Wednesday, 8 June 2016

Asymmetric Information

The latest issue of the NZAE newsletter, Asymmetric Information, includes Bryce Wilkinson's excellent critique of the Treasury's recent 'Living Standards' framework, along with a reply from Girol Karacaoglu. 

Bryce writes:
Yet high quality fiscal and regulatory analysis is difficult. For a start, politically powerful or influential spending and regulatory advocates might not welcome it. It is also difficult technically. The mainstream technique for analysing both regulatory and fiscal proposals is cost-benefit analysis.4 Treasury is the custodian of that methodology in the public service.5

Given these gatekeeper roles Treasury can’t expect to be widely liked, but it should aspire to be respected. It should not confuse the two.

Yet the Living Standards Framework does appear to want to be all things to all people. It proposes evaluating spending and regulatory proposals from five ad hoc perspectives–their contributions to economic growth, equity, sustainability, reducing risk and enhancing social infrastructure.

The framework apparently leaves it open to spending and regulatory interests to cherry-pick amongst the five pillars and within them, deciding for themselves which pillar best serves their purposes in a particular case. It gives no disciplined guidance to Treasury officers or anyone else as to how to choose between, say, competing concepts of equity, or how to assess trade-offs between the pillars. 6 Nor is there an international literature to look to for guidance.
Girol's reply follows.

You can read the Living Standards working paper here if you're particularly keen. Bottom line seems to be that if you assume a bunch of external costs from activities and that the living standards framework can internalise those external costs, then the living standards framework is a good thing. For example, if we assume that clean tech requires skilled workers, then you might not have enough investment in education if environmental quality is valued. For more such insights, but with a lot more math, you can read the paper.

Asymmetric Information also includes a regular feature profile of a local economist; I'm interviewed in this month's newsletter. So you can read that too if interested.

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