Feeling Chuffed

It was a great day for the ECON department at Canterbury on Wednesday. Our very own Rachel Webb, successfully defended her doctoral thesis, The Health Economics of Macrosomia. Rachel has been a part of the Department for many years, having previously completed her Bachelor's and Honours' degrees at Canterbury prior to starting her Ph.D. Eric blogged on a preliminary finding from Rachel's thesis here last year.

Rachel's successful defence comes on the heels of some other notable achievements of our recent students: James Graham has just started his doctoral studies at New York University, as one of the 26 New Zealand recipients of a Fulbright Award, and the only one with a degree in Economics; Nick Sander has just started his doctoral studies at the University of California, Berkeley; James Horrocks has recently completed his MBA at Cambridge; and Reza Baqaee is just finishing up his Ph.D. at Harvard.

These are not our only success stories by any means, but the notable thing for me about these five is that they were all in my Honours welfare economics class in 2009. The thing I have enjoyed most about teaching in our Honours programme over the past 14 years has not only been the incredible quality of our students, but also the diversity of their academic backgrounds, in large part because we have made a feature of the fact that one can major in Economics as part of an Arts, Science, or Commerce degree. James Graham and James Horrocks both did double majors in Economics and Philosophy; Nick and Reza completed combined Honours degrees in Economics and Maths, and the same class included students with undergraduate degrees in History, Physics and Finance. Keynes is famous for his statement that a master economist "must be mathematician, historian, statesman philosopher". It is too much to ask that students coming into graduate Economics have studied every one of these other subjects in detail, but the next best thing is to have a class that collectively has that breadth.

Me and Eaqub on Christchurch

Shamubeel Eaqub and I contributed chapters on the Christchurch earthquake and rebuild to a book that came out last week. The Herald covers it here.

Shamubeel Eaqub, NZIER principal economist and from Lincoln outside Christchurch, wrote about "overly restrictive policies on height, density and urban limits" which he said needed to be considered.

Centrally planned clusters never worked because the beauty of cities was that the close proximity of different people, skills and ideas gave rise to new ways of doing things and that was the lifeblood of innovation, Eaqub said. "Creating strict precincts based on one vision of how an economy or community is organised is misguided," he wrote.

The Christchurch Central Recovery Plan had good elements but was too restrictive on building and urban design practices.

"The plan has good enough elements to get the tick but it is taking too long to implement. The longer we wait, the higher the chances of permanent damage to Christchurch's economic future as the South Island's economic capital," he warned.

Eric Crampton, ex-Canterbury University economics lecturer and now head of research with the New Zealand Initiative in Wellington, wrote how the length of time it took to plan the new city centre had disastrous consequences.

"In Christchurch, the three-year-long quest for the perfect central city plan stopped anyone downtown from proceeding with any work at all for far too long, bleeding downtown's prospective recovery as businesses fled for the suburbs or left town entirely," he wrote.

You can, and should, buy the book here.

I'll be on a panel discussion as part of the book launch here in Wellington at LT1, School of Architecture and Design, 139 Vivian Street, at 12:30 on the 18th of September. Come along and say hi.

The Auckland launch, which I won't be attending, is on the 17th, with details at the link above. I missed the Christchurch launch on the 31st, unfortunately.

English gets it

Here's Finance Minister Bill English on housing supply:

"After the election, there's a Resource Management amendment bill that standardises a lot of the planning processes. That could be quite a step forward. We'd like to do a lot more intensive look at the incentives on councils and council officers and the way they make decisions that restrict the availability of land -- the political pressures to restrict densification within cities (which are) pretty strong here in Auckland, and the interaction with infrastructure."

English said the Government and councils needed to better understand why some Councils, such as Waimakariri and Selwyn in Christchurch, were keener to build infrastructure for new housing than others, such as Auckland.

If development isn't in a Council's financial interest, or if the incentives are so weak that a bit of NIMBY pressure can make the difference, then don't expect Councils to allow more development.

Kirznerian alertness failure?

