MBIE and the signalling model of education

What's the point of education anyway?

The usual story is that you pick up skills that improve your human capital, and that you then go on to apply those skills in ways that provide value. So training improves wages because you're more productive due to the training.

Bryan Caplan's been an advocate of an alternative story around education. In that version, education isn't really about skills, or at least mostly isn't about skills. Instead it's about signalling. If employers really cared about specific skills, there are way more efficient ways of getting those than a 3 or 4 year university degree. Instead, education is more like an arms race. The point is to demonstrate through costly effort that you're smart and diligent enough to make it through. If it were just smarts, an IQ test would suffice. But it isn't. It's also being the kind of person able to slog through an undergrad degree and consequently likely able to put up with the drudgery parts of normal jobs.

So, let's have a look at MBIE's policy graduate programme. It gives 16 months of policy training to fresh university grads with at least a B average in their Bachelors. That training part seems like actual skills-conveying.

Now if university provided skills rather than a screen and signal, you'd think there'd be some amount of matching between the grads' training and the policy areas they're working in.

Here's what we've got. Note - this is absolutely not meant as criticism of the fresh grads doing this work. I'm just curious about how they line up training and tasks.

1. An Honours History grad, with an undergrad in History and Sociology, who notes working on the KiwiSaver Default Provider Review. You'd think this would be a task suited to a grad with training in behavioural economics, economics, or finance. 
2. An Honours History grad, undergrad History and Spanish, working on consumer policy issues ranging from ticket reselling and access to safer credit, to country of origin labelling for food. This is microeconomics work. 
3. BA in Public Policy, Political Science, and IR, with a minor in Development Studies, reviewing the Crown Minerals Act to ensure it remains fit for purpose, with specific work looking at iwi engagement and opportunities to better involve Māori in decision making processes. This seems a decent fit. 
4. BA Pols and IR, and Anthropology, working on regulations for dams and dam safety, and has been lead author on a Cabinet Paper. I'd have thought that would either be an engineering role, or econ looking at CBA, or laws. 
5. Bachelor of Law and BA majoring in Pols and Psych, looking at corporate governance. Laws can fit with that. 
6. BA majoring in Pols and Film & Media Studies, looking at temporary migrant worker exploitation and engaging with the ILO in Geneva. Labour economics could have helped, or laws. 
7. Honours Pols, looking at housing policy and housing affordability. Again - microeconomics, urban economics, laws with focus on RMA / district plans. 
8. BCom Accounting and Management, and BA Pacific Studies, Pols and IR, working in prep for the APEC meetings. Seems a good fit. 

Maybe I'm way out in this, but it feels like maybe three of the eight are hitting areas where the undergrad or honours training would have provided particular help in the policy areas.

These aren't jobs for life - it's the grad training programme. Could be that grads progress from there to policy work more aligned with the things for which they'd trained. MBIE is big enough that you'd think they'd be able to find a policy area that's a decent match for most incoming grads if it mattered. 

Overall it seems more consistent with the signalling model of education than the human capital model. 

Treasury Episode IV: A New Hope

Episode 3 comes to a somewhat dark end. The State Services Commission that selected, appointed, and re-appointed Secretary Makhlouf damns his conduct in the budget hack during the press conference, but issues a more restrained report that finds the Secretary acted in good faith at all times, that his conduct was non-partisan, but that it was unreasonable in some statements made.

In summary, I find that, in relation to Mr Makhlouf's written and oral media statements:

a. Mr Makhlouf acted in good faith at all relevant times;
b. Mr Makhlouf acted in a politically neutral manner at all relevant times; and
c. Mr Makhlouf did not act reasonably in relation to:
i. his use of the phrase "deliberately and systematically hacked" in his Tuesday evening media statement;
ii. his use of the bolt analogy in his media interviews on Wednesday morning; and
iii. in his media statement on Thursday morning, continuing to focus on the conduct of those searching the Treasury website rather than the Treasury failure to keep Budget material confidential.

A better analogy to the bolt one might have been someone jumping on a trampoline outside of a second story window, taking snapshots of giant posterboards taped to the window with every bounce.

I doubt that anything in the report then reaches a level that would have the Irish Bank reconsider its offer of appointment - they'd signalled it would take findings of very very grave misconduct. I'm not great at interpretations of bureaucratic legalese, but "did not act reasonably" in a limited set of cases seems unlikely to hit that standard.

