Thursday 27 August 2009

Strategic incompetence

The ever-wonderful Scott McLemee today provides a wide-ranging review of Gambetta's work on signalling and crime (and academia). For the mafia, signalling incompetence at running a business credibly shows the subject of the protection racket that the mafia just wants to keep extracting money that way rather than take over the business fully. In academia, at least in Italy, something similar happens:
"Being incompetent and displaying it," he writes, "conveys the message I will not run away, for I have no strong legs to run anywhere else. In a corrupt academic market, being good at and interested in one's own research, by contrast, signal a potential for a career independent of corrupt reciprocity.... In the Italian academic world, the kakistrocrats are those who best assure others by displaying, through lack of competence and lack of interest in research, that they will comply with the pacts."
Kakistocracy: government by the worst. Love that word.

Gambetta's book has now moved onto my "must read" list.

Tuesday 25 August 2009

Temperature trading on iPredict

About a month ago, I pointed out a nice contract for Kiwis trading on iPredict. TEMP.2009 pays out at $1 if 2009 is warmer than 2008; TEMP.2009.HIGH pays out at $1 if 2009 is the warmest year ever (1998 by the series they're using). HadCRUT has just released July data. My best fit model continues to say that there's zero chance of this year beating 1998 and a very very slim chance (less than 1/140) that this year is colder than 2008. So if the model is right, TEMP.2009 should trade around $0.995 and TEMP.2009.HIGH around $0.001, though both will be pushed a bit towards centre due to time discounting - the contracts will pay out late January when HadCRUT releases the full 2009 series.

TEMP.2009 currently trading at 0.93; TEMP.2009.HIGH at 0.065. Contract pays end-January, or 5 months from now. 7.5% rate of return over 5 months is about a 22% annualized return. Folks on the forums talking about the contracts as sure thing. So the effective time discount rate on iPredict is about 22%. Traders turn down a sure thing yielding a 22% annualized return if they expect to earn higher returns trading on other contracts.

Our deposit limit is too low.

Disclaimer noted in my previous post continues to apply.

Earmarks, lobbying, and payback

My students in Econ 336 sometimes ask me what the politicians get out of providing earmarks or other considerations. From today's Inside Higher Ed:
Conflict of interest issues continue to befuddle universities and their legislative patrons.

Last month, The Virginian-Pilot ran an article raising questions about the hiring of Phillip Hamilton, a powerful Republican member of the House of Delegates, to lead a new Center for Teacher Quality and Educational Leadership at Old Dominion University. The reason for the questions was that Hamilton had been the key legislator in obtaining state funds for the center. Both Hamilton and the university denied that there was any conflict of interest, telling the newspaper that discussions of his working at the center came only after the legislation had passed, and that he was well qualified and so couldn't be excluded.

While that argument didn't satisfy everyone, it turns out the argument wasn't even true.

The Daily Press, another Virginia newspaper, obtained and published e-mail messages between Hamilton and the university -- sent before the legislation moved -- in which he expressed interest in a job and duties and salary were discussed. The e-mails back and forth feature the lawmaker and senior university officials discussing both the salary and the prospects for the bill that he subsequently got through the General Assembly. Hamilton talks about the need to supplement his salary; the university officials are always encouraging, and sometimes they discuss the lawmaker's overall financial intake from the likely Old Dominion job and his other employment.


The hiring of legislators for public college positions that they helped create or over which they have influence used to be common, but is increasingly the subject of scrutiny.

In April, the president of Northwest Florida State College was indicted on charges related to the hiring of a powerful state legislator who had sent large grants to the college. A Florida state senator last year gave up her $120,000-a-year position at a Florida State University reading research center that she was instrumental in helping to create, four days after Inside Higher Ed first publicized the arrangement. A series of articles by The Birmingham News about cronyism and other wrongdoing in Alabama community colleges won the Pulitzer Prize for investigative reporting in 2007.

As for Delegate Hamilton, he's now running for re-election.
Note that universities are some of the biggest beneficiaries of earmarked funds; I've also seen work showing that they're especially likely to be successful in rent-seeking when their district's representative or state's senator is on the appropriations committee, and especially when that rep is an alumn.

Note that a new listing of top political donors over the last decade is now out. Is there anybody in the top twenty that is neither a union (public service, electrical workers, education, laborers, service, teamsters, carpenters, comm workers, teachers, UAW, machinists, UFCW), a heavily regulated industry (AT&T, trial lawyers, realtors, Altria (tobacco)), or a potential bailout recipient (Goldman Sachs, Citigroup, auto dealers)? My students should think about this when we come to McChesney's rent-extraction model later this year.

Monday 24 August 2009

Afternoon roundup

  • Kanazawa asks whether the Russian tradition of children taking the father's middle and last name suggests something about Russia:
    The widespread practice of patronyms in Russia suggests that Russian men have historically had greater needs to be convinced of their paternity than men elsewhere (all of whom suffer from a degree of paternity uncertainty to begin with). Why is this? There are at least three (mutually nonexclusive) reasons for Russian men's greater needs to be convinced of their paternity. It could be: 1) Russian men's paternal investment was particularly more valuable, possibly because of Russia's hostile environment (Note that both Iceland and Russia are in very cold climate); 2) Russian men, for some reason, have had inherently lower motivation to provide paternal investment in their putative children; and/or (potentially precipitated by the fact that) 3) Russian women have historically been more likely to cuckold their husbands, by being more likely to have extrapair copulations and pass on their resultant offspring as their husbands'.
    I love that Kanazawa is always willing to go the extra mile in applying rat choice and evolutionary biology.

  • Odd forms of collateral in Italy.

  • The AIDS Healthcare Foundation sues porn producers in a bid to have condoms mandatory in pornographic films under health and safety legislation. HT: BoingBoing. Never mind that the industry already has effective self-regulation: abstract of Alexandre Padilla's relevant research below.
    This paper analyzes how self-interest and long-term profit expectations provided the necessary incentives for the adult film industry to self-regulate and to find mechanisms to minimize the risks of HIV outbreaks that could result from the asymmetric information and network effects that characterize the industry. With the help of the Adult Industry Medical Healthcare Foundation (AIM), the adult film industry developed a corporate culture to facilitate widespread coordination among members and to make the industry similar to a private club. First, I discuss the predicted effects of asymmetric information and network-effect problems on the industry in terms of HIV outbreaks. Second, I tell the story of AIM and present the policies the industry has adopted since AIM's creation to mitigate those predicted effects. In particular, I discuss how the industry managed the 2004 HIV outbreak without government intervention. Finally, I present statistics comparing HIV infection rates in the industry and general population as well as additional observations to assess the relative effectiveness of the industry in preventing and containing HIV outbreaks.
    Padilla further notes that mandated condom use would eliminate mandatory HIV tests as they then would constitute an unfair and illegal employment condition; much of the industry would be driven abroad or underground. In all those cases, the AIDS situation is worsened by regulation.

Get a blog!

Greg Mankiw points to a depressing story of a physicist trying to get a comment published on a published article. Long story short: if the editor who published the article you're critiquing gets to decide whether your comment gets published, you're wasting a lot of your time even trying.

First thing I wondered, though, was why Professor Trebino didn't just get a blog instead. Stan Liebowitz couldn't get his comment on Oberholzer-Gee and Strumpf published in the JPE; instead, he tore it to shreds in an SSRN working paper and then publicized the paper on his website. Almost two thousand people have downloaded his critique of Oberholzer-Gee and Strumpf despite it not being out in a refereed journal. He also posted a withering critique of the editorial process at the JPE.

Professor Trebino could instead have released his comment into one of the many working paper series that are out there, blogged on it, and informed any other physics bloggers out there (yes, there are some; I read Motl!) who follow the issue about his work in the area.

The web lets researchers route around inefficiencies in the journal publishing process. Why not use it?

Friday 21 August 2009

Should Meridian be made to swap hydro for thermal generation?

I was pretty lukewarm about the proposed asset swap in which Meridian would be made to sell some of its South Island hydro generation capacity to Genesis and Genesis to sell some of its North Island thermal generation to Meridian, but then I saw this story:
Meridian Energy faces a fight to preserve its green branding following recommendations that it be made to own a North Island natural gas-fired power station.
Of course, a straight swap of assets will do nothing to change the total carbon emissions from electricity generation in New Zealand. What might change, however, is the ability for Meridian to suggest that consumers can reduce their own carbon footprint by buying their electricity from Meridian.

