Afternoon roundup

A closing of some the browser tabs brings a few worthies:

• Roland Fryer Was Railroaded
• Brian Easton on the perils of ignoring economics
• Pay for defection. It raises the cost of attacking. 
• The Canadians get stuck with a copyright term extension. Cosh is excellent here. Why does the Canadian government figure it can ignore the dairy provisions in trade agreements but bound by dumb copyright stuff?
• The extortion attempt continues. [Me on this, previously]
• Ontario's Housing Affordability Taskforce report from February has a lot of good stuff. I'll need to read through it more carefully. Looks like Ford won't be implementing it but there are ideas worth thinking through for NZ. 
• Superb BusinessDesk piece on the cost of building infrastructure in NZ. I wish Auckland could outsource both construction and all of the approvals for its transport/infrastructure projects to whoever sorts that out in Seoul. 
• Liberal Education
• Ages back, Hess & Orphanides found that discretionary wars were more likely for first term Presidents presiding over poor economic conditions. Simple little model. Re-election depends on demonstrating competence, two margins for demonstrating it, if you've failed at the one worth the punt on the other. Ashani Amarasinghe has a forthcoming piece at J. Pub that's far more extensive. Lots of governments aim to distract from domestic turmoil. But it doesn't work all that well.

Easton on schools

Brian Easton doesn't seem to like our recent report on school quality.

A recent contribution has been from the NZ Initiative’s report Tomorrow’s Schools: Data and Evidence. [EC note: I've updated the link to the Initiative's site rather than Scoop] Unfortunately it is only note of six pages, which does not meet the standards of a research report, so I can hardly comment on the quality or veracity of the findings.

The note observes there are performance differences among schools (it uses NCEA attainment as a measure). No one is surprised that higher-decile schools outperform lower-decile schools by a large margin (on average). However, once the NZ Initiative adjusted for the effect of family background (they dont explain how), they found that the average differences in education outcomes across school deciles disappears. The report concludes that the inequality in education outcomes evident in school league tables is not a result of large differences in school quality, but rather of large differences in family background, particularly differences in parental education.

The NZ Initiative concludes that their ‘research’ demonstrates that the current schooling system is working and should be retained. Maybe; one wants to see the research first, especially as it contradicts the international literature. (I can think of a number of ways one could do the exercise – not all of them would be valid.)

What strikes me is that the NZ Initiative barely observes that the research suggests that the main source of educational inequality (and a whole lot of life opportunities which follow on from it) is ‘family background’, whatever they mean by that. The implications for inequality are hardly explored. As far as I can infer, the NZ Initiative is so besotted with defending the competitive model of schooling it is uninterested in the wider questions of the sources of and policies for children’s opportunities,; issues central to the egalitarian society. That, I think, captures a deep attitude of the elite right; ‘who cares about social inequality providing we are doing all right’.

Indeed there is celebration of inequality when the rich display their wealth. Of course there was inequality in the egalitarian society before 1985, but it was rare for the rich to show it, to display, what Thorstein Veblen called, ‘conspicuous consumption’. After 1985 it became common to flaunt how rich you were.

Our analyst, Joel Hernandez, spent about a year in the IDI lab on this one.

The mission we gave him: start by figuring out how much of the variability in school performance is due to things outside the school's control, like family and student background. Current league-tables could easily mostly be picking up parents' education or income. We need to be able to find the schools that are doing a superb job despite difficult circumstances, so that we can learn from them. The measures out there just aren't up to spec for doing that kind of work.

So he spent the last year merging a ton of administrative data sets and cleaning the data. It is not a small job.* For the population of students who completed NCEA from 2008 through 2017, there's a link through to their parents. From their parents, to their parents' income. And their education. And their benefit histories. And criminal and prison records. And Child, Youth, and Family notifications. And a pile more. Everything we could think of that might mean one school has a tougher job than another, we threw all of that over onto the right hand side of the regressions.

It's student-level observations with a ridiculous number of control variables enabled by the data linkages in the lab.

The point of the exercise wasn't to precisely identify coefficients on each of the independent variables. The point rather was to mop up all of the variation that comes from family circumstances. There's no structural equation modelling here or any attempt at getting at causality among those variables - just a giant reduced-form kitchen sink.

Plus, five hundred or so indicator variables for each of the country's secondary schools.

On the left-hand side - a few measures of performance at NCEA. But that's just the starting point. We're going broader. Employment after graduation. Income after graduation. Progression to tertiary. NEET status (Not in Education, Employment or Training). Benefit uptake. We could even put future criminal activity in there. So far, it's just NCEA though.

