MBIE and the signalling model of education

What's the point of education anyway?

The usual story is that you pick up skills that improve your human capital, and that you then go on to apply those skills in ways that provide value. So training improves wages because you're more productive due to the training.

Bryan Caplan's been an advocate of an alternative story around education. In that version, education isn't really about skills, or at least mostly isn't about skills. Instead it's about signalling. If employers really cared about specific skills, there are way more efficient ways of getting those than a 3 or 4 year university degree. Instead, education is more like an arms race. The point is to demonstrate through costly effort that you're smart and diligent enough to make it through. If it were just smarts, an IQ test would suffice. But it isn't. It's also being the kind of person able to slog through an undergrad degree and consequently likely able to put up with the drudgery parts of normal jobs.

So, let's have a look at MBIE's policy graduate programme. It gives 16 months of policy training to fresh university grads with at least a B average in their Bachelors. That training part seems like actual skills-conveying.

Now if university provided skills rather than a screen and signal, you'd think there'd be some amount of matching between the grads' training and the policy areas they're working in.

Here's what we've got. Note - this is absolutely not meant as criticism of the fresh grads doing this work. I'm just curious about how they line up training and tasks.

1. An Honours History grad, with an undergrad in History and Sociology, who notes working on the KiwiSaver Default Provider Review. You'd think this would be a task suited to a grad with training in behavioural economics, economics, or finance. 
2. An Honours History grad, undergrad History and Spanish, working on consumer policy issues ranging from ticket reselling and access to safer credit, to country of origin labelling for food. This is microeconomics work. 
3. BA in Public Policy, Political Science, and IR, with a minor in Development Studies, reviewing the Crown Minerals Act to ensure it remains fit for purpose, with specific work looking at iwi engagement and opportunities to better involve Māori in decision making processes. This seems a decent fit. 
4. BA Pols and IR, and Anthropology, working on regulations for dams and dam safety, and has been lead author on a Cabinet Paper. I'd have thought that would either be an engineering role, or econ looking at CBA, or laws. 
5. Bachelor of Law and BA majoring in Pols and Psych, looking at corporate governance. Laws can fit with that. 
6. BA majoring in Pols and Film & Media Studies, looking at temporary migrant worker exploitation and engaging with the ILO in Geneva. Labour economics could have helped, or laws. 
7. Honours Pols, looking at housing policy and housing affordability. Again - microeconomics, urban economics, laws with focus on RMA / district plans. 
8. BCom Accounting and Management, and BA Pacific Studies, Pols and IR, working in prep for the APEC meetings. Seems a good fit. 

Maybe I'm way out in this, but it feels like maybe three of the eight are hitting areas where the undergrad or honours training would have provided particular help in the policy areas.

These aren't jobs for life - it's the grad training programme. Could be that grads progress from there to policy work more aligned with the things for which they'd trained. MBIE is big enough that you'd think they'd be able to find a policy area that's a decent match for most incoming grads if it mattered. 

Overall it seems more consistent with the signalling model of education than the human capital model. 

Treasury Episode IV: A New Hope

Episode 3 comes to a somewhat dark end. The State Services Commission that selected, appointed, and re-appointed Secretary Makhlouf damns his conduct in the budget hack during the press conference, but issues a more restrained report that finds the Secretary acted in good faith at all times, that his conduct was non-partisan, but that it was unreasonable in some statements made.

In summary, I find that, in relation to Mr Makhlouf's written and oral media statements:

a. Mr Makhlouf acted in good faith at all relevant times;
b. Mr Makhlouf acted in a politically neutral manner at all relevant times; and
c. Mr Makhlouf did not act reasonably in relation to:
i. his use of the phrase "deliberately and systematically hacked" in his Tuesday evening media statement;
ii. his use of the bolt analogy in his media interviews on Wednesday morning; and
iii. in his media statement on Thursday morning, continuing to focus on the conduct of those searching the Treasury website rather than the Treasury failure to keep Budget material confidential.

A better analogy to the bolt one might have been someone jumping on a trampoline outside of a second story window, taking snapshots of giant posterboards taped to the window with every bounce.

I doubt that anything in the report then reaches a level that would have the Irish Bank reconsider its offer of appointment - they'd signalled it would take findings of very very grave misconduct. I'm not great at interpretations of bureaucratic legalese, but "did not act reasonably" in a limited set of cases seems unlikely to hit that standard.

Bit of a downer of an end to Episode 3.

Anyway, on to Episode 4. The next Secretary will be Dr Caralee McLiesh, coming over from New South Wales. We'll call this one A New Hope. It could all yet end badly, but there's a lot of promise here.

I'd said that the next Secretary needs to bring the academic credibility needed to signal a change in emphasis, and the managerial ability to effect the necessary changes.

It's hard for us here in New Zealand to say much on the latter front - we just don't know. But on the former - Dr McLiesh is not only well trained, she also has a string of superb publications from her time at the World Bank. Absolutely superb. Imagine having this portfolio going into a PBRF round.

• Djankov, McLiesh and Shleifer. J Financial Econ, 2007. Private Credit in 129 Countries. 2593 citations. 
• Djankov, McLiesh, Nenova and Shleifer. J Law & Economics. 2003. "Who owns the media?" 992 citations.
• Djankov, Hart, McLiesh and Shleifer. J Political Economy. 2008. "Debt enforcement around the world. 873 citations
• Djankov, Ganser, McLiesh, Ramalho and Shleifer. 2010. AEJ: Macro. The Effect of Corporate Taxes on Investment and Entrepreneurship. 
• Djankov, McLiesh and Ramalho. 2006. Ec Letters. "Regulation and Growth."

Oh - and the data series on regulation produced by the World Bank in it's Doing Business in 2004 report? That's hers too - co-managed development and production of it; Djankov was team lead. 

What things do we know from that set of papers?

