Saturday, 31 March 2012

Labour's good intentions led to bad youth unemployment

Or so Eric Crampton tells us in the NBR. Interestingly the picture the NBR use of Eric looks like it was taken in the Staff Club. What does this tell you aboot Eric!!!

More seriously, Eric writes,
Something strange started happening to youth unemployment rates starting around December of 2008.

The global recession had started in earnest, but seemed to be nowhere in New Zealand’s unemployment statistics – at least among adults.

The adult unemployment rate hit 3.3% in 2008’s December quarter; not alarmingly higher than it had been in the prior few years.

But the unemployment rate for 16 and 17 year olds, which had always tracked a fairly predictable but noisy path above the adult unemployment rate, instead took a jump.

Where we might have expected a youth unemployment rate around 14%, it instead touched 20%.

Two quarters later, when adult unemployment rates hit 4.5%, and we would have expected youth unemployment rates around 16%, the youth unemployment rate instead hit 27%.
What might have caused youth and adult unemployment outcomes to take such divergent paths? One explanation, and I think the correct one, is the Labour government’s abolition of the differential lower youth minimum wage effective April 2008.

Youth unemployment rates did not spike immediately afterwards, but neither would we have expected them to; employers are not likely to fire youths en masse with a change in the minimum wage, but they are likely to avoid hiring younger and riskier workers when more experienced and similarly-priced alternatives are available. And they’re also likely to stop creating the kinds of jobs that can usefully be done by lower-paid youths.
Demand curves do slope downwards. Eric continues,
It’s always possible that something else caused the change, but it’s not easy to come up with a “something else” that either has the right timing, the right age targeting, or is big enough to plausibly have done the job.
Those who wish to claim that the abolition of the youth minimum wage didn't cause the divergence in unemployment rates have the challenge of coming up with the "something else". There must be some labour economists out there who can raise to the occasion.

How not to argue against partial asset sales

I think there are good economic reasons for arguing against partial sales of SOEs. Full privatisation is a better idea. But what I don't get is why the anti-sale movement never seem to use good arguments. As this example from The Standard show most of their arguments don't stack-up.
Firstly: the Mixed Ownership Model Bill. If we want to stop Asset Sales, as many submissions as possible would be a good start. So click on the link to submit.

Some points you may wish to make in your submission:
  • A majority of New Zealanders oppose the partial privatisation of New Zealand’s best state-owned assets;
  • It makes no fiscal sense to sell assets earning 18% (capital appreciation and dividends) to pay down debt costing 4%;
  • Treasury’s 2012 Budget Policy Statement says that in 2016 the lost dividends from privatisation are $94m greater than the savings in reduced interest payments;
  • It is unfair to sell assets that currently belong to all New Zealanders to a small minority who will be able to afford to buy shares;
  • Partial privatisation is an inevitable prelude to foreign ownership of a large chunk of our energy companies. That will mean high power prices, dividends flowing overseas, and fewer jobs;
  • Individual energy assets, like Manapouri power station, can be sold off under the legislation into full foreign ownership and control;
  • The renewable energy sector is growing rapidly internationally. We own the companies that have the critical mass, the expertise, and the capital to take advantage of that growth and create tens of thousands of good green jobs here in New Zealand. Privatisation will end that opportunity.
  • Selling the assets is a form of intergenerational theft. One generation will sell the assets that past generations have built up and future generations will not have the fruits of that.
  • Power cuts are more common with private energy companies – they are more concerned with profit than continual energy supply.
  • Greenhouse gas emissions are likely to rise – privatised companies are incentivised to try and increase our energy use (and their profits). Which will hardly help us keep our commitments.
  • Water ownership is in dispute – Maori are filing for customary rights to water. Mighty River may not have full rights to the Waikato River.
  • Privatisation will not solve our economic problems.
The first argument isn't a good economic argument against sales, How many New Zealanders really understand the economic issues underlying asset sales? It may be a political argument against sales but that's a different thing. As to the second argument, if some of the returns are capital appreciation, How do we realise these results without a sale of assets? Also we get a lump-sum form the sale which compensates for the loss of dividends. For point 3, again we get a lump sum, which if the asset is sold efficiently, will equal the present value of the dividend stream. Looking at point 4, as I have noted before New Zealanders don't own the assets. Point 5 amounts to xenophobia and to not realising that if ownership goes overseas it is because overseas buyers can utilise the assets more efficiently. Why else would have pay more for them? And why does foreign ownership mean higher prices and fewer job? If prices can be raised and jobs cut then why wouldn't a New Zealand owner do exactly the same thing as a foreign owner? For point 6 see the comments for point 5. As to point 7, Why is this true? Where are these "tens of thousands of good green jobs"? And why would different ownership alter the incentives for companies to create these jobs if there really is an economic justification for such jobs? "Intergenerational theft"?!!! Given a sensible method of sale, the sale price will equal the present value of the future income stream and thus it not clear what future generations will lose. What is the empirical basis for  point 9? How do companies make profits by not selling their product?  Doesn't point 10 contradict point 9? Point 9 seems to say that private power companies will supply less power while point 10 says they will produce more! Both can't be true. What effect will ownership of the power companies have on  point 11? Water ownership will be in dispute no matter who owns the power companies. And as to point 12,, privatisation will not solve all our economic problems, no one policy can, who it could help solve some of our problems by leading to a more efficient use of resources.

