Australia really sucked in the 70s

Frances Woolley points to Barbara Spencer's Address to the Canadian Women Economist's Network lunch at the 2002 Canadian Economic Association meetings. I hadn't read it before.

Some less-than-fun features of Oz through the early 1970s to which Spencer points:

• Until 1966, any woman in the public service who married had to resign, unless she were a secretary and could join the typing pool;
• Women in the public service, until 1969, were required to be on lower pay;
• It took until 1972 for regulations restricting women's advancement in the public service to be removed;
• Scholarships for teachers at ANU were very generous, but bonded: graduates had to go and teach in remote places for five years after graduation, unless they got married. Unsurprisingly, almost all of them got married just after completing their degrees. 
• CSIRO, the Commonwealth Scientific Research Organisation, blocked female appointments because their scientists had to go out on field expeditions, and they didn't have toileting facilities in the field that CSIRO considered adequate for women. So while they didn't ban female appointments, all appointees had to be able to go out on field expeditions, and women were not allowed on field expeditions. This was apparently endemic through the mid-70s in sciences. 

  "A friend, who is currently a professor at the ANU in Social Welfare, was told in about 1974 by the career guidance councillor at her high school in Canberra not to do science because of the lack of appropriate bathroom facilities."

But there are also some excellent fun observations about Winnipeg and the University of Manitoba.

I knew very little about Canada except that it was rumoured to be cold and that it produced lots of logs and beavers. Arriving at Winnipeg just before Christmas in 1969 was a shock. It was so cold and desolate looking that I thought I had arrived on the moon by mistake. I had no boots, only sandals, and my feet nearly got frostbite as I got off the plane at 30 below zero on the open tarmac.

However, it may surprise you that over my years in Winnipeg, I gradually grew to appreciate the stark beauty in flatness and endless white. I remember going out into the country side and realizing that the white snowy ground stretches, basically unchanged, for hundreds of miles. I never grew to appreciate the cold.

I was an undergraduate at Manitoba, doing a double-honours in Economics and Politics, 1994-1998. The economics faculty baffled me. But there's a long history there - and one that a farm kid going to the local university would never know.

Here's how Spencer found it in the 70s.

I arrived at Manitoba with a job as a part time lecturer in the Economics Department, starting January 1970. For my first course, I took over Principles of Economics from Cy Gonick, a well known Marxist or New Left economist, as he called himself, who had recently been elected to the Legislature as part of the NDP sweep into power. Taking over from Cy Gonick was a memorable experience. His version of microeconomic theory had mostly been a diatribe against the role of U.S. multinational corporations in suppressing Canadian independence. Most of the students were taking the course solely because Cy Gonick was teaching it, including a group of about 10 Maoists, who were there to heckle him. Cy neglected to tell the students that he would not be teaching in the second term and, in addition, he promised that there would be no final examination, something that was contrary to the rules of the University. Not surprisingly, the students were quite upset and angry when they learned that I would be teaching the macroeconomics part of the course and that I would make heavy use of algebra, which would be tested on the exam. Despite being given a half eaten apple as a present by a student and no doubt receiving dreadful teaching evaluations, somehow I survived and was actually rehired by the then Chair, Clarence Barber, to teach Mathematical Economics and Intermediate Microeconomics the next year.

I remember a John Loxley seminar on the Multilateral Agreement on Investment that was very much in the Gonick tradition. 

I returned to Manitoba in January 1979 to find it in turmoil, with Cy Gonick, the leader of the left wing faction, newly appointed as Head and many of the faculty attempting to move the location of their offices to Colleges on campus, as far from the main department as possible. I did manage to get promoted to Associate Professor that year, but it was obvious that I had to leave. 

Departments that get themselves into this kind of mess do such a terrible disservice to their students. Maybe you can do that at a small teaching university somewhere, where everyone applying to the place is applying to go there because they want to see Maoists fighting Marxists and want to be right at the heart of debates within a fringe part of the discipline. But pulling this crap in the economics department at the province's flagship university - it isn't right.