Bit of a downer of an end to Episode 3.

Anyway, on to Episode 4. The next Secretary will be Dr Caralee McLiesh, coming over from New South Wales. We'll call this one A New Hope. It could all yet end badly, but there's a lot of promise here.

I'd said that the next Secretary needs to bring the academic credibility needed to signal a change in emphasis, and the managerial ability to effect the necessary changes.

It's hard for us here in New Zealand to say much on the latter front - we just don't know. But on the former - Dr McLiesh is not only well trained, she also has a string of superb publications from her time at the World Bank. Absolutely superb. Imagine having this portfolio going into a PBRF round.

• Djankov, McLiesh and Shleifer. J Financial Econ, 2007. Private Credit in 129 Countries. 2593 citations. 
• Djankov, McLiesh, Nenova and Shleifer. J Law & Economics. 2003. "Who owns the media?" 992 citations.
• Djankov, Hart, McLiesh and Shleifer. J Political Economy. 2008. "Debt enforcement around the world. 873 citations
• Djankov, Ganser, McLiesh, Ramalho and Shleifer. 2010. AEJ: Macro. The Effect of Corporate Taxes on Investment and Entrepreneurship. 
• Djankov, McLiesh and Ramalho. 2006. Ec Letters. "Regulation and Growth."

Oh - and the data series on regulation produced by the World Bank in it's Doing Business in 2004 report? That's hers too - co-managed development and production of it; Djankov was team lead. 

What things do we know from that set of papers?

• Creditor rights matter in ensuring access to credit;
• Across a broad set of countries, government ownership of the media undermines economic and political freedom rather than working to remedy market failures;
• Making it hard for creditors to proceed against a defaulting debtor hinders the development of debt markets;
• Across a cross-section of countries, higher corporate tax rates adversely affect investment, FDI, and entrepreneurial activity;
• Better business regulations improve economic growth.

I'm optimistic about this appointment. A New Hope. 

Bailout risk and deposit insurance

It looks like New Zealand may wind up getting deposit insurance at the banks. 

Let's review the case for these.

If you think that the government is very likely to bail out a failing bank, then that bank and its depositors are currently enjoying an unpriced insurance product that allows the bank to take more risks than it otherwise would, with depositors and shareholders enjoying the upside benefits, and shareholders and the Crown bearing the downside costs. Recall that under New Zealand's OBR regime, shareholders are fully burned before any depositor funds are touched - I've not heard that there's bailout risk for shareholders. 

I expect that there would be substantial bailout risk in any bank failure where haircuts under OBR would be substantial, but haven't thought that risk material. It would take a very large bad event to make a bank go down at all, so maybe you could figure that conditional on a bank's failing, the losses are likely to be more substantial than OBR could safely handle - it's not a crazy view at all. I've tended to think that there's trivial bailout risk for haircuts on the order of 10%; other economists whose views on this stuff I respect think that even a 10% haircut would trigger a bailout. They may not be wrong given precedents in Christchurch insurance. 

So it's really one where you want to be all in or not at all. The Bank and government could push hard to maintain the position described by Rod Carr when he was Deputy Governor about that bailouts simply wouldn't ever happen, and maintain expectations around that equilibrium to make it self-enforcing. But piles of economists speculating about the likelihood of bailouts and saying that they'd be likely to happen can unwind that too. 

Mandating deposit insurance and pricing it appropriately will reduce depositor returns, but if insurance makes sense, that's only because depositors will have to start paying for something they were already getting for free from the government. 

But what seems a bit nuts given all that is National's line critiquing the government. Again, from the background above, there are tenable arguments against the government's position. You could argue that we need hard lines against bailouts. You could argue that prudential regulation and results of existing stress tests mean bailout risk is low because the probability of failure is low, so any resulting insurance costs should also be reasonably low - and that all of this should be considered simultaneously with the coming changes to bank capitalisation requirements rather than on their own. 

Those aren't the arguments National's running. Instead, they're angry that the deposit insurance doesn't protect people who have a pile of money sitting in bank deposits. The government's proposal would cap protection at between $30,000 and $50,000. National thinks it should have a much higher threshold, and worries about people who have their entire retirement savings in bank deposits.

