In the lead up Simon Chapple has posted a good article on the issue, and I’ve posted up my own article as well. This is a major policy proposal that is being pushed through under de facto urgency without a proper policy design process – and with lots of unintended consequences. As a result, even though we both agree with looking at improving support and transitions for individuals facing hardship – in fact this is an issue we have both focused on in the past – this ain’t it son.

For those who do not want to trudge through text, the thoughts can be boiled down as follows:

Unemployment is a hard life shock, and there is benefit in both sharing the cost of that shock between us and helping people transition back into work. But this suggestion:

• Goes a lot further than just helping those at risk genuine hardship from this lifeshock – and is much much larger than schemes overseas. [Those that say NZ is just “catching up” with this are just directly lying]
• In its current design it will be regressive across most of the wage income distribution – with single individuals and sole parent beneficiaries disproportionately contributing.
• Will cost more than suggested.
• WIll be subject to abuse by those who are able to organise sham redundancies and sham jobs.
• Is likely to give bad employers more power over their staff.
• It creates an “alternative” to the unemployment benefit that will reduce support for the most vulnerable.

It is worthwhile to look in this space, but slow things down and work through the policy design issues – and actually look into some alternatives to achieve the policy goes.

ACC took nearly a decade to get set up and legislated, with it mentioned as an election proposal. The 1938 social security act was designed with feedback from experts, debate on alternatives (which is why we didn’t end up with income contingent payments then), and decades of prior system design – and then it was taken to an election before it was implemented.

I’ve heard on the grapevine they’ve already started hiring staff to implement the income insurance scheme as they want it legislated and underway before the election – implying this consultation is non-genuine, and we also don’t get to vote about it. If this is true then Ministers are putting their own determination to look progressive ahead of ensuring that good policy is put in place – which is very disappointing.

To be frank, this is absolutely scandalous – and even if the policy proposal was well designed (which it is not) this would be terrible. Hopefully what I’ve heard is untrue, but if this comes to pass then we should all be very disappointed in this process – and the unavoidable harm that will come from the poor implementation that will follow.

COLLABORATION AND COMBINATION DUE TO 5G: UNLOCKING INVESTMENT OR REDUCING COMPETITION?

FINTECH DEVELOPMENTS AND ANTITRUST CONSIDERATIONS IN PAYMENTS

The voting is for the “reader choice” award – you can vote towards the bottom of each of these links.

Go give them a read – I definitely learned a thing or two. Anti-trust stuff is complex, but getting this right is incredibly important – and industrial economics is definitely the topic that “feels” most like real economics, with its mix of theory, application, data.

I initially undertook this research due to my frustration when looking for information about tax and income inequality while working at Infometrics as an economist.  The 1980s and 1990s had seen dramatic changes taxes and payments to beneficiaries, and also to income inequality, so I thought it would be a valuable contribution to tease out how much these changes in tax and benefit settings had influenced income inequality in New Zealand.

To do this I worked with the models available at the New Zealand Treasury and Victoria’s Chair of Public Finance to calculate the payments that would have been received by someone in the early 2010s if taxes and benefits (including superannuation) were the same as they were in the late 1980s and early 1990s (adjusting these figures up for wage growth over that time). 

In other words, if New Zealand had not change the tax and benefit system and had instead increased payments at the same rate as wages since the late 1980s what would income inequality have looked like?

Analysing this information, and considering what would have happened in reverse – if current settings were applied in the late 1980s and early 1990s – I found that nearly 46% of the increase in income inequality appeared to be due to these changes in taxes and benefits.

However, this ignores the way that the change in taxes may have changed people’s behaviour – the new tax settings may have seen them work more, invest more in education, migrate to another country, change when they move out of home, or any of a myriad of other changes. 

As a result, I corrected the figure for the change in the way people worked due to policy.  This reduced my figure, suggesting that just over 39% of the increase in income inequality was due to the tax and benefit changes.

These things are hard as it involves trying to find a balance between accuracy and clarity – when there can be a trade-off.

“Transfers” is a more accurate term than benefits, given that a number of the payments are not seen as benefits (eg national superannuation), and the inequality number is disposable income inequality – the number after taxes and transfers. But I’ve also been told that these two terms get people stuck and make it hard for people to make sense of what is going on when trying to understand the result.

Also how do we discuss the shortcomings without overplaying them? There is a lot missing (how have some of the other characteristics of the population changed due to policy – how are these related to some other results in my thesis?), but given that the core of the result is itself of interest. This point estimate of 39% needs to clearly have uncertainty around it – but that uncertainty doesn’t imply its irrelevant.

Anyway, I’m not particularly good at research of communication – so trying to do both is a learning experience. Would be interested to here your thoughts about whether I’ve made appropriate choices about this trade-off, or in questions you may have about the research!

Standard economic theory suggests many of the choices New Zealand has made impose disproportionately large costs on current and future young generations. Of course standard economic theory may be wrong. Nonetheless, when a country adopts a path that is different from standard economic theory and normal international practice, it suggests that the path should be carefully investigated to ensure it is in an appropriate direction.

To this end I am planning to write a monograph, serial fashion. Over the next few weeks i propose to write the thing a few pages at time (in between a very busy lecturing schedule in which I am teaching four courses) and post them on this blog. My thanks to Matt and Gulnara for giving me this opportunity. I am not sure how far I shall get, but all feedback is welcome.

Feedback from younger readers is especially welcome, for reasons that will soon be obvious.

Here is page 1 – the good bits version – or, at the moment, the only bits version.

The heart of the problem

The message of this book is very simple.

Over the last sixty years, New Zealand has adopted a set of retirement income and tax policies that are very different to those used in almost all other rich countries.

New Zealand’s policies tend to be very simple and easy to understand. While ‘simple’ is often a good thing, in this case, it has a downside: it imposes high costs on current and future generations of young people. 

These costs come in various disguises. For example, young people will pay much more in taxes to fund government pensions than their parents or grandparent because the retirement income system disproportionately pushes the costs forward onto young generations. Moreover, the simple way New Zealand taxes retirement savings creates incentives that lead to higher house prices and rents.