Friday, 30 March 2012

Excessive risk-taking by banks

Many people have argued that risk-taking by banks played a critical role in the global crisis and Eurozone crisis. A new eReport released today by CEPR – edited by Mathias Dewatripont and Xavier Freixas – explores the origins of excessive risk-taking by banks. The book comprises four substantial chapters (in addition to the introduction that nicely summarises these four and puts the analysis into a broader context). From a column at we get the following summaries of the chapters,
  • Corporate governance, by Hamid Mehran, Alan Morrison, and Joel Shapiro
In principle, banks do what their managers decide and managers, in turn, are controlled by a board of directors. Excessive risk-taking must therefore involve a breakdown in control, or desire on the part of the board to encourage such activity. For example, strategic decisions by managers may be motived by consideration of their own bonuses, short-term stock price movements, or shareholders’ short-run interests (rather than stakeholders’ long-run ones). This line of reasoning directs attention to the structure of financial institutions’ corporate governance as one source of excessively risky behaviour.

Mehran, Morrison, and Shapiro argue that corporate governance may be especially weak due to the multiplicity of stakeholders (insured and uninsured depositors, the deposit insurance company, bond holders, subordinate debt-holders and hybrid securities holders), and the complexity of banks’ operations. Moreover the moral hazard created by the too-big-to-fail situation may have led boards to encourage risk-taking as they knew that big losses would be paid largely by taxpayers rather than stakeholders. The authors also look at banks’ executive compensation schemes and the composition of boards.
  • Procyclicality, by Rafael Repullo and Jesus Saurina
The boom-bust cycles in banking are at least in part caused by the procyclical availability of cheap funding and capital. In boom-times, funding is cheap and easy to get; in bust-times it is dear and scarce. This obviously procyclical nature of bank lending in the years before, during, and after the crisis has produced a consensus that banks should face anticyclical capital buffers to both reduce the size of the next boom and mitigate the damage during the next bust. The authors focus on one aspect of this, namely the question of whether and how much additional capital should be required during excessive credit growth phases, and how these excessive credit growth phases are to be identified. They study how the Basel III regulatory framework proposes to tackle the issue and the extent to which the rules accomplish their objectives.

The Basel III countercyclical provisions require higher capital-to-loan ratios when the credit-to-GDP ratio deviates from its trend. Their analysis, however, shows this works the wrong way for a majority of nations; the deviations are negatively correlated with GDP growth. In short, banks that follow the deviation from trend rule may actually be pursuing a procyclical rather than a countercyclical capital policy. The authors propose a simpler rule – the credit growth rate.
  • Disclosure, transparency and market discipline, by Xavier Freixas and Christian Laux
Prior to the crisis, market discipline was thought to be the perfect complement to supervision – channelling funds to sound institutions while penalising excessive risk-takers. The crisis has changed that view; most regulators and academics now see market discipline as a weak force. The authors of this chapter consider various theoretical aspects of how imperfections could gum up the information transmission – the key ingredient of market discipline. In addition to systemic problems, the situation worsens during a crisis because both firms and issuers have incentives to hide bad information.