ETAG Report and Wholesale Competition

As I noted yesterday, the ETAG report has some recommendations to improve the wholesale market. Their main recommendation is to require some asset swaps between Meridian and Genesis so that Meridian would own some thermal generation units in the North Island and Genesis some hydro units in the South Island.

Over at Progressive Turmoil, this is seen as
an implicit admission that the contracts market doesn’t work properly. In principle, these two firms should have been able to (and should have wanted to) contract for exactly the same outcomes as will be delivered by the asset swap.
I am not so sure. The ETAG is a bit equivocal in its treatment of wholesale market power. I suspect that the members of the group were unable to reach a consensus. The recommended asset swap may simply be a case of a policy that would increase competition if there were market power and do no damage if there is not, and so can be recommended even without an admission that the “contracts market doesn’t work properly”. I can also imagine a story in which decision making under uncertainty in the allocation of scarce hydro resources would work better if each hydro-owning generator were able to substitute to its own thermal capacity.

In any event, there is another reason why a swap of some of Meridian’s South Island hydro capacity with some of Genesis’ North Island thermal capacity is an attractive policy suggestion. More on this later….

Auckland Maori seats: good idea? [updated]

The main stumbling block currently to Auckland's merger into a mega-city isn't worries about the loss of Tiebout competition - which seems to be only of concern to me, see here and here, though NotPC also agrees and I may have convinced Matt Nolan (see comments, oops) Rauparaha that this is worth worrying about.

Rather, the biggest concern seems to be whether city council will have a standard set of wards or whether it will follow the system used for national elections in having overlapping districts: one set for those voters who want to elect to be on the Maori roll, and another set of general electorates for those who don't.

Correct me if I'm wrong, but I don't think there's anywhere else in the world that uses this kind of system.

Does having these kinds of overlapping districts help Maori? I suspect not much under proportional representation except inasmuch as they help to facilitate overhang: many voters in the Maori electorates tick the Maori Party as their district Member of Parliament but give their Party vote to Labour. The Maori Party then wins more seats than those to which it is entitled by its list vote and Parliament is made bigger. In a PR system, this means that the Maori Party has a seat or two more than it otherwise would and so has a bit more clout as a minor party.

Auckland's council, though, as best I understand it, isn't planning to go PR. What are the effects of this kind of system when you have only ward-based representatives?

Imagine that there are two groups, A and B. Everyone that self-identifies as group A, 10% of the population, is 90% likely to vote for Party 1 and 10% likely to vote for Party 2; everyone in group B, 90% of the population, is 47% likely to vote for Party 1 and 53% likely to vote for Party 2. Suppose every district has 100 voters and groups A and B are evenly split across all districts. In that case, every district has 9 A-group and 42 B-group voters for Party 1, 1 A-group and 48 B-group voters for Party 2, and Party 1 wins all districts. Now, suppose that you instead create special A-group electorates that comprise 10% of the seats. Now, Party 1 wins all A-group electorates but Party 2 wins all other seats. You've made sure that Group A is represented, but at the cost of vastly reducing their influence.

Indeed, this has been found to be one of the effects in the US of judicial mandates for majority-minority districts. Heck, even Wikipedia knows it:
Gerrymandering may be advocated to improve representation within the legislature among otherwise underrepresented minority groups by packing them into a single district. This can be controversial, as it may lead to those groups' remaining marginalized in the government as they become confined to a single district. Candidates outside that district no longer need to represent them to win election.

As an example, much of the redistricting conducted in the United States in the early 1990s involved the intentional creation of additional "majority-minority" districts where racial minorities such as African Americans were packed into the majority. This "maximization policy" drew support by both the Republican Party (who had limited support among African Americans and could concentrate their power elsewhere) and by minority representatives elected as Democrats from these constituencies, who then had safe seats.
Enough of Wikipedia; turn to Google Scholar. Cameron, Epstein and O'Halloran, 1996, find that there is a very real tradeoff between advancing the number of minority representatives and advancing the issues that minority voters care about. Shotts, 2001, finds that a majority-minority mandate has no effect where Republicans control redistricting (because they already would have packed minority voters into a small number of districts, by my read) but reduces Democratic seats where Democrats control the redistricting and where the majority-minority mandate requires supermajorities; in this latter case, it can cause the Democrats to lose control of the state legislature.

I can see why the Maori Party would support this kind of move: it guarantees them a couple of seats (yes, yes, city council elections aren't party-based, you get the idea though). But it may well also guarantee that no other city councilor has to care at all about Maori issues because they won't have any Maori constituents. But that's too conspiratorially-minded. Most likely, nobody involved in the process has bothered to check the empirical literature, just like nobody involved in the process has bothered to worry about Tiebout.

Careful what you wish for, folks. The Law of Unintended Consequences is a stern one.

Thursday 20 August 2009

Electricity Technical Advisory Group Report

The ETAG was appointed in April this year to review the performance of the electricity markets (wholesale and retail) and make recommendations on improvements.

Their intial report looks very good to me, and their recommendations make for interesting reading. Highlights include:

1. A recommendation to phase out the reserve-energy mechanism. Reserve generation is the crazy measure put in place after the 2001 dry year, in which an expensive power station (Whirinaki) was commissioned whose only role would be to provide power in the event of a “1 in 60 year” dry year. That is, the initial idea was that it be operated for a few winter months once every 60 years and lie idle the rest of the time! In practice, it has been operated a lot more than that, but the concept is still the same.

Unfortunately, the report implicitly acknowledges that rationality might be a tough sell here, and so it has some second-best recommendations in the event that the reserve-energy mechanism is retained, but its favoured option is abandoning the concept of reserve energy altogether.

2. A recommendation to replace the Electricity Commission. The EC was another misguided innovation in response to the 2001 dry year. The ETAG recommend replacing it with a hands-off agency that would not be under the direct control of government, and so not a route for governments to intervene in the industry in response to short-term political objectives. Another victory for public choice reasoning.

3. Recommendations for moves to create more price sensitivity in consumer demand. This is long overdue. In a system where capacity is highly dependent on fluctuating weather patterns, it makes far more sense for the country to respond to low rainfall by having all electricity consumers reduce demand by a bit in response to price incentives, than by asking a small number of consumers to reduce demand by a lot, or, even worse, to have a large amount of capacity sitting idle except in very dry years.

4. A focus on the retail rather than the wholesale market for improving competition. The Wolak report looked at ostensible market power by generators. The ETAG put the focus where it belongs—on the retail market.

5. Some suggestions for improving competition in the wholesale market. This would seem to be an acknowledgement that there is market power in the wholesale market as the Wolak report claimed. I’m not so sure. More on that tomorrow.

Wednesday 19 August 2009

New Zealand Employment Law is defective [Updated]

I've seen lots of anecdotal evidence that it's difficult for firms to fire problem employees under the Kiwi Employment Relations Act. The procedures are often described as onerous.

Here's a great one. Disgruntled employee of Inland Revenue (the Kiwi IRS) drives his car through the plate glass first floor windows of the IRD's Christchurch Office, then tells the attending police officers that he had every intention of doing it.

IRD's notification letter to David Theobald, the driver, is hilarious and depressing. The whole thing is documented here, including photos of the crash scene, the police report, and the letters from IRD to Theobald subsequent to the crash. Relevant excerpts:

From the police report:
The defendant admitted the facts as outlined and explained his actions stating 'I had every intention to do that. I've thought about it and knew exactly what I was doing. I had warned them that someone could drive through there with a bomb in the car and create another 9-11, as they had no security measures.'
Seems pretty clear-cut. IRD's response:
Commencement of an Employment Investigation

1. Information has come to my attention which indicates that you may have intentionally driven a vehicle through Inland Revenue's Christchurch building on Saturday 15 August 2009. I am commencing an employment investigation in to this matter.

2. I am concerned that your conduct may be inconsistent with the Code of Conduct (contributing to a safe workplace and ensuring personal activities do not discredit Inland Revenue) and/or, the Standards of Integrity and Conduct, and/or your obligations to Inland Revenue, and that if substantiated, this conduct may amount to serious misconduct.


3. Given the nature of the allegations I am considering whether, or not, suspension is appropriate. Your employment agreement provides for this to be on pay.

Note that the "Mick Elborado is innocent" group on Facebook now has 128 members.

HT: Drinkwater, and commentator Lew there.