Because these costs are much higher than the costs faced by current middle-aged and older cohorts, most young New Zealanders could be a lot better off if New Zealand had a different set of retirement income policies. Many people recognize the disadvantages young people face from New Zealand’s unique retirement income policies and taxes.

So why does the system continue? Largely because it is very hard to change the system without disadvantaging some older people. Politicians have been reluctant to introduce reforms because of their concern for those older people who cannot easily adjust to changes, and because of their recognition of hard political realities. 

Fortunately, there is an opportunity for reform. The trick is to let young people redesign the system they want for themselves without changing the basic features of the system for older people. A retirement system designed in the twentieth century may be suitable for people my age and older. But there is no need to impose a retirement income system designed in the twentieth century on people who will live most of their lives in the twenty-first century. Rather, young people who are dealing with very different circumstances to their parents and grandparents should be allowed to choose a different system – a system, which meets their demands and aspirations even as it leaves the current system in place for older generations. 

Of course, it is not costless for young people to opt out from the current system – the system is designed in a manner that means the costs disproportionately fall on younger generations. But the current allocation of costs across generations is largely arbitrary and unplanned. As a country, New Zealand has a great opportunity to deliberately choose how the costs are spread across generations while giving young people the option of choosing a better system, one they want. A reallocation of costs would be part of any “exit” strategy. Yes, costs may go up on middle aged people like myself. But it should be possible to work out a way to redistribute these costs in a manner that most people find fair. The taxes we pay to fund the New Zealand Superannuation Fund are already a step in this direction.

Is it likely that young New Zealanders want a different set of retirement income policies and taxes? Who knows – it should be their decision. Since New Zealand’s current system is so different from those adopted in other countries there should be no presumption that it is what young people want, even if it is what older people want. Fortunately, there are many different retirement income schemes and tax systems in use around the world, so there are lots of examples of what works and what may not work. These schemes have many features that young New Zealanders may find attractive.

Some changes could be easily made, without affecting the retirement incomes of older New Zealanders. Other changes may require more difficult choices if they affect the transfers flowing between generations. Either way, New Zealanders have a fantastic opportunity to allow younger cohorts to design the retirement income policies that they want, aligned with their interests and suitable for the century they live in. We should not squander it.

This book is all about the possibility of change. It describes the main features of New Zealand’s retirement income and tax policies, and how they are different to those in place in most rich countries. It explains why young people may want change – why the current system is so bad for young people – but it does not advocate change to the current system for older generations or advocate any particular solution for young generations.  Those choices are for young people to make, to enable them to have a system designed by themselves for themselves for the twenty-first century. 

Just wanted to say thanks! If it wasn’t for the active discussion here and the passionate New Zealand economics community I would never have done it.

You can find a version of it here (and the archive here). And working paper versions of a number of the chapters:

• on NZ tax-transfer history,
• Vertical and Horizontal equity,
• imputing wages for those who aren’t working,
• estimating labour supply responses to changes in available net incomes,
• and decomposing changes in income inequality into tax and non-tax components.

I had meant to do posts on the issues here, but only really found time to write about the inequality measure I mainly used (the Gini coefficient) and a post on measuring vertical and horizontal equity.

Next year I will be back adding up some material from teaching 1st year economics at Victoria University of Wellington – I’ve been teaching the introductory micro and macro courses for a few years now as a teaching assistant, and will keep it going while I also do other work (as I love it).

Now such a process is a representation of the views and values I have – not an example of economics.  I am not submitting my views on this as an economist, I am submitting it as a person – the fact that I have studied economics does not gives my values any more weight, it just gives me a neat language that allows me to clearly articulate those values.

In case this also sounds to critical I would like to point out that this is a cool idea, I like how easy they have made the process, and how they are making us all feel appreciated about giving our feedback – good work Statistics NZ!  The discussion is supposed to be constructive here, that is my goal

So with that in mind, give it a read below – or as a pdf (MN Indicators submission):

Matt Nolan submission on Indicators Aotearoa

Here is my official submission to the Indicators Aotearoa New Zealand consultation.  For brevity I will call this Indicators below.

My understanding of the submission purpose

The series of submissions in conjunction with other estimates is intended  to understand progress/wellbeing in some way, and work out what needs to be measured to create it.  The idea is that – in an ideal world – as a society we want something that is conceptually like GDP except about wellbeing.

However, we can’t measure wellbeing so we want other heuristics (outcomes) that we can measure that are related to it.  By getting the values of New Zealanders on these heuristics we can have an idea about the things NZers think matter, and thereby improve policy/policy investigation.

So since it is like GDP we are interested in two things:

1. The “flow” of wellbeing at a point in time – this is the GDP equivalent view.
2. The “capital stock” that allows for the creation of wellbeing in the future – this is analogous to the stock of factor inputs in national accounts.

As the goal of this submission is only to talk about things I value then only the “flow” concept is relevant.  What should be part of this flow so that we can model how it is determined, talk about the current flow, progress on that flow, the sustainability of that flow for future generations, and policy trade-offs regarding that flow.

There are technical issues here – but that isn’t what you are asking me about, you just want my values so that is what I will concentrate on here.

In order to explain my values I will have to also explain how I understand the framework and what I am being asked.  My apologises for the length.

Submission

I went to use the online submission form to give my view on these indicators and was met by this – followed by a text box to expand one why each mattered:

Wanting some clarity on what we really mean by wellbeing I went to the documentation – just to see more text saying that the goal is measuring wellbeing.  That is all a bit meaningless isn’t it?

I do appreciate the ease of submission – I really do.  But this categorisation feels a bit scatter gun and I didn’t really know how to represent my values through it easily.  Specifically I have five problems here:

1. A lot of the categories are closely related to each other while others are separate and broad – health is a single category but environmental quality is split into three??
2. There is a mixture of things that may give me satisfaction directly (the outcomes you want my values on) and things that are “capital” for the creation of satisfaction (not the point).
3. How am I supposed to indicate my relative value over issues (other than entering text in a box)?  What about the value relative to issues I didn’t select?
4. What I report I value often depends on what I believe is absent, rather than what is truly important for me when it comes to discerning my life satisfaction.  Eg Access to clean water is one of the most valuable things/outcomes in my life, but it is not something I would consider when faced with a tickbox of values.
5. Finally the question asks what I think matters to New Zealanders – but it should be what I value.

