SciBlogs

Archive 2013

Comorbidity and costs Eric Crampton May 24

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Another for the "underlying variables very likely cause both substance abuse AND negative outcomes" file, via +Ole Rogeberg . It appears that novelty-seeking and conduct disorder strongly predict future alcohol, tobacco, and other drug use among youths.

They suggest that early identification of those likely to be at risk and subsequent management of conduct disorders and of novelty-seeking behaviour might reduce the risk of substance abuse.

Behavioral or pharmacological treatment of disruptive disorders in children and adolescents is likely to have lasting effects across multiple disruptive psychopathologies due to the common thread that underlies ADHD, CD [Conduct Disorder], and NS [Novelty Seeking] — the inability to plan out actions, inhibit actions, and consider the implications of actions (impulsivity) (Miller, Stephen, & Tudway, 2004). For instance, preliminary findings from our lab recently determined that higher levels of CD and ADHD symptoms are associated with higher levels of initial sensitivity (e.g., subjective and autonomic experiences, such as reports of pleasure, liking the taste, nausea, heart rate) to alcohol and tobacco during adolescence, which suggests that these individuals may be primed to be more responsive to substances of abuse (Bidwell et al., 2012; Palmer et al., 2012; Wills et al., 1994).
Think back to how social cost studies tend to attribute the costs of substance abuse. They begin by defining as counterfactual the average outcomes for all individuals of similar age and gender; the monetised difference in outcomes between average non-abusers and substance-abusers is taken as social cost.

But those likely to become heavy substance-abusers would not have had average outcomes had drugs, alcohol, or tobacco never existed.

 The relevant counterfactual group are those who were at similar risk of becoming substance abusers and who managed to avoid it. And even that will lead to overestimates because the general-purpose technology that lets those lucky individuals avoid substance temptations would itself drive outcomes.

It's entirely likely that substance abuse aggravates things for those with disruptive psychopathologies and that the costs they impose on others are consequently higher than they would have been. But substance abuse is only responsible for part of that cost - not for the whole she-bang.

It's also worth pointing out that this new study tilts the scales further in favour of Ole Rogeberg in his argument with the Dunedin folks about cohort selection effects. I still wish that Dunedin could be convinced to put up a GSS-style front end for their data so that other researchers could check results while not compromising privacy.
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The value of outreach Eric Crampton May 24

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I enjoyed the CBC's radio show, The Invisible Hand. Rather than take a Freakonomics-style "wow, isn't this counterintuitive" take, they instead simply presented standard economic theory as it is understood by professional academic economists.
Worthwhile Canadian Initiative's Stephen Gordon provided academic assistance for the project.

The CBC more typically airs standard economic fallacies as fact, or at least it did back when I was in the country, so this was really rather nice.

What reaction did they get? Here's the show's producer Matthew Lazin-Ryder. Start listening at the 14 minute mark. At 15:55 he talks about his "honest to goodness depression" about the show's being criticized for being "brazen right-wing propaganda". He says [transcription errors mine]:
We wanted to make a show that had a completely different perspective from the things most people hear. And our probably naive anticipation was that people would take it in that way. We didn't honestly expect the angry backlash that we got. ... Our agenda was to present how mainstream economists think about things. 
He also tweeted: 
There is a body of things that economists know about the economy. Sure there's stuff we argue about, but especially in microeconomics, we kinda know what's going on. And the basic set of things about which economists agree diverges wildly from how the public thinks the economy works. The profession attaches perhaps too high of reward for deriving the results of some model when you change a plus to a comma in a utility function when the first order welfare gains are in just getting the voting public to appreciate principles-level economics.

I get irritated when bog-standard economics is cast as having a "right wing" agenda. Mainstream economics helps you figure out what works and what doesn't work for achieving any particular end and the trade-offs that are involved. If you want a fair bit of redistribution, that's entirely consistent with mainstream economics so long as you set up the transfers appropriately; heck, it drops out of most models where you assume diminishing marginal utility of income.* But bog-standard mainstream economics in Canada says a lot of unpalatable things: ditch supply management to reduce milk prices; get rid of barriers to both interprovincial trade and labour mobility; get rid of all the zany exemptions in the GST and adopt New Zealand's version instead.

Imagine a genie gave you a button. If you push the button, every voter in the country thoroughly and intuitively understands principles-level economics. At the same time, the most recent n issues of every academic journal in economics disappear along with all knowledge of their results: we would need to re-invent or rediscover every one of them, with some chance of never finding them at all. Up to what value of n do you leap to push the button? 5 years' worth? More?