Co-morbidity and the irrationality stick

It irritates me when economists reach quickly for the irrationality stick when they see a behaviour that they wouldn't themselves choose and that they don't like.

Here's Frances Woolley's review of Phishing for Phools. She there takes on their argument that alcohol is more harmful than tobacco:

So it's not that hard to show alcohol is more harmful than tobacco. The trick is to focus on total harm, as opposed to harm per user, and on measures of morbidity, rather than mortality.

The belch in Akerlof and Shiller's argument is that they mostly ignore this evidence on disability, focussing instead on a radically different type of harm: "loss of affect" or "loss of capacity for intimacy". Alcohol, they argue, causes "subjective, hard-to-observe changes in personality", and leads to divorce and the break up of relationships.  The major piece of evidence backing up this position is the Harvard Grant Study, which tracked Harvard students from the classes of 1939 to 1944, and found that those abused alcohol at some point in their lives (23%) died young. Moreover, "alcohol wrecked their ability to relate to others."

Making any kind of statement about the psychological impacts of alcohol is hard, because so many people use alcohol to self-medicate. As Eric Crampton has argued here, alcohol abuse can be symptom of depression, anxiety, or other personality disorders, rather than a cause. Akerlof and Shiller argue that the alcoholics in the Harvard Grant study were, at the start of the study, "no different from their more sober peers" in terms of their personalities and family backgrounds. Instead, "alcoholism had changed their personalities." This reading of the evidence seems to seriously underrate the ability of present or future alcoholics, and their families, to lie and dissemble, and seriously overrate the assessment abilities of late-1930s social scientists. I can believe that alcohol use impacts people's personalities. But I find it hard to believe that, absent alcohol use, alcohol abusers would be just like anyone else.

I'd point to this post on alcohol and co-morbidity.

Co-morbidity is complicated and hard. Just comparing the life satisfaction survey figures, or other outcomes, between users and non-users is hardly sufficient: where some substance use is part of self-medication for prior illnesses, attributing the total difference between users and non-users to use is simply wrong. Could be that outcomes are better than you might have expected, if the self-medication works; could be that outcomes are worse. Either way you need to be looking at the marginal increment against the proper baseline rather than just comparing outcomes across users and non-users.

You might think this is just a problem for crappy cost-of-illness studies that nobody should ever take seriously anyway. But look at the psychiatric hospitals that went and banned smoking. Turns out now that smoking behaviours among schizophrenics is very plausibly self-medication. See also here.

People consume psychoactive substances for reasons. Assuming away those reasons and concluding people are irrational or phools...

The Jedi Gap

Is there a growing Jedi gap? Or is the Canadian National Household Survey letting us down?

The CBC reports:

Once numbering in the vicinity of 20,000, the ranks of those in this country who claim to be Jedi Knights inspired by Star Wars movies have dwindled to fewer than half that figure, according to Statistics Canada's first release of data from the 2011 National Household Survey.

"A lot less this time. I think there's about 9,000 reporting Jedi," said Jane Badets, a senior analyst at Statistics Canada.

"And that was true elsewhere in other countries. A lot less than in other countries, too, doing censuses. Very low reporting of things like Jedi."

What started as a gag among friends on a British Columbia ski hill ballooned into something of a phenomenon on the 2001 census when thousands of Canadians told Statistics Canada they followed the Jedi religion of Star Wars lore.

But Frances Woolley shows some very large problems with the NHS. Either Canada's ethnic make-up changed radically since 2006, or ethnicity affects one's likelihood of answering voluntary surveys; the latter seems more likely.

Recall that New Zealand had 20,000 Jedi in 2006; we have yet to see figures from the 2013 Census. Our Census remains mandatory. While we know that while Jedi will not lie, they may refrain from identifying themselves as Jedi if it's voluntary.

