Encouraging Arrow-Debreu worlds

Chris Dillow warns that economics only results in real-world changes when it serves the interests of the powerful.

This poses the question. How come economics is performative in some regards (option pricing, bosses’ pay) but not in others, such as contingent markets?

It’s certainly not because Arrow-Debreu theory is new or marginal. It is much older, and far more widely taught in universities than the work of Jensen and Murphy cited by Aditya.

Nor is it because state-contingent markets would be an obviously bad idea. Yes, we know from the theory of the second best that it is not necessarily efficient to remove a single market distortion, so it’s theoretically possible that the introduction of a few such markets would be sub-optimal. But whether this would be the case in practice takes some proving. And anyway, plenty worse ideas than these have been turned into economic reality.

There is, of course, a simple answer to this question. Economics is performative when it serves private interests, but not (necessarily) when it serves public ones. Traders immediately saw the usefulness of the Black-Scholes option pricing formula, and bosses quickly saw the use of Jensen and Murphy’s work. But the benefits of better state-contingent markets accrue to millions and cannot so easily be captured privately. They are an example of a Nordhausian innovation - one with high social benefits and low private benefits and which do not therefore exist. Paradoxically, markets are incomplete because of a market failure - that there’s a positive externality to creating complete markets.

I could, of course, put this more crudely. Economics is performative when it serves the interest of the powerful, and not performative when it doesn’t. In this sense, the problem is not with economics, but with a class structure that causes the “real world” to be a corrupted and perverted form of a market economy.

As powerful counterexample, here's Justin Wolfers working to push us closer to Arrow Debreu worlds in helping to get prediction markets legalized in the United States. Prediction markets are exactly the kind of Nordhausian innovation that shouldn't exist. The Case-Shiller markets also help move us to Arrow-Debreu.

It's fun to think about the market failure of there not being enough markets. One obvious solution is that governments support rather than oppress prediction markets. Three cheers for New Zealand's iPredict, and for the policy environment that allows it to exist.

Anti-paternalism

Dr. Michael Keane writes in the IPA Review:

Consider a low-socioeconomic status individual who is smoking, drinking, gambling, eating junk, spending on frivolous retail purchases (a ‘shopping addict’) and having indiscriminate sex (‘sex addict’). Does she or he really employ sophisticated risk management equations and decide that the benefits outweigh the costs?

Arousing public anger at those deemed unworthy of the privilege to make choices is a dangerous tactic. However, it is probable that many of the more vocal public health academics do genuinely believe that they, the elite, have a paternalistic duty to control the incapable masses.

As every dysfunctional behaviour can, without many inferential steps, be related to health expenditure, appeals to such imperative have few logical limits. The folly of enforcing interventions against peoples’ will on the basis of economic analyses of the cost to the state is obvious, and educated health professionals should know better than to use such divisive and emotive arguments.

If the growth of the Nanny State is to be curtailed, policy makers must have the confidence to stand firm against the mutton of opinion even when it is dressed up as the lamb of science.

Hear hear.

Even worse, most numbers cast as representing social costs, which most folks interpret as costs to them via the state, consist almost entirely of costs borne by drinkers, smokers, and gamblers themselves. The healthist beancounters don't just assume that the addicts fail to employ cost-benefit analysis; they rather assume that such consumption has no associated benefits. That's how they get to count private costs as being social. Any evidence of potential market failure through imperfect information or irrationality is taken as sufficient reason for dismissing all potential consumption benefits. The argument of course proves too much.

Treasury!

Treasury's advice to incoming Ministers, now released, looks rather good. I'll really look forward to whether any of these translate into policy proposals.

In their advice to the incoming Minister for Regulatory Reform they suggest priority be placed on fixing the RMA; labour markets (in particular ACC, minimum wages, and occupational regulation); housing supply; innovation IP and standards; and the Overseas Investment Act. They also want to tighten up requirements on Regulatory Impact Statements (which haven't seemed particularly binding).

The Briefing to the Minister of Finance recommends ... well, this is more easily done as bullets.

• A faster return to budget surplus and debt reduction; 


• Strengthening of the Public Finance Act to "reduce the risks of procyclical fiscal policy during future periods of strong economic growth";
• Hopefully, this could bind a future version of 2005's Michael Cullen from ruining an otherwise decent run. 


• Targeting early childhood education subsidies to lower income households; 
• Makes perfect sense, especially in combination with increased work requirements in welfare reform.


• Have fewer but better teachers teaching larger classes. 
• This is entirely consistent with what I've seen of the educational literature: small class sizes don't do much to help, but good teachers do a lot. 


