists.  But this:

Williams said the report showed that the Government’s contribution to a rescue package should be at least 25 per cent because the tax receipts would make it cost-neutral.

It makes me angry.  So angry I am going to avoid writing any more as I will end up viciously attacking politicians such as Mr Williams for obvious mis-information.

The only reason to get involved is real externalities, doing a partial eqm analysis and saying the tax take rises involves ignoring where the hell the tax comes from and the opportunity cost.  Treasury is right when they say this is neutral.

Update:  Paul Walker comes out in favour of this irritation.

Update 2:  Covec report is found here, and pdf here.