After separating out all of the variability that comes from family background, the coefficient on each of the schools' indicator variables tells you the average effect of that school on outcomes.

Our plan had been to put up the big report in July(ish) with all of the method and the first set of results. Then, short reports would follow regularly on different outcomes.

But then the Bali Haque report came out. The report said that there are huge differences in student outcomes across schools, that those differences showed up as differences by decile, that decile differences were inequitable, and that the entire school system needed to be overturned because of it. Currently self-managed schools operating under school boards would be replaced with hubs managing dozens of schools.

There are indeed very real problems in board governance in some failing schools. It's something that features regularly in stories of persistent school failure. But if the justification for abolishing school boards and putting in place a big new governance structure is strong differences in school outcomes by decile, well, we know that that wasn't the case.

So we moved. Because we're a think tank. Forward the short report on the variability in outcomes by decile after separating out the family background effects.

And then Brian thinks we're hiding stuff or trying to downplay the family circumstances, perhaps trying to hide the evidence that big income redistribution schemes are warranted.

It would have been irresponsible of us to put up the coefficients on the other correlates. We have a kitchen sink of variables to mop up effects, not to precisely identify the coefficients on any of them. Putting up all of those coefficients without checking their sensitivity would have been premature. We control for whether the child is from a single-parent household. Whatever the sign on the coefficient, it would feed into culture wars around divorce and the desirability of two-parent families. We control separately for mothers' and fathers' incomes, and mothers' and fathers' educations. Results could feed into arguments around two-earning families. Most of those control variables would fuel one interest group or another. And even if we were sure we had the numbers right, they're still not causal. If you find that kids of well educated parents perform better at NCEA, that doesn't mean you should start giving degrees to parents to boost their kids' chances.

We'll have more in the full report. What we have so far though lends zero support to arguments around redistribution. Parents' education matters a ton. Income - not so much when education is controlled for. But we need to play with it more before we say anything more. If we have to suffer Easton's grouchiness for it, oh well.

But our object here is the exact opposite of Easton's imaginings. If we can identify the schools that do a fantastic job with kids that other schools have a hard time helping, that means the Ministry or ERO could go into those schools and see whether they're doing anything differently from schools that aren't doing such a good job. Sure, it would take a policy change around operational use of IDI. But it is entirely doable. Learning from that can help lift performance for those that too many schools are currently failing.

And there are all kinds of ways of handling it.

Within the current model, you could get reports from the Ministry to every school board telling them where they're doing well, where they're doing poorly, and which schools they might want to learn from (and which might need their help). The reports would help empower school boards that cannot tell whether poor outcomes are because the community is disadvantaged, or because the Principal is failing. And if the data were available to the parents, that could encourage parents to take a more active role in board governance in places where there is underperformance. Both voice within the school, and exist from underperforming schools, could help encourage better performance. And don't pretend that this is bad because the status quo is some paradise where all the schools are doing great and everyone sends their kid to the local school. Right now, parents use worse proxies for school performance and will happily walk by an excellent low decile school to get their kid into a higher decile school that's further away. The local school might be the one who could do more to help their kid. But we can't tell without better data.

Within a hub-based model, the reports provided by the Ministry could help the overarching structure to manage performance among their schools, to send investigators in to figure out why one school is doing particularly well in ways that nobody had noticed before, and to use what they learn to help others. They could use it to test the effects of different kinds of practice on outcomes. In the data lab, what goes on in the schools is a black box. We just don't know. But the hubs might know that one school never shifted to modern learning environments and the other one shifted to them 6 years ago. It could look at whether those kinds of policies had any effect.

Either way, it would also help the Ministry in similar ways. It could help ERO check whether any of their interventions improve student outcomes.

There is just so much that can yet be done with better use of the data we have. I've been pointing to it for years. Nothing's being done about it. The Ministry has a staff of 3000; we have Joel. We don't have time to do all of it. That's one reason we're opening up all our code in the lab for others to build on.

Imagine if every guidance counsellor in every school received a report from the Ministry for every student. The report for each student finishing Year 10 would say "Here are a thousand kids who looked a lot like you 5 years ago, and another thousand who looked a lot like you 10 years ago. Here are the choices they made about paths through school, through to tertiary or vocational training, and their later employment outcomes. Here's what the kids like you who chose a Bachelor's Degree are doing now. Here's what's happened for those who chose vocational training. Many of these choices may never have occurred to you." It is entirely feasible to do this right now. It would take a few months' coding. After that, it's just push-the-button. And it isn't being done. 