This has important national defence implications. While New Zealand has been able to cut defence spending down to trivial levels, trusting in its strong cohort of Jedi in case of any emergency, Canada cannot really tell whether they really need the Joint Strike Fighter because of dwindling Jedi numbers, or whether the Jedi just failed to complete the voluntary forms.

It also has implications for ongoing negotiations in the Trans-Pacific Trade talks. If Canada can no longer rely on Jedi mind tricks to defend supply management in dairy, perhaps New Zealand's Jedi will be able to push us towards free trade.

Our daughter, born on Star Wars Day three years ago, is one of the Jedi in the 2013 New Zealand Census.

Living Free

Frances Woolley says we should ignore the aggregate indices of economic freedom and look instead to whether people experience freedom. She points to the World Values Survey question asking whether people think they have freedom of choice and control over the way their lives turn out.

The survey question asks:

V46.- Some people feel they have completely free choice and control over their lives, while other people feel that what they do has no real effect on what happens to them. Please use this scale where 1 means "none at all" and 10 means "a great deal" to indicate how much freedom of choice and control you feel you have over the way your life turns out.

Results? I've pulled them into a Google spreadsheet; I'm rather sure I don't believe the numbers. Colombia ranks about the highest on the table, with 52% giving an answer of 9 or 10. 42% of Mexicans give an answer of 10. If we rank by medians, here are some of the values (so long as I haven't messed up taking the median on ordinal data):

• Mexico: 9.2
• Colombia: 9.0
• New Zealand, Norway, Sweden, Argentina, Trinidad: 8.3
• USA, Canada, S. Africa, Australia, Brazil, Romania, Uruguay, Jordan, Andorra, Guatemala: 8.2
• China, Finland, Switzerland, Slovenia, Turkey, Ghana, 8.1
• Zambia, Malaysia: 7.0
• VietNam, Iran: 6.9
• Germany: 6.8
• Netherlands, Serbia 6.7
• Rwanda: 6.0
• Ethiopia, Mali, Hong Kong, Egypt: 5.9
• India: 5.5
• Burkina Faso, Iraq 5.0
• Morocco: 4.9

I can kinda understand having fairly nominally unfree countries right at the top if it's cheap to buy off the police: worst would then be the meddling countries that enforce things. But Iran beating Hong Kong? Finland matching China? 

I sympathise with Frances when she writes:

This is why I start fuming when people start talking about freedom. It's how people live their lives that matters, not abstract ideology.

But I still expect that the Human Freedom Index provides a better proxy for experienced freedom than the WVS measure. It's pretty easy to imagine someone agreeing that they have a great deal of control over their lives because they know what things to avoid doing if they don't want to have the police shoot them.

Culture and agents

Frances Woolley very nicely points out the problem with hand-wavy references to 'culture' as explanation: by explaining everything, it explains nothing. She also points out that it violates economists' methodological individualism:

"Culture" as an explanation also violates what Eric Crampton calls "the first rule of the microeconomists club": methodological individualism. A good economic explanation starts with the choices of individual rational actors. It begins with the premise that people are, fundamentally, all alike - we want social status, reproductive success (or sex, anyways), economic security. What looks like differences in tastes are, in fact, differences in ways of achieving those fundamental goals that we all share. [emphasis added]

Frances's point here is important. I'm not sure that I'm 100% committed to the idea that we all do in fact share fundamental goals; we at least put pretty different weights on the different goals. I'm not even sure that I'm committed to the idea that individual preferences are stable or even knowable outside of the context of choice. But people having different constraints and production functions for similar base goals is a much better starting point than looking at the outcomes of others' optimisations and deeming them to be doing a bad job of fulfilling their own utility functions.

Rumplestatskin at Macrobusiness read Frances as saying culture can't matter, then defended the study of culture in economics. He concluded:

It is genuinely unfortunate that to be taken seriously by the economics ‘in crowd’ you have to start with a theory that ignores time, has a unique equilibrium, and aggregates all agents into one.  There are so many avenues of research being pursued at the fringe of the profession, and within other disciplines, such as sociology anthropology, and psychology, that have so much to offer in terms of explaining and predicting social and economic phenomena by happily embracing cultural explanations.