The model of deposit insurance and bailout risk in my head is that bailout risk is sharply increasing in the number of small and relatively poor depositors who lose their shirts in a bank failure. They could credibly say that they trusted in the government's prudential supervision and would be in a very poor position because of the failure. Someone with a couple hundred thousand dollars sitting in a deposit account would likely hit the 'informed investor' triggers in other areas - in other words, people who should really really know better than to leave lots of money sitting in deposit accounts for substantial periods of time.

What model of bailout risk must be in your head to think that the government is especially likely to bail out a pile of rich people who really should have known better? Is National really here saying "Yeah, we'd totally do an SCF bailout again, you've got to price that kind of thing in because we can't help ourselves from bailing out rich people who should have known better"? All explanations are depressing. 

Do flat taxes make sense? Depends on your goal.

Stuff's Susan Edmunds got in touch asking whether flat taxes work. I was pretty long-winded, so only some of my comments could possibly be used. Here's what I'd sent through. Enjoy!

People’s views on flat taxes will depend on their views of the desirable overall size and scope of government. It is difficult to finance a large redistributive state on a 17.5% flat tax – the Crown gets a very large proportion of its revenue from income tax payments from high income earners. The flat tax is consistent with ACT’s desire for a more constrained and smaller government, and can be efficient within that setup. Lower effective marginal tax rates can increase labour supply, but we should be cautious not to overstate effects here. Most studies conclude that primary earners are not that responsive to tax rates, or at least not in the shorter term in deciding how many hours to work. The overall tax burden can be important for bigger on/off kinds of decisions though, like whether to migrate to New Zealand in the first place, or whether to shift abroad if you currently live here.

So a flat tax can be consistent with a shift toward a smaller overall government.

ACT proposes funding the reduction in the overall tax take by abolishing the Provincial Growth Fund, raising the age of NZ Super, removing fees-free study, cancelling winter energy payments, capping Working for Families, and ending government contributions to Kiwisaver.

Abolishing the Provincial Growth Fund seems sensible enough, but we should note that that fund will end at the end of the current government. A tax system change is long lasting. So future governments would be constrained against putting in big expensive regional spending programmes to buy the support of whichever party might make that a condition of coalition support.

Raising the age of Super entitlement, so long as it’s done with enough lead-time for people to prepare properly for retirement, is also a generally good idea – whether you want to use the savings then to give more money to younger poorer people, or to fund a reduced overall tax bill. It would be difficult to do this in the short term.

Removing fees-free study makes the overall package less regressive than it might otherwise seem as the benefits of the programme disproportionately accrue to higher-earning families. While many poorer families also benefit from fees-free study, the bulk of the benefit goes to higher earning families who would have gone to further study anyway. That’s one reason that we had opposed fees-free in the first place, and had suggested reinstating interest on student loans while using the savings to boost scholarships for low-income students and to improve preparation for tertiary study at high school.

Winter energy payments are incredibly badly targeted and an ineffective way of supporting those on lower incomes. But the combination of reducing this payment while also increasing income tax paid at the bottom might argue for an offsetting boost to benefits. Similarly, capping Working for Families to two children will be attractive to those on higher incomes who have had fewer children and who might wonder about very large family sizes among those on lower incomes, it would likely have negative effects on material deprivation among those poorer larger families.

Finally, abolishing Crown contributions to Kiwisaver also seems rather sensible. Series of papers produced by Grant Scobie and various co-authors showed that Kiwisaver has had no effect on overall savings rates. The policy then mostly rewards people for savings that they would have undertaken anyway.

Caveat on all of this: I have not double-checked the numbers and am taking them all as given on ACT’s website.

Aligning the flat tax rate with the company tax rate will mostly have effect on companies’ ability to attract foreign capital, and a bit of a reduction in taxes paid by nonresidents. Under the imputation regime, the company tax rate is a bit irrelevant if the company is solely held by Kiwis: the owners of the firm get an imputation tax credit along with any dividend payment, so if the company tax rate were higher than the top marginal tax rate, then IRD would just be writing that off against their income tax due anyway. Where it would have effect is on dividend distributions to foreign owners who aren’t eligible for imputation credits and who would consequently see a tax reduction – and also consequently be more willing to invest in New Zealand. Since New Zealand is generally shallow when it comes to capital and could use a lot more investment, on balance that part seems rather desirable.