What difference could it make for a kid who never considered university a possibility, because of the community she grew up in, to see that other kids with similar academic records had done brilliantly at uni and that they'd better push to do the UE courses? What difference could it make for a kid whose parents were pushing university to see that kids with comparable records did far better pursuing a trade? Better information has to help.

We have a pretty big work programme here on deck. Once Joel's code is up in the data lab, I'll put up a note about it. I've already been in touch with friends back at Canty. One substantial barrier to assigning IDI projects for Masters thesis work is that you spend a year in data cleaning and matching (and just learning your way around) for any big project. You can't dump that on a Masters student without strong risk that the project falls over. But you can assign projects that build on an existing codebase.

Academics won't put up their code because their incentive is the opposite of ours. They'll want to get the vita lines on every possible way of dicing the data after fronting the fixed cost of merging it. Just look at access around the Dunedin Longitudinal survey, or some of the others out there. Tons of publicly funded work locked up for the benefit of those who ran the surveys.

We want ours to be as open as possible within the constraints set by StatsNZ around the data lab. We want way more people using that code base to see what's going on in education. And if any of them find ways of improving the code to improve match rates, even better!

Our work here is a starting point.

* Even worse, it seems to be a much-repeated job, with anyone doing work in the area duplicating efforts. Joel will be getting all of his code up into the StatsNZ wiki for others to build on - the process for getting it in there isn't trivial though.

Confusion about the TPP

I agree with much of what Brian Easton says here about the TPP.

• The car dispute between the US, Mexico and Japan (and Canada) is likely a bigger dealbreaker than dairy;
• The Pharmac provisions don't break Pharmac, they just make it more expensive for the government to run;
• It's possible to have a deal that's good enough on dairy to make the Pharmac bit worthwhile;
• There's no clear consensus on optimal patent length, with some argument it should be shorter.

I disagree with him on one point though, and it's a point I've seen raised by others. The argument runs as follows. Because New Zealand unilaterally did away with just about all its tariffs some time ago, the only negotiating chips it has left on dairy access are copyright and IP provisions. So because we did away with tariffs, we're stuck having to take on IP provisions we don't like in the TPP.

I could understand this argument if we were talking about bilateral trade deals. But, New Zealand is only one of many countries in the TPP. Whatever deal comes in applies to all of them. If one gets crazily long copyright duration, they all do. If one gets a longer period before generic drugs can be used, they all do. And it will be interesting to see whether the final copyright provisions are that different from those in the US/Australia trade agreement, where Australia still got stuck with a pile of copyright nonsense despite having a pile of tariff barriers up for negotiation.

I just can't see how New Zealand's tariff status affects things. We're a small enough country that, even if we had crazy high tariffs, no US domestic industry would care enough about getting access to the NZ market to outweigh US dairy wishes to keep NZ out. This is just standard Mancur Olson stuff: the costs of free trade with NZ, in the US, are concentrated; the benefits are diffused. And that would be true no matter New Zealand's tariff status.

Easton vs Krugman on Earthquake Finance

Brian Easton argues for a 3% earthquake levy in The Listener.

Prudence suggests the Government should be developing a backup strategy. One possibility is a Canterbury earthquake levy, a surcharge of, say, 3% on each person’s income tax bill. The levy would be used to pay off the government’s earthquake expenses that couldn’t be recovered from insurance and the like. There would be a special account to which these expenses were charged (including those already incurred); proceeds from the levy would be credited to it as long as the account was in deficit – probably for at least 12 years.

This only makes sense if the government faces serious constraints on debt issuance. Again, here's Paul Krugman on how to handle natural disasters:

Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts.

But wait: even more important, the government can borrow (or, in principle, lend, if it pays off all its debt). So it should balance its budget in present discounted value terms, not year by year. This means that the tradeoffs should include future spending and taxes as well as this year’s spending and taxes. And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending 
in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters. [emphasis added]

Recall that the standard theory says that, if everything were optimal ex ante, you'd want to cut spending on non-earthquake stuff, issue debt, and raise future taxes. The equilibrium size of government is a bit higher in total but spending on non-earthquake things has dropped. If you think government was too small ex ante, you should push for smaller non-quake cuts, larger debt, and higher post-quake taxes; if you think it was too large ex ante, bigger cuts to non-quake services, less debt, and smaller post-quake tax hikes.

Easton ruled out those options at the outset: spending cuts "could be politically and economically disastrous"; increased debt isn't on the table as he reckons it would make credit downgrades too likely.