Imagine a world where the physicists and engineers spent most of their time figuring out how to get internal combustion engines from 20 to 22 percent efficiency but where, outside of the lab, everyone else is riding horses because they think engines are evil and witchcraft and tools of capitalist oppression. Maybe it's not quite that bad in economics, but it isn't far from it.**

SciBlogs addendum: This is far more an issue for economics than for the physical sciences, but you can imagine a similar deal for things like GMOs. Thinking about some measure of "is the world a wonderful place with happy, well-fed people and nice things", how many years' worth of GMO research would you burn in exchange for getting everybody up to a Science 101 level of understanding of GMOs so that they stop trying to regulate science out of existence and stop trying to ban things that make people better off? People are a problem.

* But be careful! Cowen points out that utilitarian theories may be less egalitarian than you'd like. I asked a couple years ago about appropriate egalitarian policy when we start opening up the margins:
Pity the borderline Asperger's investment banker who, despite his financial success, seems at a bit of a disadvantage in dating. Reddit posted the 1600 word email that the would-be suitor sent to the woman who dumped him after the first date; it's since shown up all kinds of places. But folks snickering at it seem an awful lot like a rich one-percenter laughing at a pleading email from a starving man.

If I can play armchair psychiatrist, the same Asperger tendencies that helped this poor guy in investment banking have killed him in dating.

If you're an egalitarian, what is appropriate policy? Is this guy better or worse off than the poor musician who dates easily? With whom would you rather trade places, taking both their positions and their characteristics? If we redistribute income because the investment banker's last dollar is worth less to him than it would be to the poor musician, think too about the marginal utility of the musician's last date relative to the banker's.
 And should we compensate the beauty-challenged?

** See, for example:


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How to increase prices and profits in the U.K. retail energy market Paul Walker May 23

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This piece from the Adam Smith Institute website should act as a warning to countries wanting to reregulate their energy markets. Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers. Markets may not be perfect but it helps to understand how they work before setting out to "fix" them.
Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.

Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.
What you may ask is wrong here? Energy prices were increasing and someone had to be blamed. Ofgem (Office of Gas and Electricity Markets) the U.K. regulator for energy markets, was unable to find evidence of market failure and thus it concluded that the problem was customer failure. Customer failure being a nice way of saying "consumers are stupid"!. Customers were paying high prices because they were unable or unwilling to understand suppliers’ offers and thus the market had to be simplified.
An increasingly crackpot series of proposals and directives has emerged from Ofgem, Government and now Which? magazine for dumbing down the retail market. All are well-intentioned, none shows any understanding of competitive markets, none will increase customer engagement, and all will make customers worse off.
First came ideas from Ofgem,
It noticed that suppliers based in one area were offering lower prices to customers in their competitors’ areas. In 2009 it decided that requiring suppliers to charge the same price to all customers would bring the benefits of the lower prices to all customers - Right? Wrong. Suppliers predictably found it more profitable to raise their low prices to new customers than to lower their prices to existing customers.

Customers suffered because the low-price offers were withdrawn. They also began to lose interest in switching supplier: the switching rate has since fallen by nearly a half. But suppliers did not lose out from this reduction in competition. Quite the opposite: Ofgem’s calculations show their retail profit margins increasing to an all-time high: from minus £10 per dual fuel customer in May 2009 to about £50 from 2010 to 2012 to £100 now.

In 2011 Ofgem proposed that all suppliers should offer the same monthly standing charge – which Ofgem itself would specify. It overlooked – or didn’t care – that this prohibited tariffs with no standing charge, which are popular with pensioners. And that Ofgem would now be jointly responsible for setting energy prices. Ofgem withdrew its proposal.

Meanwhile, suppliers found other ways to compete – for example by offering lower prices online. Customers benefited – until Ofgem decided that this made the market too complicated. In October 2012 Ofgem proposed that suppliers would be allowed only four tariffs per fuel. This of course is tough on customers with minority tastes, like green tariffs, or even tariffs with no standing charge. And innovation will cease if a supplier can only innovate by withdrawing an existing tariff that supplies about a quarter of its customers. But now it’s simplicity that counts, not the availability of products that customers want.

There are other petty restrictions. Discounts must be the same each year, expressed in pounds not percentages. If this restriction had been in place, it would have banned the best offer in the market earlier this year. And in future it may not be viable for suppliers to offer discounts that don’t use percentages to tailor the discount to the size of bill. But the availability of good offers is no longer a relevant consideration.
Then ideas from the government,
At the same time, another bright idea popped up at Prime Minister’s Question Time. Just in time for the County Council Elections. The campaign leaflet says “Conservatives in Government have forced energy companies to put customers on the lowest tariff”. Leave aside that this is not yet enacted, and still just an idea that Ofgem might reluctantly trial. Leave aside too why Conservatives in Government and not Ofgem are now regulating energy companies. Let us just ask: what does it mean and is it a good idea?

