New interventionism

Excellent post and picture by the Economist.  First the picture:

Then the post:

Mr Cable has a point. It is hard to fault measures, like the Automotive Council and the HVM, that correct what economists call “collective action problems”—where firms can only solve their difficulties by clubbing together to share costs and risks. By inviting joint bids for funding, the government is encouraging businesses to form such talking shops. On the same day that Mr Cable gave his speech, for example, a group of 242 employers in the creative sector announced a proposal for a co-investment partnership.

Yet however scientific the spending decisions, the risk of faddishness or cronyism will exist so long as politicians are the ultimate paymasters. Creating lists of priorities, even when their purpose is to root out market failures, can generate new distortions: if the government supports eight great technologies, for example, what happens to the ninth? And why invest in specific skills that fallible businesses think they need when Britain suffers from a shortage of employees trained in general disciplines like maths that can be applied across a wide range of industries?

The new interventionism is one of the few areas on which all three main parties agree—making these questions all the more pressing. On September 18th Nick Clegg, the deputy prime minister, told the Liberal Democrat conference that “businesses across every region are being given billions to help them grow.” Such talk is worrying—and smacks of the age-old urge to throw money at problems. That is the thing with industrial activism: for politicians elected to “do something”, it is much harder to own up when inaction, not action, is the best policy.

As individual, hell as economist, it is tempting to think about how government can get things going, or to view society as one big optimal control problem.

But let us be a bit more careful.  There are limits to our knowledge – both of the impact, and what the impact “means”.  If we are not careful the determination to improve outcomes for the society we all care about can quickly become the determination to create work which provides us income, which other people in society are being forced to pay for.

Government is a institution that helps with co-ordination.  So are firms, co-operatives, communities.  Within this, implied prices help to determine this coordination (either shadow prices or explicit prices – prices are at least implicit even with government choice) – let us make sure that we keep this in mind, and that we ensure our explanations remain consistent within areas of policy advice.

Government has a role in delivering services and helping co-ordination when the broad public asks for it, but we have to be incredibly careful that we have a consistent and accepted argument for intervention before doing so.

Of course, this is where New Zealand is good – policy advice is careful, considered, attempts transparency, and there is a recognition of limits!  As the public we should always be poking and prodding to find out more though :)

Note:  I’ve seen people commenting on the Economist article saying “that is what a democratic organisation can do” and “should do”.  I appreciate that argument but we can take it too far, as a result I think there is some confusion here.  If every party decides they want to do this type of intervention with specific businesses largely behind closed doors then society hardly has a choice, and they are forced to allow this sort of experimentation to occur.  The government is extractive in that sense.  Even if society is pro the concept, then we also need to make sure there are safeguards in place to avoid this becoming “subsides for business”.

A large institution that convinces the public it controls their everyday lives, extracts resources from them to transfer to businesses who rub them up, and does so under the “faux coordination” claiming a democratic mandate is not really what we picture when talking about a democratic regime.  Instead, that sounds more like the United States ;)

  • MillAhab

    Clearly I can’t drag myself away from TVHE at the moment!
    Matt you may enjoy the following article:

    http://www.strategy-business.com/blog/The-Source-of-Organizational-Dysfunction-Revealed?rssid=all_updates&gko=a9124

    In particular the statement: “cited brain research that showed the human mind simply can’t grasp all of the complexity of a semi-lattice arrangement in a single design exercise. Our brains evolved to simplify complexity in order to identify threats in the environment. We can’t design organizations that formally incorporate all their complexity”

    This is the risk with these interventionist mechanisms – we (as in a discreet groups of individuals) don’t have the sense to know what we don’t know.
    Also as an aside as anyone at TVHE given any thought to how their can be a geniune housing shortage (as in providing a roof over a head) in Auckland if the latest census data indicates population growth has been much slower than previously thought? It seems to me that the better explanation (which is the one Dominick Stephens has put forward on more than one occasion) is that property owners are choosing to hold multiple properties in the expectation of capital gain.

    • http://tvhe.co.nz/ Matt Nolan

      “Clearly I can’t drag myself away from TVHE at the moment!”

      And I’m very happy about that – big fan of comments!

      “This is the risk with these interventionist mechanisms – we (as in a discreet groups of individuals) don’t have the sense to know what we don’t know. ”

      This is a very good point, our unwillingness to accept the limits of our knowledge sometimes is a bit uncomfortable.

      I’m glad you posted about brain research, as the entire idea of action, choice, and the unconscious is going to be a massive part of future debates – if we accept that the unconscious mind does a couple of things:

      1) Helps determines preferences

      2) Runs a model that helps inform, and sometimes directly set, choice

      Then our implicit view of this model informs the way we view policy! I am noticing more people use “unconscious choice” as a means to say we need intervention – but this is not necessarily true, both for the reason you’ve mentioned, and the fact that this “model” may be different than the one they are relying on for their conclusions!

      I aim to post on this at some point!