• Creditor rights matter in ensuring access to credit;
• Across a broad set of countries, government ownership of the media undermines economic and political freedom rather than working to remedy market failures;
• Making it hard for creditors to proceed against a defaulting debtor hinders the development of debt markets;
• Across a cross-section of countries, higher corporate tax rates adversely affect investment, FDI, and entrepreneurial activity;
• Better business regulations improve economic growth.

I'm optimistic about this appointment. A New Hope. 

Bailout risk and deposit insurance

It looks like New Zealand may wind up getting deposit insurance at the banks. 

Let's review the case for these.

If you think that the government is very likely to bail out a failing bank, then that bank and its depositors are currently enjoying an unpriced insurance product that allows the bank to take more risks than it otherwise would, with depositors and shareholders enjoying the upside benefits, and shareholders and the Crown bearing the downside costs. Recall that under New Zealand's OBR regime, shareholders are fully burned before any depositor funds are touched - I've not heard that there's bailout risk for shareholders. 

I expect that there would be substantial bailout risk in any bank failure where haircuts under OBR would be substantial, but haven't thought that risk material. It would take a very large bad event to make a bank go down at all, so maybe you could figure that conditional on a bank's failing, the losses are likely to be more substantial than OBR could safely handle - it's not a crazy view at all. I've tended to think that there's trivial bailout risk for haircuts on the order of 10%; other economists whose views on this stuff I respect think that even a 10% haircut would trigger a bailout. They may not be wrong given precedents in Christchurch insurance. 

So it's really one where you want to be all in or not at all. The Bank and government could push hard to maintain the position described by Rod Carr when he was Deputy Governor about that bailouts simply wouldn't ever happen, and maintain expectations around that equilibrium to make it self-enforcing. But piles of economists speculating about the likelihood of bailouts and saying that they'd be likely to happen can unwind that too. 

Mandating deposit insurance and pricing it appropriately will reduce depositor returns, but if insurance makes sense, that's only because depositors will have to start paying for something they were already getting for free from the government. 

But what seems a bit nuts given all that is National's line critiquing the government. Again, from the background above, there are tenable arguments against the government's position. You could argue that we need hard lines against bailouts. You could argue that prudential regulation and results of existing stress tests mean bailout risk is low because the probability of failure is low, so any resulting insurance costs should also be reasonably low - and that all of this should be considered simultaneously with the coming changes to bank capitalisation requirements rather than on their own. 

Those aren't the arguments National's running. Instead, they're angry that the deposit insurance doesn't protect people who have a pile of money sitting in bank deposits. The government's proposal would cap protection at between $30,000 and $50,000. National thinks it should have a much higher threshold, and worries about people who have their entire retirement savings in bank deposits.

The model of deposit insurance and bailout risk in my head is that bailout risk is sharply increasing in the number of small and relatively poor depositors who lose their shirts in a bank failure. They could credibly say that they trusted in the government's prudential supervision and would be in a very poor position because of the failure. Someone with a couple hundred thousand dollars sitting in a deposit account would likely hit the 'informed investor' triggers in other areas - in other words, people who should really really know better than to leave lots of money sitting in deposit accounts for substantial periods of time.

What model of bailout risk must be in your head to think that the government is especially likely to bail out a pile of rich people who really should have known better? Is National really here saying "Yeah, we'd totally do an SCF bailout again, you've got to price that kind of thing in because we can't help ourselves from bailing out rich people who should have known better"? All explanations are depressing. 

Do flat taxes make sense? Depends on your goal.

Stuff's Susan Edmunds got in touch asking whether flat taxes work. I was pretty long-winded, so only some of my comments could possibly be used. Here's what I'd sent through. Enjoy!

People’s views on flat taxes will depend on their views of the desirable overall size and scope of government. It is difficult to finance a large redistributive state on a 17.5% flat tax – the Crown gets a very large proportion of its revenue from income tax payments from high income earners. The flat tax is consistent with ACT’s desire for a more constrained and smaller government, and can be efficient within that setup. Lower effective marginal tax rates can increase labour supply, but we should be cautious not to overstate effects here. Most studies conclude that primary earners are not that responsive to tax rates, or at least not in the shorter term in deciding how many hours to work. The overall tax burden can be important for bigger on/off kinds of decisions though, like whether to migrate to New Zealand in the first place, or whether to shift abroad if you currently live here.

So a flat tax can be consistent with a shift toward a smaller overall government.

ACT proposes funding the reduction in the overall tax take by abolishing the Provincial Growth Fund, raising the age of NZ Super, removing fees-free study, cancelling winter energy payments, capping Working for Families, and ending government contributions to Kiwisaver.

Abolishing the Provincial Growth Fund seems sensible enough, but we should note that that fund will end at the end of the current government. A tax system change is long lasting. So future governments would be constrained against putting in big expensive regional spending programmes to buy the support of whichever party might make that a condition of coalition support.

Raising the age of Super entitlement, so long as it’s done with enough lead-time for people to prepare properly for retirement, is also a generally good idea – whether you want to use the savings then to give more money to younger poorer people, or to fund a reduced overall tax bill. It would be difficult to do this in the short term.

Removing fees-free study makes the overall package less regressive than it might otherwise seem as the benefits of the programme disproportionately accrue to higher-earning families. While many poorer families also benefit from fees-free study, the bulk of the benefit goes to higher earning families who would have gone to further study anyway. That’s one reason that we had opposed fees-free in the first place, and had suggested reinstating interest on student loans while using the savings to boost scholarships for low-income students and to improve preparation for tertiary study at high school.

Winter energy payments are incredibly badly targeted and an ineffective way of supporting those on lower incomes. But the combination of reducing this payment while also increasing income tax paid at the bottom might argue for an offsetting boost to benefits. Similarly, capping Working for Families to two children will be attractive to those on higher incomes who have had fewer children and who might wonder about very large family sizes among those on lower incomes, it would likely have negative effects on material deprivation among those poorer larger families.