I think some of the reporting around the proposed flat tax has been a bit lazy, but some of the problem is that we just don’t have data here that’s available in other places. For example, there’s been a lot of reporting that many earners would see an increase in total taxes paid under a 17.5% flat tax because the higher tax on earnings under $14,000 would outweigh the reduced taxes paid on earnings over $48,000. But many earners that are in that group will be secondary earners in households where a primary earner will enjoy a more substantial tax cut. So if we then consider a household where one person is on >$100k and the second person is on $40k, there would be an increase in the tax paid by the second person but it would be dominated by the tax cut enjoyed by the first person. And, the tax increase on the second person would be ‘inframarginal’ – in other words, the marginal tax rate doesn’t change for that person, but the tax collected on earlier earnings does. So it should not have any effect on the second person’s hours worked (conditional on that person still finding it worthwhile to be in work), but will have some likely minor effect on the higher-earning partner’s labour supply. And if we think about migration decisions as being about how the household as a whole fares, it could have effects on decisions by families with a higher skilled worker to move to New Zealand.

So, I suppose, a few bottom lines:
• If your ideal government includes a lot of redistribution, including programmes like fees-free study that are very poorly targeted if you think redistribution should mostly help poor people, then you shouldn’t be a fan of flat taxes. They simply cannot raise the amount of money necessary for a large redistributive state.

• If you think that government should on the whole be smaller, then financing it via a flat tax can work well. Don’t be overoptimistic about huge consequent growth effects coming out of increased labour supply from the highly skilled who are already here, as the literature suggests primary earners’ wages are not all that responsive to tax rates. But you could see a bump via greater labour supply from high skilled secondary earners, and through changes in migration.

You can’t really say whether a flat tax works without specifying what the goal is. It doesn’t work if you want to have a large and redistributive state as you cannot finance that kind of government on a flat tax. But it does work if you don’t want that kind of government. 

The quoted bits have me more firmly on the pro side. I'd be happy enough with a smaller overall size of government, but figure it's worth laying out the tradeoffs.

A world without opportunity costs?

From Question Time yesterday comes a useful question for anyone setting Principles-level exams. Discuss this exchange with reference to theory as discussed in class. 

Hon Amy Adams: How can he say that he's used "evidence and expert advice to tell us where we could make the greatest difference to the well-being of New Zealanders", when the Government has chosen to pour hundreds of millions of dollars into fees-free tertiary at the expense of giving Pharmac enough money to keep pace with inflation?

Hon GRANT ROBERTSON: The premise of that member's question is incorrect. Money that supports education, money that supports health, and money that supports housing are all part of the Budget; one is not at the expense of the other. What we're doing is actually making up for the enormous under-investment of the previous Government.

…

Hon Amy Adams: Why was spending $7 million on Artists in Schools a higher well-being priority than the mere $6.5 million needed to reinstate cochlear implant funding that his Government cut in last year's Budget?

Hon GRANT ROBERTSON: Again, the member is not reflecting the Budget process that she knows well. These things are not trade-offs against one another. We are creating an environment in which we're investing in well-being across all sectors of the economy. In the health sector, this Government has a record that is far superior to that Government.

Robertson could be right if they just set a total amount that will go to health, then weigh bids within health against other bids within health - but that would also make a bit of a nonsense that the wellbeing budget ensures every dollar provides the greatest possible increment in wellbeing. 

Google keeps making our lives better

Navigating post-earthquake Christchurch was tough. Every day brought a new set of road closures to route around. And they weren't always easy to predict in advance. If enough roads were closed on the south side of town, I'd want to take the longer northern loop to get from New Brighton to the University - but I wouldn't know that until I hit the closures.

So I'd then asked some friends at Google whether this couldn't be automated (and posted on the basic idea here). Traffic flow data already held could be used to infer road closures. If everyone who'd been recommended to follow Dyer's Road down to Ferry Road took a turn on Linwood instead, and nobody was on that small stretch of Dyer's Road, it would be a safe guess that it was closed. Why not flag it as likely closed, route around it, then update when it noticed traffic flowing again?