If it means that energy suppliers will be forced to put their own customers on to the lowest tariff offered by their rivals, is there the remotest chance of this working? Suppose it means that energy suppliers will be forced to put customers on the lowest tariff they themselves offer. But if a supplier offers a discount on its standard tariff coupled with an exit charge of £50, do we really want to force that supplier to put all its customers on a tariff that locks them in? And if a supplier wanted to offer a discount for new customers, but was forced to put all its existing customers on the same discounted tariff, isn’t it obvious that it would be more profitable not to offer the discount in the first place? Once again, the proposal will drive out the best offers.
And finally ideas from Which? magazine.
It says that Ofgem’s proposals for simplifying the market don’t go far enough. The government should require single unit prices for each energy tariff, like petrol prices on a garage forecourt. Simplicity is flavour of the month, and petrol is a competitive market, so what’s wrong with this? Lots.

First, Which? seems to be asking for a single uniform price across the whole of the country. But distribution network charges vary considerably across the country. To impose a uniform retail price or network charge would require massive geographic cross-subsidisation between network operators and between customers that would be neither workable nor obviously equitable.

Second, forcing all tariffs to have a zero standing charge would mean that suppliers would not be allowed to offer a lower unit price to larger customers that are more economic to serve, and suppliers would no longer be interested in attracting smaller customers. The likely impact on different kinds of customers has not been considered.

Third, limiting the variety of energy products so that customers are faced with only one price per supplier would enable and encourage suppliers to coordinate prices. If one supplier breaks ranks then other suppliers will either follow or that supplier will fall back into line. Customers will find that suppliers offer similar prices almost all the time. Where then is the incentive to engage in the market?
Littlechild's conclusion,
All these schemes assume that regulators and governments know more about customers than those who make a living by discovering and providing what customers want. These schemes won’t really simplify the market and they won't persuade customers to engage more. But they will restrict competition, and customers will be worse off because the best offers will disappear. Suppliers will find it costly to comply with the proposed 126 pages of new regulatory red-tape, but the costs will be passed through to customers and the suppliers will grumble all the way to the bank.

Is it May already? Asset sales edition Eric Crampton May 22

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It must be May. The Christchurch Press is reporting that Council is considering selling some assets to pay for the quake.

May 2, 2011: The Press wondered the same thing. I put up the general conditions under which Council should sell assets.

May 21, 2012: Another round of speculation about Council asset sales. Labour was outraged by that the City might contemplate selling dividend-paying assets. I pointed out that, unless there are really serious problems in asset markets, dividend flows get capitalised into asset prices. I'd written:
Cosgrove can only be right where the asset is more efficiently owned by local council, or where there are serious problems in IPO markets, or where the Council has a particular kind of stupidity.

If the asset is best owned by government, then the selling price will be less than the discounted value of the dividend flow. Otherwise, local Councils can do better by selling off the asset and taking the cash.

If there are serious problems in IPO markets, then things sell for less than fundamental value at IPO. But there's no particular evidence of this.

The last one might be more of a worry. Imagine a guy who has a trust fund that pays him a modest annual income. He generally is foolish in how he spends it, but he's always able to pay his bills. If he is given the investment as a lump sum, he blows it all on pop rocks and bungee jumping and has no income flow for the next year. That guy is probably better off not being able to sell off the dividend-paying asset. Is Christchurch Council that guy? Hopefully not. But post-quake, unless they're dumb enough to blow it all on stadiums, there are tons of productive ways they could be spending the money - roads, sewers, turning Red Zone into useful parks.

And, if Council is dumb enough to blow any divestiture returns on pop rocks and stadiums, are they smart enough to handle the asset properly if they own it in the first place? Note that an asset like the Lyttelton Port of Christchurch isn't like a hands-off trust fund; it requires annual decisions about asset maintenance versus dividends. Cosgrove talks about how the revenue stream from assets helped kept rate rises in check; what reports I'd heard on maintenance standards at the Port as of a few years ago suggested that Council was putting a fair bit more weight on current dividend flow than on maintaining the assets. Divestiture may be a bad idea if Council is prudent enough to manage the asset properly while they own it, but profligate if they're handed a lump sum of cash; under the current circumstances, with plenty of really pressing financial needs, I'm less worried about this one.
And here we are, May 2013. In today's Press:
A Christchurch city councillor says the city could offload non-core assets, including its own offices, to help pay its share of big-ticket rebuild projects.

Cr Tim Carter said last night that less important assets were expendable if it helped ease the council's debt burden in funding anchor projects such as the new convention centre and roofed sports stadium.

...He was against selling strategic, money-earning assets such as Christchurch International Airport, Lyttelton Port, Orion, and Enable, which is installing ultra-fast broadband in Christchurch.

His comments come as Prime Minister John Key yesterday weighed into the council asset sales debate.

Key told Firstline it was up to the council to ask whether the people of Christchurch wanted "the nice-to-haves".