You are asking my personal view on the indicators that influence wellbeing – why not just ask me what things matter to me the most?  And what does wellbeing mean – in this context won’t my concern lie more with things I think are absent from my life and things that I think other people should change (even though there is no ethical reason why I should have a say in that).

So I couldn’t fill out that form.  Instead I will give a written submission explaining the types of things that matter given my views and values as a New Zealander.  They will not be the same as others – I accept that – but it is also the only perspective I can justifiably give.

Armed with our values the purpose of the indicators is to determine what outcomes to measure to evaluate those, and what capitals to calculate to describe how those outcomes are determined.

Making wellbeing practicable

There is no way you can construct a “measure of wellbeing” from this – and neither should you.  This multidimensional view is central to what I believe you are doing after all.   Instead the goal is three-fold:

1. To discuss the progress of New Zealand and New Zealanders along measures we believe have value.
2. To discuss the capabilities of New Zealanders now and in the future to live a good life.
3. To allow a quantitative framework that allows the comparison of trade-offs from policy.

These are all good goals – and if wellbeing is a term you are using to make this simple for people like me to think about what you are doing that is cool.  But it isn’t a measure of wellbeing, and shouldn’t be.

Looking at why you are interested in this measure gives me a better idea of what you want to know from me!  Specifically, what do I see as necessary things New Zealand needs to have and progress upon to ensure a good life for its citizens.  It is these outcomes you want me to discuss – not intermediate things that might represent part of the process of getting to something we value as part of our core set of capabilities.

Ok, so thank you for asking and here is the way I think.

Absolute and relative measures

When thinking about my own capability to live a “good life” I recognise that there are absolute and relative things that matter to me.

Absolute measures are things like whether I have fresh running water, my access to the internet, and my ability to access a social activity like community football.

Relative measures are things like whether the quality of clothing I’m wearing compares the that worn by other people, my education level relative to my peers, and how good I am at community football relative to other players on the pitch.

When I think about my capability for these things, it is a matter of whether the social and economic environment provides me the preconditions to meet a basket of absolute and relative things that I see as necessary for meeting the good life.  This is hard as what constitutes a good life varies, both in terms of the outcomes that people value and the opportunities people have to achieve these outcomes. So my personal values represent the outcomes I personally see as important for this “good life” characterisation.

So given this what are my personal values?  Well I’m quite simple and I understand my own life though the satisfaction of a hierarchy of needs, so using Maslow’s form I’d would go from most important to least important values as:

• Am I earning sufficient income to pay for my material necessities (incomes ability to buy some basket of goods).
• Am I sufficiently secure that I will be able to pay for the necessities I require in the future (job security, income volatility, treatment if I become ill).
• Do I feel engaged and safe in my community (friendship, safety, and social connections).
• Do I have work and hobbies, or the opportunity to find these, that engage me.
• Do I feel that I am taking part on a level playing field?

Personal responsibility is a central part of growth, no doubt.  But this can only occur when there isn’t a deficiency with regards to these needs.  Personally when I am stressed out about whether I will have enough future income to pay my rent, I find it more difficult to concentrate on writing articles and thinking about data projects.

But what is in my basket?

With values you are probably interested in the things I would put in my basket.  Now this is a personal question but I will answer.

I enjoy having vegetarian food and clean water, access to nice running trails and paths, an internet connection that lets me watch video, access to health care if something goes wrong, quality coffee and beer, a job that matches the skills I’ve trained in …

This is where the tick box is problematic, those categories that you list are both too narrow and too broad to capture values.  They are too narrow relative to aggregate wellbeing, but too broad relative to individual values.

If we want to figure out what I value most relative to the cost it takes to produce it, market mechanisms are quite powerful.  If we can use market mechanisms to represent these different attributes, then an income measure – and income availability – becomes the core metric for talking about ALL of the issues in the tick box.  

This rhetoric isn’t some neo-liberal conspiracy … as people’s underlying capability to get hold of this income, their endowment, becomes the core focus of everything.  Again everything boils back to people’s capability to live a “good life” given diverse endowments and needs!  Common and public goods matter here, but these allocative issues are specific, can be improved with the property rights and markets (given an acceptance of endowment effects), and tend to be less far down the hierarchy of needs.

Putting the person into the society

When I put it this way my personal values are dominated by the ability for individuals to live a good life in terms of their ability to meet needs – needs that are sometimes relative but still needs.  What about the values of those in the middle or top of the income distribution?

Fundamentally, the progress of a nation is judged by how it treats the worst off.  Where the worst off are not just those in material need, but those with a lack of access to social services (friends and family), and who lack the opportunity to change circumstances.  It is by identifying measures of those who are worst off regarding outcomes we care about that we are best placed to judge whether society progresses.

GDP/income is one of the few measures where we also care about the level of the distribution as well as characteristics of the distribution/bottom.  We know that if we had more consumption goods then all other things equal that is progress – we cannot say the same thing with social connectedness or subjective measures of wellbeing.  The issues here are two-fold:

• For something like social connectedness social bonds can be “too strong”, and in turn create animosity between groups who identify with a given bond.
• For subjective wellbeing views of life satisfaction can be reference dependent implying that past improvements in wellbeing are ignored when reporting such figures.

In this way my values refer to people having the capability to achieve social and material outcomes.  I only care about certain things (eg health, environment, financial stability) in so far as these matters influence the capability of people now – and in the future – to achieve their social and material outcomes.  In this way I want measures of these outcomes. For me these are:

• The value of material outcomes for households:
  • Average material outcomes
  • The distribution of material outcomes
  • The number of people failing to meet a minimum standard for those outcomes
• The value of community and interpersonal engagement.
  • Reporting on people having access to people they can trust.
  • Number of people involved in community activities.
  • Faith in local and central government politics.
  • Number of people who believe that society allows them to have the capability to be involved in the political process.