Finally, abolishing Crown contributions to Kiwisaver also seems rather sensible. Series of papers produced by Grant Scobie and various co-authors showed that Kiwisaver has had no effect on overall savings rates. The policy then mostly rewards people for savings that they would have undertaken anyway.

Caveat on all of this: I have not double-checked the numbers and am taking them all as given on ACT’s website.

Aligning the flat tax rate with the company tax rate will mostly have effect on companies’ ability to attract foreign capital, and a bit of a reduction in taxes paid by nonresidents. Under the imputation regime, the company tax rate is a bit irrelevant if the company is solely held by Kiwis: the owners of the firm get an imputation tax credit along with any dividend payment, so if the company tax rate were higher than the top marginal tax rate, then IRD would just be writing that off against their income tax due anyway. Where it would have effect is on dividend distributions to foreign owners who aren’t eligible for imputation credits and who would consequently see a tax reduction – and also consequently be more willing to invest in New Zealand. Since New Zealand is generally shallow when it comes to capital and could use a lot more investment, on balance that part seems rather desirable.

I think some of the reporting around the proposed flat tax has been a bit lazy, but some of the problem is that we just don’t have data here that’s available in other places. For example, there’s been a lot of reporting that many earners would see an increase in total taxes paid under a 17.5% flat tax because the higher tax on earnings under $14,000 would outweigh the reduced taxes paid on earnings over $48,000. But many earners that are in that group will be secondary earners in households where a primary earner will enjoy a more substantial tax cut. So if we then consider a household where one person is on >$100k and the second person is on $40k, there would be an increase in the tax paid by the second person but it would be dominated by the tax cut enjoyed by the first person. And, the tax increase on the second person would be ‘inframarginal’ – in other words, the marginal tax rate doesn’t change for that person, but the tax collected on earlier earnings does. So it should not have any effect on the second person’s hours worked (conditional on that person still finding it worthwhile to be in work), but will have some likely minor effect on the higher-earning partner’s labour supply. And if we think about migration decisions as being about how the household as a whole fares, it could have effects on decisions by families with a higher skilled worker to move to New Zealand.

So, I suppose, a few bottom lines:
• If your ideal government includes a lot of redistribution, including programmes like fees-free study that are very poorly targeted if you think redistribution should mostly help poor people, then you shouldn’t be a fan of flat taxes. They simply cannot raise the amount of money necessary for a large redistributive state.

• If you think that government should on the whole be smaller, then financing it via a flat tax can work well. Don’t be overoptimistic about huge consequent growth effects coming out of increased labour supply from the highly skilled who are already here, as the literature suggests primary earners’ wages are not all that responsive to tax rates. But you could see a bump via greater labour supply from high skilled secondary earners, and through changes in migration.

You can’t really say whether a flat tax works without specifying what the goal is. It doesn’t work if you want to have a large and redistributive state as you cannot finance that kind of government on a flat tax. But it does work if you don’t want that kind of government. 

The quoted bits have me more firmly on the pro side. I'd be happy enough with a smaller overall size of government, but figure it's worth laying out the tradeoffs.

A world without opportunity costs?

From Question Time yesterday comes a useful question for anyone setting Principles-level exams. Discuss this exchange with reference to theory as discussed in class. 

Hon Amy Adams: How can he say that he's used "evidence and expert advice to tell us where we could make the greatest difference to the well-being of New Zealanders", when the Government has chosen to pour hundreds of millions of dollars into fees-free tertiary at the expense of giving Pharmac enough money to keep pace with inflation?

Hon GRANT ROBERTSON: The premise of that member's question is incorrect. Money that supports education, money that supports health, and money that supports housing are all part of the Budget; one is not at the expense of the other. What we're doing is actually making up for the enormous under-investment of the previous Government.

…

Hon Amy Adams: Why was spending $7 million on Artists in Schools a higher well-being priority than the mere $6.5 million needed to reinstate cochlear implant funding that his Government cut in last year's Budget?

Hon GRANT ROBERTSON: Again, the member is not reflecting the Budget process that she knows well. These things are not trade-offs against one another. We are creating an environment in which we're investing in well-being across all sectors of the economy. In the health sector, this Government has a record that is far superior to that Government.

Robertson could be right if they just set a total amount that will go to health, then weigh bids within health against other bids within health - but that would also make a bit of a nonsense that the wellbeing budget ensures every dollar provides the greatest possible increment in wellbeing. 

Google keeps making our lives better

Navigating post-earthquake Christchurch was tough. Every day brought a new set of road closures to route around. And they weren't always easy to predict in advance. If enough roads were closed on the south side of town, I'd want to take the longer northern loop to get from New Brighton to the University - but I wouldn't know that until I hit the closures.

So I'd then asked some friends at Google whether this couldn't be automated (and posted on the basic idea here). Traffic flow data already held could be used to infer road closures. If everyone who'd been recommended to follow Dyer's Road down to Ferry Road took a turn on Linwood instead, and nobody was on that small stretch of Dyer's Road, it would be a safe guess that it was closed. Why not flag it as likely closed, route around it, then update when it noticed traffic flowing again?

It wound up being more complicated than I'd have thought, and SCIRT was doing its best anyway to try to get road closure data up in real time in format that could be read automatically. But it still wasn't great.

CityLab reports that it's coming: Google is adding a disaster-navigation tool to Google Maps. Crowdsourced user responses will provide suspected closures in addition to the confirmed road closures.

I hope Wellington does not get its expected earthquake any time soon. If it does, this will make life a little bit more manageable. There will be so many unpredictable road closures due to slips. If you're home and have little gas in the tank, it will be hard to tell whether you can even get to the petrol station. This will help.