"Then they'll ask how are you going to pay? That could be through rates or asset sales," he said.
The case against selling the airport isn't that it's a money-earner. A money-earning airport will sell for a LOT of money at IPO. Rather, the case is that the local monopoly airport would be tempted to set fees to maximise its own profits without considering that reduced traffic into town might have some broader costs. It might even do things like charge really high fees to taxicab companies for the right to operate from the airport, increasing the costs of Christchurch as a travel or conference destination.

I still think that Council should fully divest assets that are managed at least as well by the private sector and don't have the kind of problem that the airport could have, partially divest other assets, and use the money for roads, sewerage, overbridges, and for topping up the costs of rebuilding and repairing Council facilities. But if John Key wants Council to sell off the Port to fund a big covered stadium or a huge convention centre, well, I discussed that case last year.
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Interesting blog bits Paul Walker May 22

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  1. Sam Richardson asks Events capital = big returns, right?
    The New Zealand Herald today is reporting that Auckland is a more successful city than Sydney at attracting and hosting major events. Auckland Mayor Len Brown says: "Major sporting events are big business and bring substantial economic benefits to the host region, so there is fierce competition globally to secure events." There certainly is fierce competition all right - but not a whole lot in the way of compelling evidence that the economic impacts of events are as substantive as commonly thought.
  2. Matt Zwolinski asks Should You Buy a T-Shirt Made in Bangladesh?
    Recent events in Bangladesh have brought moral questions surrounding sweatshops into the spotlight again. And many consumers are wondering whether they might be doing something wrong by purchasing goods that are made in Bangladeshi textile firms.
  3. Mario Rizzo on Bangladeshi Garment Workers and the Perversion of Ethics
    This is another instance of the simplistic pseudo-morality of those who can only see what is right in front of them at the present moment. This attitude is closer to a sympathetic reflex than a reasoned moral judgment.
  4. George Hall and Thomas J. Sargent on Fiscal prioritisation: Lessons from three wars
    Can we learn from previous instances of fiscal prioritisation? This column surveys the US Treasury’s response to three wars – the Revolutionary War, The War of 1812 and the Civil War. Contemporary advocates of engaging in fiscal discrimination might ponder the actions of previous US Presidents Madison and Grant, who honoured all existing federal obligations despite challenging fiscal conditions.
  5. Chris Dillow on Adam Smith on Immigration
    UKIP claims that its tax policies are derived from Adam Smith. But what would the great man make of its anti-immigration policies? I suspect the answer is: not much.
  6. Klaus Desmet and Stephen L. Parente on Unleashing growth: The decline of innovation-blocking institutions
    Innovation is the beating heart of modern growth. This column argues that innovation-blocking institutions weaken when markets expand and competition intensifies. The rise and decline of medieval Italian crafts guilds offer valuable insights into this process. Policies that promote greater market integration and stronger competition are key steps in lowering the barriers to innovation.
  7. John Taylor on Why Title II of Dodd-Frank Has Not Reduced the Likelihood of Bailouts
    Today the House Financial Services Subcommittee on Oversight and Investigations held a hearing on whether the Orderly Liquidation Authority (OLA) in Title II of the Dodd Frank Act has reduced the likelihood of bailouts of large financial firms. I was one of the witnesses. Here is a summary of my 5 minute opening statement.
  8. William Kerr on Cuddly or not, the design of worker insurance is critically important
    Do economies’ social policies affect their innovative outcomes? This column uses the case of venture capital investors to argue that it may. Countries that protect workers rather than jobs – and thus avoid employment-protection laws – developed stronger venture-capital markets over 1999-2008, especially in highly volatile sectors like computers or energy.
  9. Gary Becker on The Rise in College Tuition and Student Loans
    Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.
  10. Richard Posner on College Costs and Quality
    I graduated from Yale College in 1959. Tuition, room, and board at Yale in the late 1950s was $2000 a year; this year it is $60,000. Adjusted for inflation, this is a more than threefold increase. Average salary for a full professor at Yale went from $13,000 in 1959 to $186,000 this year (excluding medical school faculty), which after correction for inflation, an almost twofold increase. The rates of increase in these two variables varies from college to college, but I believe it is generally true that college costs have risen significantly faster than faculty costs. One thing that has depressed the increase in faculty costs is the increasing use of graduate students and other part-time faculty in lieu of tenure-track faculty. In addition, the administrative staffs of colleges have grown rapidly, in part because of increased legal regulation of education. Also, colleges have increased the quality of student housing and provided other amenities for students, in an effort to compete more effectively for rich kids. In addition, greatly reduced state subsidies for state colleges, in the wake of the economic depression that began in 2008, have forced state colleges to increase tuition.

If it saves only one life… oops. Eric Crampton May 22

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New Zealand's been pretty gung-ho about banning smoking. Tobacco taxes have been rising pretty sharply; tobacco can't be displayed by retailers and instead has to be kept concealed; the Government's unattainable aspirational goal is a SmokeFree New Zealand by 2025.

