First let me cover off the two reasons you have probably clicked on this post: The question mark is on purpose – even though it sounds like a statement. In the end, these are issues of balance rather than black and white rights and wrongs. Then again, maybe I’m biased as I see myself as […]
Interesting blog bits Jul 21
- Konstantins Benkovskis and Julia Woerz, on Lower import prices = 100% welfare gains? Not necessarily: don′t forget the impact of consumer taste and product quality
Import price statistics may not be a reliable indicator of welfare gains. They must adequately reflect the fact that consumers value variety, and that consumer tastes and product quality change over time. This column evaluates existing findings, and introduces new results for the four largest EU economies – including evidence of higher consumer welfare gains than suggested by official import prices for the period from 1995 to 2012.
- Susan Ariel Aaronson on Why the US and EU are failing to set information free
The internet promotes educational, technological, and scientific progress, but governments sometimes choose to control the flow of information for national security reasons, or to protect privacy or intellectual property. This column highlights the use of trade rules to regulate the flow of information, and describes how the EU, the US, and their negotiating partners have been unable to find common ground on these issues. Trade agreements have yet to set information free, and may in fact be making it less free.
- Nico Voigtländer and Mara Squicciarini on Knowledge elites, enlightenment, and industrialisation
Although studies of contemporary economies find robust associations between human capital and growth, past research has found no link between worker skills and the onset of industrialisation. This column resolves the puzzle by focusing on the upper tail of the skill distribution, which is strongly associated with industrial development in 18th-century France.
- Don Boudreaux on Cool!
2014 is the centenary of an unusually large number of regrettable events. But some good things also happened that year – for example, 1914 saw the first installation in a private residence of air-conditioning.
- Art Carden on Should Your City Run More Buses or Build Light Rail? Cato’s O’Toole Says More Buses
If your city doesn’t have a light rail system, someone in town probably wants to build one. If your city already has a light rail system, someone in town probably wants to expand it. According to a June 3 Policy Analysis by the Cato Institute’s Randal O’Toole, this would be an expensive mistake.
- Peter Boettke on The Good, the Bad, and the Ugly … of crony capitalism?!
Paul Rubin is an economic thinker I respect tremendously, but I am not sure I agree with him here. I do agree with live in the 2nd best (at best) world and thus it is a mistake to use 1st best theoretical ideas to guide practical affairs of public policy. I prefer instead to think of institutional robustness, rather than ideal welfare economics.
- John Taylor on New Legislation Requires Fed to Adopt Policy Rule
A lot of research and experience shows that more predictable rules-based monetary policy leads to better economic performance—both in terms of price stability and steadier-stronger employment and output growth. But in practice there have been big swings in Fed policy between rules and discretion, with damaging results as in the 1970s and the past decade of a financial crisis, great recession and slow recovery. This experience—especially the swing from rules to discretion in the past decade—demonstrates the need for legislation requiring the Fed to adopt rules for setting its policy instruments.
- Bryan Caplan on Ownership for Cartoonishly Nice People
The noble and prolific Jason Brennan has just released Why Not Capitalism?, a short book replying to Gerald Cohen’s Why Not Socialism? Outstanding work, as usual. For me, the highlight is Brennan’s explanation for why even cartoonishly nice people would want to own private property. It’s easy to see why cartoonishly nice people – classic Disney characters like Mickey and Minnie Mouse – would want other people to own private property. But why would the nicest people imaginable want to claim ownership on their own behalf?
- Art Carden on Intolerant Socialism
As Jason Brennan writes, capitalism is preferable to socialism because voluntary socialist experiments like utopian communes and socialist camping trips are possible in a world with private ownership of the means of production. Capitalism tolerates socialism. Socialism does not tolerate capitalism.
What is a Gini? Jul 21
Everywhere we turn nowadays people are talking about Ginis. And sadly, they are not misspelling Genie, they are talking about Gini coefficients. The reason for this interest in Gini coefficient stems from the fact they are used to measure “inequality” in an income distribution – with books such as the Spirit Level made hay discussing […]
Zone wars Jul 21
Adrien de Croy, who lives with his family in a home zoned for EGGS and also within the proposed One Tree Hill College zone, understood there was significant pressure on the rolls at AGS and EGGS.
“They can’t really reduce the zones unless there’s an alternative in place, and [the proposed One Tree Hill College zone] basically gives them the opportunity to reduce their zone. We see it as the first step to removing us from the Auckland Grammar and EGGS zones.”