• Welfare reform: in particular, reduce the age at which work testing applies for sole parents on benefit.
• I like this. Before you note the unfairness of making sole parents work, do consider that we've had both our kids in daycare from the time they were three months old. Suggesting that I pay more in taxes so others can spend more time with their kids makes me angry. But I worry that it might induce some on benefit to have more children so as to remain eligible. Is it impossible to make the sole parent benefit conditional on use of reliable long-term birth control? 


• Reduce taxes by broadening bases. 
• I'd really need to see specifics here as there aren't obvious candidates for base-broadening that would be likely to result in aggregate deadweight loss reductions. They seem to hint differences in effective capital taxation on owner-occupied housing as compared to other investments might be basis for policy changes; they'd then have the somewhat tricky problem of either forcing low income folks out of their homes for inability to pay capital gains on accrual, or forcing kids to sell the family home to pay capital gains on realization, or inducing distortions in duration of home-ownership if you can avoid paying taxes on unrealized capital gains.


• Fix regulatory regimes around RMA, local government, housing supply and the minimum wage.
• Raucous applause. Wild and exuberant cheering. Housing supply constraints, erected by local councils, are killing housing affordability. And for the folks like TV3's Patrick Gower, who wants to paint Treasury as really being in favour of big minimum wage increases on very shoddy evidence, here's Treasury in today's release:

  In addition, it is important that wider labour market settings support welfare reform. For example, large increases in the minimum wage would limit employment opportunities for people transitioning from welfare to the labour market and for youth.



• Shift science and innovation funding to focus on commercialisation
• This isn't crazy; there's a big world on whose contributions to basic science we can free-ride. But it's also debatable whether commercialization and applied work can be done by folks who aren't conversant in the basic science.


• Encouraging use of prices as demand management for Auckland transport; use market structures for encouraging more efficient water use.
• Raucous applause from every economist worthy of the title.


• "Ensure that the longer-term recovery strategy is realistic, maintains confidence in the future of the city, and contributes to the return of normal operation in the insurance, financial, property and labour markets". 
• I'm not sure that $1billion + light rail systems are realistic. Neither am I sure that initial Council plans did much to encourage confidence. 


• Phased increases in the age of eligibility for government superannuation
• Raucous applause.


• Reintroduce interest on student loans
• Raucous applause again

Throughout the document, Treasury's lobbing bricks at the outcomes of Director's Law: that democratic governments wind up using welfare to benefit the middle class rather than the poor. 

For example, government spending on social services (ie, health, education and income support) increased by almost 20 per cent more for households in the top half of the income distribution than for households in the bottom half of the income distribution between 1997/98 and 2009/10 (figure 18). The spending increases for higher-income households have been primarily driven by higher education, health and NZS expenditure. Better targeting of these social service expenditures could both improve overall social outcomes and reduce fiscal costs.

I hope they're able to get half of what they're aiming for.

Gimmie some sugar

Ah, those nutty public health folks. Is it plausible that sugar is bad for your health and is one of the reasons for increased diabetes rates? Sure. But that sure isn't sufficient basis for this:

Sugar is so toxic it should be controlled like alcohol, according to new report that goes so far as to suggest setting an age limit of 17 years to buy soda pop.

It points to sugar as a culprit behind many of the world's major killers — heart disease, cancer and diabetes — that are now a greater health burden than infectious disease.

A little sugar "is not a problem, but a lot kills — slowly," says the report to be published Thursday in Nature, a top research journal.

And Count Chocula will be subject to plain packaging legislation? You think I'm kidding...

"We recognize that societal intervention to reduce the supply and demand for sugar faces an uphill political battle against a powerful sugar lobby," the researchers say, "and will require active engagement from all stakeholders." But such "tectonic shifts" in policy are possible, they say, pointing to bans on public smoking, limits on alcohol sales and condom dispensers in public washrooms. "It's time to turn our attention to sugar."

Ah yes. The powerful sugar lobby. They are indeed responsible for many real ills: sugar tariffs and subsidies in the US. But the public health guys, as usual, completely discount an alternative explanation for why people might oppose sugar regulation: that we enjoy eating it.

How long until some dodgy outfit comes up with a Cost of Sugar to Society study that puts together a table of aetiological attributable fractions for the burden of various diseases due to sugar consumption, tallies the costs to the public health system of sugar-related illness (80% of total dentistry expenditures, 50% of diabetes, etc...), adds to that all of the subjective intangible costs experienced by those incurring downside consequences from eating sugar (and all of the costs of growing "harmfully-consumed" sugar), assumes zero private enjoyment from eating tasty sugary snacks, and publishes a massive social cost figure for sugar use that will help fuel demand for sugar regulation?

HT: @JoelWood

Update: Here's Barbara Kay in the National Post on sugar taxes:

Taxes are justified as a deterrent for any substance we know to be harmful in quantities, because we all pay for the health care of people who are negligent of their health in the over-consumption of stuff they know is bad for them.