The market’s main sources of information are firms’ financial reports and credit rating agencies and the authors address a number of reproaches levelled at both. On the financial reporting, the use of fair value analysis has come in for strong criticisms as it caused firms to write down asset falls as the markets collapsed with this leading to eroded capital and heightened uncertainty. The authors however argue that fair value is not much to blame as it only affects banks’ trading portfolios and there is substantial discretion for banks to suspend it if the losses are considered temporary. They are more critical when it comes to credit rating agencies, concluding that these profit-maximising firms are in an institutional setting that inadequately deals with conflicts of interests. They call for more regulation of credit rating agencies to redress this.
  • The banking resolution regime, by Xavier Freixas and Mathias Dewatripont
The last chapter addresses systems for taking banks into bankruptcy since beliefs about what happens when all goes wrong do affect risk-taking. If distressed bank are bailed out, risk-taking is never too risky for the bank. Banks are bailed out to avoid the high social costs of such failures. The first objective of regulation is therefore to reduce the cost of bankruptcies; this is the main focus of the last chapter.

Banking resolution, according to the authors, should be thought of as a bargaining game between shareholders and regulators. Shareholders want to maximise the value of their shares while regulatory authorities’ main objective is to preserve financial stability at the lowest possible cost. Given this, time plays against the regulatory authority. The authors thus argue for bankruptcy rules that are specially crafted for the banking sector (and different from those applying to non-financial corporations).

The authors also argue that time is of the essence, even with the perfectly efficient bankruptcy procedure. Banks in distress should be quickly closed or quickly bailed out. The chapter’s examination of banking crises in different countries shows great variety in the procedures followed and conclude that theory has no clear-cut recommendations to offer.

Plainly the design of the bank resolution mechanisms is critical. One proposal is to add a layer of capital to prevent future crises, but the authors defend the possibilities opened by contingent capital (like contingent convertibles and capital insurance). They argue that these types of mechanisms would preserve the best characteristics of debt and therefore limit moral hazard. The authors conclude by considering cross-country resolution and the challenges it implies and discuss the recent changes in the European banking resolution framework.

Thursday, 29 March 2012

Contraception and the gender wage gap

From the Freakonomics blog:
The male-female wage gap narrowed considerably during the 1980s and 1990s, thanks to increased educational attainment among women and an influx of women into high-earning fields. Factors such as the Women’s Movement and the 1964 Civil Rights Act are often cited as the drivers of this shift, but economists are also narrowing in on another influence: the Pill. Economists have linked the Pill to “delays in marriage (among college goers) and motherhood, changes in selection into motherhood, increased educational attainment, labor-force participation, and occupational upgrading among college graduates.”
Now in a new NBER working paper Martha J. Bailey, Brad Hershbein and Amalia R. Miller look at The Opt-In Revolution? Contraception and the Gender Gap in Wages:
Decades of research on the U.S. gender gap in wages describes its correlates, but little is known about why women changed their career paths in the 1960s and 1970s. This paper explores the role of “the Pill” in altering women’s human capital investments and its ultimate implications for life-cycle wages. Using state-by-birth-cohort variation in legal access to contraception, we show that younger access to the Pill conferred an 8-percent hourly wage premium by age fifty. Our estimates imply that the Pill can account for 10 percent of the convergence of the gender gap in the 1980s and 30 percent in the 1990s.
The paper's results suggest that the Pill's power to transform childbearing from probabilistic to planned shifted women's career decisions and compensation for decades to come.

Wednesday, 28 March 2012

Too big to fail

This is from an interesting post by Jerry O’Driscoll at ThinkMarkets:
The issue of banks viewed as too big to fail has been taken up several times on this site. In its Annual Report, the Federal Reserve Bank of Dallas has weighed in on the topic with an essay on “Choosing the Road to Prosperity: Why We Must End Too Big to Fail – Now.”

It is authored by Harvey Rosenblum, the bank’s Director of Research. Since Richard Fisher, the bank’s president, signed off on the annual report, one presumes he endorses the substance of the essay.

It is a very hard-hitting piece, arguing that “the vitality of our capitalist system and the long-run prosperity it produces hang in the balance.” It explains why TBTF is “a perversion of capitalism,” which undermines faith in markets. Rosenblum quotes Allan Meltzer on point: “Capitalism without failure is like religion without sin.”
It is good to see that one of the banks that make up the Federal Reserve system is making the argument for ending TBTF.

More bloggers really are needed

Over at Groping towards Bethlehem the point is made that a blog really becomes a blog when other blogs link to /recognise it. That is, when a blog becomes part of a conversation. But as has been noted before conversations on New Zealand blogs on specialised bits of economic policy, or even more so economic theory, are limited because few of those economists who blog are working in the same area. Thin markets don't help create a blogosphere. The overlap in expertise/interests of Anti-Dismal, Offsetting Behaviour, TVHE, Groping towards Bethlem and Fair Play and Forward Passes is too thin to generate the interplay of ideas and opinions needed to create and sustain ongoing conversions.