Given this I value a lot of outcomes.  However, for many of these things it isn’t a matter of wanting more – it is a concern regarding their absence that drives my value.  In this way and given the value framework I outlined above I would want to know how many people have material and/or social needs unmet and how this is changing overtime – both with a fixed (absolute) basket of needs and a clearly articulated moving (relative) basket.

Data that tracks households lived experience (time use and material standards) over time – specifically data that tracks the same individuals (panel data) – is necessary to discuss these questions.  In order to evaluate the efficacy of policy to represent our values we require more household level panel data in New Zealand.

Relative values

I can discuss valuing these things – but to discuss trade-offs and come up with a policy prescription we need a way of figuring out our willingness to trade between these things right?

People may have much stronger feelings than other people on the factors that matter – something we may rule out by treating individuals as anonymous.  But even if I ticked five of your boxes, how do you know about how intensely I feel about each category. Fundamentally, what exactly do we know about people’s willingness to trade-off between the things that matter to them …

Add to this the fact that these measures will be packed to the rims with response bias – as people subconsiously signal social worth rather than revealing preferences – and I’m a bit worried about how interpretable this data will be.  Still you peps are the experts here and I’m sure you realise this – so I’ll leave it be.

I just wanted to highlight that I view the lack of information of relative values in this to be a significant concern for evaluating the data received from this process.

Individual: “You are an economist!  You must agree that GDP is crap.”

Nolan: “Ahh well, ummm, what question are you asking?”

Individual: “What, it is just crap though, you must agree that it is rubbish”

Nolan: “Well it depends on your question, why are we measur …”

Individual: “Come on, it is just rubbish, everyone agrees it is rubbish.  I mean we care about so many other things”

Nolan: “Ahh so your question is about what we should value. Ok yeah it doesn’t measure all social value but …”

Individual: “Yeah, it’s rubbish, exactly”

I don’t have enough fingers and toes to count the number of times I’ve had this conversation – but in truth GDP is really good at measuring what it is supposed to measure … the problem is that people keep using it as a measure of something else.

But it is hardly the individual’s fault that they have come to this conclusion.  Decades of GDP fetishisation by policy makers combined with economists who spend more time talking about (and in the extreme teaching) the shortcomings of GDP than actually teaching what GDP is supposed to measure has provided this great rule of thumb that people follow to understand what is going on.

So in this post let me do something novel – let me stand up for GDP.

What is GDP

Say that you were sitting around doing your nails and the government suddenly contacted you.  They said “Dear TVHE reader, we really want to know the aggregate final production of goods and services that is taking place in the nation, can you help us”.

As you are the type of person who reads this blog, you are also the type of person that would know how to answer that question – you would tell them to go onto that statistics agency website and download the latest GDP data.

GDP is a measure of the market value of production in final goods and services that takes place in a period of time.

Ok, why are we using market value – is it some type of conspiracy?  No.  We use market value as a way of aggregating things that are otherwise incomparable – when thinking about production it is pretty hard to add up a chair and a haircut.  By using the market price we are also incorporating the idea of the full set of resources used to construct it – if factor prices do not change, then this price tells us how much of one good could be translated into another.  Of course, factor prices do change if we change relative demands so this isn’t a thought experiment we should push too far in any case.

Why do we care then?  You know that circular flow we are all taught in stage one economics, the one that people keep making fun of saying we need to “include an ecosystem” or “include the value of social connections” or “make it into a doughnut”, it is those FLOWS that GDP is measuring.

I’m not saying that including other things is bad – they’re cool especially when there are feedbacks between these systems.  Such modelling is completely legitimate (although lets note that it also requires measurement, not just pictures).  What I am saying is that GDP is an aggregate that describes a very specific system.  It measures that very specific flow, as it was that flow at a point in time that Kuznets was aiming to measure.  As in the circular flow, GDP is measuring the monetary flow associated with the real flow of the production of goods and services (expenditure GDP) or the monetary flow associated with the real flow of factors of production used to make goods and services (income GDP) – in so far as we care about measuring this flow, and a question that deals with this flow in isolation, it is a brilliant measure!

Now if you are about to launch into a discussion of the fact that Kuznets was discussing National Income and that GNP was the original measure not GDP that is all good [great posts on it here and here] – I don’t disagree, and in a country like New Zealand the differences between these measures matter when truly considering access to resources, hence why trends in GNDI are what are often recommended by NZ economists.  But these measures are all looking for the same core set of concepts – the market value of production (by national borders or national citizens) for a given nation – it is just that GDP does it most directly for the production flow.

What is it (GDP) good for?

Well GDP is good at measuring that flow we just talked about – or measuring the market value of production within national borders at a point in time.  Why would we care about this measure?

1. If we have a way of working out aggregate production we have an idea of how much stuff there is – if we were say, fighting a war, the countries capability to produce is something of interest.
2. If we have a measure of aggregate production that abruptly changes it tells us that something funky might be going on – such as a Great Depression.
3. If we have a measure of aggregate production we can try to figure out why it differs between nations, and how policies we introduce change it.  This allows us to work out trade-offs that may exist for policy aims between the amount of output produced and other measured aggregates (unemployment, average water quality, life expectancy, average skirt length).
4. Very importantly, if we want to discuss flows of money and monetary policy Nominal GDP is measuring exactly this flow in the circular flow diagram … which is fundamentally a model for monetary policy!

GDP is surprisingly nifty for these things … as long as we don’t always start with the unconditional prior “more GDPs are good”.  We need to ask “what is the trade-off that creates this GDP”.  Furthermore, even if no other observed variables change when GDP goes up this still doesn’t imply rising GDP is good (note no observed changes, so higher GDP implies higher income for everyone) as it may be the result of unmeasured non-market activities being measured (eg illegal drug sales, raising of children) or market activities with an unmeasured negative externality.