      “Also as an aside as anyone at TVHE given any thought to how their can be a geniune housing shortage (as in providing a roof over a head) in Auckland if the latest census data indicates population growth has been much slower than previously thought?”

      I am not sure that the stock of population in Auckland is necessarily lower than we had previously thought – we knew that population growth had slowed from 2001-2006 already, and the Auckland figures were “relatively” strong from what I’ve seen.

      The weak rental growth over the past year is the best data point favouring Stephens view – and I think it is a compelling view about the rate of growth in prices over the past year. However, the level of house prices was elevated prior to this – and rental growth had been pretty strong previously – to me this points to a ‘shortage’ in level terms as well. The arguments don’t have to be mutually exclusive – and my impression is that for Westpac they aren’t ;)

      • Shamubeel Eaqub

        Re the housing ‘shortage’, like Matt says they aren’t mutually exclusive. However, if Auckland’s population is say 2% lower than previously thought (based on the electorate count; official Census estimates due 15 Oct), then the size of the ‘shortage’ is smaller. As a rough rule of thumb, it would be 30,000 fewer people and 10,000 fewer households/houses.

        • http://tvhe.co.nz/ Matt Nolan

          Indeed – post the 15th is going to be interesting! Glad they’ve moved that forward.

          • MillAhab

            Economically speaking what is the difference in the market between a shortage of 20 houses vs. 20,000? If the market has been assuming 20,000 and it is closer to 20 what effect might that have?

            As for neurological/psychological research on behaviour and decision making I think it is absolutely fascinating and as society moves more into the world of ‘big-data’ surely as you say these areas will receive even more attention and research? Perhaps behavioural economics will become even bigger than the micro/macro kind?!

            • http://tvhe.co.nz/ Matt Nolan

              I’d note that the term “shortage” is being used in a bit of a cheeky way – it is just implying that housing is relatively scarce for some reason. Namely that it appears the price of existing houses are above their implied replacement cost for some reason!

              The 20k figure simply that that, for a given occupancy rate (#people per house) the stock of housing would need to be X, but instead it is Y which is 20k lower. If it turns out that the stock is in line with the occupancy rate we instead need to ask why there is that price difference – consent laws and zoning restrictions will still be relevant even with 0 shortage, due to the fact they increase replacement costs for a given property!

              Policy responses should be different though – having the govt just “building houses” would likely not be helpful, and would be pretty wasteful in this case. This is why the “numerical shortage” argument is very popular with policy makers – gives them an easy ‘solution’ ;)

              Neuroscience won’t make behavioural economics more important than the rest – it will give it a way to be integrated. However, much of what neuroscience is finding is not policy relevant – a fact that seems to even be slipping by economists who are determined to make policy conclusions based on it. If anything, it is suggesting that it is time for a resurgence in welfare economics to meet our improvement in description due to neuroeconomics ;)

              • MillAhab

                Thanks for the reply Matt – the old saw of “if all you have is a screwdriver then everything looks like a screw” applies to policy analysts as much as anyone I’m sure!

                • http://tvhe.co.nz/ Matt Nolan

                  It is human nature – although I am sure policy analysts are quite careful, and if the “shortage” figure disappears they will no doubt give everything another look ;)

                • The other Neil

                  I do think there is a “cost of capital” argument playing into house prices too. The reduction in interest rates that has been experienced I think has played a big part in the valuation increase. Even allowing for flat rental payments the decline in interest cost means that the capital price can be bid up and still be cashflow neutral and the value leverage is significant. To the extent that people think there will be capital gain they may then place all of their return expectations into an expectation of future capital gain, rather than operating cash.

                  Adding to this are dimensions mentioned above such as replacement costs, consenting and zoning, but I also think standard budget constraints also result in the amount that can be extracted via rental being partially limited. So any shortage helps to reinforce the capital gain view. This in turn dampens the “need” for the investment to be net (of interest etc) cash positive. Of course if capital gain expectations are not met then this will create some problems.

                • http://tvhe.co.nz/ Matt Nolan

                  Hey other Neil!

                  I think we have to be a little careful here – yes a reduction in interest rates implies we do not need the same yield on property. Yes current house prices are likely to be related to future expected house prices for investors. And yes expectations of capital gains enter into an investors decision regarding whether to invest.

                  But the idea that expected capital gains replace rental increases for a “satisfying” investor goes a bit far for me – if there is an underlying shortage of “housing services” the price of housing services (rents) relative to income should be rising. If it is falling then the idea that an increasing shortage of property is driving an appreciation in house prices seems to be a stretch – unless we in turn talk about the way the market is segregated!

                  Ultimately, these issues are always a bit more complicated than the aggregates suggest. That is why the work laying all these things out by places like Motu is so useful :)

                • The other Neil

                  I was thinking leverage rather than yield. The decline in borrowing costs, holding rental constant, provides a significant increase in ability to pay. I appreciate that this is reated to the yield proposition, but commentators often neglect to consider that leverage provides, well leverage!

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