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.