In short, we just need more New Zealand economics blogs!

Tuesday, 27 March 2012

Public Choice - A Primer

There is a new short book out from the IEA on Public Choice - a Primer by Eamonn Butler.
'Market failure' is a term widely used by politicians, journalists and university and A-level economics students and teachers. However, those who use the term often lack any sense of proportion about the ability of government to correct market failures. This arises from the lack of general knowledge - and the lack of coverage in economics syllabuses - of Public Choice economics.

Public Choice economics applies realistic insights about human behaviour to the process of government, and is extremely helpful for all those who have an interest in - or work in - public policy to understand this discipline. If we assumes that at least some of those involved in the political process - whether elected representatives, bureaucrats, regulators, public sector workers or electors - will act in their own self-interest rather than in the general public interest, it should give us much less confidence that the government can 'correct' market failure.

This complex area of economics has been summarised in a very clear primer by Eamonn Butler. The author helps the reader to understand the limits of the government's ability to correct market failure and also explains the implications of public choice economics for the design of systems of government - a topic that is highly relevant in contemporary political debate.

Easterly on Acemoglu and Robinson

Bill Easterly reviews Acemoglu and Robinson new book "Why Nations Fail" in the Wall Street Journal. He writes,
Far too much intellectual firepower regarding the global poor these days focuses on the (small) things Westerners can do to help—obsessing about, say, how much money to spend on mosquito-blocking bed nets to fight malaria. The bigger questions—about why some societies prosper and others don't, about how to improve the lot of an entire impoverished class—are left by default largely to uncritical admirers of China's growth. The arrival of "Why Nations Fail" is thus a hugely welcome event, since economists Daron Acemoglu and James A. Robinson take on the big questions and in doing so present a substantial alternative to the dominant thinking about global poverty.
"Why Nations Fail" also offers this crucial insight: Experts cannot engineer prosperity with the right advice to rulers on policies and institutions. Rulers "get it wrong not by mistake or ignorance but on purpose." Change happens only when a broad coalition revolts, forcing the elite to allow more pluralistic political competition (e.g., the Glorious Revolution in England, the Meiji overthrow of Japanese feudalism and Botswana's democratic ouster of British colonizers).
A couple of interesting points that Easterly raises are a challenge to the current methodological fad of randomized controlled experiments in development economics and a methodological objection to the use of comparative historical case studies. He is concerned about "cherry picking" on the one hand, and "ex post rationalization" on the other.

EconTalk this week

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the nature of public debt. One view is that there is no burden of the public debt as long as the purchasers of U.S. debt are fellow Americans. In that case, the argument goes, we owe it to ourselves. Drawing on the work of James Buchanan, particularly his book Public Principles of Public Debt: A Defense and Restatement, Boudreaux argues that there is a burden of the debt and it is borne by future taxpayers. Boudreaux argues that all public expenditures have a cost--the different financing mechanisms simply determine who bears the burden of that cost. Boudreaux discusses the political attractiveness of debt finance because the taxes lie in the future and those who will pay for them may not be clearly identified. The conversation closes with a discussion of the role of expectations in both politics and economics of debt finance.

Monday, 26 March 2012

Should governments regulate monopolies?

In this video from Learn Liberty Lynne Kiesling talks about government regulation of monopolies, essentially laying out Schumpeter’s argument that when entry costs are low, monopolies do not persist because monopoly profit serves as a lure to entice entrepreneurs and innovators to create new value propositions that break down market barriers and definitions.

More bloggers needed?

Eric Crampton makes the point that,
The Economist says America's number one in EconBlogging. Why? They have a blogosphere, where Europe only has blogs. It's the links and the discussion that makes the whole thing worthwhile.
He later notes that,
New Zealand's getting better. Paul Walker and the TVHE team drew me in, and together we dragged in Seamus (occasionally), Bill Kaye-Blake, and now Sam Richardson. Let's hope we can pull a few other folks into the conversation.
One question worth asking is, What percentage of US economists blog as compared to New Zealand economists? I mean does the US have an economics "blogosphere" simply because it has the majority of economists? Even if New Zealand had the same percentage of economists blogging as the US we still wouldn't have an economics blogsphere simply because of the much smaller number of economists here.