There is no logical end to that argument.

Hope for the weka?

Enviropreneur Roger Beattie has pushed for the right to raise and farm NZ protected weka for the dinner table. It's the best approach for conservation: while the Department of Conservation's funding depends on animals being endangered, a farmer's profits depend on his being successful at breeding and raising animals.

Meanwhile, exotic African animals are finding new hope in Texan game farms. Maybe if somebody can smuggle some weka out of the country and over to Texas, they'll be able to there start a commercial breeding operation.

Here's Roger tearing a strip off former Labour Conservation Minister Chris Carter. Shame National decided to keep Labour's policy on this, as on more than a few other issues.

Bogus polls

Web polls are worse than useless, says Thomas Lumley. Why? Anchoring bias.

Seeing the results is likely to make your beliefs less accurate, even if you know the information content is effectively zero.

It might not be immediately obvious how bogus web polls cause harm. But if anchoring bias feeds into conformity or bandwagon effects, and that cycles into voter policy demands, we can move from bogus poll to "most people think X" to "Policy should be X" to "How can you oppose X, most people agree...". I think similar mechanisms work in bogus "cost of X" studies, eroding some voters' default liberalism by convincing them that they're bearing, through the tax system, costs actually borne by those engaging in the activity.

StatsChat continues in its Sisyphean quest to beat the stupid out of journalistic use of stats in New Zealand. Check the link above for fun and game in margins of error across three web polls. Forfty percent of Kiwis know these stats are bogus; shame it isn't eighnty.

Food Bill revisited

I wish I knew the likely effects of the upcoming food bill. NZCPR asked me for a short piece based on my prior post; here's what I gave them. One link didn't make it through there: 3 News on the Food Bill.

I wonder whether both Minister Kate Wilkinson and the bill's critics couldn't both be right. If the current de jure rules aren't strenuously enforced against small traders, or only are so irregularly, then the de jure loosening of restrictions on small traders could be a de facto toughening if enforcement is tightened.

Radio New Zealand last week featured one small cheese producer on the costs of the prior regime and her worries about the new one. Minister Wilkinson's comments there really aren't reassuring. [HT: Gonzo] She emphasizes that even small-scale cheese-makers will come under the regulatory apparatus:

The cheese that's produced from three cows or three thousand cows is still expected to be safe. ... We want the Biddies [cheese-maker Biddy Fraser-Davies] of this world to keep producing fantastic cheeses, but we also want that cheese to be safe.

But let's recall that the vast majority of costs of food-borne illness are the individually borne intangible costs of being sick. Those costs are very real and the Applied Economics study tabulating them seems pretty sound. But why oughtn't I get to choose to buy cheese from a small producer and take that individual risk without Wellington getting involved? The costs of head injuries from skiing may well be high, but if I'm the one bearing them, oughtn't I be the one who decides to wear a helmet? Wasn't this supposed to be the government of individual responsibility that defeated Helen Clark's Nanny State?

Wilkinson worries about ensuring that people can be confident in the local food system. If information asymmetry is the problem, all the government needs to do is give out stickers to producers wishing to produce under regulatory guidelines so that they can advertise as such; absence of that certification then says you have to be sure you can trust the producer. And, anybody who's paranoid about food poisoning can always choose to purchase from big producers at supermarkets instead of small guys selling home-made stuff at farmers' markets. And, frankly, I'll trust Biddy Fraser-Davies, the small cheese producer interviewed, over Wilkinson's bureaucrats.

I wrote for NZCPR:

Perhaps worse than my potential loss of choice as consumer is the loss of an easy pathway to small-scale entrepreneurship. Even if the monetary costs of registration as a food producer are low, Wellington often weighs too lightly the discrete hurdle thrown in front of a potential entrepreneur who has never otherwise had to worry about compliance regimes. The dread costs of figuring out which forms to fill out, and the fear of getting something wrong, can be very real barriers to would-be new small-scale entrepreneurs. When you’re really not sure if you’ll be able to make a go of a new venture, adding a hurdle of having to seek permission can provide a burden much larger than the nominal $50 registration fee.

Muriel Newman at NZCPR (link currently here, but likely to suffer linkrot) also comments:

For a government that claims to be committed to encouraging wealth creation and reducing compliance costs on small business, the Food Bill could be a major step backwards. It appears to be being driven more by bureaucratic considerations rather than the need to encourage entrepreneurship in the food sector - within the bounds of stringent food safety imperatives. It is also not clear what the answer is to a fundamental question that should be asked of all new legislation: Is there a problem to be fixed and if so will this Bill fix it?

At least raw milk doesn't seem likely to be killed under the new bill.