I'm not sure I follow Rumplestatskin's path from "methodological individualism" to "ignores time, has a unique equilibrium, and aggregates all agents into one." There are plenty of models of that sort, but they're hardly required; they're just more tractable. Hayek was one of the biggest proponents of methodological individualism and was hardly this kind of theorist. And I tend to think representative agent models when taken too seriously can do harm: it can be too tempting to assume that deviations from the modeled path stem from a policy-relevant irrationality or stupidity rather than from differences in individual production technologies or utility functions that we'd assumed away for tractability.

Further, Frances was simply saying that 'culture' can't be the sum of one's explanation. As she'd written:

The Becker-Stigler view does not imply that culture or preferences are unimportant. Rather, it is rallying cry for economic imperialists, a call for economists to take culture, preferences, and all of the other phenomena ignored by previous generations, and explain them using the tools of rational choice theory.

According to this approach, "culture" is the beginning of an explanation, not the end. Why is there son preference is some places and not in others? What are the advantages and disadvantages, the costs and benefits, of sons? How can son preference persist? 

Wishing for the New Zealand tax code

It's easy to forget just how excellent the NZ tax system is relative to those in other countries. But we are the envy of the world. Two datapoints for this week:

Tim Harford wishes UK VAT reform would move to a system like New Zealand's, where everything attracts GST: we tax food. After listing the absurdities of the UK system, where Jaffa Cakes are tax advantaged over "chocolate digestives" and whether a sausage roll is taxed depends on whether it's been heated. Harford asks what should be done, then answers his own question:

The Mirrlees Review is an attempt to figure out what the UK tax system would look like in an ideal world, and I looked it up. The authors reckon that you could levy a uniform rate of VAT on almost everything, raise benefits, pensions and tax credits, increase the income tax threshold by £1,000, cut the basic rate of tax to 18 per cent and the higher rate to 38.5 per cent, and leave pretty much everyone better off – the government would have more revenue and citizens would be more likely to buy what they really wanted rather than what the tax system nudged them to buy.

Harford wants the VAT to apply to everything, not just to sausage rolls.

Other than the tax-free threshold, that sounds an awful lot like the New Zealand system, where GST applies comprehensively and where, in 2010, the National government reduced tax rates across the board while increasing the GST.

Item the second: Frances Woolley makes the case for taxing food in Canada. The only place where I'd quibble with Frances's analysis is here, and it's only a minor quibble. Frances writes:

When the case for taxing basic groceries is presented in these simple terms, the assumptions underlying the argument become apparent. The equation of choice with happiness rules out any paternalist arguments for exempting basic groceries from taxation. For example, at present soft drinks are subject to sales tax, but milk is not. A tax on milk would be expected to decrease milk consumption and increase soft drink consumption, all else being equal. Those who would argue for taxing basic groceries would respond in one of two ways: first, that we should respect people's choices whatever they are; second, so many of the basic goods exempted from sales tax at present are teeth rotting, IQ-lowering sugary junk anyways that the paternalist argument has little force.

All of this is true. But the current equilibrium also involves a government-enforced dairy cartel that forces up the price of milk relative to soft drinks. Abolish the dairy cartel while imposing GST equally across all food items and the price of milk would drop, not rise. Especially for a GST as low as Canada's, and a dairy cartel as noxious as Canada's.

Again, Frances wishes that Canada had a system that looked a lot more like New Zealand's.

It would be awfully nice if Labour and the Greens here stopped trying to score populist points by hacking on one of the world's best consumption taxes. Labour, in office, recognized the GST's advantages and refrained from wrecking it for a decade. Too much populist nonsense in Opposition might force their hand in a future government.

Do visit the GST tag for Seamus's excellent prior posts.