So just enjoy it for what it is!

What about those shortcomings!

We can split the short comings in two – the shortcomings for measuring what it is supposed to, and the shortcomings associated with being a measure of “progress” or “wellbeing”.

As a measure of production aggregation is problematic.  If a table is $50 and a TV is $200 our nation is unlikely to be able to say “I will stop building 40,000 tables to build 10,000 TVs”.  However, it offers the best way I can think of to aggregate output at a point in time.

Furthermore, unmeasured output and externalities are missed.  This is mostly problematic when we want to compare over time and the coverage of GDP or social environment has changed.  For example the rise of the second earner has seen more household services provided by the market sector, increasing GDP although no more is really being produced.  However, if we want to talk about it in terms of “consumption value” the externality issue becomes key.

Now what happens when we try to talk about GDP in terms of wellbeing.  Ummm well GDP measures the flow of production created in national borders.  If we were a factory owner that would be fairly useful, but also limited – but we are an entire nation in this discussion!

If we make more things then this is an intermediate target towards some true goal – life satisfaction.  Now economists tend to frame all of these as “consumption opportunities”, but we aren’t talking about consuming more physical things per se – it is all different ways of an individual spending their limited time that give them satisfaction.  This is complex both philosophically (what is wellbeing), practically (how do we influence wellbeing), and in terms of measurement (how do we measure wellbeing – pro-tip we can’t directly) so we use these intermediate values as heuristics for some underlying whole.

People want some set of consumption opportunities, and they always do want more (non-satiation).  However, the value they receive depends on what others have, what they have, and it is far from just measured in terms of GDP – especially when things like community spirit are part of this consumption!

GDP measures a sub set of the consumption opportunities of individuals – yes more GDP with no change in other opportunities is great, I would appreciate a world where I had a better can opener or another pair of socks.  But this alone is so far from the final set of consumption opportunities that greet me on a daily basis with all my choices (“if I do this how will it influence my relationship with my boss”, “should I go to this party to engage with this group, or stay home and spend mental health time with my toy dog”) for me to view it as a sole measure of wellbeing!

Note:  This isn’t me accepting that policy “should” target some mythical goal of well-being … we are going to get back to this in the future, as there is a lot of ground to cover before we can get there.

We need wellbeing measures damnit!

Now there is your issue – you want an aggregate to tell you the world is getting better.  The world is more complicated than that, with the way we value things that are not clearly comparable the biggest issue (eg comparing the wage in your job to the value of a second blanket on a hospital bed).

Yes, economists can lean towards markets to provide this information (given the way people make choices when facing trade-offs).  But even this preference doesn’t lead to economists saying GDP, as a measure of market activity, measures anything like well-being.

The fact GDP doesn’t do this isn’t GDP’s fault – it is your fault for asking it to do this!  It is policy analysts and politicians fault for focusing on the lazy way of describing progress.  It is the public’s fault for not educating themselves on these measures.  I realise people including myself have an incentive to avoid thinking, but that isn’t an excuse for it.

Honestly, if people want to describe what is going on and how it fits their own value system they have to do a lot of work – no-one can add it all up for you as only you know your values!!

Take the World Economic Forum, an organisation packed with economists who are infinitely smarter and more successful than I’ll ever be:

Is our love-affair with GDP coming to an end? As the business landscape reinvents itself, demographics shift, inequality expands, climate change gets worse and technology continues to advance at breakneck speed, Gross Domestic Product is struggling to stay relevant. In order to keep up with the changes wrought by the Fourth Industrial Revolution, many are arguing that we need to find a new measure to assess the health of our economies and – more importantly – the people living in them.

This is followed by the selection of five “indicators” which are, somehow, supposed to give an “alternative”.

Can no-one else see how utterly incoherent this framework is.  GDP is a single measure of a single thing.  Values are complicated.  As a result, our solution is to pick random things that we can add up (let’s not pretend that they aren’t hinting we just add the five measures together with equal weights in that post – not saying it directly doesn’t change hinting it hard) so we feel like we have a measure of a complicated issue …

If you want to work out whether society is “progressing” you have to do work with value judgments.  If you want to answer a smaller question you have to do the same.

Look it is about policy, we use GDP to tell if policies are good now and we shouldn’t

Hey ok, that is a good way of reframing the debate.  So you are admitting GDP is fine, but it has excessive importance when we have policy debates as other things we value are not measured as well or as publicly.

Wait a second, what happens if we do measure those other things well and just describe the trade-offs when faced with an actual policy question?

Wait another second, what do these alternative measures we want to replace GDP with actually measure?  A dashboard of incomparable statistics doesn’t measure anything let alone tell us anything?!  We need a policy question and a way of describing trade-offs between outcomes!

Wait a third of these seconds, I don’t actually think I hear real life people talk about the consequences of policies on GDP or funky looking aggregate measures that much during an election – they will talk about take home incomes, often keeping GDP fixed.  They will talk about investment in health and education because we see those as things we desire.  They talk about jobs because people want to have the opportunity to work.

I find when I talk to non-economists/non-policy people they articulate their values in terms of these consequences, income, jobs, quality of life – and policy arguments based on those outcomes matter.  They are interested in the distribution of outcomes, winners and losers, and they want quick ways for this information to be articulated.  They realise not everything they care about can be cleanly quantified, and demand to be told about things they care about that we cannot measure as well.

Given this it isn’t clear that GDP is the issue, but instead people who aren’t able to persuade the public to agree with what they want have decided they need to create esoteric measures of “wellbeing” to convince others to agree with them

I love the idea of measuring things better and giving more information by doing so.  I love the idea that the public looks at more than just one measure to understand the society and economy around them.  But GDP is actually one of the measures that fits within this concept, when many of the arbitrary aggregates being create to “replace it” – which don’t clearly measure anything – don’t.

In truth asking if we have “progressed” is subjective to the point where telling people we have measured it with an aggregate is misleading/misinformation.  If someone has a question about specific policy aims (is there less crime, are we wealthier, what is happening with social activities) we should be able to pull together measures to give them an idea of that outcome – and that’s that.