Mr de Croy, whose eldest child is 7, said at this stage his main concern was for the value of their property. A real estate agent had told him a typical premium someone would pay to get into the “double Grammar zone” was about 20 per cent.
Last year the Herald reported one Mt Eden home just 750m outside the area went for $516,000 less than a house up the road, valued the same but situated 250m within the zone.
One Tree Hill College principal Nick Coughlan said he understood such concerns, but they were unfounded.
The zone, and any overlaps, was informed by the need to not divide areas and homes around contributing schools. There was no intention to realign zones in the future, Mr Coughlan said.
We can do better than this, though, to gauge the effects of school zoning. For that, we turn to Waikato’s John Gibson and Geua Boe-Gibson. They’ve estimated the effects of school boundaries in Christchurch pre-quake. From their abstract:
School attendance boundaries are a contentious issue in New Zealand, and have been relaxed and re-imposed depending upon political sentiment. Critics contend that a supposedly egalitarian state school system becomes one of selection by mortgage, with the value of ‘free’ schools capitalized into property prices. Attendance boundaries restrict the schooling opportunity set facing a student, who typically is unable to study at nearby high-performing schools if they live outside their boundary. We relate schooling opportunity sets to sales prices of over 8000 houses in Christchurch, controlling for dwelling attributes, neighborhood characteristics and geographic accessibility to a wide range of services. Our model explains over three-quarters of the variation in prices and we use this model to predict property prices if there were no attendance boundaries. Abolishing boundaries expands most schooling opportunity sets and predicted house prices generally rise. But prices would fall in some higher income neighborhoods with highly educated residents, who are likely to oppose reform of school attendance boundaries.
Gibson and Boe-Gibson use a year’s worth of house sales in Christchurch, October ’04 through October ’05, to check the effects of school zones on prices after accounting for land and building area, building age, materials, parking, garage, and whether there was a deck, slope, or view. I hadn’t known that QV data included information on the latter three. Importantly, they link in Census meshblock data on neighbourhood ethnicity, immigrant status, education, and employment, and meshblock crime. Some of the work on school zone effects will confound “good school” with “seen-as-desirable (ie no rednecks) neighbours”.
They simulate the effects of a standard deviation increase in NCEA Level 1-3 pass rates on median house prices and find that, all else equal, having access to a school with a standard deviation better NCEA pass rate is worth between $14,300 and $19,900 for the median house. This gives a few implications.
First, the market value of policy innovations that improve school quality is very high: a policy that improved NCEA pass rates by a standard deviation is worth about $42 billion.
Second, locking poorer people into poorer schools seems a pretty bad policy. Gibson calls it “selection by mortgage”, and worries it can reduce social mobility especially among minority groups.
Finally, while abolishing school zones would increase the total value of the housing stock because gains to those getting access to better schools exceed losses to those currently sitting on regulatory rents, it’s unlikely to happen because those earning the rents are more effective at protecting turf. While the average goes up in value by about $25,000, houses in preferred zones drop in value by about $20,000. I expect this is an upper-bound estimate as other forms of rationing would have to come in for the better schools in the absence of mechanisms allowing them to grow, and as I’d expect that those with current access would find ways to maintain such access.
Rich people can afford to pick their preferred public schools; poor people get locked into whichever schools service poorer neighbourhoods. The problem is worse in much of North America, where schools are funded from local property taxes rather than from general revenues, ensuring that poor places can’t afford good schools; New Zealand’s decile funding system works to provide equitable funding across schools. But zoning still causes problems.
Gibson and Boe-Gibson conclude:
…the property market becomes the main schooling selection mechanism for New Zealand parents who are ambitious for their children. Even though schools may nominally be ‘free’, students from poorer households face more restricted schooling opportunities than do wealthier students, being constrained through the housing market.
Almost two decades have passed since New Zealand’s brief experiment with relaxing school attendance boundaries in the 1990s. The frequency of reselling houses makes it likely that most home-owners have paid a price for their dwelling that includes the expected value of access (or exclusion) from particular schools. Consequently there will be windfall gains and losses if future policy reform allows a weakening of attendance boundaries and an opening up of school enrolments. Nevertheless, the wide variation in school performance and the contribution of attendance boundaries to reducing social mobility suggests even difficult reform is worthwhile.
I would love to see a replication of this work in Wellington. In particular, I’d love to know the relative magnitudes of school zone and all-source earthquake risk on property values. Is there a bigger difference between moving from Wellington College zone to out-of-zone than from moving from a low-medium quake-risk property to one that will fall off the side of a cliff in an earthquake? I suspect so, but it would be nice to know.
