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. 

MBIE discount rates

Treasury's cost-benefit guidelines say that the public sector should normally use a 6% discount rate in assessing normal projects.

People can argue about whether that's the right discount rate, and especially when it comes to very long term projects.

But at least having a single recommended discount rate puts all projects on a common basis. If it's weighted too heavily towards the present, it's so-weighted across all policy areas. No pick-and-choose to put in a high discount rate for projects with back-loaded costs to get it over the line, or a low discount rate for projects with front-loaded costs and later benefits.

MBIE's RIS on the government's Taranaki oil ban uses a different set of discount rates.

First up, we should be giving bouquets to MBIE for putting through advice that it had to know would be unwelcome. The government had already announced the ban - it simply didn't care about normal policy processes or potential costs. MBIE would have felt some pressure to say nice things about an already announced policy, and they didn't do that.

They have taken stick for the choice of discount rates though. They presented a range of costs to the Crown under different scenarios, including a 3% discount rate, a 10% discount rate, and an undiscounted flow of tax, royalties, and industry profits. Their midpoint estimates came from the 3% discount rate figures.

It looks like there's prescription in the rules around assessing permit applications requiring a 3% discount rate normally, and a 10% discount rate when proxying for industry cost of capital.

I don't know why that prescription is there. I am also not nearly a good enough interpretation guy to know whether this requires that rate in this context, or whether these rules were superseded by other rules I don't know about.

But I am curious why a 3% rate is here prescribed. I'm happy to entertain arguments that we should use a lower discount rate for really long term projects, but I'd want that to be set across all really long term projects rather than just some of them.

If anybody knows the backstory here, the comments section is open...

Risks we don't even know about

Isn't it great that MBIE's out there, protecting us from risks that we don't even know about?




If only someone were out there protecting us against the risk of MBIE safety campaigns that manifestly fail cost-benefit assessment.

Treasury used to do that job, but since they kinda stopped hiring economists, they have had to save their trained economists for deemed-more-important work, like inventing wholecloth entirely new budgetary frameworks to account for living standards.

Our report on the scaffolding regulations is here; NZIER's confirmation that things were at least as bad as we thought is here.

And my critique of Treasury's hiring practices is in tomorrow's NBR.

Giving credit the credit it's due

If we assume that people who use credit cards get no benefit from using credit cards instead of using EFTPOS, then it's pretty easy to show that using credit cards is socially costly. It's more expensive to process credit card transactions; these can be real resource costs. Anytime the benefits of something that has real resource costs are assumed equal to zero, it's pretty easy to show it's something pretty costly, on net.

MBIE's consultation document on credit card fees racks up some substantial costs of credit card use, under the assumption that the 40% or so of consumers who pay off their balances in full every month get no benefit from the use of the credit facility.

I pay off my credit card balance in full every month. Among the many benefits I enjoy when using my credit card rather than EFTPOS:

1. Simplicity in ordering things online. It is a pain to arrange a bank transfer when ordering things online. I've done it for some retailers who didn't take credit when I was last building a computer and needed to buy components. But it adds 15 minutes to a transaction. 
2. Consumer protection. Credit cards come with protection against fraud that doesn't come with normal EFTPOS.
3. Ease of use internationally. We had a few issues in using our credit card last time we went back to North America, despite having warned Kiwibank ahead of time that we'd be travelling abroad and that we needed our cards working in North America. But the EFTPOS cards only work at bank machines, not at retailers. Visa and Mastercard work everywhere - barring glitches.
4. Not having to carry foreign cash when travelling abroad. If you pull cash using EFTPOS rather than just using your credit card, you have to guess how much cash you're going to need. 
5. Before we had a mortgage with a credit line, the credit facility was useful even if we did pay it off every month - the 40 days' interest-free after purchase before payment gave time for smoothing things out for big lumpy purchases like whiteware. That is helpful. Since having the mortgage with the credit line, the credit facility lets us shave off some of our monthly mortgage interest payment - although that counts as a transfer in the welfare analysis.