Ramming together a measure to tell people if “the world is better” at a single viewing isn’t helpful – it is merely making a series of hidden value statements and telling people “believe them, it is data”.  If you think that is persuasive, useful for the public, and useful for good policy making then I must say that I am far from convinced of your position so comment below

Before you get angry at me

First off you may be frustrated by the way GDP has been used and obsessed with my policy makers and politicians.  And you know what, hell yea I agree with you completely here – the “moar GDP” justification for policy always wound me up too!  But I’m saying that maybe there is a lesson that single measures of progress are inherently flawed, and that we have a measure for a specific question – rather than this being a suggestion that GDP is rubbish and we just need some new measure to save the world.

You may have an alternative measure that you believe fairly represents a different question, say about social progress.  Or a dashboard that you think articulates the varying outcomes society values clearly without imposing unnecessary value judgments on them.  If that is the case link it below and make a little case for it in comments – as that sounds really cool and I’d love to learn about it.

I was just making an argument for GDP and for current data against the idea of an arbitrary dashboard such as that used by WEF – I have no doubt there are much better efforts out there that articulate important information clearly.  I am open to your persuasion

Anyone who reads this who also read my writing pre-2014 will remember that I was a strong post-distributionalist when it comes to social insurance policy.  To the point where the term pre-distribution (or predistribution) did not appear on TVHE when I did a search.

Since then the economic environment has changed and I have spent more time considering these issues.  So have my views changed?  Let’s consider the issue.

Tl;dr No, but I think the terminology can be used more clearly. With regards to redistribution – if our concern is the distribution of income alone pre-distributionalist policies are indirect and inefficient.  But pre-distribution policy prescriptions have relevance when discussing issues of transition – which is essentially insurance from shocks, and the provision of job/income security (as apart from a security net).  Such insurance can be costly, but is still worth discussing in this frame. Furthermore, if we stretch the term pre-distribution far enough it becomes ridiculous – sure the whole study of economics concerns the distribution of income, but the name is used for a subfield for a reason.

Definitions

Contrary to Wikipedia pre-distributionalist policies are not new.  Until the reforms of the Fourth Labour government in New Zealand, New Zealand social policy was heavily pre-distributionalist.  Now this, from the bat, suggests to me that my definition of pre-distributionalism (which is based on reading of welfare and tax policy history in Australiasia and Scandanavia where this term can be used to differentiate from tax-transfer policies) may differ from modern discussions (which I have not read).  That is fine by me but I will try to be clear on issues below so it is obvious what I am talking about.

So what is pre-distributionalism as I discuss it here?  I have always interpreted it as stating that a pre-distributionist redistributes the means and structures for generating income prior to trade occurring, rather than redistributing the income generated from trade (post-distribution).  In both cases the purpose of this policy is then to redistribute income to deal with some perceived inequity in society.

A post-distributionalist policy would be something like an unemployment benefit, while a pre-distributionalist policy would refer to a government guaranteed job at a given wage rate for a worker in an industry that is fading away.  A post-distributionalist policy would be to provide a family benefit for those with children, while a pre-distributionalist policy would be to influence wage rates in industries where parents tend to work to increase their market incomes.  Both are redistributing income and providing a form of income security – but the incentives, costs, and benefits differ.

Now I’ve heard that pre-distributionalism can be steered away from the line that it is redistributional – instead stating that they are preventing inequalities from occurring at the source.  I dislike this, as it makes the success of pre-distributionalist policies untestable – if income inequality was to fall they would claim success (through redistribution) and if it didn’t they would claim that the underlying inequality they were dealing with was dealt with by definition.  If there is a “non-income” type of inequality we are targeting, then any dichotomy between pre and post-distributionalist policies is false, as the only real point of post-distributionalist policies is to change the distribution of income.  Note:  Many “inequalities” are in fact unobservable or are justifiable.

But this cuts to the heart of the issue – if we are going to evaluate policies we actually need to define what the aim of the policy is.  In this way I would argue that we can split policy targets into three when it comes to setting these policy schemes:  The first two are static – the level and dispersion of income/final goods and services.  The third is dynamic, in the face of shocks who bears the risk.

You may argue there is a fourth string – that the structure of returns are efficient and equitable!  If that is where pre-distributionalists are referring to then all they are saying then the entire term is pointless for two reasons – as it refers to all policies that are not tax and benefit policies, and refers to their final evaluation rather than a description of their distributional properties!  Note:  Post-distributionalists don’t get off scott-free here for jumping too quickly to welfare evaluation – this is a whole other kettle of fish though.

So yes these policies influence the distribution of income, but the distribution is not the “purpose” of them – instead they are targeting some other equity or efficiency principle.  This is the same category error people make with monetary policy and financial stability.

What do I mean – yes we should talk about the distributional impact of all policies, but the “target” of all policies shouldn’t be focused on its impact on the distribution of income … or even worse some undefined inequality that we will just say is solved as a result of our pet policy .

Note:  If someone was to say “I think competition policy is more relevant to welfare than something that merely targets reducing the observed inequality in incomes” I would say “yup”.  But by saying you are a type of “distributionalist” you are stating that the primary concern of your discipline is the distribution of income.  Also remember that someone who focuses on post-distributionalist policies doesn’t disavow other policies – they just aren’t trying to move every potential policy recommendation into their field of research …

The distribution of income 

What is the distribution of income?  We can think about it in the following way – we have some characteristics (I’m male, 32, eat poorly, have experience working as an economist, and like to argue far too much) and the market offers us a set of potential jobs given these characteristics.  They offer different combinations of income, work satisfaction, and leisure – we then fall into one in some way.  On top of that if we are endowed with resources we can save them in some way where there is a set of risk-reward opportunities for our saving – these generate income.

Nice.

So the distribution of income depends on endowments (savings, characteristics) and the return on offer for these.

Nothing in this about the fairness generating the process – and the process itself is very much a function of policy.  However, after we have introduced a series of policies that give a “structure of returns that are efficient and equitable” is the outcome just?  Maybe, but maybe not – due to insufficient information about the income generating process or due to luck.