In some situations size really does matter.

Eric goes on to say,
How did America make it work? The Economist's R.A.:
How did America's economics blogosphere develop the necessary density? Early buy-in by important economists mattered, but the growth of the community has been more driven, in my opinion, by an aggressive horde of strivers. Economists, journalists, and would-be pundits with less access to traditional outlets (newspapers, conferences, and journals) were attracted by the low barriers to entry of the web. This ready group of writers created sufficient "liquidity" of opinion to drive an effective conversation, the value of which has subsequently pulled in other respected voices.
If buy-in from important economists matters then we are in big trouble as we simply don't have any here. If on the other hand it is the "aggressive horde of strivers" that matters, then we are in trouble again because as noted above our horde is just too small. If Europe can't do it, what chance for NZ?

None of this mean we don't want more economists blogging, more economists can only raise the standard of economic commentary here in New Zealand. The big question is how to get them to take it up. May be having a blog should be a requirement for getting a PhD in econ!!

Friday, 23 March 2012

Hutchison on Smith

The way Adam Smith evaluated the role of government in the economy is often misinterpreted. Recently I came across this comment by Terence Hutchison,
However, The Wealth of Nations was, as Viner emphasised, 'an evaluating and crusading book', which sharply criticised existing society and government, and argued strongly for changes in national policy' (1968, p. 326). Smith was crusading, of course, against the excessive activities of monarchical, aristocratic and highly nationalistic governments, and for a greatly expanding role for the invisible hand.
This view seems to argue for anti-government view of Smith (or at least an anti-government-as-Smith-knew-it view). But Hutchison then adds,
At the same time Smith wanted to retain a wide-ranging economic agenda for government, the precise extent of which had to be decided by empirical, case-by-case studies. He would have rejected fundamentally any conjecture that the invisible hand, or any other system, could produce perfect efficiency for a real-world economy. In his ideas, thought and method, Smith -abhorred the perfection, or extremes, which 'the man of system' sought so eagerly to promote.
Such a case-by-case method of evaluation looks somewhat like a Coaseian comparative institutional analysis approach.

Thursday, 22 March 2012

The costs of treating smokers, the obese and the healthy

From an interesting post from LifestyleReviews.
In 2008 the Dutch government looked into the cost of treating people from the age of 20 to death. They had three categories, the healthy, obese and smokers. The results were not what the health gurus were looking for, the paper says:

“Until age 56 annual health expenditure was highest for obese people. At older ages, smokers incurred higher costs. Because of differences in life expectancy, however, lifetime health expenditure was highest among healthy-living people and lowest for smokers. Obese individuals held an intermediate position. Alternative values of epidemiologic parameters and cost definitions did not alter these conclusions.”

The lifetime costs were in Euros:

Healthy: 281,000

Obese: 250,000

Smokers: 220,000
This will make the healthists feel unwell.

EconTalk this week

Daron Acemoglu of MIT and author (with James Robinson) of Why Nations Fail talks with EconTalk host Russ Roberts about the ideas in his book: why some nations fail and others succeed, why some nations grow over time and sustain that growth, while others grow and then stagnate. Acemoglu draws on an exceptionally rich set of examples over space and time to argue that differences in institutions--political governance and the inclusiveness of the political and economic system--explain the differences in economics success across nations and over time. Acemoglu also discusses how institutions evolve and the critical role institutional change plays in economic success or failure. Along the way, he explains why previous explanations for national economic success are inadequate. The conversation closes with a discussion of the implications of the arguments for foreign aid and attempts by the wealthy nations to help nations that are poor.

Monday, 19 March 2012

How not to argue against prison privatisation

From Stuff we learn that
Prime Minister John Key has confirmed old regional prisons are set to close and be replaced with a new privately-built prison at Wiri, in South Auckland.
I have written on prison privatisation before, see for example here, and have pointed out the good and bad points of prison privatisation.

I just wish Charles Chauvel had read my posts. If he has he would have have argued as follows,
Labour's justice spokesman Charles Chauvel said Wiri was expected to cost the taxpayer about $1 billion over 25 years but its "indirect" costs were becoming clear and were "disturbing".

"National seems to have made a decision that, rather than refurbish many regional state-owned institutions, it will simply close them. Prison closures will be a big blow to regional economies. Job losses will be significant."
Indirect costs? And how are these "costs" disturbing?