Pigovean paternalism

Frances Woolley reports on problems in her students' understanding of Pigovean taxes. After a set-piece question asking students to calculate equilibrium Pigovean tax in an externality case, students were told to answer this last bit:

Opponents of the tax on potato chips take a careful look at Dr. Economides’ study. It turns out that the only people harmed by potato chip consumption are potato chip eaters themselves, as potato chip consumption is associated with bad skin, weight gain and depression. Does this strengthen or weaken the argument for taxing potato chips?

Frances rightly notes that weakens the case for Pigovean taxation; I'd go farther and say that it darn near obliterates it. If the argument for taxation is consumer irrationality, then, as Seamus has noted before, we've stepped rather outside of the rational choice framework that's necessary for assessing costs and benefits in the first place. What does a demand curve even represent in the case where consumers aren't competent to evaluate net personal benefits? Maybe we can derive it from observing consumer behaviour, but revealed preference goes away and the welfare analysis then has to start from a rather different place. Some of the behaviouralists have started building frameworks for that kind of analysis, with multi-self Pareto criteria, but it's hardly canon.

...it seems that some students really don't believe that people are rational decision-makers, fully taking into account the long-term effects of their consumption choices. Even when people are only harming themselves, they support Pigouvian taxes on paternalistic grounds, to stop people from harming themselves.

It seems to take irrationality of a very particular form for Pigovean taxes to be a solution to internality problems. We need it to be the case that consumers irrationally discount health costs of monetized value x but to respond optimally to taxes of equivalent value. If consumers are also irrationally price-insensitive, you've doubly hurt them by imposing the tax. And we still have the problems that arise once revealed preference can't form a starting point for welfare analysis.

And, despite the explicit framing of the question - that consumers only harm themselves - some students read into it that they were hurting the taxpayer through the public health system:

Some students disputed the basic premise of the question, the idea that potato chip eaters are only harming themselves. Bad skin, weight gain and depression, they argued, are harms to others, because we have a public health system. ...

What interested me about this response was how "health" becomes a lens through which public policy issues are viewed, and a justification of policy choices. Perhaps, though, the students were just mislead by the wording of the question. Guessing that the specific details about bad skin, weight gain and depression must matter in some way, they figured that the question must be asking about health care. 

These are upper level undergrads in economics, and they're messing up the distinction between pecuniary and technological externalities. Costs through the public health system are only a transfer unless these consumers are eating more potato chips than they would in a private system; in that case, only the deadweight costs of the increased portion of consumption get to count as policy-relevant on an efficiency standard.

I hate to keep banging on about this [hit the fiscal externalities tab below]. There's no way that the folks at Carleton wouldn't have hammered home the distinction between technological and pecuniary externalities. But fiscal externalities - externalities that work through the budget constraint but via the tax system - keep seeming technological to students when they're really mostly pecuniary. Partially this is because folks don't start with Buchanan and Stubblebine, but I expect that it has more to do with that fiscal externalities have seemed perhaps an interesting sidebar not worth extensive class time.

We are graduating too many students who know that negative externalities are bad and that government should tax negative externalities, but who have little sense of which ones actually have efficiency consequence.

Stealth Taxes

Frances Woolley argues the case for hidden taxes:

Visible taxes can lead to bad policy choices when a tax's visible incidence is different from its actual incidence. The average tax payer will vote for a tax/benefit scheme that appears to be in his or her interests - for example, increased health care spending financed by increased corporate income taxes - not realizing that the burden of the corporate income taxes might be shifted forward onto customers or backwards onto employees - in other words, right back onto the average tax payer.

It's a nice second-best argument. And, consistent with one of my favourite papers in experimental economics (previously discussed here): Sausgruber and Tyran's finding that buyers in a double-auction will happily vote for inefficient redistribution programmes framed as a tax on sellers but will oppose it when framed as a tax on buyers, despite equivalent incidence.