As a result, we in turn justify redistribution.

Redistribution of income

If all we care about is income alone, then post-distributionalist policies get us where we want to go with certainty – in that way, they give us greater income security and horizontal equity over the population as a whole.

For example a job guarantee may offer an individual greater income security than the existence of a safety net – but if those guarantees are in areas that are unprofitable this is really a benefit payment from society.  By making broader society bear the risk that the job has value you creating uncertainty about the required tax.  Furthermore as this person has a higher guaranteed income than people with otherwise identical characteristics by virtue of having this job, there is horizontal inequity.

Furthermore, we can do a better job of targeting with post-distribution – as at this point we have “observed” things such as luck, or the product of unobserved characteristics (observed income).  As a result, redistribution that will have been missed by pre-distribution gets picked up by post-distribution – but this does not happen the other way.

In terms of efficiency it is often assumed that post-distributional policies are superior to pre-distributional policies.  After all, job guarantees keep people working in roles where they are producing little, while a social safety net clearly demarcates the difference between work and benefit income – incentivising people to look for roles where their work is valued.

Job schemes in New Zealand helped to hold down the reported unemployment rate in New Zealand through the 1970s and early 1980s, but they were incredibly wasteful – in most cases providing people differential benefit levels for not doing much.

But this does ignore something – people were still going to a job, a job they did not believe would disappear.  And that leads us into another separate issue.

Economic security

Now, post-distributional policies are sufficient for economic security when shocks are only very small – they provide a safety net, and people are relatively fluidly able to move being job types.  Such policies are set given considerations of relative status and equity already and so there is no need to consider more active intervention.

But technological change, globalisation, and the GFC (which arguably helped to speed up some of these changes) imply a situation where the return to the skills people have has changed significantly – with some people rewarded for training in areas that are complementary to technological change while others have seen their income and job prospects disappear.

We should not want to make the past reappear.  Technological change and globalisation generate wealth.  But, arguably, we may believe that such a change is only fair if the losers are compensated by the winners – if the compensation we discuss for Kaldor-Hicks efficiency actually takes place.

Now this is an issue I find incredibly difficult.  This is an area I do not envy policy makers.  We cannot just tax the winners from globalisation and give income to those who, in the absense of change, would have been better off as:

1. We don’t have sufficient information
2. If we view it in too static a sense, it may excessive mute incentives for people to develop skills that suit the new reality
3. Income isn’t the only issue that matters – pride in having a task you perform well and the status that gives you in your community are also important, and are lost.

As a result, arguably a potential pareto improvement from a policy involves both pre and post-distributionalist policies.  Furthermore, the cost-benefit analysis of such policy changes needs to count such transitional shocks.

Now, this is already how economists generally consider such issues.  Look at this article by Benje Patterson from 2013.

A generation of workers in Southland’s labour market have become institutionalised in the Tiwai environment.  Subsidised power led to the creation of well-paid positions and accrual of skills that would not have otherwise been demanded by the wider labour market.  This artificial disjoint would leave some former Tiwai employees with a tricky transition into comparably paying employment should the smelter close.

Parallels can be drawn between the current situation for Tiwai’s employees and car assembly workers left jobless in the late 1990s. Both industries flourished because of some form of government intervention.  Tiwai survives because of preferential power pricing, while New Zealand’s car assembly industry only ever existed due to sizeable import tariffs on cars.

Not surprisingly, when the government decided to withdraw these protective motor vehicle tariffs in 1998, domestic assembly plants could not compete with the price of imported vehicles and were forced to shut down.  These closures left thousands of car assembly workers jobless.  As with Tiwai, many of these assembly workers had dedicated a large proportion of their working life to an industry whose labour demands were quite different to those of New Zealand’s broader labour market.  However, despite this disjoint, additional support from the government to help with their transition into other employment was not forthcoming.  The government gave a mere $400,000 of funding for communities affected by car assembly job losses on top of normal social support and employment assistance.

I find this lack of additional support somewhat callous.  Car assembly workers had acquired a specific skillset on the understanding that society wanted to support the industry, as a result, the government’s decision to remove car industry tariffs essentially boiled down to changing an implicit social contract.  The government should have recognised its role in the problem and gone out of its way to assist these workers’ reintegration into the labour market.  It was a change in government policies that undermined the value of the human capital these workers had developed – which suggests that as a matter of fairness, these workers should be compensated for that loss.

Pre-distributionalist policies (at least the ones that make sense) occur within the scope of compensation for an economic shock.  These are positive sum games where some of the people involved have lost out – if we want to make sure people in society are still willing to play these games, we have to ensure that they aren’t (and don’t feel) taken advantage of.

If this is the crux of the discussion around pre-distributionalism then it is worth talking about.

If pre-distributionalism is really about power structures and competition policies using different terminology then that is nice and all, but I don’t see the need when a clearly communicated prior literature on these issues already exists – and requires absolutely no conflict with post-distributionalist policy.

As soon as the article was released I put down a cheeky facebook post among my own friends – I’ve now made it public to share here:

Now as it was among my friends I was assuming it would have context – but on a blog it doesn’t.  So let me explain.

The economists at the RBNZ are excellent.  They are intelligent, articulate, and passionate about economics.  I’ve always found them insightful, and they have a genuine interest in balancing theory with realistic policy.  In the same way, the heads of department and govenor have always been people interested in a balanced understanding of the economy and having an honest interpretation.  Put this way, the individuals involved are doing an excellent job – I am sure Shaz feels the same way.

However, how are policy choices then communicated to the public?  An independent central bank needs an ability to be credible – eg in the case of inflation targeting, when they tell people inflation is going to be some level price setters in the economy need to believe that when setting their own prices.  Such credibility involves persuading the public the Bank knows what it is doing and clearly communicating what it is doing – as a third part the Bank also needs to be able to articulate why what they are doing is justifiable and within their mandate, or why some outcomes are the responsibility of government.