Dr. Ben Powell, author of Out of Poverty: Sweatshops in the Global Economy, appeared on BBC World Service as part of a debate on the economic necessity of sweatshops in developing countries.You can listen to an audio of the full debate here.
Why not capitalism? Jul 19
Most economists believe capitalism is a compromise with selfish human nature. As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Capitalism works better than socialism, according to this thinking, only because we are not kind and generous enough to make socialism work. If we were saints, we would be socialists.
In Why Not Capitalism?, Jason Brennan attacks this widely held belief, arguing that capitalism would remain the best system even if we were morally perfect. Even in an ideal world, private property and free markets would be the best way to promote mutual cooperation, social justice, harmony, and prosperity. Socialists seek to capture the moral high ground by showing that ideal socialism is morally superior to realistic capitalism. But, Brennan responds, ideal capitalism is superior to ideal socialism, and so capitalism beats socialism at every level.
Clearly, engagingly, and at times provocatively written, Why Not Capitalism? will cause readers of all political persuasions to re-evaluate where they stand vis-à-vis economic priorities and systems—as they exist now and as they might be improved in the future.
A link to the Bloggingheads.tv clip is available here.
Update: Brennan gives a brief summary of his book’s thesis here.
The Economics of World War I Jul 18
For the history buffs among you here is an interesting collection of papers on “The Economics of World War I“. The collection is from VoxEU.org and it has been put together to commemorate the centenary of the outbreak of the First World War. Over the coming gyear Vox will be publishing a series of articles on the economics of the conflict itself, as well as on its causes and consequences. These will eventually be published in a Vox eBook.
Thus far there are four articles available:
Financial preparations leading up to WWI
Harold James, 8 July 2014
The 1907 panic emanated from the US but affected the rest of the world and demonstrated the fragility of the whole international financial order. The aftermath of the 1907 crash drove the then hegemonic power – Great Britain – to reflect on how it could use its financial power. There is a close link between the aftermath of a great financial crisis and the escalation of diplomatic tensions that led to war in 1914.
Changes in migration policies after 1914
Drew Keeling, 23 June 2014
The war declarations of August 1914 spelled far-reaching alteration to the fundamental character of modern long-distance international mass migration. For most of the preceding century, in the majority of big economies international human relocation had been largely peaceful, voluntary, and motivated by market incentives. Since 1914, it has been mostly shaped by politically determined quotas and legal restrictions, or driven by flight from war, oppression or similarly fearsome dangers and disasters
Four myths about the Great War of 1914-1918
Mark Harrison, 2 June 2014
As its centennial approaches, the events of the Great War have worldwide resonance. Most obviously, is China the Germany of today? Will China’s rise, unlike Germany’s, remain peaceful?
Height of World War I servicemen
Timothy J Hatton, 8 May 2014
The last century has seen unprecedented increases in the heights of adults. Among young men in western Europe, that increase amounts to about four inches. On average, sons have been taller than their fathers for the last five generations. These gains in height are linked to improvements in health and longevity.
The Price of Food Jul 17
Imagine that, every winter, you heard stories on the radio about the terrible terrible food price increases and how they were hurting poor families. And suppose you never heard stories in the summertime about the just-as-regular price drops. What would you think about the long-term price of food?
Radio NZ called me yesterday asking if I’d come on Morning Report to talk about the latest inflation figures and the price of food. Here’s the notes I’d made for myself, some of which I used.
Headline year on year CPI growth is 1.6%, a bit below the middle of RBNZ’s target band of 1-3%. Again, inflation in tradeables was far lower than inflation in non-traded goods: for much of the past decade, inflation in traded goods has helped pull down overall inflation rates. June quarter inflation in tradeables was 0.1%; non-tradeables, 2.7%. Food is up 1.6% on last year, in line with overall inflation rates.
Inflation in food prices attracts a lot of attention because it’s easy to tell stories about people who are hurt when food prices go up. Quarterly food price inflation was 0.9%, up on last quarter because it’s winter now, and 1.6% on the year, because we had a bigger increase earlier in the year that means we’re higher than the same time last year. But we don’t hear as much about the seasonal price drops in summertime. The December 2011 summertime price drop and December 2012’s were together enough to make year-on-year food price inflation negative for three consecutive quarters. And I just don’t get why a 0.9% quarterly food price increase, like this quarter’s, draws that much more agonizing than December 2011’s 2.2% quarterly food price drop, or December 2012’s 1.8% drop, or December 2013’s 1.3% drop.