The overall number of jobs in the economy will not be much affected by the privatisation plan. There will be fewer jobs in some sectors of the economy and regions of New Zealand, but there will be more jobs in other sectors and other regions. Also seeing prisons as some sort of regional development plan seems weird, it makes imprisoning people look like a good thing that should be encouraged!

The questions Chauvel should be asking are to do with what can be contracted upon. The issues with prison privatisation arise because of the incomplete nature of the contract the government will sign with the prison provider.

Friday, 16 March 2012

Hold-up or stupidity?

Or both? Over at his blog Fairplay and Forward Passes Sam Richardson writes on one of the all time great hospital passes, the bailout of the Otago Rugby Football Union (ORFU) in large part by the Dunedin City Council (DCC).

Sam writes,
[ ... ] the tipping point wasnt't due to money being coughed up by a benevolent benefactor, rather it was the Forsyth Barr Stadium, the fear of losing a tenant and what it would do to facility revenues.

After a seven and a half hour meeting yesterday, the Dunedin City Council has agreed to 'forgive' a $480,000 debt from the ORFU to ensure that professional rugby remained in the city, and more importantly, guaranteed the new stadium at least one rugby tenant.
Is this a classic example of hold-up? The problem is with relationship specific assets. The DCC put money into a stadium which badly needs rugby to be played there for the stadium to have any chance of being viable and now they have had to write off $480,000 of debt to ensure that rugby is played there. Looks like the ORFU has renegotiated things to capture a good share of the available quasi-rents.

But is it hold-up? After all for hold-up to occur you need a contract to renegotiate but do the ORFU and the stadium have a contract for the Otago ITM Cup team to play there? The answer may be no. Richardson continues,
[ ... ] the DCC have painted themselves into a corner, the story gets murkier yet. Why? Because of this juicy tidbit, revealed later in the article:
Cull said it had been discovered that there were no agreements in place for either the Otago ITM Cup team or the Highlanders to play at the stadium.

''Whether the ORFU went into liquidation or not, DVML was left with a very risky situation, as there were no contracts in place guaranteeing an income stream from professional rugby in our region. DVML had taken on the running of the stadium under the impression that those contracts were in place, underpinning that revenue stream.''
I'm sorry? I didn't just hear that. There are NO agreements in place for ANY local rugby teams/franchises to play at the new stadium?
Yes stupidity now looks like a big player in all of this.

So the DCC put a lot of ratepayer money into a stadium without having contracts in place to make sure that the only big revenue stream they have would in fact be available. Without rugby the stadium is finished, even with rugby the stadium's future isn't great, but without it the stadium is a gone burger and yet there were no contracts for any rugby at the stadium. What were people thinking?!

And what incentives does the bail out give for the Highlanders? As Sam puts it,
I can just imagine them [the Highlanders] saying: "Now, Mr Cull, you've just helped out the ORFU. How much do you want to pay us for to play at your swanky new stadium? You need us. Your figures show you'll have a very hard time without us, in fact. There is nothing stopping us from hightailing it elsewhere to other parts of the country for a better deal. Show us the money!".
If you want to know why public money shouldn't be put into sports stadiums just go ask a Dunedin City ratepayer.

EconTalk this week

Emanuel Derman of Columbia University and author of Models. Behaving. Badly talks with EconTalk host Russ Roberts about theories and models, and the elusive nature of truth in the sciences and social sciences. Derman, a former physicist and Goldman Sachs quant [quantitative analyst], contrasts the search for truth in the sciences with the search for truth in finance and economics. He critiques attempts to make finance more scientific and applies those insights to the financial crisis. The conversation closes with a discussion of career advice for those aspiring to work in quantitative finance.

Friday, 9 March 2012

New Zealanders do not own them

Liberty Scott makes the point that New Zealanders do not own SOEs.
New Zealanders do not own SOEs by any standard definition of what ownership of property means.
And he is right. His argument is that an owner has two basic rights: 1) the right of alienation and 2) the right to dividends from profits. Liberty Scott writes:
First and foremost is the right of alienation. You can sell, gift or surrender that stake to whoever is willing to buy or receive it. You are not forced to own it. After all, if you were, you'd be forced to bear liabilities as well as receive proceeds from profits.