If this had been my product, I would have quickly sent retailers some stickers to put on the packs and asked them to shift the product to a higher shelf where the kids can't get them easily. 

Instead we had this:

A confectionery company is dealing with a sticky situation after penis-shaped gummy lollies made their way into some of its packs, costing the company thousands of dollars in recalls....One out of every 20 or 30 bags would have one or two little gummy penises in them, he said.
The company had apologised to the customers and compensated them with free lollies.
Collecting up all the bags of lollies and dumping them at the tip had cost the company thousands of dollars, Van de Geest said.

I'd bet that, had they stickered the packs and put them on the top shelf, they would have sold out quickly with buyers hoping to be the lucky one to find the prize inside. The stickers could have the picture of the offending gummi along with a note "Every 20th pack has a prize! Collect all the colours!"

So, Kirznerian alertness failure? Or, more likely, horror at potential outrage from parents hurting them in the longer term? I would have thought that the "top-shelf plus sticker" approach would have been enough to guard against parental backlash, but it isn't my money on the line.

Housing consensus

I love that both the left and right in New Zealand now agree that supply restrictions are the main cause of housing unaffordability.

At the 10:40 mark in panel discussion with Sean Plunkett, NZ Initiative's Oliver Hartwich points out that freeing up land supply would do more to stop speculative investment in housing than would Labour's proposed capital gains tax. Labour's Phil Twyford replies that Labour will direct Councils to increase the build rate, increase the supply of greenfields land, and liberalise restrictive planning laws.




Fix supply, and the demand-side pressures largely take care of themselves.

Negative value added: education edition

Remember the story of the West German auto exec who, after touring the Trabant plant, wept because the value of the steel and other inputs going in exceeded the value of the car coming out? The Trabant plant was destroying value.

That's how I felt on reading the New Zealand Qualifications Authority standard on economics. Or at least this bit. They are making the students dumber by teaching them things that are not so.

Here's the particularly offensive bit:

3.  Market failure refers to situations when a market fails to deliver an efficient or equitable outcome. Efficiency occurs when Social Marginal Cost equals Social Marginal Benefit. Equity occurs if a situation or outcome is considered to be fair. The different market failures relate to: consumption externalities, production externalities, public goods, imperfect information, inequitable income distribution. 

4.  Government interventions refer to interventions in a market by central or local government. For example, these may include, for each market failure, a selection from:

• subsidies, taxes, regulations, property rights and government provision (consumption externalities) 

• subsidies, taxes, regulations, property rights and government provision (production externalities) 

• government provision (public goods) 

• regulation (imperfect information) 

• progressive taxes, welfare benefits, collective provision and minimum wage (inequitable income distribution). 

This just isn't so!

Pick up any reasonable intermediate microeconomics text. Market failure occurs when the conditions underlying the first welfare theorem fail to hold. That doesn't necessarily mean that there's anything the government can or should do to fix things, but it opens up the possibility that there could be interventions that improve outcomes. The kinds of things in the first four bullet points are pretty standard textbook analysis, though we'd need to caution that the failures are necessary but not sufficient basis for intervention.

The last bullet point is right out. Draw the standard Edgeworth Box and derive the contract curve. Any of the infinite number of points on that curve are consistent with market efficiency (the First Welfare Theorem), but only some of the points will be consistent with particular views of equity.

If the government decides that one point on the curve is preferred, for equity reasons, to the one that would be achieved by markets, it can push things in that direction through appropriate redistributive measures. That's the Second Welfare Theorem. But we would never describe equity-based interventions as correcting a market failure. If we were on the contract curve, where marginal rates of substitution and marginal rates of transformation all lined up nicely, but we just didn't like that point for some reason, that just isn't a market failure. And I would have given a failing grade to a student who would have described it as such. Heck, I ran multichoice questions specifically checking against this kind of fallacy. NZQA is teaching students how to get a failing mark on intermediate micro exam questions.