Update: IndyMedia gives an alternative take which, if accurate in all details and contains no omissions, would suggest Theobald would have had a decent case against IRD in employment court well prior to his driving the car through the window. I don't know much about HR, but the story sounds like a legalistic risk-averse employer deciding to jump through all the hoops necessary to dismiss an employee, with the formal procedures undertaken being sufficient to push Theobald over the edge. My best point estimate, but with a very wide confidence interval around it given my lack of knowledge of either the case or of exact details of employment law.

That's what they want us to think

Turns out that garlic attracts vampires rather than repelling them. I suspect a long-term disinformation campaign run by the vampires, in conjunction with their fellow-travelers in the media (and the Rand Corporation), as being behind the fallacy.

We're through the looking-glass here people.

"Does garlic protect against vampires? An experimental study." Tidsskr Nor Laegeforen, 1994.

"Vampires are feared everywhere, but the Balkan region has been especially haunted. Garlic has been regarded as an effective prophylactic against vampires. We wanted to explore this alleged effect experimentally. Owing to the lack of vampires, we used leeches instead. In strictly standardized research surroundings, the leeches were to attach themselves to either a hand smeared with garlic or to a clean hand. The garlic-smeared hand was preferred in two out of three cases (95% confidence interval 50.4% to 80.4%). When they preferred the garlic the leeches used only 14.9 seconds to attach themselves, compared with 44.9 seconds when going to the non-garlic hand (p < 0.05). The traditional belief that garlic has prophylactic properties is probably wrong. The reverse may in fact be true. This study indicates that garlic possibly attracts vampires. Therefore to avoid a Balkan-like development in Norway, restrictions on the use of garlic should be considered."

Tuesday 18 August 2009

Police agitprop [updated]

The New Zealand Police reports that $379 million in social harm was avoided in their latest anti-marijuana campaign in which 140,000 marijuana plants were destroyed. So each marijuana plant is associated with about $2700 in social harm. Amazing. If you think that a shonky economic consultancy firm was involved in setting up the numbers on which this was based, you'd be right.

A quick scan of BERL's drug harm index suggests that, for marijuana, roughly half of the tallied social costs are the costs of producing marijuana. So police destroying marijuana crops saves the social cost of growing marijuana crops. Except that it doesn't: the growers obviously already had incurred a fair portion of their production costs. Next, roughly a third of the total costs come from the court system: police, courts, prisons, and lost output from those incarcerated for marijuana. So the police operation saved us the costs of police operations.

There's no point in doing a thorough fisking of BERL's drug harm index. It looks every bit as shonky as their report on alcohol, and their only defense will wind up being world view, and the folks who care more about useful agitprop than about sound statistics will keep citing their numbers.

It's depressing that our government commissions cost reports that are only useful as agitprop.


Update: The BERL report even warns against using the drug harm index as a measure of harms avoided by police operations!
The NZDHI does not directly measure harm avoided by seizures but rather harm that could be avoided had illicit drugs never been introduced to society. Drug seizures will not avoid all of the harm generated by drugs. For example, Customs or NZP operations divert in order to carry out drug seizures. These resources would not have been diverted if drugs had never been introduced, but they are diverted as a result of drug seizures. The NZDHI incorporates the value of Customs and NZP time spent on these activities, but these costs result from drug seizures rather than being prevented by them. Applied analyses of interventions, such as a cost-benefit analysis, are an appropriate way to measure avoidable harm.
p. 49.
You can't blame the police for being too confused though, as BERL also writes:
The Index captures the social costs potentially avoided by drug seizures in a given year in constant dollar terms.
p. 46

Odds that BERL will correct Detective Senior Sergeant Scott McGill? Oh, right.
As with anything that enters the public domain, it is the consumer’s right to interpret it as they see fit and for them to take responsibility for their reaction to it, not for the author to manage their response to it.

Monday 17 August 2009

Gender pay gap: nonpecuniary benefits edition

Another reason why differences in average wage rates by gender are not evidence of discrimination:
This study is the first to estimate mothers’ marginal willingness to pay (MWP) for job amenities directly. Its identification strategy relies on German maternity leave length. The key aspect of the maternal leave framework is that mothers can decide whether and when to return to their guaranteed job. Thus, in contrast to previous studies that analyze the job search of employed workers, this framework allows us to overcome the limitation of not observing the wage/amenity offer process. A theoretical model of the leave length decision is derived from a random utility approach. Using data from the German Socio-Economic Panel and the Qualification and Career Survey, this model is estimated by a discrete duration method. The MWP for amenities can be inferred through the estimated elasticities of the leave length with respect to the amenities and the wage. The results provide evidence that mothers are willing to sacrifice a significant fraction of their wage to reduce hazards (22%) and to enjoy a flexible working schedule (36-56%).
From Andrea Christina Felfe's new SSRN paper, "The Willingness to Pay for Job Amenities: Evidence from Mothers' Return to Work". If measured wage differences include only salary and not non-pecuniary benefits, and if men and women have different average valuations of non-pecuniary benefits like flexible work schedules, then this can drive observed wage differentials directly. Of course, most regression analysis I've seen shows the wage gap disappears anyway when controlling for education, work experience, and time outside the work force.

HT: Wayne Marr at SSRN's Twitter Feed.

Hoisted from the comments: for a Hayekian game

Commenter Max Marty writes:
I've often wished for a Simcity-ish simulation that operated on actual market principles. I even tried getting a copy of a simulation called "Capitalism" but its just a different flavor of micro-management at the agent level.

Alright, who wants to start a Hayekian inspired game company with me?
I've wondered what a Hayekian Sim City game would look like. If you start ground up with a new city, like Sim City, the game would be trivial: just set an optimal rule structure at the start and make sure there's an insurance market against Godzilla attacks.

A more interesting variant could work something like the following. You're the city comptroller. You've been appointed by the newly-elected mayor to sort out the mess that the city's in. He was elected on a reform platform, but he's worried that if he goes too far, he'll be turfed in the next election and he's more than happy to make you scapegoat if necessary. You get polling data on which issues the public thinks are currently most important and reactions to your latest policy moves. All of the economics works as it should, but implementing optimal policy too quickly could see you turfed from office. So, if voters think education is important, you might still find that a move to eliminate zoning and turn the public schools into charter schools would yield protests and strikes by the teachers' unions (still protected by State-level union rules so you can't just fire the lot of them) and protests by folks who would suffer large losses to property values with the eliminations of restrictive zoning (rich folks basically). What small moves can you make to build support towards optimal policy? How many compromises on other margins are you willing to accept to make small changes on the more important margin?

Or, if folks are upset about the high costs of taxicabs, you might find that eliminating taxicab licensing (restrictions on entry: the New York Medallion system) would dramatically reduce fares but also would yield gridlock as cab owners protested by blocking key intersections and a wave of voter opposition as a poor immigrant who invested his life savings to buy a taxicab medallion, which he planned on passing on to his son, talks about how the reforms would bankrupt him. Can you devise a policy that compensates the losers but remains popular with voters? Tullock says no, but I still think a buy-out of medallion holders financed by a bond issue that's paid off using a tax on taxi fares would be a Pareto move. I'm almost surely wrong though, because there are no Pareto moves left in politics (== $20 on the sidewalk) and because Tullock says there's no system that would work. I just don't know why it wouldn't work.

Add in machinations of the challenger for office and some incentives to implement policies that induce his supporters to leave town: the Curley Effect.

Then add in random swings in voter opinion based on whether the local TV station aired an expose on the free coffee city workers get in their lunchrooms or whether Barry White has just sung a song about how the city should eliminate whacking day.

The game sounds depressing. And frustrating. And is sufficient reason never to run for public office.

Saturday 15 August 2009

We don't know how lucky we are [updated]

Further to the famous (in New Zealand) Kiwi anthem "We don't know how lucky we are", embedded below:
Yikes. Note that the Southern Mississippi results are despite that U Southern Miss is one of the most successful schools at drawing in Congressional earmarked funds.
The database, which was put together using the Center for Responsive Politics's data on lobbying and the information on earmarks compiled by Taxpayers for Common Sense, shows universities filling 9 of the 10 top slots, and 13 of the top 20 positions, in a list of organizations that both lobbied the government and benefited from pork barrel projects from their representatives. The University of Alabama led the way with $40.55 million in earmarks (it spent $360,000 on lobbying in 2009 and individuals contributed $138,494 to political candidates). Four of the next five slots were filled by Mississippi universities (U. of, Mississippi State, the University of Mississippi Medical Center, and the University of Southern Mississippi), and one interesting recipient in the top 20 was Teach for America, which spent $509,000 on lobbying and got $2 million in earmarks.