I don't know what the monetary value of all of that is. But it sure isn't zero.

I hit some of this in my column in last week's NBR ($). A snippet:

MBIE assumes that 40% of customers choose credit cards over EFTPOS solely because of rewards like cash back or Airpoints dollars. They then go on to calculate the $45 million in costs to the economy on the assumption that those consumers receive no benefit from using credit other than the rewards. That is a huge problem in their analysis, and we will come back to it. Let’s pretend they’re right for now, even though we know better.

On a first cut, it seems that there should be little to worry about. Retailers can choose whether or not to accept credit cards; customers can choose whether to go to places where the prices are slightly higher and credit cards are accepted, or to go to retailers with slightly lower prices that only accept EFTPOS. What’s the issue?

The MBIE report worries that all but the largest retailers are forced by competition to accept credit cards. It also warns that things may get worse, with increasing popularity of credit over EFTPOS and the potential rise of reward-scheme debit cards. And it notes that if merchants increase prices across-the-board to cover the higher fee cards, poorer customers who are less likely to those cards will be adversely affected.

If part of MBIE’s basic model is that retailers cannot afford to forego accepting credit cards because the more valuable customers choose retailers based on whether they can use their reward-laden, high-fee cards, it seems odd that high-end (but low margin) Wellington grocer Moore Wilson has a surcharge for credit card users that dwarfs scheme-based rewards.

Merchant choice really does not seem that weak. I expect that you, like me, have seen plenty of shops and restaurants with a piece of black electrical tape over the credit button and others with a little piece of paper taped underneath the credit button saying “No Credit.” And plenty of small shops and restaurants will put a minimum purchase size on credit card transactions – often $15.

If merchants do have effective choice in whether to accept credit cards, or to accept them only with a surcharge, then the power-based arguments in MBIE’s analysis are less compelling.

But there seems to be a more fundamental problem in MBIE’s cost tallying. Reward schemes are nice, but they are hardly the only reason that a lot of consumers choose credit over EFTPOS. 

The Christchurch Problem

Want a single picture illustrating the problem with Christchurch's rental market? Thanks to a hard-working boffin at MBIE, here's a nice one. 

I'd wondered whether the reported drop in the number of affordable rentals reported by MBIE was simply due to reduced availability across the board or whether it reflected a rightwards-shift in all rents. And so I asked for the graph below.*
Those renting a property in New Zealand lodge a bond with the Tenancy Tribunal. The graph comes from their data, via MBIE. We see a massive drop in the number of new tenancies at lower weekly rentals and about as many higher-rent tenancies as there were pre-quake.

The graph above shows the absolute drop in lower-rent tenancies. We can also graph things cumulatively to show the change in the proportion of total rents at each rental band.* The rightward shift in bonds paid is rather pronounced. But without data linking addresses to bonds paid, it's pretty hard to distinguish between a few potential stories. The graph cannot tell us whether we simply had destruction of low-end properties and no change in the rest of the market or across-the-board destruction and then shifts in the price of lower-end properties such that the number of tenancies in the $400-500 per week range remained roughly constant. It seems almost certain that both were going on, but we can't really say much without address-bond-linked data.

Also, the bond data only captures new bonds lodged. Some of the decline in new bonds posted could be due to tenants being reluctant to shift where rental availability is thin. Some of the drop in bonds could also reflect a shift of rental properties into the short-term holiday home market. On the other hand, many long-term tenants may have been displaced where either the house needs to be repaired or where the owner wishes to live in the house while the owner's home undergoes repair work. Either way, the new-bonds-posted data gives a reasonable reflection of the going price of current rentals in Christchurch. Or, rentals as of 2012.

In 2010, there were 18,094 bonds posted. In 2012, 14,695. That's a 19% drop despite rather a few homeowners needing to rent a property.

Thanks to MBIE for providing useful data and discussion!


* Some browsers have problems with the embedded Google Docs graphs. SciBlog's WordPress implementation also usually gets cranky about it. So here are static image versions for those needing them.