Even worse, were we to take the Second Welfare Theorem as justification for equity-related interventions, the Theorem does require that least-inefficient means be used to get to the preferred point on the contract curve: typically, lump-sum redistribution of initial endowments. In the real world, you aim for the least distortionary taxes available: maybe land value taxation, maybe progressive consumption taxes. But you sure as heck don't go for minimum wages. That's a good way of ensuring that you never get back to the contract curve, or that you stay farther away from it than you could have using alternative measures like wage subsidies (or, to be consistent with theory, lump-sum transfers).

Why does this matter? There are decent theoretical reasons for interventions addressing First Welfare Theorem considerations. They're sciency. And, if designed properly with appropriate side-payments, they can in theory make at least one person better off while making nobody worse off. But there just aren't such justifications for equity-based policies - they're based on aesthetic considerations. It would be like having an engineering class move on from efficiency considerations in engine design to say that it's also an efficiency failure if the engine is painted blue instead of red.

Somebody please fix NZQA so that the economics standard isn't teaching kids how to fail their intermediate micro exams?

Update: in comments, Granite26 very correctly notes:

In your red vs blue engine example, it might be more correct to say 'uses too much fuel regardless of the efficiency with which it is converted to horsepower'. We should all be riding Mopeds, you know

Update 2: Paul Walker points me to the source on the Trabant story.

Against Scottish Independence

As a New-Zealander/Canadian, the Scottish referendum on independence is really none of my business, but I feel compelled to write strongly against separation. And, while Economics is my area of relative competence, and I think Paul Krugman in absolutely right in this piece that independence would come with a high economic cost to Scotland, it is not the Economics of independence that motivates this post.

You see, when I was a lot younger, I would have cheered loudly for independence. Like most people, my sense of identity was closely tied up with my citizenship, and, growing up in New Zealand, one manifestation of that tribal national pride was a deep-seated resentment at the remaining symbols of our close ties to the U.K. and England in particular. I was a strong anti-monarchist, hated the presence of the Union Jack on the New Zealand flag, hated the use of a crown in symbols of government departments, etc. My silly sense of identity was further tied up with my name, that saw me identifying more closely with 25% of my ancestry that is Irish with sympathy to the additional 25% that is Scottish, rather than to the 50% that is English. 

So what changed: Two things really. The general answer is that I grew up. While tribalism is probably an instinct that has roots in our evolution as a species, rational thought should be able to overcome its sillier manifestations, and I look back at my former attitudes with some embarrassment. I was like petulant teenager who overcompensates in trying to assert his independence as an adult separate from his parents by rejecting parental advice without thought but then finds that he can be secure in his status as an adult without rejecting his family roots. I now see that it is easy to maintain an identity as a New Zealander without the need to reject any of the aspects of New Zealand society that owe their origins to our English roots. And parliamentary democracy, the common law, John Locke and cricket are pretty darn good roots to have. 

But the more specific change was that I emigrated to Canada, and took out citizenship there living in Quebec at the time of the constitutional crisis of the late 80s and early 90s. Indeed, one of my first votes as a Canadian was in the '95 Quebec referendum on separation. I was by then a proud Canadian, but as a relative newcomer I could observe with the perspective of an outsider. And what I observed was the destructiveness of petty tribal politics, the magnification of the importance of past injustices, and the associated diminishing of the positive aspects of a shared history. And it made the immaturity of my own youthful tribalism apparent to me. 

Scotland has been linked politically with the rest of the UK for longer than Quebec has been with the rest of Canada, and there aren't the same language and religious differences that have made Quebec distinct within Canada. Yes, there are differences in averages between Scotland and England, particularly in political outlook, but identity politics often blinds us to the fact that differences between groups are typically small relative to variances within groups. It is far healthier for a society to emphasise the similarities within that society rather than the differences, and Scotland has been an important part of the culture of Britain that has been so influential on the modern world. David Hume, Adam Smith, and golf are pretty darn good roots as well. 

So I strongly hope that next week, the Scottish give a resounding vote in favour of remaining part of the United Kingdom, and furthermore that the is a general agreement never to even countenance such silliness again.