Not a Kiwi anthem as yet, but some good fun from Kiwi FM on my drive in to work this morning: Kiwi band Bear Cat's song "New Zealand Adopt This Panda". Apparently, Bear Cat only writes songs about pandas. Excellent fun. If they had an album, I'd buy it.

Morning roundup

  • We have a verdict in the Janet Moses case. If you recall, her family drowned her because they mistook mental illness for demonic possession and thought the makutu ceremony, with attendant risks of drowning, just the thing. Well, the courts seem to have agreed with the family. The jury said guilty of manslaughter; the judge said no jail. For the record: if ever someone thinks I'm possessed by demons, I have not consented to any application of any exorcism (consent of the victim can matter).

  • Some sciency goodness from our friends at New Zealand Ag Research: The Epigenome Song!


My review of Nudge appeared in the Christchurch Press this morning. Enjoy!
Cass Sunstein, the phenomenally productive legal scholar and now head of the Office of Information and Regulatory Affairs in the United States, wants to give you a nudge. And I do too. You might not like my nudge, but I can’t see a convincing argument against my nudge that doesn’t also cut against Sunstein’s.

Sunstein and coauthor Richard Thaler argue that foibles in human rationality mean that we are prone to making bad decisions: especially on decisions we make infrequently, where short term gains are outweighed by longer term costs, where we don’t get good feedback from the consequences of our decisions, where the choice is difficult and where we may not even ourselves have a good sense of our own preferences. Moreover, for lots of these kinds of choices, the choice architect – the person who arranges the order of the menu items or who picks the default Kiwisaver investment fund for your firm – can’t avoid influencing your choice; Sunstein provides a good deal of evidence that choice context matters. In these kinds of cases, he argues for what he calls a “libertarian paternalism”: set the choice architecture so as to maximize the chances of folks making the right decision, but let them make the wrong decision if they really want to. So the chef at the workplace cafeteria should make sure that the healthiest options are given the most prominent position, the HR director should make sure that the default Kiwisaver plan is the one that makes the most sense for the most workers, and the government should make it harder for us to make choices that redound to our own detriment unless we’ve given evidence of having put some thought into it.

While Sunstein worries about our decisions over investment plans or our weakness of will at the buffet table, I worry about our decisions at the voting booth. We vote infrequently, there’s no feedback from our personal voting decision to any policy outcome (unless you happen to hit Lotto by breaking a tie), the voting decision is complex and we may have little grasp of the issues at stake let alone our own positions on those issues. In my own research, I’ve found that only about half of voters in 2005 could place National, United Future, and Labour correctly on a left-right spectrum, for example, and that individuals’ political knowledge independently affects their policy and party preferences even after controlling for income, education, race, employment, gender, and other demographic characteristics. And so I think we (by which I mean you) need a nudge. Under my libertarian paternalistic voting system, your electoral enrolment would be linked to your census details. You’d then answer a brief questionnaire when entering a computerized voting booth, and I’d tell you, through the computer’s algorithms, for whom you should vote. Trust me: I’d be choosing the option that really would be best for you, if you only understood all of the policies supported by each of the parties and had a PhD economist’s understanding of the likely effects of these policies. You’d still be free to pick some other candidate or party, but you’d have to first reject the default choice I’d pick for you. The remaining options would then be presented in an order designed to maximize the chances of your choosing the next best option.

I trust that you find this kind of scheme repugnant. I’d find it great, so long as I got to be the choice architect. But opinions surely would vary, and I’d surely oppose the scheme if anyone other than me got to be the architect. The problem is that most of the arguments against my scheme cut similarly against Sunstein’s. More worrying, Sunstein seems pretty happy to blur the line between nudges and shoves: increasing cigarette taxes to discourage smoking is surely paternalistic, but is a bit stronger than a nudge. And, honestly, even the choice preserving nudges, like cars that nag you about the petrol you could save by easing up on the pedal, sound thoroughly unpleasant: I’d be nudged into learning enough automotive electronics to cut the right wires.

There are a few cases where Sunstein recommends nudges instead of regulation as a way of rolling back current nanny state protections. In particular, his recommendations to get the state out of the marriage business and instead provide default “civil union” contracts, with the option for couples to select into alternative arrangements, is rather nice and not that far from practice in New Zealand. And, allowing problem gamblers to sign onto a state-provided list banning their entry into gambling facilities is surely a less intrusive solution than blanket regulations catching all punters. For the most part, though, nudges are recommended in addition to existing regulations, not as a way of expanding the range of choice. But couldn’t we imagine creative nudge-based alternatives to current regulatory regimes in areas like drugs or health and safety regulations?

Nudge provides a provocative read. Just be sure to think about the kinds of folks who’d be likely to be giving the nudges, and how hard they’d be pushing.

Friday 14 August 2009

Economist envy

"I have economist envy on a good day and worse things on a bad day,” he said.

- Donald Tomaskovic-Devey, Professor of Sociology, U Mass Amherst.
Kids, if you want to do social science, get your degree in economics. Or risk economist envy later on.

Teaching relevant skills

We send many of our honours students to Treasury and to the Ministry of Social Development, among other places. Boris Hampton reports that ability to withstand blistering abuse from Ministers can be a job requirement.
There is nothing, unfortunately, in the Public Service Manuel that covers what to do when your minister hurls obscenities at you. Officials who have to deal with Gerry Brownlee on a regular basis have been asking for guidance but there’s not much in the way of precedent. That is not to say previous ministers did not curse their officials. Of course they did.

What Muldoon called his energy officials, when they told him their previous advice to spend a billion dollars on a dam was wrong, has gone down into Wellington legend. In fact, the words were blistered into the woodwork in Rutherford House, until it was revamped for Victoria University.

But back then officials were able to handle it. These days the schools are just not turning out people who can deal with that sort of thing.

One hears tales of Ministry of Economic Development officials coming back in tears. Treasury officials sent across have turned it into a competitive game, and try to see who can collect the worst insult. The game spluttered out, not because of the officials, but simply because Gerry’s vocabulary is not all that wide, even the swear words.

The best reply so far seems to be “I don’t agree, Minister.”

State Services Commissioner Iain Rennie simply says “tell the officials to get over it” which sounds like advice he has offered before.
If this is the case, and if we're meant to be preparing our students for the real world, the implications for pedagogy are interesting. I will ask my HoD, and co-blogger, if I should work to better prepare my students. Seamus? Ought I unmuzzle?

It sounds like Brownlee ought to watch Deadwood. There's no better training for eloquence in cursing. If cursing has health benefits, then surely improved cursing is even better.

And the cell phone ban

About the forthcoming ban on using cell phones in cars: Liberty Scott nails it.
However isn't THAT the issue? The philosophical belief that when people cause an accident, it isn't them to blame per se, but because they did something they shouldn't have. Why is it easier to produce a rule to ban something, than to focus on people who drive dangerously and cause an accident?

Is it because it is easier for the Police, who can treat talking on the cellphone as the reason to prosecute, rather than negligent driving?

Or is it because of ACC? ACC remember removes your civil liability from being to blame for causing personal injury by accident to anyone else (although not property damage). Indeed your ACC levies for owning a car (equivalent to accident insurance) don't vary if you have a good or bad driving record. So perhaps opening THAT up to competition, so bad drivers pay far more for accident insurance, and good ones pay less, might make a modest difference?

You see, I by and large don't give a damn if stupid people cause accidents damaging their car and themselves. The state has better things to do that protect people from themselves. I do care about such people taking me or others with them. That is where rights to drive should be removed and penalties imposed.
The more you socialize risks, the greater the pressures for regulation to induce folks to do what they would have been doing if you hadn't distorted the market for risk in the first place.

In the first couple of months of Key's government, I was starting to think my prognostications were wrong. Now, I'm not so sure.

Thursday 13 August 2009

Capital gains tax and distortions

I'm no expert on the Kiwi tax system. But a few things strike me.

First, we're hearing a couple of different stories for a capital gains tax. The first story is that the current tax structure gives investors a disproportionate incentive to invest in housing relative to other assets and that this causes distortion. While I can see the case for a distortion away from interest-bearing assets and towards assets that carry capital gains, I have a much harder time seeing how this necessarily twists investment towards housing. Now, it could be the case that some property investors who improve and resell properties quickly are able to disguise normal income as capital gains by this mechanism, but I'd be surprised if the efficient solution were a broad capital gains tax rather than IRD just watching things a bit more closely.