If the New Zealand government had put out an RFP for this kind of functionality, it doubt anyone would be offering to provide it for cheap. Instead, Google's giving it to us for free.

I hope that, come the quake, Bernard Hickey remains true to his principles and boycotts this excellent free service.

It's so nuts that New Zealand's looking to move out of step with the OECD on international tax and impose punitive rates on Google. Imagine if Google ever shrugged.

For want of a CURF

Some things are just hard to know without decent public use microdata.

There's been a lot of furore about ACT's flat tax proposal, with many on the left outraged that a libertarian party would support lower taxes.

Many have also pointed out that a 17.5% flat tax would represent a tax hike - not just for those currently on the 10.5% lowest tax rate, but also for those who are at a low enough point in the 30% tax band that the inframarginal increase in taxes on the first $14,000 of earnings would outweigh the reduction in taxes on earnings above $48,000.

No quibbles on that part - it's just maths.

But I am a bit more curious about household distributions. How many of those who would see that inframarginal increase in taxes are in households where the other earner would see a real tax cut accompanied by a drop in their tax rate? I remember Pacheco and Maloney's work showing that many minimum wage earners are in higher earning households, so the minimum wage is poorly targeted. I expect there could be similar effects here.

To know that we'd need a two-way earnings table. The columns would show the earnings of the primary household earner, split into different bands. The rows would show the earnings of the secondary household earner, split also into different bands. Each cell would provide the count of households where the primary earner earned the column amount, and the secondary earner earned the row amount.

For households with two earners on lower wages, the flat tax would be a tax increase. For some of those, it would only be an inframarginal tax increase. For others, it could represent a tax increase at the margin (anyone earning less than $14,000 per year).

For households with one higher earner and one lower earner, I'd expect most would see a tax reduction with effects at the margin, but I don't know the numbers.

And households with two higher-earners would definitely see a tax cut.

I guess the substantive point is that a lot of the folks being currently touted as seeing a tax hike under ACT's proposal would be in households where the net effect would be the opposite, and where the tax hike part would be inframarginal while the tax reduction part would have effects at the margin. We don't expect big labour supply effects on primary earners from tax cuts, and we do expect more supply responsiveness from second earners - but if the effect on second earners is more likely to be inframarginal, then that's a bit different.

And the more substantive point is that it's just dumb that it's hard to know what the numbers actually are. In the US, I'd just download the ACS PUMS and tally it. Here, because Stats' back-end systems are archaic, the only tables we have are the ones somebody thought to code in ages ago. You can't dynamically generate them.

Stats does have Confidentialised Unit Record Files, but you have to go through an application procedure to get them. And, once you have them, you can only use them for that one specific thing that you asked to use them for, then delete them. If you want to check something out just out of idle curiosity - like this tax question - well, you can't. Even if you have the CURF from a prior request that you're still working on, you have to get permission to use it to ask this specific question.

And the most recent CURF that might answer the question would be the one from the 2013 Census; they don't CURF the HES.

I have a query in with Stats in case this table already exists somewhere on a disused server in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying 'Beware of the Leopard', as that's always a possibility. But this kind of stuff shouldn't take hassling Stats staff (they are exceptionally helpful, and it wouldn't surprise me at all if somebody there is already building the table) or doing a whip-round of other economists to see whether they know whether this kind of data exists. You should just be able to download the darned Census CURF and check it - or have back-end systems that can support the kind of data access that IPUMS provides.

UPDATE: Stats' helpful advisor informs that that cross-tab does not exist and would take either a custom data request, or a research project through the IDI.

UPDATE2: Customised data requests charge out at $155/hour. If Stats' back-end systems weren't rubbish, or if they decided to free the Census CURF, any of us could just do it on our own.

Haidt!

Jonathan Haidt will be speaking in Auckland on 1 August. I've seen him present before; he's excellent. 

In 2012, US psychologist Jonathan Haidt rose to fame with the publication of his book The Righteous Mind: Why Good People are Divided on Politics and Religion. In its review, The New York Times called Haidt’s book “a landmark contribution to humanity’s understanding of itself.” It has since gained widespread praise from commentators left, right and centre (see here).

Both Foreign Policy and Prospect Magazine have listed Haidt on their respective rankings of the world’s Top 100 public intellectuals.

Haidt has since published extensively on threats to academic freedom and the polarisation of political debate on campus. His latest book (with Greg Lukianoff) is titled, The Coddling of the American Mind: How Good Intentions and Bad Ideas Are Setting Up a Generation for Failure.

The New Zealand Initiative is proud to support Jonathan Haidt’s first visit to New Zealand.

This will be a rare opportunity to meet one of the world’s most original thinkers in New Zealand. Haidt’s work in moral psychology has deep implications for many of our global and domestic political debates.

Tickets are available here. There will also be a much smaller Wellington event with Initiative members.

A sugar intervention that actually looks promising

Usually I'm pointing to daft stuff on the sugar file. 

But my jaw dropped when I read this one. An intervention that sounded sensible, that's been piloted, that looks effective, and is quite possibly cost-effective too.

Here's RNZ:

But dental decay in even the most deprived communities could be prevented by the simple method of brushing teeth once a day at school, and a Northland study had proved it, and the government should take heed, Dr Stallworthy said.

In 2015, DHB dentist Ellen Clark set up a highly controlled tooth-brushing trial in Northland schools for her Master's thesis in Public Health, through the University of Otago.

A teacher aide was paid to supervise tooth-brushing sessions, once a day for 170 children at Kaitaia Intermediate School.

Several other schools were selected as controls, all of them in areas of high deprivation, where children were given a toothbrush and fluoride toothpaste, but had no supervised brushing sessions at school.

More than two-thirds of the children were Māori.

Ms Clark said she had hoped to improve the children's oral health - but the results were far better than she dared to hope.