Now central banks – including the RBNZ – more than accept this as their role.  And they actively do what they can to achieve this.  In my comment I am stating that I think they rely too much on appeals to authority to persuade which leaves them vulnerable when their credibility does get undermined.  Instead, communication has to be such that the Bank can be wrong (as all forecasts are wrong) and still maintain authority.

Note:  To be clear the idea of “smartest person in the room” here isn’t meant to be an insult – it is just a way of saying “appeal to authority”.  You put most people at the RBNZ in a room with me and they would be the smartest person in the room anyway

Inflation targeting as a communication framework

Now a lot of people actually disagree with me on this point – and feel that appeals to authority are sufficient and necessary given the way people set expectations (some would say it is an assumption that people are stupid, but more realistically it is an assumption that people are time constrained when considering inflation).  Of course, I disagree with those who disagree with me – as what we care about is the times when people reevaluate their price setting rules – if other institutions start to be seen as more persuasive than the Bank, due to the form of their arguments, inflation gets unanchored (and independence gets threatened).  This gets MORE important when a financial stability mandate is also thrown in.

The RBNZs communication area is facing two difficult issues it has not faced before:

1. The necessity of communicating about financial stability, due to changing regulation/policy in this space.  Furthermore, the Bank now wants to set deposit holders expectations regarding losses so that risk is taken into account.
2. A persistent period of low inflation due to repeated external shock has crept into inflation expectations.

To think about how the Bank should communicate about these ideas they need to clearly think “what are we talking about” whenever they are doing a specific statement.  When Shaz mentions Carney it is because he has used the framework of inflation targeting to clearly communicate his views of monetary policy – one of the key advantages of inflation targeting is how it allows a framework that ensures households and firms can clearly set expectations regarding inflation and interest rates AND allows justifications for why inflation and interest rates differed from forecasts.

Inflation targeting, in this way, is a communication framework.  It is credible and persuasive as the central bank can communicate how their choices can influence inflation, and how they will in turn act if outcomes vary from their expectations.

When it comes to then discussing financial stability and financial regulation, these issues are SEPARATE from the inflation target.  Yes sure, financial regulation influences inflation and interest rates – that is lovely.  But if your monetary policy framework is inflation targeting and you are a credible central bank you ARE setting inflation at your target level as a matter of credibility – financial regulation need not be a central part of your discussion of monetary policy, and if it does keep stealing the headlines at monetary policy discussions then it muddies the waters and makes it harder to communicate to price setters.

Without clearly splitting these issues for communication purposes you confuse price setters, which reduces the efficacy of policy.

And what is making this worse is the inconsistency in RBNZ discussion about financial stability.  I recognise this is a work in progress, but changing the motivation for policies and pretending nothing has happened is poor – attacking policies (such as debt level targeting) and then turning around and introducing them as great ideas doesn’t actually indicate an open mind, but instead seat-of-your pants policy setting.  This is fine for politicians but not a central bank where the rest of us have to have faith that you guys have considered the trade-offs involved deeply before making a statement on something

Now I also disagree with Shaz’s “extroverted” examples.   Rajan got himself involved in politics too much, which in turn confuses the role of the central bank govenor, and also has lost him his job.  A good head isn’t trying to control policy, they are trying to cleanly meet their mandate as determined by a policy targets agreement.  To me, the RBNZ has always clearly recognised their roll in letting the value of fiat currency depreciate at a known target rate (inflation) and they have done a good job with respect to it.

BUT, the communication around financial stability policy, the creeping confusion about the relative roles of monetary and fiscal policy in policy debates, and a frank lack of bloody minded language about doing everything they can to get inflation to target are all factors that have muddied the waters.  The increasingly reactive nature of policy setting and speeches (rather than proactively pointing to targets in the future) combined with a growing muddle between monetary and financial policy is what led me to say I didn’t want to discuss this anymore.

In fact I don’t even want to discuss it now as this is NOT what I am currently thinking about.  However, Shaz’s article motivated me to write something up – as I was a bit concerned people would focus on the potential attacks in his article, rather than just the suggestion that our Bank needs to remember its core competencies when communicating with the public.  When put this way I am sure we are all saying something fairly obvious, something that many at the Bank would agree with but would merely have a different view on the trade-offs involved with communicating these ideas.

Tldr

The RBNZ has great economists and good leadership, but should be using inflation targeting more forcefully (and without reference to financial stability) to meet monetary policy goals.  At present, there is a risk that wandering into political issues, or the inconsistent explanations about what the Bank is doing, undermines monetary policy.

This is an issue around the world of course, and our Bank does do a good job – but it is worth reconsidering these issues from time to time to make sure the focus is on the core elements of what Bank policy should be doing, not the cute issues around the side.

So why doesn’t the stereotype hold up?  Well for one, Kiwis can’t get the unemployment benefit in Australia – they could pre-2000 but then things changed.  Just check it here.  It is common to see Australian media (and people I run into) complaining both that Kiwi’s are “stealing their jobs” and “stealing their benefits”.  In truth Kiwis are heading over there, without a security net, to work hard to make something of themselves in a larger country – they can’t get the benefits, and the idea of a zero sum set of jobs is just straight incorrect.

Secondly, within both countries there are proportionately fewer people on the dole in New Zealand than in Australia.  New Zealand produces these numbers directly, but I couldn’t find matching Aussie data.  As a result, we can just look at the unemployment rates (given they use matching definitions of what constitutes unemployment):

Sure unemployment went a bit higher recently, due to the deeper recession in NZ – but on average a lower proportion of NZers are unemployed than Aussies are.

And this has occurred with much higher employment rates (% of people over 15 in work) in NZ than in Aussie.

So, out of the population, a larger proportion of NZers are actually working relative to those in Aussie.

So not only was it a stupid, racist, and bigoted call – the data doesn’t even support the TV hosts prejudices.

Note:  The term dole bludger is insulting and degrading in the first place – irrespective of the relative unemployment rate.  Even if NZers could get benefits, and the UR was higher in NZ, this type of attitude towards benefits is pretty dirty.