The second story is that we need to reduce our reliance on income taxation and move towards a broader tax base; reducing income taxes in favour of a higher GST and a capital gains tax could be part of such a move. But at least some of the arguments running this way are that the New Zealand savings rate is too low so we need to encourage savings and discourage consumption. It's rather unclear to me that putting a tax on the fruits of investment is a good way of encouraging savings.

My bigger worry on the latter story is that it's pretty unrealistic to think this will be a revenue-neutral move. During the session on tax at the New Zealand Economic Association Meetings, there was at least as much talk about introducing a capital gains tax as a way of avoiding having to cut entitlement spending going forward as their was about using it to replace other forms of tax. Call me a pessimist, but even if the first move on introducing the new tax is to reduce other taxes at the same time, the odds on income taxes going back up to the status quo ex ante are, well, pretty high. Even if the current government is perfectly sincere about wanting to just broaden the base in a fiscally-neutral way, it's then awfully cheap for some subsequent government to ratchet things back up.

Unless the move to introduce a capital gains tax is coupled with serious spending cuts that hit medium term budget projections - like increasing the retirement age - a current move to introduce the new tax while cutting other taxes just isn't a stable equilibrium. It instead makes it more likely that the medium term budget problems are resolved by overall tax increases rather than by spending cuts. I rather prefer the latter, so I worry about moves that make the former more likely.

Afternoon roundup

  • Effects of Central Bank Intervention on the Interbank Market During the Sub-Prime Crisis. Abstract:
    Does central bank intervention improve liquidity in the interbank market during the current sub-prime crisis? To answer this question, we employ a unique dataset which reports trades and quotes of the e-MID, the only electronic, regulated interbank market in the world. Our results show that central bank intervention appears to create greater uncertainty rather than enhancing liquidity as intended. We find that central bank intervention crowds out private liquidity. These results suggest that, when counterparty risk poses systemic risk to the interbank market, the central bank should focus on providing interbank loan guarantees or engage in direct asset purchases rather than simply injecting capital into the system.

  • The Effect of Compulsory Schooling on Health – Evidence from Biomarkers. Abstract:
    Using data from the Health Survey for England and the English Longitudinal Study on Ageing, we estimate the causal effect of schooling on health. Identification comes from two nation wide increases in British compulsory school leaving age in 1947 and 1973, respectively. Our study complements earlier studies exploiting compulsory schooling laws as source of exogenous variation in schooling by using biomarkers as measures of health outcomes in addition to self-reported measures. We find a strong positive correlation between education and health, both self-rated and measured by blood fibrinogen and C-reactive protein levels. However, we find ambiguous causal effects of schooling on women's self-rated health and insignificant causal effects of schooling on men's self-rated health and biomarker levels in both sexes.
    Upshot: estimates of the effect of income on health overestimate the effect of income if they don't include education. Note, of course, that IQ also has independent effect.

  • Cool map of congressional earmarks. There's a reason most empirical work is done on US data.

  • NZ contemplates a capital gains tax. I'm not convinced this is the best way of dealing with distortions in the Kiwi investment market.

HT on many to Wayne Marr

Did electricity companies really overcharge by $4.3b? Part 3

I am still reading the report by the Electricity Technical Adviosry Group, released yesterday, but it looks like they have rejected the conclusions of the Wolak report and instead focused their attention on other areas.

I'll blog on that when I have digested the report. In the meantime, a final post on the Wolak report:

Previously, I blogged here and here on why I don’t believe the figure of $4.3b from the Wolak report on how much electricity companies ostensibly have overcharged themselves through the exercise of market power. The calculation of the $4.3b figure, however, was just one part of the empirical analysis in the report. A significant earlier part of the report is devoted to calculating estimates of the ability and incentive of firms to exercise market power, and showing that it correlates very highly with price.

Now correlation does not imply causality. While the results in that part of the report are consistent with firms having exercised market power, they are also consistent with perfect competition, since the very conditions that lead to a high ability of firms to exercise market power (firms running up against capacity constraints) are the very conditions that would lead to high prices in competitive markets. The details here become somewhat technical, but I want to make one general point: Sometimes empirical results can be too good to be believable. Consider the following graph from the Wolak report:

The red lines shows average prices across the day between 2001 and 2007, and the blue line shows the average estimated ability of firms to exercise market power. One can see just by eyeballing the graph that one could explain close to 100% of the within-day variation in prices by the within-day ability to exercise market power. There are two conclusions one can draw from this: Either the exercise of market power is the only factor influencing price variation; or, the measure of the ability to exercise market power is highly correlated with other determinants of price.

It is pretty hard to believe that market power is the only determinant of within-day variation in price: for instance, there are fixed costs to starting and shutting down thermal power stations, so once a thermal station is started in order to supply power during the peak hours, the marginal cost of continuing it running during low-demand hours is relatively low.

If, on the other hand, the ability to exercise market power is highly correlated with other determinants of price, we cannot infer from the high correlation between it and price that it was the cause of any of the price variation.

The bottom line here is that we should be very very wary of drawing any conclusions from the correlations presented in this section of the report.

Wednesday 12 August 2009

Self-enforcing protocols: property tax edition

The excellent Bruce Schneier posts today on Self-Enforcing Protocols and points to one I'd not heard of before:
Here’s a self-enforcing protocol for determining property tax: the homeowner decides the value of the property and calculates the resultant tax, and the government can either accept the tax or buy the home for that price. Sounds unrealistic, but the Greek government implemented exactly that system for the taxation of antiquities. It was the easiest way to motivate people to accurately report the value of antiquities.
This makes a lot of sense to me for things like Greek antiquities, where the owner of the object has a lot of private and expensive knowledge about the true market value of the good. I'm not sure that it makes sense for housing. Right now, city councils hire assessors to make their tax assessments; it's unclear that distributing the burden of assessment more efficiently extracts information about market prices. I'd expect that the administrative cost minimizing solution is the one where the council hires assessors rather than having every household privately either hire assessors or otherwise come up with a figure.

I wonder if anyone's ever done formal modeling of this arrangement. In contrast to the case with antiquities, the valuer/owner experiences massive transactions costs if the government unexpectedly decides to exercise its option to buy. Consequently, folks would have an incentive to bid willingness to accept rather than expected market price. And that means we'd then be taxing folks' sentimental attachment to pieces of property. However, if market value (presumably the government's strike price for the call option) is below willingness to accept, folks will shade their valuations down to market value. If there's uncertainty about what the government thinks actual market value is, risk-neutral folks will shade their bids such that the probability-weighted sums of utility across keeping the house with a lower tax bill and losing the house are maximized; risk-averse folks might overvalue their house for fear that the government will exercise the call option, though they shouldn't go above willingness to accept.

Another complication is whether the government would really ever be able to exercise its call option. Could they really evict the little old lady who came up with her valuation number using the recommended rule-of-thumb but whose property experienced idiosyncratic appreciation? If not, the system falls apart.

Leaving aside those problems, I can see two reasons for wanting to move to such a system, but I'm not sure that they're sufficient bases for such a move.

First, if the government wanted to base property taxes on the owner's willingness to accept rather than on market value, then this system would be preferable. In a world where official assessments are updated infrequently but are always updated in the case of a market sale, tax assessments can induce inefficiently low turnover in housing: if your property has appreciated since the last assessment, you'll be more reluctant to move than if your property were taxed based on a current assessment. Moving to regular owner-assessment could solve this problem, but so too could more frequent official assessments.

Second, if the system did induce truthful revelation of willingness to accept, with a call option for government based on that price, eminent domain would be a heck of a lot simpler. But again, I'm not sure that these benefits would beat the costs. You could argue that it's an erosion of property rights in giving the government a call option on all our property; it's unclear to me that this system has that much effect at the margin. Kelo v. City of New London is the current precedent in the US; New Zealand also seems plenty able to expropriate property owners for public works as well. At least this system would force payment closer to actual willingness to accept.

Finally, if valuations were in the public domain and folks were posting their real willingness to accept, the real estate market would be a heck of a lot more interesting. If you always fancied that house down the road, you'd know what you'd need to pay for it.

A more worrying downside would be that it would allow an unscrupulous government to force its opponents to pay higher property taxes: if your property tax is based on how far from average valuation your house is, and the government uses a rule of thumb that it exercises its call option if reported valuation is say 5% below market value, you might rightly fear that the rule of thumb in your case would be actual market value, or some higher number. You then have to report a valuation closer to your true willingness to accept than do others; in equilibrium, you pay slightly higher property taxes.