"The children who were brushing (at school) had a mean number of 11.7 tooth surfaces that improved - that is, they remineralised or (the decay) reversed. In comparison, the kids who were not brushing had 8.6 tooth surfaces that deteriorated over the year which was quite profound, I wasn't expecting that - I thought you'd have to follow these kids over several years before you saw such significant results."

Tooth-brushing programmes in schools in Denmark and the UK had been showing similar results, Ms Clark said.

One of the better known ones, the Scottish Child Smile project had saved the government an estimated $NZ9.1 million in just two years.

The low-tech intervention could do the same for New Zealand, at a relatively low cost, Ms Clark said.

Supervision was critical, but the cost of a teacher aide, for an hour a day per school, was tiny compared to the potential savings in teeth and dollars.

No equipment was needed apart from brushes and toothpaste - the children in the Kaitaia study spat into paper towels, and rinsed their brushes at the water fountain.

The beauty of the study was that it removed the usual inequalities in oral health, caused by poverty, and the results had prompted interest from overseas, and from other DHB's around New Zealand, Ms Clark said.

She was now working on a detailed cost-benefit analysis, in the hope the government might consider rolling the programme out through Northland.

And though the study is over, Kaitaia Intermediate has kept up the toothbrushing - and continued to report good results, Ms Clark said.

And here's the Masters Thesis.

It's a shame that it seems needed, but here we are.

In related news, a friend emails me a public health anecdote from the mid-2000s. According to the anecdote, an academic did some joint research with MoH into rheumatic fever and found that shared toothbrushes were part of the problem, as were shared beds - the recommendation then was to hand toothbrushes out at GP offices to prevent that transmission vector. Toothbrushes are cheap.

According to the anecdote, MoH buried that part of the research in case it reflected badly on ethnic groups more likely to share toothbrushes. The collaborator never worked with MoH again due to frustration over the barring of the findings' being used.

If anyone knows more about this one, drop me a line.

Afternoon roundup

The afternoon's worthies on the closing of a week's worth of browser tabs:

• Hamish Rutherford explains why, despite Keith Ng's insistence that any mildly clever move in a Google Search that gets you something that somebody didn't want you to see is indeed a hack, the inappropriate use of the term kinda matters. Keith now recommends we use the term cyberbadtouch instead of hack - I like it. 


• Environmental monitoring and reporting at a few of our Councils could stand improvement.


• Is there any good reason that the RMA makes it hard to put up new wind farms? When oh When will have a fit-for-purpose RMA?


• The Irish Central Bank's recruitment process for its next Governor cost €70,236. I wonder whether their headhunter talked to any senior economists around town.


• Great piece from Damien Grant at NBR on the coming regulation of the insolvency industry. I'd be using it in my Public Choice class were I still in that world. A snippet:

  ...the Ministry of Economic Development proposed, in 2010, a simple bill allowing the Ministry to ban those who were acting dishonestly from being liquidators.
  
  The industry body at the time, known as INSOL, sought a far more intrusive regulatory model. It has succeeded.
  
  Parliament has adopted a ‘co-regulatory’ regime, where the coercive power of the state is delegated to approved industry bodies who will issue licences to those who want to be insolvency practitioners.
  
  This is a terrible result. In a field with 50 active firms dominated by a handful of large players, the industry will set its own guidelines, decide who can and cannot practice and will investigate complaints against themselves.

• Tom Chivers has a very nice piece reminding everyone of the risks of replacing GDP with dodgy metrics.


• I completely fail to understand a public health establishment that spends all its time campaigning to ban anything with sugar in it while it seems there's zero consequence for ignoring doctor's quarantine advice and flying from Auckland to Christchurch, round-trip, while infectious with the measles. Could the New Zealand airlines at least ban this clown from their flights in future?

What else could he say?

Well, turns out I was at Makhlouf's farewell party, in a way.

I'd been initially invited to the thing via a Treasury 'Save the Date', then uninvited for obvious reasons after I pointed out, again, the depth of deterioration at Treasury under Makhlouf's watch. The quality of policy advice has dropped substantially, as reported in Treasury's annual reports; the stakeholder surveys show declining confidence, and I think it's due to Secretary Makhlouf's administration having focused on faddishness over rigour and the deterioration of economic competence in the organisation.

When RNZ's Madison Reidy ran a whip-round of economists, she couldn't find anyone who disagreed with me on the deterioration at Treasury.

Here's Finance Minister Robertson, reported in Politik at last night's farewell event. 

Robertson also praised Makhlouf for making Treasury a more diverse place and addressed recent criticism from the NZ Initiative economist, Eric Crampton, that Treasury was putting too much emphasis on diversity and was not hiring enough highly qualified economists.

“ My message to Eric Crampton, the NZ Initiative and the Taxpayers' Union Is that the Treasury should have economists.but it should also have people from other walks of life who aspire to be part of an organisation that delivers to New Zealanders better-living standards," he said.

Peter Hughes was also reported to be fulsome in praise of Makhlouf. Of course he would be. The State Services Commission completely screwed up in having Gabs reappointed in 2016.

If Robertson and Hughes want to ignore the failures at Treasury, well, it's their administration that will suffer - and the rest of us. A Finance Minister needs quality advice, and he will not get it.

I hope that this is just a "well, what else could he say at the man's funeral" thing. But he didn't need to endorse Treasury's awful hiring practices.

Update: I'm more annoyed about this the more I dwell on it. The next CE has to know he has the Minister's backing in fixing the problems at Treasury. I thought Robertson understood the task ahead. At every point, I've been critical of Treasury but optimistic about Robertson's having some desire to fix things. I am updating substantially on this. Will he even be able to get the kind of candidate he needs if he's signalling that he thinks Treasury's composition is a-ok?

What counts as 'Moderate' reliability for Cochrane?

Glenn Boyle prompted me to hit the Cochrane Review's findings around SSB price interventions a bit more closely.