As part of this push, New Zealand banned smoking in prisons. And some hospitals have been a bit aggressive in banning smoking not only within the premises but also on the grounds outside of the hospitals. It's pretty easy to argue that folks going to hospital to get well shouldn't be smoking. Hey, maybe that gives them the extra shove they need to quit. Right? Oops.
A mental health patient who killed himself was put off seeking hospital treatment because he was not allowed to smoke onsite, a lawyer leading a judicial review application on smoking in hospitals says.
A smoking ban on hospital grounds including outside psychiatric wards by the Waitemata District Health Board is a breach of human rights, barrister Richard Francois argued at the High Court at Auckland today.
He is calling the proposal "torture" on the hospitals' most vulnerable patients.
"Psychiatric patients are segregated," Francois said in his opening statement.
"They're locked in a room and told they can't smoke cigarettes in a time they're under extreme stress, have been hauled away from family, friends and employment."
He argues that research does not back up the need for psychiatric patients to give up smoking on hospital grounds for their health or the health of others, and is simply a breach of rights which will create a barrier for patients wanting to seek help.
This kind of response shouldn't have been all that surprising.

There is a rather extensive literature on comorbidity of smoking and serious mental illness. Some argue that nicotine can serve as self-medication for those with specific mental illnesses; others say instead that it's a way for those with serious mental illness to impose some structure on their days and is a changeable part of the culture of mental illness. Either way, it's pretty hard to avoid that smoking rates among the mentally ill are much higher than those among the general public. That can provide a pretty decent argument for finding ways of helping those with mental illness to quit smoking. Or, from the other side, you could argue that those with lower life expectancies and who have a harder time enjoying life to start with oughtn't be deprived of those things that they do enjoy.

Either way, banning those placed in psychiatric hospitals from smoking outdoors on hospital grounds seems remarkably punitive. It seems pretty unlikely that enforced cold-turkey treatment while being hospitalised for mental illness is best for anybody.
He [Francois] raised an example of a Hillmorton Hospital patient in Christchurch who used to self-refer himself to the psychiatric ward after attempting suicide.
His mother had said he "quite liked" being there but this changed after a smoking ban came in, Francois said, reading from a Coroner's report.
"He killed himself this time. Smoking was everything to him, it was like the be all and end all of it really."
Wouldn't it have made more sense to have specialised smoking-cessation help for those with mental illness? Pretty sad when smoking is someone's alpha and omega. Even sadder when we get this instead.

Update: just so we're clear, I disagree with the synopsis that I reckon the policy killed the patient. Causality is way to hard to establish to say anything like that. Barriers to entering treatment seem a bad idea; the policy made this kind of incident more likely. And it seems an awfully hard policy to restrict access to pleasurable things to those people who have a harder time experiencing pleasure.
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Why didn’t we see it coming? jamesz May 21

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A lot of things in economic models are ‘exogenous’ and outside our usual frame of investigation. Not just little, unimportant things but big things, too: innovation and technological change, recessions, bubbles in markets. On some reading of economic models each of these things is unknowable and unpredictable. Obviously that’s far from satisfactory and lots of people are working hard to change things. Via Mark Buchanan, here is an interesting perspective on why things turned out this way:

To look at the economy, or areas within the economy, from a complexity viewpoint then would mean asking how it evolves, and this means examining in detail how individual agents’ behaviors together form some outcome and how this might in turn alter their behavior as a result. Complexity in other words asks how individual behaviors might react to the pattern they together create, and how that pattern would alter itself as a result. This is often a difficult question; we are asking how a process is created from the purposed actions of multiple agents. And so economics early in its history took a simpler approach, one more amenable to mathematical analysis. It asked not how agents’ behaviors would react to the aggregate patterns these created, but what behaviors (actions, strategies, expectations) would be upheld by–would be consistent with–the aggregate patterns these caused. It asked in other words what patterns would call for no changes in micro-behavior, and would therefore be in stasis, or equilibrium. (General equilibrium theory thus asked what prices and quantities of goods produced and consumed would be consistent with—would pose no incentives for change to—the overall pattern of prices and quantities in the economy’s markets. Classical game theory asked what strategies, moves, or allocations would be consistent with—would be the best course of action for an agent (under some criterion)—given the strategies, moves, allocations his rivals might choose. And rational expectations economics asked what expectations would be consistent with—would on average be validated by—the outcomes these expectations together created.)
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If we assume equilibrium we place a very strong filter on what we can see in the economy. Under equilibrium by definition there is no scope for improvement or further adjustment, no scope for exploration, no scope for creation, no scope for transitory phenomena, so anything in the economy that takes adjustment—adaptation, innovation, structural change, history itself—must be bypassed or dropped from theory.

Strangling research in its crib [revised] Bill May 21

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The Dominion Post runs a science column by Bob Brockie, who briefly introduces readers to new findings or key ideas from the world of science. It’s a nice addition to the newspaper, better than the scandale du jour that passes for journalism, even if he has the annoying habit of speaking ex cathedra.