Working out the formal modeling and likely effects of such a rule would be an interesting project for someone, if it hasn't already been done. I have a hard time seeing it being a worthwhile move in property taxation though.

Robin Hanson would agree

Bruce Charlton, Professor of Theoretical Medicine at Buckingham and Editor in Chief of Medical Hypotheses, asks "Why are modern scientists so dull?"
In a nutshell, I am suggesting that:
  1. Educational attainment depends on IQ × C [conscientiousness]; but IQ and C are not closely-correlated.
  2. Modern education has progressively raised the floor for C (by lengthening the educational process and by changes in educational evaluation methods).
  3. Educational attainment therefore nowadays increasingly rewards C in preference to IQ.
  4. Yet revolutionary science still requires high levels of IQ, and the higher the better.
  5. So, in revolutionary science where IQ is vital, selection of personnel should not be determined only or mainly by educational attainments; but this information needs to be supplemented with direct, formal IQ testing.
  6. Furthermore, revolutionary science requires high levels of creativity; which are associated with moderately high Psychoticism trait – yet modern education and science selects very strongly in favour of Conscientiousness and Agreeableness and therefore enforces low Psychoticism.
  7. So, the education, training and career structure of modern science tends to depress average IQ and cull creativity – which are the prime qualities requires for success in revolutionary science. Consequently, modern top scientists are likely to be less intelligent and creative than is desirable, and probably significantly less intelligent and creative than top scientists used to be.

HT: NCBI ROFL. I don't know what they think is so funny about this, other than the difficulty of setting up a preferable selection mechanism. The explanation of the current mechanism seems entirely plausible to me. More from the original article:
Modern science is just too dull an activity to attract, retain or promote many of the most intelligent and creative people. In particular the requirement for around 10, 15, even 20 years of postgraduate ‘training’ before even having a chance at doing some independent research of one’s own choosing, is enough to deter almost anyone with a spark of vitality or self-respect; and utterly exclude anyone with an urgent sense of vocation for creative endeavour. Even after a decade or two of ‘training’ the most likely scientific prospect is that of researching a topic determined by the availability of funding rather than scientific importance, or else functioning as a cog in someone else’s research machine. Either way, the scientist will be working on somebody else’s problem – not his own. Why would any serious intellectual wish to aim for such a career?

The whole process and texture of doing science has slowed-up. Read the memoirs of scientists active up to the middle 1960s – doing science then was nimble and fast-moving in texture and also longer-termist in ambition. Unexpected leads could be pursued. It was common for people to begin independent (really independent) research in their early- to mid-twenties. For the individuals concerned there was a palpable sense of progress, a crackling excitement.

Nowadays, training to be a scientist is an exercise in almost-endlessly-deferred satisfaction. There is an always-increasing requirement for years of training (i.e., extra years of doing what other people decide you ‘need’ to do, and not what interests you) – and also for more advance-planning, application for committee permissions, and demand for logistical organization; combined with a proliferation of scientifically-irrelevant and energy-sapping bureaucracy.

The timescale of scientific action and discourse has gone up from days, weeks and months to months, years and decades. Yet at the same time, the requirement for unremitting annual high productivity means that the timescale for research pay-off has contracted to a maximum of 3–5 years. It is usually career suicide to take the time and risks entailed by scientifically-ambitious research [2]. In sum, the tempo of science has slowed but the time-horizon of science has contracted. Modern science is both duller and more short-termist: the worst of both worlds!
My remaining question: if high science filters out the highest g folks, where do they go?

Update: Robin Hanson emails (apparently, comments from LJ accounts are bouncing):
Well of course modern academia isn't optimized for revolutionary intellectual progress; why ever would one expect that? the more interesting question is what functions is academia adapted to perform; what have been the pressures that pushed it to the form it has? I have suggested that academia mainly functions to let people affiliate with credentialed as impressive folks.

And more on the new paternalism

Robin Hanson links to Megan McArdle's interview with Paul Campos on the war against obesity.

Short version of the interview: there's really not much that can be done to permanently make fat people thin; most current campaigns are fueled by moral panics about the need to do something about associated health care costs and by disdain for folks who become obese. Being thin is a marker of high status, and anti-obesity campaigns do a lot to reinforce that kind of social hierarchy while being utterly ineffective in improving health outcomes.
Megan: An economist recently pointed out that we don't encourage people to move to the country, even though rural people live more than three years longer than urban people, and the diffefence in their healthy life expectancy is even more outsized. Nor do we encourage people to find Jesus or get married. We target "unhealthy" behaviors that are already stigmatized.

Paul: Right, as Mary Douglas the anthropologist has pointed out, we focus on risks not on the basis of "rational" cost-benefit analysis, but because of the symbolic work focusing on those risks does -- most particularly signalling disapproval of certain groups and behaviors.In this culture fatness is a metaphor for poverty, lack of self-control, and other stuff that freaks out the new Puritans all across the ideological spectrum, which is why the war on fat is so ferocious -- it appeals very strongly to both the right and the left, for related if different reasons.

The New Paternalism

More on healthism as the new paternalism.
The latter-day addition of food highlights the point that for most of Australian history, wowserism had been firmly buttressed by Christian morality-the demon drink, smoking, and gambling may have had health or financial consequences, but for the most part the real damage they caused was moral. Now, even when some of the key participants in the debate are religious leaders, their calls for restrictions or bans tend to use humanist, rather than religious, arguments.

Alcohol, like the new sin of eating unhealthy food, is now classed less as a public morals issue than as a ‘public health' issue, on the same par as epidemic management and public sanitation. Public health advocates believe that the government must not only override people's individual decisions about their health, but that non-contagious, unique health problems are best treated by banning entire populations from certain activities.

The bizarre consequences of this approach was recently highlighted by the chief executive of VicHealth, Todd Harper's comment that the defeat of the alcopops tax was ‘a low point for health' and his argument that for the future ‘kicking politics out of health is perhaps the best health promotion of all'.

So according to Harper, the state intervening to deliver health outcomes is ‘not political', but the state leaving individuals to make their own choices is ‘political'. This sort of whacky logic would be laughable if it were not for the success these state-funded apparatchiks are having in achieving ever greater power over the rights of citizens to make individual choices.

Tuesday 11 August 2009

In which the paucity of data is bemoaned

In my Economics and Current Policy Issues course, we spend a week on poverty and welfare. As part of that, we go through the evidence on US welfare reform. American welfare reform in 1996 set lifetime limits on how long a recipient could receive benefits - capped at 5 years for the most part. For this year's iteration, I was curious to check how binding that kind of cap would be if applied in New Zealand. In other words, what proportion of folks on benefits, in particular the Domestic Purposes Benefit, have received benefits for more than five years. The MSD provides data on the duration of the current spell of benefit receipt, but no data on the total duration of prior spells among those recipients. I can find that about a quarter of current DPB recipients hadn't received any other main benefits in the previous four years, and we can find that 10% of current recipients have been continuously on the DPB (15% on the DPB or some other benefit) for ten years or more, but I can't find any data on lifetime receipt.

In response to my emailed question, the Ministry for Social Development told me that all records prior to 1996 are held in hard copy rather than electronically. In other words, nobody knows for how many years current beneficiaries have received benefits. Figuring it out would require manually going through each beneficiary's paper records, putting them into electronic form, and then running the averages. As it stands, the data does not exist in any usable form.

I wonder how the government can make any kind of informed policy decisions when it has no clue whether current beneficiaries are experiencing transitional problems or whether their current spell on benefit is just the latest in a series of spells. Surely optimal policy varies depending on this. The best I can find is a study by Moira Wilson a few years back that took a cohort of 250,000 granted a benefit in 1993 and followed up five years later. But again, that's just a two-period snapshot.

I've asked MSD if there's any data available on the cohort that became eligible for the DPB since 1996: their lifetime records will be available electronically. We'll see what comes back.

It would be awfully nice if Wellington could devote a few resources to getting the data in order. A few summer interns doing data entry could make a decent start. Some of the kinds of questions to which we cannot know the answer for lack of data:
  • How many total years have current beneficiaries received benefits, in how many spells, with breaks of how long between spells and with what reasons for transitioning between types of benefit or on and off of benefit?

  • Is there a blip upwards in the birth rate among women on the DPB as work entry requirements come close to binding? In other words, is the timing and number of births elastic to the duration of benefits? It would be a perverse result for the child-poverty campaigners if the DPB were encouraging more within-poverty births; we haven't sufficient data to tell.