If this counts as moderately reliable evidence, well, draw your own conclusions about the weight to put on the stuff they count as low or very low reliability.

Here are the three studies they evaluated.

1. Cornelsen 2017. They looked at a 10 pence price hike on SSBs across a chain of UK restaurants. 9% reduction in SSB items sold per customer. While there was a 22% increase in per-customer sales of fruit juice on the main menu, there was a 10% drop in fruit juice sales on the kids' menu, a 7% drop in sales of diet cola, and a 6% drop in sales of bottled water. They did not run it as a diff-in-diff, just looked at pre/post. Tap water isn't measured; could have been generalised shift towards tap water. And there's weird stuff - the change in consumption in levied SSBs is reported as significant with a p-value of 0.004, but the 95% CI runs from a -15.21 drop to a 3.15 increase. Typo? Who knows. It's public health. No discussion of whether there just might have been a coincidental generalised shift to tap-water given the drops in sales of diet colas that didn't get the price hike. Nothing on whether there was substitution into desserts. And it's all at Jaime Oliver restaurants; their shifting towards bankruptcy over time plus his generalised increasing awfulness may have affected customer cohort too. If his big menu reorganisation and self-imposed sugar tax was accompanied by a giant "I'm so great look what I did" publicity campaign, as it almost certainly was because it's Jamie Oliver we're talking about here, well, you might think that the clientele might have shifted away from the people who like soda to the kind of people who like folks that yell at people who like soda. No accounting for any of that. 
2. Blake 2018. A price intervention in a single convenience store reduced sales at that single convenience store. It was the convenience store in a hospital, so maybe it was a bit harder for folks to pick other stores. But come on. 
3. Breeze 2018. Leisure centres in Sheffield increased SSB prices by 20 pence and saw a 31% reduction in sales per customer, with some increase in sales of diet soda. No clue how many people brought in their own soda in their gym bags. Oh, but the intervention also included staff training and publicity and stuff that might have had additional effect on their own around salience of health and price.

Here's Beaglehole on reading this latest evidence:

But when sugary drinks are made more expensive, or sugar-free alternatives made cheaper, sales fall, the researchers found.

"The evidence is unequivocal... you put up the price, consumption goes down," NZ Dental Association spokesperson Rob Beaglehole told The AM Show on Thursday.

"You get rid of junk food from schools, consumption goes down. Better sugar labelling is again another way of reducing sugary drink consumption. There's lots of different ways that we can act."

I'll never disagree that demand curves slope down. But the elasticity matters. And this latest Cochrane Review ... well, if that's the basis for recommending generalised hikes in SSB prices via soda taxes...

Sweet restrictions

The Science Media Centre asked me for comment on the latest Cochrane Review on interventions around sugar.

Reading through the thing, I was struck by the weakness of evidence around a lot of the kinds of things folks here like to demand that the government do.

Cochrane rates the certainty of evidence on a scale that runs: very low, low, moderate, high.

The interventions with the strongest evidence base around environmental interventions aimed at reducing consumption of sugar-sweetened beverages were rated "moderate". Nothing rated high. Interventions rated as having "moderate" evidence included:

• Improved access to low-calorie beverages in the home environment
• studies in this group would provide free home delivery of bottled water or diet drinks to people often in places with unreliable access to clean drinking water, and found reductions in soda consumption as consequence. 
• Multi-component community campaigns focused on SSBs
• Results here drew from one study. 
• Government food benefit programs with incentives for buying fruit and vegetables and restrictions on the purchase of SSB
• Here, studies looked at interventions restrictions on purchasing SSBs using the equivalent of New Zealand's WINZ payment card. The studies found reduced sugar consumption. New Zealand already bans a lot of classes of purchase on the payment card, including alcohol and tobacco. It wouldn't be infeasible to do it here, but there would be a lot more SKUs that would have to be loaded up properly into the card - it could prove difficult in practice. Checkout clerks are already well trained around identifying alcohol and tobacco purchases; knowing which beverages would be banned and which would not would require the back-end systems being programmed correctly. I expect it wouldn't be a simple thing.
• In-store promotion of low-calorie beverages in supermarkets
• Evidence here all drew from Foster 2014. That was a randomised trial looking at in-store promotion of healthier items: lower-fat milk, ready-to-eat cereal, frozen meals, in-aisle beverages (Diet Pepsi and Aquafina water), and checkout cooler beverages (zero calorie beverages and water). Effects were often statistically significant, but I'm not sure that a store selling 24 more gallons of skim milk and 53 more gallons of 1% per week are really all that big a deal. 
• Price increases on SSB
• Three studies found that places chosen for soda price interventions, like a leisure centre or a particular corner store, saw reduced sales of those price-boosted items. But it seems kinda likely that folks would just be purchasing their soda at shops next door that weren't part of an experiment involving higher soda prices. You oughtn't generalise from it. No surprise that Beaglehole does generalise from it though. 
• Small prizes for the selection of healthier beverages in school cafeterias
• Evidence ranged in strength from moderate to low. In the Hendy 2011 study (rated moderate; the others were low), there was a three-meal-per-week reduction in the number of meals with unhealthy beverages selected in an intervention in primary schools where kids' meals were monitored and they got token rewards from parent volunteers chosen as monitors. If your school has that many available parent volunteers, I guess it's not that high cost to implement - though you might imagine other things parent volunteers in schools might more usefully help with. 
• Traffic light labelling
• Evidence here was rated moderate in reducing consumption of red-labelled beverages. 

Everything else had evidence rated as low or very low confidence. 

Here's what I told the Science Media Centre about it; Newshub picked up a bit of this commentary but didn't contrast the price bit I'd noted with how Beaglehole approached it.

The Cochrane Review provides an important synthesis of the evidence regarding non-tax interventions aimed at reducing consumption of sugar-sweetened beverages [SSBs].