Monday, though, he got up my nose [no link -- sorry -- stuff.co.nz doesn't actually want you to find anything easily]. He was discussing the new DSM-5, which has courted controversy by redefining psychological pathologies. We are all — well, half of us — apparently in need of treatment by the very people who decide whether we need treatment.

In his brief history of the DSM, Brockie said that psychology moved away from Freud to science. The meaning of this is clear: there is real, true knowledge that is produced through science, and then there’s all that other stuff that people believe without it actually being true, and that’s where Freud (and by extension, Lacan) belongs.

There are two enormous problems with this. The first is that this statement is glaring proof of the social production of scientific knowledge. I’d venture to guess that Brockie has not actually studied Freud, and has little knowledge of the split between Freudian psychotherapy and Anglo-American psychology. What he knows is likely to be what he’s been told, the stories he’s heard along the way. Science proceeds not only ‘funeral by funeral’ but clique by clique, lunch table by lunch table. Waving the ‘Freud’s not science’ flag isn’t so much a statement of fact but a not-so-secret handshake that marks him as one of gang.

And what a gang it is. They are in charge of funding, and funding allows science research. That’s the second problem with Brockie’s statement. They’ll say they want investigator-led research; they’ll say they want to give researchers the ability to follow their curiosity and investigate all manner of topics, regardless of where they might lead. The truth is, they are perfectly happy to strangle research in the crib if they don’t like it.

I know this, because they have strangled mine, repeatedly, while intoning ancient rites of scientific concern. They have just done the same to novel research proposed by a friend and colleague. We can show the theoretical basis for the work, we can demonstrate the linkages to international peer-reviewed literature, we can link the primary research to the hypothesis — we can do all the things these quartermasters of science demand. And then, they say that it isn’t ‘science’ because the science hasn’t been done because it hasn’t been funded.

It doesn’t help that we are talking about inter-disciplinary research – research that falls somewhere in between the disciplinary silos. Call it economic psychology, or psychological economics, or decision sciences if you like, but it is just the latest area of research in which we develop theories of human behaviour and test them. I’ve tried to explain it here (pdf), Andrew Dickson tried a different angle here, and yet another perspective is here. And still we get things like this 2012 article saying ‘Surprisingly little scholarly work has linked food and Lacan’.

Maybe that has something to do with funding decisions rather than lack of curious researchers. You want to say that Freud is not science? Give me a few a million dollars over several years to do the research. If I fail, you can have your talking point.

The scientists controlling the money are like Abraham, driven by Yahweh to demonstrate their obedience by sacrificing the young Isaac. But Yahweh is I Am Who Am, certain in His existence. Science can also be a jealous and uncertain Master, a Cronus who must devour his young to protect his reign. When he guides Abraham’s hand, he doesn’t stay the knife.


Series on tax: Part 2b – let’s experiment with explanations Matt Nolan May 21

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In the second part of my series on taxation I wrote about distortion and burden.  But I’m not sure whether my description about wedges and how people respond to prices was necessarily clear enough for a non-economist audience.  So I’m going to experiment with some other ways of articulating what I mean – ways that are equivalent, but for different people may be clearer.

Note:  I apologise in advance if this is a bit scattered – if you have questions or comments note them down in the comments, you’ll be doing me a favour :)

Paying our labour and capital

Remember that I stated in part 1 that we want to think about taxation, and spending, in terms of changing the allocation of goods and services.  This is not saying that goods and services are “fixed” and we are moving them around – no no no no.  It is saying that we are instituting policies that change the mix of goods and services, giving up some and increasing the amount of others.  We are thinking about how to use our scarce inputs to create outputs.

Now I have a strong preference towards private provision, given that voluntary prices are truly democratic and combine knowledge we don’t share as a society (but have internally as individuals), so let’s not get too ahead of ourselves in thinking we can “plan” the economy.

But, when looking at the issue we can say that we have a government sector, and a non-government sector. Labour and capital combine in both sectors to make goods and services … these are government goods and services and non-government goods and services.

Now if the government sector made goods and sold them to the public for a price, without raising any taxes, they would be just like any other firm.  In this case, the price paid for the government goods creates the income to pay for the labour and capital, and the labour and capital owners will purchase a mix of government and non-government goods at the relative prices :)

But government doesn’t work this way.  It pays for its goods by taxation instead of setting a price.  It uses this tax money to pay labour and pay capital when they create government products.  There is likely to be a reason for this, such as the existence of public goods, the urge to redistribute some products by providing them publicly, the desire for equal access to health and education.  That is cool.

In this context, the taxation is the government “claiming some proportion of non-government goods” to pay labour and capital with – since the labour and capital who produce government goods want to consume both government and non-government goods.  The government taxes non-government good providers, taking some of their output, and then sending over some of the produce of government production.