  • If we were to move to US-style lifetime caps, how many people would be subject to them? The optimal lifetime cap surely depends on the distribution of lifetime receipt. Length of current spell gives a lower bound estimate; what's a more reasonable estimate?

  • What are the longer term trends in movement between the unemployment benefit and other benefits? If the recession drags on and we see folks flip from unemployment benefit to the main benefit, what's their expected duration on main benefit before rejoining the workforce?
I'm not about to take on these projects even if the data were to exist; busy enough already. But it's more than a bit worrying that nobody can take them on for lack of data in usable form.

Did electricity companies really overcharge by $4.3b? Part 2

In a number of places, the Wolak report assumes that the demand for electricity in New Zealand is not sensitive to the spot price. This is certainly reasonable as a short-run assumption. In New Zealand, wholesale prices are set every 30 minutes. If something unexpected happens to supply (say a failure in a piece of the transmission network) causing prices to spike up, then there is no capacity for buyers to respond to that price spike within the half-hour to reduce the pressure on prices.

But over the course of a dry winter, when prices remain high for long periods, demand can and does adjust. This happens in various ways. First, a few large buyers who buy directly on the spot market reduce their demand to lower their exposure to high prices; second, other large institutional buyers who purchase in advance on forward contracts find it profitable to reduce their electricity use and sell those contracts back into the market at the spot price; finally, retail companies, who are buying at the spot price and selling to customers at a pre-set fixed price, offer financial incentives to their customers for reducing usage below normal levels.

What this means is that, even if, contrary to what I argued in my previous post, there were genuine excess capacity in the system in the dry years due to generation companies exercising market power, prices could not have been reduced right down to normal-year levels without generating excess demand and market failure.

The implicit assumption in the Wolak report is that there is so much excess capacity in our system that, even in dry years, we could meet all the country’s electricity demand without a significant increase in price, and without the need for public “conserve power” campaigns. Furthermore, it assumes that at price equal to the marginal cost of the most expensive thermal unit, generators would be able to earn a sufficient return to cover the investment costs of creating capacity that would only be used for a few months 1-2 times a decade. I simply don’t find this plausible.

NZIER on internalities

The latest NZIER Insight tackles the issue of internalities. Economists traditionally count only external costs as policy relevant. Internality theory argues that self-control problems lead people to consume more than they would want to. So, if the problem drinker sincerely wishes he could drink less than he currently drinks, the costs to him of his excess drinking get to count as a policy-relevant cost because government could, in theory, make him better off by encouraging him to reduce his consumption.

If we take internality theory seriously, it's not a call for higher taxes on goods consumed by folks with self control problems. Rather, it's an argument for ensuring that sufficient self-control mechanisms are available. Fortunately, many such mechanisms are available. Other economics blogs have already discussed at length private self-binding mechanisms. If that's insufficient, in the case of alcohol, Pharmac already heavily subsidizes disulfiram. For much less than the cost of a bottle of beer per day, you can buy a pill that will make you violently ill if you consume alcohol.

Given that these mechanisms exist, aren't secret, and, in the case of disulfiram, are already heavily subsidized by the government, I just can't buy internalities as policy relevant for alcohol. It's schizophrenic. Internality theory requires that the person suffering the excess cost really wants to be able to cut back; if we then have evidence that plenty of available mechanisms for cutting back are ignored, I call phooey on counting internalities.

Some folks might well want to go the step further and argue "self-control all the way down" - that the same self-control problems that stop the drinker from going cold turkey also mean that the remorseful drinker always promises to take the disulfiram tomorrow. Well, that really seems observationally equivalent to that the consumer just enjoys his drink but knows that he can reduce social disapprobation by whining about self-control problems. One of the best things about economics, done as economics, is that we tend to ignore the lies people tell about why they do things and instead look to preference as being revealed by action.

Unfortunately, Zuccollo at NZIER muddies the waters a bit in using internalities to justify BERL's shonky analysis of the costs of alcohol use. Yes, if you buy the internalities argument, then there will be some internal costs that get to count as policy relevant. But it isn't all internal costs! Rather, it's just the excess costs that are incurred because of the internality problem: the area above the marginal benefit curve and below the marginal cost curve to the right of the intersection of the two curves. Instead, BERL counted all internal costs as social costs under an assumption of zero benefits to harmful consumers. By contrast, our analysis looking only at external costs makes more sense if "internalities" from excess consumption roughly balance internal benefits (consumer surplus) from prior consumption.

Zuccollo insists that consideration of internalities isn't just disguised paternalism. Yes, in theory, if you buy the theory, the problem drinker welcomes the imposed tax. But in practice it's impossible for the government to implement such a scheme non-paternalistically. As Glen Whitman puts it,
In short, the old paternalism said, “We know what’s best for you, and we’ll make you do it.” The new paternalism says, “You know what’s best for you, and we’ll make you do it.”
Zuccollo notes the problems of implementation given that governments haven't access to our utility functions, saying
Perhaps this is the main reason why internality taxes are not yet gaining widespread popularity in government circles.
Perhaps also botched and shonky applications of theories that remain out of the mainstream canon of economics oughtn't form the basis of a government commissioned economic cost analysis. And perhaps other economists ought to keep an eye out that internality taxes not gain more credence than they're due. Read Whitman, linked above.

Monday 10 August 2009

Did electricity companies really overcharge by $4.3b? Part 1

I finally have a bit of spare time from my day job to post my thoughts on why I don’t believe the Wolak report’s claim of overcharging by $4.3b over 7 years. The way that the overcharging figure was calculated is a bit involved, but it essentially boils down to an assumption that it would have been possible to supply the country’s electricity needs, even in periods of low hydro reserves, if all generators (hydro or thermal) had charged the marginal operating cost of the most expensive thermal plant. This is shown in the following graph taken from the Wolak report which compares the actual wholesale price to that theoretical benchmark.

The counterfactual prices (in red) rise a bit in the winter months, as marginal costs are higher at thermal plants when they operate close to full capacity, but not by as much as actual prices (in blue), particularly in the dry years of 2001 and 2003.

There are underlying assumptions here that I question. The first is that the marginal operating cost rather than capacity constraints would have been the key determinant of prices in a competitive market. The report assumes that since plants were operating below full capacity during the dry years, the high prices were not due to capacity constraints, but this ignores that fact that plants are required to maintain capacity in reserve so that the system does not collapse if there is a failure at some point in the transmission grid (so called ancillary reserves), and also that hydro generators in particular, need to conserve the limited amount of water in their reservoirs at the start of the winter months not only for later use at the time when, in retrospect, it has the highest value (the report’s assumption), but also as insurance against continuing low inflows. That is, even if in retrospect at the end of a winter it transpires that not all the available water was used, that does not mean that reserves were being strategically withheld to manipulate price; it is consistent with the need to maintain security of supply for all but the worst-case contingencies.

The second underlying (and implicit) assumption in the report is that the electricity demand is fully inelastic (i.e. unresponsive to price). More on that in the next post.

Friday 7 August 2009

Further on the price elasticity of demand for alcohol

The Law Commission's report claims that youth are particularly price sensitive and that heavy drinkers are no less price sensitive than moderate drinkers. As noted a couple of days ago, the latter claim is absolute nonsense. Price elasticity of demand among heavy drinkers about roughly half of that of the average. However, that average includes heavy drinkers, so it probably understates the true difference between moderate and heavy drinkers.

What though of the claims of heightened youth price elasticity? It's plausible: alcohol is also income elastic, and youth are poorer, so what you could find a higher elasticity working through that mechanism. LC cites a book by Babor which isn't available in the Canterbury library. I'll put it on interloan request, but in the meantime have gone searching for any numbers on the elasticity of youth consumption. Google Scholar has only thus far provided one estimate. Grossman, Chaloupka, et al, 1998, Economic Inquiry. They find that youth short term price elasticity of demand for alcohol is -0.41. Identical to the average found in the meta-study cited in the previous post.

Given how the LC utterly misread the literature on relative elasticities of heavy and moderate drinkers, I'm not inclined to give them the benefit of the doubt while waiting for the book on interloan. We will see what shows up in the interloans pile in a week or two.

Next stop: Holodeck

Researchers from the University of Tokyo have developed 3D holograms that can be touched with bare hands. Generally, holograms can't be felt because they're made only of light. But the new technology adds tactile feedback to holograms hovering in 3D space.
HT: Wayne Marr

Odds of civilizational collapse if we have cheap functional holodecks what, 1%? More? Stupid tempting experience machines....