The review found that many often-recommended measures have little evidentiary base, with certainty of evidence rated as very low. Interventions in this category included measures like healthier vending machines in workplaces and schools, restrictions on the number of stores selling SSBs, urban planning restrictions on new fast-food outlets, and menu-board calorie labelling. No studies were found that might provide basis for restrictions on advertising.

Some measures showed promise, with a moderate certainty of evidence established across numerous studies.

Improved access to low-calorie beverages in the home environment reduced SSB consumption, but many included studies focused on places without reliable access to clean drinking water. Regular home delivery of free non-SSB drinks across broad swathes of the population seems unlikely to pass any reasonable cost-benefit assessment, and especially in places where piped water is of reasonable quality.

Restrictions placed on purchases funded through food benefit programmes reduced SSB consumption, and could be implemented in New Zealand by adding SSBs to the list of prohibited purchases on Work and Income Payment Cards. But the administrative costs may not be trivial, and the imposition on low-income households who enjoy soda occasionally should not be ignored.

Small prizes for selecting healthier beverages in primary school cafeterias showed some promise.

While price increases in individual targeted stores showed reduced sales of SSBs in those particular venues, the surveyed studies in that area do not look at overall consumption; people could easily have shifted to purchasing from outlets where prices had not been hiked.

And while the review authors tentatively suggested a somewhat broader set of interventions may prove effective, they also warned that their confidence in the likely effects is low to moderate. Rather than providing evidence for policy change, we should view the report as suggesting measures potentially worth trialling within an appropriate experimental framework designed to improve the evidence base.

Where the evidence base presented for any substantial effect of interventions is moderate at best, even without being evaluated as part of a broader cost-benefit assessment that weighs implementation costs and costs to consumers, we should be highly sceptical of any calls for strong intervention based on this report. It should rather temper our enthusiasm for large-scale measures likely to impose substantial cost for rather less certain benefit. Pilot studies and trials of some of the more promising interventions may be warranted.

Barbershop thoughts

I'd be surprised if something like this didn't already exist, but if it doesn't, it'd be a great feature for Spotify (or another of the streaming services).

I was sitting in the barber's chair yesterday when something that sounded a lot like Spotify's 80s New Wave collection came on. It was rather good. It was almost what Spotify's Daily Mixes might recommend for me some days. I was mildly proud of myself for finally remembering, two songs later, that the one that had been bugging me was by Echo and the Bunnymen.

Imagine a barbershop with some staff with musical preferences and customers who also have musical preferences. If clients with scheduled appointments have their Spotify handles loaded into the shoppe's roster, there'd have to be a way for Spotify to run an adaptive playlist that takes some least-distance measure across all the liked songs by the people currently in the room, filtered through some basic parameters the shoppe might set. The shoppe might wish to rule out songs with explicit lyrics, for example - or it might not. Or it might have an upbeat or relaxed or whatever vibe that it tries to go for - and the algorithm could then pull appropriate tunes from the customers' playlists.

It should have applications beyond barbershops though. House parties without a DJ could just let Spotify configure things after the host says who's there. Heading out on a road trip with friends? It would pull from the favourite tunes of those in the car without anybody having to muck about.

And having the feature would increase the value of network effects in the player with the feature - if your friends are using it and you want your tunes to start showing up when you're at your friend's house, you'll want to be on the same player.

I'd be surprised if one of the streaming services weren't already doing something like this though.

Due diligence and the Irish Central Bank

Barriers to exit are barriers to entry. If you're going to hire someone to a permanent position, you have to do a lot of due diligence. When I was on faculty at Canterbury, recruitment processes were very thorough as we appointed faculty to permanent positions - the norm in America is appointment to a limited-term position after which a faculty member may progress to tenure. So we tried to be careful. Mistakes could last for a very long time.

This morning, Radio New Zealand reported that the Irish Central Bank would not withdraw its offer of appointment to Secretary Makhlouf unless there were findings of "very very grave misconduct" in the current investigation.

That is a substantial barrier to exit. Firing governors of central banks should be hard if central banks are to be independent.

But where there are heavy barriers to exit, you need a lot of due diligence at the front end.

When Radio New Zealand's Madison Reidy asked economists around town whether I'm out on a limb in what I've been saying about Treasury, she couldn't find anyone who disagreed with me.

So I wonder just what kind of due diligence Ireland's version of SSC has undertaken. Did they ask any economists in New Zealand about how Treasury's fared over the past few years?

Hide the Decline

Back in April, Madison Reidy interviewed Treasury Secretary Gabriel Makhlouf about the 2017 Treasury Stakeholder survey. That interview didn't air until this morning; it's here. 

I'll do my best to transcribe the relevant bit here.

Makhlouf: Sometimes we haven't done a good enough job at engaging with stakeholders so they understand what we're doing and why we're doing it. I'd like to think that if we did that survey today, we'd get a better set of results.

Reidy: Shouldn't you be doing these measures again this year? You do it every two years.

Makhlouf: Oh we've done, umm, I don't know if we are going to do it again this year.

Reidy: Is that because you had such a poor performance last time that you're not going to measure it this time around?

Makhlouf: No it's because we're actually implementing a whole bunch of changes which we want once we've got to a particular point in our change program that we'll then want to assess how that's impacting so it's just a question of timing as to when we do it.

Reidy: It's all good and well to say to me that you know you think you've changed and that the perception of what the Treasury does and is is now better but wouldn't you want that in hard numbers?

Makhlouf: No no no I will do, I just said, I think it's just a question of time of when we do that.

I wonder whether that survey is yet underway. I was a respondent in prior years' iterations, and that would have been about this time of year. I expect RNZ will be following up to see whether the 2019 survey has yet been started.

The worries aren't Just Eric. I'm just the only one willing to have my name on it. Reidy followed up, as is eminently sensible.

Other top economists RNZ Business spoke to - who did not want to be named - shared the concern and frustration over Treasury's apparent weakened performance.