If you take the broader picture and compare food price inflation to other stuff, it’s not out of whack. Say you had a dollar in June 2006. It would take $1.20 to buy the same total bundle of goods today as then, but $1.29 to buy the same bundle of food. It would take $1.32 to buy as much housing and household utilities now as you could have bought for $1 in June 2006. You can get the June 2006 bundle of transportation services for $1.17. Petrol? $1.26. If we bundle together all the goods that aren’t traded, you’d need $1.29. For traded goods, you’d need $1.08. Food cost inflation over the longer period is higher than inflation in other traded goods, but shipping costs per unit value are going to be higher for food coming in from overseas than for televisions, and the rest of it’s domestic.
Continuing with 2006 as a base year, the minimum wage was then $10.25. It’s now $14.25. So a dollar’s worth of minimum wage in 2006 is now $1.39: hikes in the minimum wage have at least kept up with inflation. If we look at average weekly earnings over the same period from the quarterly earnings and employment survey, $1 in weekly earnings in 2006 turned into $1.32 in 2014.
The CTU’s Bill Rosenberg didn’t like my use of 2006 as base year because he reckons wages haven’t done as good a job of keeping up with inflation in more recent years. I’d picked 2006 only because that makes things easy in the RBNZ series: they use 2006 as base year in the recent inflation figures. But, for Bill’s benefit, here’s the full series, using 2009Q4 as baseline. Why that quarter? Because the wage index actually dropped in March 2010, and he referred to low wage growth over the last 4-5 years. I don’t have June 2014 inflation in there because we don’t yet have June 2014 wages.
I’m here using the RBNZ’s M1 Prices series on CPI and food, and the StatsNZ Earnings and Employment Survey’s Average Weekly Earnings series QEX043AA. What’s happened to average weekly earnings compared to either CPI and food over the past four years? Compare blue to red and green. It would be better to use median earnings, but that’ll be in the annual income statistics which haven’t come out for 2014 yet. If I’m picking the wrong series for purpose, I’ll defer to whatever Matt Nolan tells me should have been preferable.
Radio NZ referred to me as “The New Zealand Initiative’s Eric Crampton” and referred to NZI as successor to the Business RoundTable. Two mild corrections.
First, I don’t start officially with NZI until I get myself organised to get to Wellington. My last day with Canterbury as Senior Lecturer in Economics was Monday. Tuesday was my first day as Adjunct Senior Fellow with the Department of Economics & Finance. That unpaid affiliation will continue when I move over to NZI and will let me continue to help out with some supervisory work; I also hope that Econ interns from Canterbury will be able to help us out on a few projects once I’m settled.
Second, NZI is successor to both the NZ Business Roundtable and the New Zealand Institute. The two bodies merged after Roger Kerr’s death, with Oliver Hartwich coming in to head things up.
The Price of Weed Jul 17
Tim Worstall’s likely right about the price of marijuana in a fully free market. He notes that the price of marijuana per kilogramme, in Malawi, where much international tobacco production takes place, runs as low as $3, so a pack of 20 joints would be maybe about $0.50. He makes a few predictions as consequence:
So, yes, I feel confident in predicting that a pack of fully legal cannabis joints, one that is able to benefit from the full effects of global capitalism, would cost something like 50 cents instead of the predicted $50.
I would also go on to make two further predictions. Currently the proposed and enacted taxes on cannabis are ad valorem. That is, they’re based upon the value of the cannabis itself. As the price crashes as a result of trade I am certain that those ad valorem taxes will be replaced by unit taxation. So many dollars per pack of joints, rather than x or y percentage of the value of them. The second is that full liberalisation of the cannabis market will be followed milliseconds later by calls for trade barriers to be imposed. For, obviously, if Malawi were to be allowed to compete then all and every US based producer will go bust. Which, given the interplay between the localisation movement and the legalise cannabis movement isn’t something that will be welcomed. Legalisation would therefore be followed by the “Smoke Local” campaign.
Ad valorem taxation doesn’t make sense for products whose purported negative effects are far more related to the quantity consumed than to the price of the goods that are consumed. It’s pretty unlikely that a $600 bottle of Grange does a hundred times more harm to anybody than a $6 bottle of a more economical brand. You could perhaps see its being applied if the only thing that really mattered in price setting were the strength of the product, and if consumers were better judges of product strength than were the revenuers. But in the more plausible case where there can be strong gradations in product quality for the same level of active ingredient, you want to go with unit excise lest you shift the market towards cheaper products that are, perhaps, harsher on the lungs. So unit excise based on some measure of standardised THC equivalent could work: stronger joints would draw a heavier tax, just as spirits draw more excise the greater the alcohol concentration.
