Author Archives: jamesz

Why can’t things just ‘be’?

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While browsing Andrew Gelman’s recent posts I also came across this gem, which reinforces my priors in every possible way. So of course I loved it! He writes:

More and more I feel like economic reporting is based on crude principles of adding up “good news” and “bad news.” Sometimes this makes sense: by almost any measure, an unemployment rate of 10% is bad news compared to an unemployment rate of 5%. Other times, though, the good/bad news framework seems so tangled.
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Who’s supposed to be “concerned” [about the drop in the price of Facebook shares]? … I just don’t get it. Why should I care? If the shares underperform the market, people can buy a piece of Facebook for less. That’s fine too, no?

I think Gelman has put his finger right on the problem: news needs to be normatively charged to be worthwhile. A drop in share prices is good for some people and bad for others, but it probably doesn’t involve a loss of social welfare. Yet, to be a good news story, it needs to have a normative dimension with a hero and a baddie. I’m not blaming the reporters for that; it’s just human nature to want it. Unfortunately, it makes the job of reporting on economics particularly difficult.

In fact it explains why economists are constantly accused of being unable to reach a conclusion. It’s not because they don’t understand what’s going on: it’s because they attempt to describe the costs and the benefits of policies, which usually accrue to different groups. Few policies are unambiguously good or bad, so almost any economist’s commentary provides ammunition for both sides of the normative debate.

Unbelievably exciting results!

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Chris Dillow, via Eric:

…even intelligent and numerate people are quick to misperceive randomness and to pay for an expertise that doesn’t exist; the subjects included students of sciences, engineering and accounting.

Which reminded me of Andrew Gelman’s recent post about results in headline academic journals such as Science and Nature. He quotes Sanjay Srivastava saying:

As long as a journal pursues a strategy of publishing “wow” studies, it will inevitably contain more unreplicable findings and unsupportable conclusions than equally rigorous but more ‘boring’ journals. Groundbreaking will always be higher-risk. And definitive will be the territory of journals that publish meta-analyses and reviews.

We may all know that the implausible results that often lead headline journals are likely to be wrong, but it doesn’t seem to stop us citing them constantly!

Why does the realism of assumptions matter?

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From Rogeberg on rational addiction:

Theories of rational addiction make assumptions concerning the choice rule, preferences and beliefs of people, and derive the resulting consumption plans. … Some economists claim support from the famous as-if methodology of Friedman 1953 … which explicitly identifies prediction as the only aim of “positive economics.”…[Such] explanations may prove excellent predictive devices as long as the empirical regularities they describe remain stable… [but] this defense comes at a cost: Since someone acting as-if he was rationally solving some decision problem would not behave optimally unless this was the actual decision problem he faced, assumptions matter when we turn to welfare analysis. Nor can as-if theories claim to explain in the sense of describing the mechanism or causal process underlying a phenomena, their aim is just to relate observable quantities in the simplest, most empirically successful way. To use a metaphor… an as-if theory of a car would be of no help to a mechanic if the car broke down.

The reference point for optimality depends upon the model you’re using. If it’s not a good causal explanation of the problem then it cannot tell you about the optimality of the agent’s decision.

It’s just another reminder that we need to be really careful when moving into the realm of welfare economics because it implies numerous additional assumptions that we don’t need elsewhere.

Cost of legislation

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A paper out of Otago university finds:

Every time Parliament passes a new act it costs the country an average of $3.5 million, according to a new study. And… even just a piece of regulation costs around $530,000…
Researchers in Wellington and Otago came up with the figure by analysing the number of acts and regulations passed between 1999 and 2010, and looking at the costs of running Parliament and getting policy advice.
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The price range for a new act was from $2 million at the low end, up to $6.2 million.
“This is because the size of new legislation varies greatly, from just a few pages to hundreds. So when considering both acts and regulations, we calculated the average cost per page of legislation at $45,000.”

They included the cost of Parliamentary time and the cost of the policy analysts’ time.

Why economics helps everyone

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From the philosopher Jon Elster in a trenchant critique of Gary Becker’s approach to everything:

If Gary Becker didn’t exist, we would have to invent someone like him. For close to four decades he has been taking economic theory beyond its usual domain of applications, almost single-handedly creating the economics of discrimination, human capital theory, the economics of crime and punishment, and the economic theory of the family.
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Although I disagree sharply with much of it, it has raised the level of discussion enormously. Before Becker, most explanations of addiction did not involve choice at all, much less rational choice. By arguing that addiction is a form of rational behavior, Becker offers other scholars the choice between agreeing with him or trying to identify exactly where he goes wrong. Whatever option we take (I’m going to take the second), our understanding of addiction will be sharpened and focused.

Even if you don’t like the argument, the conclusions, or the framework, we can all agree that using a consistent analytical framework is a good thing!

Bad business decisions by CEO Key

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Asset sales are in the papers again today:

If New Zealand’s Government were a business, it would have no case to sell stakes in its energy generation firms… Sustento director and economist Raf Manji said. It was admirable for the Government to lower debt, but the numbers around selling stakes in energy firms to do so did not add up, he said.
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No more important public good existed than energy, as it was essential to people and businesses, so it was dangerous to raise the firm’s focus on profits.

Much like Raf, I’m not ideologically opposed to the government selling assets. However, we clearly disagree about the rationale for selling energy assets. He makes two points: it’s a bad business decisions, and energy is a public good so public provision is required.

On the first point, economists have long argued that the country is not a large company and shouldn’t be treated as such. If we wanted governments to be highly leveraged investors to return a profit then they should probably stop taxing high productivity people and giving the money to people with lower productivity. I’d ditch the welfare system, too: a loss-making business if ever I saw one! Obviously the government’s not an investor trying to turn a profit so let’s focus on what can do to improve social welfare and equity. Raf’s second argument seems to implicitly acknowledge that by appealing to the government’s role in providing public goods.

The public goods argument is far stronger because it is widely acknowledged that public goods are under-provided by the public sector. The reason is to be found in the two defining characteristics of public goods:

  • One person’s use doesn’t decrease the quantity available for everyone else. For instance, however much I enjoy clean air in New Zealand, there is no less for you.
  • You can’t stop people from using it, so property rights over it become fairly meaningless. You can’t own clean air here and sell it, so there’s no private incentive to generate it. That’s why we need environmental regulations to deal with pollution.

What’s striking about these two characteristics of public goods is that energy fits neither of them! When I use energy, you can’t use that energy. When I don’t pay my power bill the power company can cut me off. So energy isn’t a public good and the arguments for public provision that apply to public goods don’t apply here.

Update: Matt and I have written about asset sales previously, as have Paul Walker and Seamus Hogan.