In this way, the tax exists in lieu of a price.

Now, while a price would see government goods and non-government goods produced with respect to their relative market value, taxation and spending is unlikely to lead to this same case for two reasons:

  1. The government goods are explicitly being produced beyond their relative market value – as we believe there are non-market benefits associated with it.  This is redistribution through tax and corresponding spending.  In of itself this isn’t necessarily inefficient – with a lump sum transfer relative prices will just adjust.  We can view this as changing the “endowment” of underlying resources for different people.
  2. Depending on the type of tax there are relative price effects, which reduce efficiency directly.  This occurs because it creates a gap between the cost of the good for the person buying it and the return for the person selling it (the “wedge”) – and so the very existence of the tax changes where people work, what they consume, and where capital ends up relative to the case where prices represent underlying value given the allocation associated with the government transfer.  This only occurs with taxes that influence relative prices – so not lump-sum taxes.

A web of prices, an ideal frontier, the fundamental welfare theorems

Now here is the way I see this idea when we think of spending, taxation, and the economy.

There is a set of resource (land, labour, capital, enterprenuers) and agents are endowed with some quantity of these resources.  Through trade, and the establishment of institutions and contracts, this leads to outcomes.  Prices in this case represent a set of relative values, and there is a frontier of outcomes (depending on initial endowments, that can be changed through lump sum government transfers) that can be seen as “pareto optimal”.  This is really just the fundamental welfare theorems which hold for perfect competition.

When we have a tax that isn’t lump sum, so it creates a wedge between the buyers and sellers price in a market, we end up in a situation “below” this frontier, which is in turn pareto inferior to a potential outcome.  This is why you will often see economists arguing for the idea of a poll tax with a progressive transfer system.  I’m not entirely sure – as I inherently see the transfers as having the same impact in terms of labour supply (unless we actually delink the benefit system from work), and believe that when equity concerns are taken into account some of these outcomes are not truly “pareto inferior”.

Now we don’t have perfect competition, it is more likely that we have monopolistic competition and the associated inefficiencies of that.  Modern policy oriented models do assumes this (eg DSGE models) and work from there.  However, even given this the tax principles are not terribly different – and as a result, I stick with useful simplifying assumptions to describe tax policy.

Furthermore, issues of information, incomplete markets, endogeniety and co-ordination failures, and oligopolistic competition do push us away from this idea, and provide scope for government interventions that are win-wins!  But at the current margin we already allow for those with policy – the “marginal” concept of taxation is very much along the area of trade-offs I’m discussing in these articles.

Trust me, these additional issues do play a significant role in how we try to discuss interventions – and many current interventions are based on it (eg monetary policy that tries to close output gaps, government intervention in markets over competition and consumer issues). Even if we “unrealistically” assumed perfect competition and perfect knowledge, the distributional impact of tax changes are insanely hard to work out – the best we can do (and that I’m aiming to do) is to provide a flavour for the direction of the different trade-off between taxes, not the magnitude or an implication of what we should do.

When we look at a range of marginal ideas such as “shall we try to ramp up healthcare” we are facing the traditional transfer problem akin to the fundamental welfare theorems, and this sort of exercise is useful.

That is so unrealistic, man economists say such stupid thing

I have tried to be honest about assumptions.  Often when an economist does this, someone is a dork and says something like the above.  If someone appears that feels like commenting in this way, I am replying to you right here.

Excuse me for admitting that allocation is an incredibly complicated issue that requires great care and thought when setting up a policy.  Why don’t you just go back to telling the world about your “make everyone better off by magic plans” and not bother talking to me again.

Why am I bothering with this comment – because there are innumerable people out there who simultaneously believe:

  1. There are really obvious and easy solutions to economic problems.
  2. Economists make really dumb assumptions and are stupid.
  3. Economists massively overcomplicate issues with maths and terminology.

I find those assumptions mutually inconsistent, and whenever I meet a person like that (which is far too often) I can’t help but feel that there is really something wrong in their life that they are trying to make up for.  If I had any empathy I’d be sympathetic – instead I’m going to write this part of my post to insult them.

To everyone who has avoided their snark and has constructive things to say – thank you, I want to give you a hug.

Conclusion

Hopefully these examples helped to clear up the idea of burden and distortion – it is an interesting issue, and one that requires careful analysis when we actually go to investigate policy!  Next week I will have an article up with some “ideal taxes” (poll taxes, land taxes, ability taxes), and I will touch on ideas of horizontal and vertical equity!  With all that we will be ready to hit factor taxes and consumption taxes the following week, inflation taxes the week after, and externality taxes the week after that.

Where I have gone in parts of this post is beyond where I’m heading on the Rates Blog posts – quantitatively I am talking about the same results, but the description involved is more involved.  It wouldn’t be fair to burden that on the larger public on Rates Blog who are less likely to be as nerdy as anyone over here ;) … unless they are interested in the ideas, in which case I hope they see it!