But Easton also worries that the "loose fiscal stance" we'd have if we used debt to fund earthquake recovery would give RBNZ cause to tighten monetary policy. Maybe we're in some kind of knife-edge case where earthquake damage is sufficiently large that government cuts to other programmes sufficient to fund the earthquake reconstruction would be seriously damaging while debt issuance sufficient to fund the recovery would be a really large injection in need of partial offsetting; it's otherwise hard to reconcile his fear of big bad things happening with spending cuts and other big bad things happening with debt-funded spending. But standard theory says to fund things by both cutting current spending and increasing debt and future taxes rather than either alone.

And, it's hard to find much evidence of strong constraints on demand for our debt in the auction data; the last offering of government bonds found a weighted average successful yield of 3.8% on bonds maturing 2019. You can make a case for substantial tax increases if you think government is just way too small, but it's perhaps a bit mischievous to hang it on earthquakes.

But as Brian Easton was NZIER's Economist of the Year a couple of years ago, it's likely that I and Krugman and the standard theory of public finance going back to Ricardo are wrong on this one.

The problem of social cost studies

Matt Burgess presented some of our work on social cost studies at the NZAE meetings. His presentation is embedded below, but it doesn't scale down well to blogger size, so you might do better by just hitting the link.


Prezi seems a pretty slick way of handling presentations; I'll have to remember it in future. Hit the forward triangle to advance the view. A few references as you work through it:

• On healthists vs economists: Public Health and the New Paternalism
• BERL's study of the social costs of harmful alcohol use:
  
  • Our initial report
  • Their reply
  • Our rejoinder.
  • Further explication of our minimal rationality assumption: we only require that, on average across all drinkers in the group, excess costs of "irrational" or mistaken consumption roughly match consumer surplus from the rational consumption.
  • Seamus also raised an important methodological point: there is no useful comparison between aggregate tax take and social costs where social costs include costs imposed by the drinker on himself.
• BERL's drug harm index
• The PWC study on the benefits of adult and continuing education
• On the problems when government funds studies to lobby itself

Matt correctly concluded that current processes don't protect policy against this kind of behaviour. Reputational mechanisms are very weak because while a consultancy's shonky report may disgrace it among academics and other consultants, the target audience - voters - is oblivious and journalists are not equipped to critically assess these produced reports. So even a shonky firm can get a new contract from a government department that wants a big number. Standard peer review doesn't work because the client, often Ministry of Health, doesn't want a sound number: it wants a politically convenient number. So it'll appoint peer reviewers that will provide its desired level of critique. And, the probability of a thorough external fisking is very slim; Matt and I did it, unpaid, because we were really annoyed that BERL was happy to let its number be compared against the aggregate tax take for purposes of policy discussion - we're masochists.

Matt consequently proposed that the NZAE work as a broker for peer review of consultants' reports. For a fee, the NZAE would assign a paid expert referee who would provide a proper independent review. A Ministry could signal that it wanted a credible number by insisting that such independent review be done. This is probably a more useful suggestion than my alternative: the awarding of an annual prize - the Shonky Award - for the worst piece of economic consulting work produced in that year.

A colleague who attended the session reports that another in attendance said BERL / MoH didn't put much weight on our critique because we were paid by industry. I WISH. I would have no problem at all in being funded to do this kind of work, so long as there were no strings on editorial freedom. But the sum total of anything that could possibly be in any way seen as compensation for our work on the BERL report was that I was invited to give a talk at last year's Beervana conference; when Susan and Ira came along, their flights and the hotel room upgrade / extra night were on my dime. I had to pay for my own ticket for the beer tasting, but didn't have to pay to attend the conference dinner (again, common for plenary speakers). In fact, I had a minor argument with the alcohol folks on the upgrade because the hotel seemed to have charged both us and them for it and the Brewer's Guild wanted reimbursement. Being flown to Wellington to present work at a conference hardly counts as compensation: it's kinda standard drill in academia that somebody who wants to hear you present flies you out there and puts you up. Here's the full list of who's been paid what:

• BERL: $135,000 for its initial report
• Our critique: nothing
• Brian Easton: $7,000 for his independent and impartial (but non-tendered) review of the differences between BERL and Crampton/Burgess
• BERL: we have an OIA request in on whether they were funded for their critique of our report; tomorrow's MoH's due date. Update: MoH says they didn't pay.
• Our rejoinder to BERL: nothing
• Our submission to the Law Commission: nothing
• Marsden Jacob and Associates: $60,000 for their untendered shockingly incompetent review.
• Our rejoinder to MJA: nothing

We're chumps. Every time we critique the healthists, the healthists pay themselves more to reply. Perhaps Marsden Jacob will yet be paid to fix their errors. There's absolutely nothing wrong with being paid to do work. But beware the one-sided skepticism.