I'm not sure that a tax's invisibility necessarily protects against stupidity. New Zealand's clean GST is built into consumer prices; there's still not unreasonable pressure to wreck it by exempting food. But, that Labour's only advocated the wrecking ball when safely away from the Treasury benches suggests something.

Frances continues:

A final argument for stealth taxation is that it facilitates budget balance.  People want good things from their governments, like health care and old age pensions. But they don't want to pay taxes. So the temptation is to vote for spending initiatives and vote against any tax increases. When taxes become more visible, people become more aware of the taxes that they are paying, and lobby harder for tax cuts. The result: future generations are burdened with debt and taxes.

Now the argument could be made that in fact invisible taxes contribute to government debt - if the average voter realized how little he benefited from the Bush (Bush-Obama?) tax cuts, how much those tax cuts benefitted the richest Americans, and just how mind-bogglingly rich the richest Americans are, perhaps he would have voted against them. I don't know of any decisive evidence on this point, so if you disagree, feel free to say so in the comments.

Some degree of visibility in taxation is desirable - without information how the tax system works, and who bears the burden of taxation, it is difficult to make good policy decisions.

This is a fun one to think through. Specify that voters are largely ignorant but will vote against anybody they think is to blame for bad outcomes. And, specify a Westminsterian system so they know who's to blame for bad outcomes. In that world, I'm not sure whether it matters a lot whether the taxes are hidden or visible. If taxes with too high of deadweight losses are used to fund services of too little value, incumbents get turfed. Maybe it takes slightly longer if policy has lagged effects. Retrospective economic voting then saves things. If there's no opacity, the ruling party has to balance losses from bad effects of policy against loss in popularity from running "works, but unpopular" policy. At least there's weight on the effects of policy despite voters not knowing a damned thing except what they see out the window.

In a political system where responsibility attribution is more difficult - either Parliamentary with PR and powerful committees or a Presidential system with strong division of power and a federalist structure - things are harder to work out and could then persist longer. Then there's rather less incentive to weigh the effects of policy; rather, you blame the President if you're Congress, blame the other party in Congress if you're the President, blame the State if you're local government. Blame gets spread and incentives for good policy are flattened.

I'm also not sure that complete opacity is as good an idea in a Brennan-Buchanan Leviathan taxation world than in a Musgrove benevolent despot one.

On having a powerful instrument

Frances Woolley's onto the problem:

But any exogeneous phenomenon that is closely related to an economic outcome of interest is usually thoroughly understood. Researchers will have had numerous opportunities to observe cause-and-effect relationships. Hail destroys crops and causes the price of wheat to rise. Cold winters increase the demand for fuel and cause the price of heating oil to rise. The low-hanging fruit have been picked, processed, and made into jam. 

This mean that, in practice, researchers face an exogeneity-plausibility trade-off -- hoping to find truly exogeneous explanatory factors, they have turned to less and less plausible explanations.

One line of research that exemplifies this trend is the use of biological or ancient historical factors to explain economic growth. True, some of this literature is fascinating and thought-provoking, for example Alesina, Giuliano and Nunn's research suggesting that modern attitudes towards gender can be explained by historical use of ploughs.

...

The problem is that exogeneity/endogeneity is easier to assess than plausibility. So a paper with an exogeneous but wacky explanatory variable has a reasonable chance of being published. A paper with a potentially endogeneous but sensible explanatory variable faces more challenges. 

When I was a grad student, I saw a paper presented that tried to estimate the effects of political efficacy on public spending. The author argued that counties with more radio listeners saw more funds dispersed during the New Deal. Seems plausible. The obvious endogeneity problem is that richer places get radio first; parsing out the effects of radio is then tough. The author used ground conductivity as an instrument: it affected AM radio reception but wasn't correlated with income. He presented all the usual econometric tests for exogeneity of instruments. I asked whether he'd tried just checking whether ground conductivity affected spending before radio could have hit the area. Maybe the data wasn't good enough for the obvious instrument plausibility test, but the paper hit the QJE so I suppose it wasn't necessary.