Secondly, ownership bears the ability to gain dividends from profits and capital gains from appreciation of the assets. Conversely, it also means you bear liabilities (in the form of your assets being devalued and shareholding able to be surrendered to creditors, or rendered worthless through the market).
Liberty Scott goes on the note that New Zealanders have neither of these rights in relation to SOEs and thus are not owners of the SOEs. I agree with the conclusion but I get to it via a different argument. In particular I don't use the right to be a residual claimant as part of the definition of ownership.

Awhile back Madsen Pirie at the Adam Smith Institute blog had a nice posting on the topic of public ownership being a misnomer. As Pirie puts it
The state sector may have the name of the public filled in on the dotted line, but the public do not own it in any meaningful sense of the word. All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the bureaucracy in command of it.
This is an important point, without control you don't have ownership. As Oliver Wendell Holmes Jr. put it,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
Clearly the "public" does not have the rights Holmes refers to. The government (or its bureaucracy) has these rights. Following Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", 'Journal of Political Economy', 94:691-719) economist's tend to define the owner of an asset as the one who has residual rights of control over the asset; that is whoever can determine what is done with the asset, how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Under "public" ownership it isn't the "public" who has the control rights, its the government. The "public" can not determine what use is made of a "public" asset, rather its use is determined by the politicians and managers in command of it.
Because the public has no choice over whether to pay for state services, or to choose what quality of service is appropriate for them, they have no power over them. In their absence it is the managers and workforce who increasingly direct the services to meet their needs and convenience instead of those of the public.
Just think of the "public" universities in New Zealand, there are no private ones, what control does the "public" have over them? Control rests with either the government or a complex system of academic and non-academic staff, executives, outside trustees and current and past students of the university. The university's "owners", the "public", have the least say of anyone in their running.

In fact as Pirie points out, paradoxically,
The public actually has more influence, via its choices and purchasing decisions, on private sector businesses than it can ever have over state industries and services.
So private is more public.

Why then do we not include the right to be a residual claimant as part of ownership as Liberty Scott does. Well it is not always true that control rights and income rights go together and when they don't the question has to be asked who is the owner? It is not clear in Liberty Scott's definition who the owner would be. In the Grossman/Hart definition it is whoever has the control rights. Note that income rights can be contracted away in a way control rights can not. If for example you are the manager of a firm with a performance based pay package, say you receive a percentage of your firm's profits. Now assume that all the firm's workers are on such deals and the deals take up 100% of the profits of the firm. Who owns the firm? Not the workers, despite the fact that they get all the profits. The owner will be whoever has the control rights, that is, whoever signed the performance contracts with the workers. Note the owners get zero income.

This does raise the question of why do we normally see control and income rights being held together. In short this is because income rights give you the incentive to use assets wisely while control rights give you the ability to do so. Having only one of the rights means assets will not be used efficiently.

Thursday, 8 March 2012

Can public sector wage bills be reduced?

An interesting, and relevant, question asked by Pierre Cahuc and Stephane Carcillo in a new NBER working paper. The abstract reads:
This paper analyzes the relation between public wage bills and public deficits in the OECD countries from 1995 to 2009. The paper shows that fiscal drift episodes, characterized by simultaneous increases in the GDP shares of public wage bills and budget deficits, are more frequent during booms and election years, but not during recessions, except for the 2009 exceptionally strong recession. The emergence of fiscal drift episodes during booms and election years is less frequent in countries with more transparent government, more freedom of the press, as well as in countries with presidential regimes and less union coverage. Inversely, fiscal tightening episodes, characterized by simultaneous decreases in the GDP shares of public wage bills and budget deficits, occur less often during booms than during recessions. The emergence of fiscal tightening episodes during recessions and election years is less frequent in countries with more union coverage.
The last point about union coverage may be relevant to New Zealand given the power of state sector unions.

Wednesday, 7 March 2012

The "Wealth Of Nations" turns 236

On March 9 that is.

Smith’s 1776 book marked the beginning of the Classical school of economic thought and thus is normally considered to be the beginning of economics in general. The "Wealth of Nations" was also a most aggressive attack on the mercantilist economic policies that had come to characterise England’s economic policy during that era. But mercantilist policies still seem to be with us, which is one reason why we need to remind ourselves of Smith's arguments.

There is not need for a debate

There has been a Call for TV cathedral debate. We are told,
A televised debate on the future of Christ Church Cathedral needs to be held, a city councillor says.

Cr Aaron Keown today emailed New Zealand's news networks asking for one to ''host the biggest debate in the earthquake recovery of Christchurch''.