I’d done some very rough ballparking a few years ago (see here and here) on potential revenues from excise on marijuana were it legalised, and were it taxed on a per-unit basis with the tax set to maintain a constant price to consumers before and after legalisation. I am not asserting that there are social harms equivalent to that tax rate that the government does well by internalising through tax but rather that, for some reason, voters see demand abatement as a good and that maintaining constant prices, or at least avoiding any big drop in prices and the consequent Campbell Live specials, would be one way of avoiding the screaming-voter problem.
I assumed an autarkic domestic market as I expected that international obligations would be seen as constraining against either import or export. In that case, the domestic production cost can be a decent starting point, albeit with the caveats I’d then made and that Worstall also warns about: benchmarking prices on small-scale domestic production may be misleading if a legal domestic market provides economies of scale and better production technologies, like ones that don’t require hiding the plants from police helicopters or in hydroponic-equipped closets.
If international political considerations didn’t prevent trade, the numbers I’d been working with would be really rather out. I’d assumed that politicians would set unit excise to maintain costs to consumers at about the same level as it is now, with the treasury then getting much of the return from legalisation rather than growers. But it’s pretty hard to imagine Kiwi growers getting prices down to anything like $0.50 for a pack of 20.
But now we have a problem with excise. The excise rate that would maintain the cost to consumers while allowing imports would destroy any domestic industry, or at least the lower end of it. If current prices are on the order of $300/ounce, and if prices from Malawi are more on the order of $3-$4/kg, and if there are about 35 ounces in a kilogram, and if domestic production costs by the time it hits retail are somewhere maybe around $100-$150/ounce, well, the per-ounce excise has just jumped from the $150-$200 range to basically $299/ounce.
Options? Setting a higher import tariff than the domestic excise might sound appealing, but it would be pretty distortionary: the price that keeps Malawian product at at least $300 makes product imported from elsewhere pretty expensive as Malawi defines the bottom of a very wide price range. Another option would be to set excise at the very bottom of the current selling price for the very worst quality product. Imported product would swamp the bottom end of the market, but there’d potentially be room for higher-priced local speciality products.
You could alternatively think of combinations of excise and retail minimum pricing if supporting local industry were important enough for you to accept either rents and rent capitalisation to cannabis retailers (if retailing licences are constrained) or to put up with (or try to constrain against) all the ways that retailers would chisel on minimum pricing otherwise.
I’m happy with whatever meets the voter participation constraint.
[Update: thanks to Peter for pointing out a typo in comments, now corrected.]
Stat Juking revisited Jul 16
About 700 burglaries were “recoded” in the Counties Manukau south area over three years, an internal police investigation has found. It found that about 70 per cent of the time, the offences should have remained burglaries.
The revelations will be an embarrassment for Police Commissioner Mike Bush, who was district commander of the area at the time, although he was not responsible for overseeing the coding.
Police have not said why the statistics were altered, but say staff were not under instruction to do so. Tolley denied police were under political pressure to reduce burglary statistics.
You don’t need overt political pressure to get this kind of outcome, just KPIs with strong enough incentives. On the plus side, they were caught. On the down side, I can’t see how lower level staff doing the coding would have any incentive to muck the stats around unless they were getting pushed by those whose KPIs did provide such incentive. It would be really interesting to read the full report.
The review listed dozens of examples where break-ins and attempted burglaries were downgraded, including one case where police failed to follow up after a witness gave them a burglar’s registration number.
The review found the burglary recoding rates in Counties Manukau south at the time were 15 per cent to 30 per cent whereas other areas typically recoded about 5 per cent.
So where last week’s rumours were about failing to pursue charges, which wouldn’t have mattered for stats based on recorded complaints, downgrading the complaints to less serious offences would matter.
I’d be curious to know what kinds of lesser offences were artificially inflated to keep the burglary numbers down.
I hope that the Police stats units have informed any researchers who’d been using the incorrect figures of the updated and corrected series. Anything that relied too heavily on 2009-2012 Manukau data is now going to have to be re-done.
The Herald on Sunday broke the story on the 13th. Their version is gated. The Stuff version, which notes “It was reported” rather than crediting the Herald, is here.