Wednesday 5 August 2009

Eroding our Clean Green image: corruption edition [updated]

Kiwi readers will already know that former Immigration Minister and Labour Party MP Philip Field was yesterday convicted of corruption. Long story short, he took bribes from poor Thai workers, in the form of unpaid labour on his houses, in exchange for his facilitating their visas. I have little to add beyond what Stephen Franks and David Farrar have already said on the issue.

The bigger scandal for me isn't the corruption; it's that the previous government did everything it could to prevent any kind of serious investigation of charges against Field. Do check the above Farrar post.

Helen Clark couldn't easily fire Field for the same reason that she couldn't fire Winston Peters, whose false declarations of political donations earned him Parliament's censure and should have cost him his position as Foreign Minister - Peters was "stood down" but never fired, letting him keep the Ministerial Baubles of Office.

Labour's coalition governed by a rather narrow margin. In a 121 seat Parliament, Labour (50 seats) plus NZ First (7 seats) plus United Future (3 seats) plus Jim Anderton (1) adds up to 61 seats. Clark kicked Field out not for corruption, but because he signaled running for a new party in the next election. Kicking him out meant that the supply and confidence agreement with the Greens became rather important; it's not implausible that Labour was forced into supporting Sue Bradford's anti-smacking bill because of this. Had Clark done the right thing and kicked Peters out, she would have lost all of NZ First, requiring her to get both the Greens AND Maori on side.

And so we have another pernicious effect of MMP: encouraging corruption, or at least massively discouraging its punishment. Governments in First Past the Post systems tend to be strong enough to withstand losing an MP or two if need be. Not so under MMP; we expect minimal winning coalitions. And so another chalk-mark in favour of John Key's building a broader coalition: he can credibly kick anybody out, and even lose either all of ACT or all of the Maori Party's support, and still govern. While this means that ACT cannot really constrain National against silly things like forcing the superannuation fund to invest ridiculous amounts domestically, it also has upsides.

Kiwis like to go on about their clean image. Transparency International ranks us well, at least for now. I don't expect nonsense of this sort under the current administration, mostly because Key has arranged things such that he cannot be in the pinch Clark was in. We'll see what happens after the next election.

Update: Farrar notes that Labour was winning confidence votes by a margin of about a dozen at the time (ie, Greens and Maori Parties tended to vote with the Government). It does make a difference, though, whether the party's block vote is inframarginal or marginal. In the latter case, the negotiating position changes; wishing to avoid such a change may well have contributed to Clark's not sacking Field.

Postal hack

David Malki, creator of the wonderful Wondermark comic strip, has discovered a nice hack of the USPS. Turns out that you can use the USPS's automated postal center's printed stamps, which include a date mark, to send pre-dated mail if you have enough foresight to buy the postage before the due date that you otherwise know you'll miss. So, if you know you won't finish your taxes before the 18th of April, buy your postage on the 14th. There's some risk, as postal workers sometimes cancel the printed stamps anyway. Malki then runs the experiment:
On April 15 of this year, I went to my local APC at 10:30 PM, long after the actual post office had closed. My intent was to buy ten first-class stamps and mail them in succession, seeing how old the stamps would have to be before the letters would start being returned, as well as whether or not they would be cancelled with an additional, dated postmark.
So I arranged with friends a thousand miles away (in Seattle) to receive the letters, and as a control subject, sent one letter that night of April 15. The next letter was sent the next day. …And so on, at increasing intervals of time, through April 29, a full two weeks after the date of the stamp. I expected that letters sent in the first week or so would arrive, and then they’d start coming back.

I was wrong. They all made it.
The interesting part was that, as predicted, not all of the stamps arrived with cancellations. Of the ten sent to Seattle, only six arrived there cancelled — meaning that four envelopes (40%) arrived indicating only the April 15 date and no other postmark.

Wonder how long 'till Bruce Schneier takes note.

Tuesday 4 August 2009

A vision of Hell

Brimstone and fire are nothing.
There are times, in the adjunct “career” when one may be compelled to teach in unnatural teaching situations. Because department schedules are often not set until the week before the semester starts, it is difficult, if not an outright gamble, to arrange the perfect teaching schedule — “perfect” stretching into a very wide semantic spectrum.

I had the (un)fortunate experience to receive offers, one Winter semester, from all four colleges to which I had applied. Not having any steady work, I told myself to “make hay while the day was good” or some such from the Grandfather/advice voice in my head, and I accepted all 10 sections. I had no idea what I was getting myself into.

It should go without saying that before you accept a class section, you have done the math and figured out if you are able to meet the minimal time requirements (prep, in class, grading) to successfully teach it. I did not perform this task. I jumped right in, thinking that the extra money would really be nifty, especially with the relatively lax summer class schedule to follow. Perhaps I could go crazy and purchase some health insurance for my spouse and daughter. I could go all out.

There is a definite point when you realize that you have seriously over-committed yourself. ...
Ten classes across four universities. I really don't understand folks willing to stay on the adjunct track like this. There are good jobs outside of academia. The odds of moving from adjunct to tenure-track are low. If this had been my best option coming out of grad school, well, going back to the family farm would have looked mighty appealing.

Gaming the Socialist Calculation Debate

Marginal Revolution today links to a review of a new video game: Dawn of Discovery.

Trying to figure out whether I'd be best advised to find the PC or the Wii version, I did a quick check of other reviews and found this gem.
Sadly, managing the resources you need to produce isn't straightforward, which makes the otherwise delightful business of city building occasionally irksome. With any of your production facilities, you can tell at a glance at what percentage of their peak efficiency they're operating. However, it's not clear how this translates into tons of goods produced. Naturally, as your population grows, so too does the amount of each good that the population consumes, but there's no clear way to determine just how many tons of a particular good your residents require. This makes it needlessly difficult to anticipate upcoming shortages, and it's easy to get frustrated when you find yourself in the midst of a dairy crisis or similar shortage that could have been avoided with clearer information regarding supply and demand. Scrambling to create more facilities to produce whatever you're suddenly lacking works, and over time, through trial and error, you'll develop a better sense of how many production facilities you'll need for each of your goods, but that's hardly an ideal way to handle this important aspect of gameplay.
Indeed. And, it's an even worse problem if you're trying to run a real economy this way rather than a video game one. I've always been troubled by this aspect of games like SimCity and Civilization. If you as central planner don't build things like airports, ports, libraries, universities, temples or a colosseum, they just don't get built. If your workers don't build farms and mines, no entrepreneur steps in to do it. In SimCity, or at least the version I played more than a decade ago now, you have to specify rigid zoning and can't just let the city evolve. Unfortunately, any realistic game that requires the central planner to make all of these decisions will require that we encounter the calculation problem; it's neat to see the game reviewer complaining about it. Of course, the gaming would be a bit more boring for the player if he could just set some basic laws, a low tax rate, and try to stay on good terms with the other civilizations out there: the game is designed to maximize fun for the player, not to maximize utility for the simulated persons within the game. The more that games disguise the inefficiencies caused by the "economic planning" approach, the less will today's players appreciate Hayek.

Monday 3 August 2009

Evening roundup

  • Warren Ellis continues to recommend Brew Dog beer. I wonder if there's any in New Zealand. Latest iteration: Brew Dog somehow manages to brew an 18.2% alcohol beer, then lets the wowsers do the marketing for them. Brew Dog responds. If you don't know what to get me for Christmas...

  • Patri Friedman uses D&D dice to help combat procrastination. Faced with distraction, rolls a saving throw. If he passes, he keeps working. Awesome.

  • Megan McArdle points out some of the problems with healthism (HT: Cheryl Cline):
    Fat people are a problem! They’re killing themselves, and our budget! We must stop them! And what if people won’t do it voluntarily? Because let’s face it, so far, they won’t. Making information, or fresh vegetables, available, hasn’t worked–every intervention you can imagine on the voluntary front, and several involuntary ones, has already been tried either in supermarkets or public schools. Americans are getting fat because they’re eating fattening foods, and not exercising. How far are we willing to go beyond calorie labelling on menus to get people to slim down?

    These aren’t just a way to save on health care; they’re a way to extend and expand the cultural hegemony of wealthy white elites. No, seriously. Living a fit, active life is correlated with being healthier. But then, as an economist recently pointed out to me, so is being religious, being married, and living in a small town; how come we don’t have any programs to promote these “healthy lifestyles”?
    Just wait, it will come.

  • What can happen when content owners don't rush for the lawyers when somebody uses their song on YouTube