It wound up being more complicated than I'd have thought, and SCIRT was doing its best anyway to try to get road closure data up in real time in format that could be read automatically. But it still wasn't great.

CityLab reports that it's coming: Google is adding a disaster-navigation tool to Google Maps. Crowdsourced user responses will provide suspected closures in addition to the confirmed road closures.

I hope Wellington does not get its expected earthquake any time soon. If it does, this will make life a little bit more manageable. There will be so many unpredictable road closures due to slips. If you're home and have little gas in the tank, it will be hard to tell whether you can even get to the petrol station. This will help.

If the New Zealand government had put out an RFP for this kind of functionality, it doubt anyone would be offering to provide it for cheap. Instead, Google's giving it to us for free.

I hope that, come the quake, Bernard Hickey remains true to his principles and boycotts this excellent free service.

It's so nuts that New Zealand's looking to move out of step with the OECD on international tax and impose punitive rates on Google. Imagine if Google ever shrugged.

For want of a CURF

Some things are just hard to know without decent public use microdata.

There's been a lot of furore about ACT's flat tax proposal, with many on the left outraged that a libertarian party would support lower taxes.

Many have also pointed out that a 17.5% flat tax would represent a tax hike - not just for those currently on the 10.5% lowest tax rate, but also for those who are at a low enough point in the 30% tax band that the inframarginal increase in taxes on the first $14,000 of earnings would outweigh the reduction in taxes on earnings above $48,000.

No quibbles on that part - it's just maths.

But I am a bit more curious about household distributions. How many of those who would see that inframarginal increase in taxes are in households where the other earner would see a real tax cut accompanied by a drop in their tax rate? I remember Pacheco and Maloney's work showing that many minimum wage earners are in higher earning households, so the minimum wage is poorly targeted. I expect there could be similar effects here.

To know that we'd need a two-way earnings table. The columns would show the earnings of the primary household earner, split into different bands. The rows would show the earnings of the secondary household earner, split also into different bands. Each cell would provide the count of households where the primary earner earned the column amount, and the secondary earner earned the row amount.

For households with two earners on lower wages, the flat tax would be a tax increase. For some of those, it would only be an inframarginal tax increase. For others, it could represent a tax increase at the margin (anyone earning less than $14,000 per year).

For households with one higher earner and one lower earner, I'd expect most would see a tax reduction with effects at the margin, but I don't know the numbers.

And households with two higher-earners would definitely see a tax cut.

I guess the substantive point is that a lot of the folks being currently touted as seeing a tax hike under ACT's proposal would be in households where the net effect would be the opposite, and where the tax hike part would be inframarginal while the tax reduction part would have effects at the margin. We don't expect big labour supply effects on primary earners from tax cuts, and we do expect more supply responsiveness from second earners - but if the effect on second earners is more likely to be inframarginal, then that's a bit different.

And the more substantive point is that it's just dumb that it's hard to know what the numbers actually are. In the US, I'd just download the ACS PUMS and tally it. Here, because Stats' back-end systems are archaic, the only tables we have are the ones somebody thought to code in ages ago. You can't dynamically generate them.

Stats does have Confidentialised Unit Record Files, but you have to go through an application procedure to get them. And, once you have them, you can only use them for that one specific thing that you asked to use them for, then delete them. If you want to check something out just out of idle curiosity - like this tax question - well, you can't. Even if you have the CURF from a prior request that you're still working on, you have to get permission to use it to ask this specific question.

And the most recent CURF that might answer the question would be the one from the 2013 Census; they don't CURF the HES.

I have a query in with Stats in case this table already exists somewhere on a disused server in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying 'Beware of the Leopard', as that's always a possibility. But this kind of stuff shouldn't take hassling Stats staff (they are exceptionally helpful, and it wouldn't surprise me at all if somebody there is already building the table) or doing a whip-round of other economists to see whether they know whether this kind of data exists. You should just be able to download the darned Census CURF and check it - or have back-end systems that can support the kind of data access that IPUMS provides.

UPDATE: Stats' helpful advisor informs that that cross-tab does not exist and would take either a custom data request, or a research project through the IDI.

UPDATE2: Customised data requests charge out at $155/hour. If Stats' back-end systems weren't rubbish, or if they decided to free the Census CURF, any of us could just do it on our own.