Independent think tanks are important.

Update: Reidy clarifies a bit further on Twitter, in response to criticism that she shouldn't have been talking to me because neoliberals, and that everyone else required anonymity.

Sure, but there is no economic thinking behind this criticism. They are people who are generally concerned about the quality of what should be the gold standard in their industry. None of this was orchestrated, I called on them individually and they all said the same thing.

— Madison Reidy (@maddireidy) June 9, 2019

The *all* seems significant.

The long term rot

Over at The Spinoff, I go through the problems at Treasury I've been chronicling here for some time. Most of this will be familiar to loyal readers, but I do put a couple of new bits in.

The Spinoff truncated a couple of bits for length ... I did go on for a while. The shorter form version is here; we have the full one over at our site.  

If the Canterbury earthquakes taught us anything, it’s that the immediate response to a disaster is a very different thing from the rebuilding that has to follow.

Disaster response is about triage, the good-enough, and avoiding substantial further harm. The rebuild is different. It takes a fair bit of thought about what the place should look like, and a long-term strategy to get there. In the best case, the long-term vision has always been in place and all that needs to be done is working out how to get there from the current mess. But it can be a lot harder if there were a lot of longer-standing issues prior to the disaster that also need to be resolved.

The State Services Commission’s investigation of Treasury Secretary Gabriel Makhlouf’s conduct and statements during last week’s unauthorised access to budget documents is disaster response. But this disaster was not the Christchurch earthquake, and the IT department is the least of Treasury’s issues. Last week’s mess is the culmination of years of mismanagement at Treasury that saw the substantial erosion of Treasury’s competence. Treasury’s core role as the government’s lead economic advisor has been put at risk.

Treasury needs a recovery, and a rebuild. The job facing any incoming Chief Executive will be exceptionally challenging.

I expect Minister Robertson will be watching the appointment closely; it's just too expensive for a Finance Minister to have an unreliable Treasury. 

Read the whole thing at the link above. It's good to see that the piece is making the rounds as it should. 

Protecting the Privileged

Over at Newsroom ($), I wonder why we extend employment protections designed with vulnerable workers in mind to Chief Executives - and just what the heck does somebody have to do to be fired as a public sector Chief Executive.

It used to be the case that the question of firing of public sector chiefs never even came up. Senior civil servants would themselves tender their resignations for catastrophic failures, and Ministers could accept or reject those resignations as appropriate.

But when a resignation is not offered for performance this far off the norm, and the appointee continues in the position, something is manifestly wrong - either employment law as it relates to senior executives, or the government’s willingness to put up with exceptionally poor performance.

Treasury has not had a good week.

... But the Minister cannot fire the Chief Executive, even if he wanted to. Chief Executives in the New Zealand Public Sector are appointed by the State Services Commission and can be removed only by the State Services Commissioner.

Section 39 of the State Sector Act 1988 states that the Commissioner of the State Services Commission may remove the Chief Executive of a department or departmental agency from office, with the agreement of the Governor-General in Council (in other words, Cabinet), for just cause or excuse.

This past week would seem to constitute just cause or excuse on a simple, normal English reading of the term.

But few things in employment law are ever simple. Employment law and case law around it has developed to ensure workers’ due process rights. Whatever your view on appropriate process protections for dismissal of junior staff, highly paid Chief Executives need to be able to be dismissed quickly, easily and without payoffs.

It seems absurd to view senior executives in the private or public sector as being in a vulnerable position in relation to their employer and needing the same protections as less privileged workers. But that is where the law seems to sit. A 2017 Members’ Bill from National’s Brett Hudson would have made it somewhat easier to dismiss senior employees, but was voted down by the Coalition Government.

And it may be prolonging Treasury’s misery.

...If Minister Robertson were to indicate extreme displeasure with the Secretary, or to categorically state he had been misled by the Secretary, he could be viewed as prejudicing the outcome of a due process investigation. If he does not, National will continue to attack him as complicit with Treasury in last week’s allegations about National’s so-called hacking.

The State Services Commission may wish for a tidy and quick investigation, but advertising timelines at the outset could also be considered prejudicial where he may need to demonstrate, for employment law purposes, that he has investigated the issues thoroughly and with an open mind. But without an announced timeline, we might fear that the State Services Commission is simply kicking the can until Makhlouf is safely ensconced in Ireland.

All this extends the stench of Wellington unaccountability. Just how bad does a public sector Chief Executive’s performance have to be before accountability kicks in? And what does it say about employment law in New Zealand when it comes to the most privileged?

Update: there's now an ungated version up at the Initiative's website.

Around the budget traps

Budget lock-up on Thursday was fun. I didn't get to ask Minister Robertson whether he still had confidence in his Treasury Secretary, but it probably would have been rude to ask. 

A few bits from me on it over at the Spinoff, our Insights Newsletter, and over in the Stuff newspapers - I think it ran in both the Dom and the Press on Friday. They reversed the headline, but s'all good.

The end of my Dom piece:

Treasury often undertakes this kind of programme evaluation work, or at least assists in overseeing it. But Treasury's core economic and analytical capabilities have been seriously eroded under its secretary, Gabriel Makhlouf.

Treasury was awarded $5m a year over the next four years to "deliver core functions and the wellbeing approach". Rebuilding Treasury to be able to deliver the evaluation capabilities necessary for achieving Robertson's vision may be a bigger job than that.

It would have perhaps been the wrong day to ask the minister of finance whether he has any confidence in Treasury's capability to deliver. I have doubts.

Programme evaluation has always been the poor cousin to programme announcements. When voters too easily infer a government's depth of caring by the quantity of its spending, rather than the outcomes that spending achieves, that outcome is not surprising.

I hope the wellbeing approach yet proves to be something more than that. It may otherwise be difficult to distinguish from business as usual.