By the end of it, we should all have an idea about the framework we view tax within.  Given that, we can make our own judgments about what is fair, and interpret the evidence about burden to try to figure out whether that makes much sense.  To be honest, all of that is far beyond me ;)

The Price of Wool and Economic Growth Eric Crampton May 21

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You know how most comments sections are, well, terrible?* Not this one. Gerald Silverberg blogs on the New Zealand 1951 GDP data point and the Reinhart-Rogoff mess. I'm going to leave refereeing on Reinhart-Rogoff to Justin Wolfers. But just look at the depth of wonkery that goes into a single cell in an Excel spreadsheet. Careful data collection and distribution is ridiculously undervalued.

Gerald tries working out New Zealand growth rates for 1946-1952, contrasting Maddison's data with others. The Reinhart-Rogoff data doesn't look like Maddison's. Then commenters, likely including at least one data maven from the bowels of the NZ bureaus, start helping out.

Commenter Oscar first points to an FT piece showing that Maddison uses calendar years while the Stats NZ series uses March years. Then Silverberg starts wondering whether 1951 was due to the waterside lockout or to the wool price boom, quipping:
Who would have thought that you would have to become an expert on NZ wool exports and labor relations in 1951 to decide if public debt affects economic growth.
It gets much much wonkier from there. Mark Sadowski provides a short history of the waterfront dispute and the wool boom:
I was convinced from the start of the HAP/R&R controversy that the New Zealand part of this story was explained by the 1950-1951 New Zealand Wool Boom and not the 1951 New Zealand Waterfront Dispute.

The 1952-53 New Zealand Yearbook shows that wool sales were 47.1 million NZ pounds in 1949-50, 107.5 million NZ pounds in 1950-51 and 52.7 million NZ pounds in 1951-52.

Most of this was caused by a change in price, not a change in output. The average price of wool rose from about 38 NZ pennies a pound in 1949-50 to 88 NZ pennies a pound in 1950-51 and fell back to 40 NZ pennies a pound in 1951-52. (There were 240 pennies to a New Zealand pound.) Production was about 298 million pounds in 1949-50, 294 million pounds in 1950-51 and 315 million pounds in 1951-52.

According to the HAP/R&R dataset New Zealand's nominal GDP (NGDP) was 1.101 billion NZ pounds in 1949, 1.396 billion NZ pounds in 1950 and 1.446 billion NZ pounds in 1951, so that was a substantial proportion of New Zealand's economy.

A good paper about the New Zealand Wool Boom is here.

I can't locate a free copy, nor can I save a PDF file I can cut and paste but I would summarize the episode as follows.

Demand for wool had been strong since WW II ended but supply had been unresponsive to elevated prices. When the Korean War started in June 25, 1950 there was an immediate elevation in the price of wool. Between that date and March of 1951 the price of wool went up two to three fold depending on grade (lower grades went up more, mainly because that was the kind of wool the military was buying). Demand wasn't simply driven by US military stockpiling as retailers actually used rising prices to induce even higher sales.

In January 26, 1951 the United States Office of Price Stabilization (OPS) imposed a general price ceiling measure designed to freeze the pre-war price-wage structure. The price ceiling on wool brought trading in Boston (the central US wool market) to a standstill and caused US participation in New Zealand wool auctions to more or less cease. This led to falling New Zealand prices until February 7 when an emergency exemption was granted to the US military through April 1. This caused prices to recover but once the exemption expired prices fell sharply. By June 1951 they had fallen by 50% and by March 1952 they had fallen a total of 70%.

Now, my sense from reading the history of the Waterfront Dispute is that it was less a strike than a lockout. The government brought in 3000 troops an unknown number of scabs to keep the dockyards running, and thereby crush the union.

The 1954 New Zealand Official Yearbook shows the Cargo Manifest Tonnage "cleared" (exports) fell from 1,163,934 tons in 1950 to 1,129,629 tons in 1951. It rose up to 1,173,577 tons in 1952.

In other words the mass of cargo moved fell by only 2.9% and rose by 3.9% the following year.

What about the actual value of exports? Exports *rose* from 183,752,000 NZ pounds in 1950 to 248,127,000 NZ pounds in 1951, and fell back to 240,561,000 NZ pounds in 1952

Wool exports rose from 74,653,000 NZ pounds in 1950 to 128,176,000 NZ pounds in 1951 and fell to 81,998,000 NZ pounds in 1952. Note that wool exports increased by over 70% in 1951 and amounted to nearly 52% of all exports that year.

So it would appear that the 1951 Dockyard Dispute had little effect on actual exports. [note: links tidied from source]
And all of this over one cell in a rather large Excel table. Raise a toast tonight to the wonks whose work provides every cell of every spreadsheet on which we rely.

* Except at Worthwhile Canadian Initiative, somehow.
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