He said the public needed to hear all the facts in an "open and transparent" forum before the "symbol of our city" was lost forever.
Keown said last week the cathedral would be demolished "over my dead body".

"I would be in there chaining myself to the building to stop that and I know lots of other volunteers would come in to do that," he said.
Actually no. "We" don't need a debate because it isn't up to "us" whether or not the Cathedral is demolished. It is up to the owners of the building. They have the property rights over the building, which include the right to bring it down, if they so wish, and Mr Keown-or anyone else-gets no say in the matter.

Oliver Wendell Holmes Jr. made it clear as to what ownership means,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
The Anglican church has these rights and their rightful exercising of them means that the cathedral will be demolished and that decision is to be "uninterfered with" and Mr Keown and his supporters must be excluded "from such interference".

The only group who need to "hear all the facts in an "open and transparent" forum" are the owners and I assume, given that they have made their decision, they already know the facts.

Aaron Keown, or anyone else, doesn't have control rights over the Cathedral and if he wants said rights then he can get them by buying the Cathedral from its current owners. Using HIS money I should add. I'm guessing he could get it cheap right now!

The decision as to the future of the Cathedral belongs to the Anglican church, as they are its owners and only to them. If the church wishes to ask for Mr Keown's opinion that is up to them, but Mr Keown certainly has not right to try to usurp the church's property rights.

Small firms are a big problem for Europe’s periphery

Or so claims the Economist. They write,
A bias to small firms is costly. The productivity of European firms with fewer than 20 workers is on average little more than half that of firms with 250 or more workers (see right-hand chart). The deeper roots of the euro-zone crisis lie with the loss of competitiveness in the region’s trouble spots. This problem owes more to dismal productivity growth in the past decade than to rapid wage inflation. If the best small firms were able to grow bigger, Greece and the rest might solve their competitiveness problems without having to cut wages or leave the euro.
But why is small bad? Isn't firm size, like so many of the characteristics of firms, dependent on the situation of the firm? Don't we need some comparative institutional analysis here? Any display of inefficiency simultaneously represents an opportunity for mutual gain, the parties to such transactions have an incentive to relieve inefficiencies (in cost-effective degree). What are the obstacles? What is the best feasible result?

Also how are they measuring productivity here? There are problems in productivity measurement in areas like the service sector of the economy.

I mean do you really think having a law firm of 250 people is going to be more efficient than one of 5 people? For a start how do you get 250 partners to agree on anything?! The time and effort it would take just to make decisions would be huge and would make the firm inefficient.

So size may not be the problem, it may be the result of deeper problems in the troubled economies of Europe. Size and low productivity may be correlated without any causation. A third problem may lead to both small size and low productivity.

EconTalk this week

Charles Calomiris of Columbia University talks with EconTalk host Russ Roberts about corporate debt, capital requirements, and financial regulation. This is an in-depth conversation about how debt works on a firm's balance sheet and the risks that debt vs. equity pose for the survival of the firm. Calomiris applies these insights to financial regulation--how it works in practice and the firm's choices in responding to various interventions including bailouts and capital requirements. The conversation closes with a discussion of some of the government interventions in the financial crisis.

Sunday, 4 March 2012

What makes a charter school effective?

An interesting question given that charter schools have been in the news recently. From the latest NBER Digest comes this note by Laurent Belsie:
Traditional measures of what makes a good school - small class size, high per pupil spending, and a large share of teachers with advanced degrees but a small share with no certification - don't necessarily determine student achievement, according to a new study of 35 New York charter schools by Will Dobbie and Roland Fryer. Instead, they find that five policies that rarely get measured systematically - frequent teacher feedback, data-driven instruction, intensified tutoring, increased instructional time, and high expectations - can explain roughly half of the variation between more effective and less effective schools. In Getting Beneath the Veil of Effective Schools: Evidence from New York City (NBER Working Paper No. 17632), the authors conclude that these five policies also do a better job of predicting student success than indicators for whether schools offer wrap-around services that serve the "whole child," whether they focus on finding and keeping the best teachers, and whether they use a "No Excuses" approach to teaching.

For this analysis, Dobbie and Fryer amassed a large data base on 35 charter schools that vary widely in their approach to teaching and learning. For example, the Bronx Charter School for the Arts focuses on the arts, while the KIPP Infinity School uses a "no excuses" approach, emphasizing instructional time, parental involvement, and a concentrated focus on math and reading. When the authors study these varied approaches, they find that schools with a larger share of certified teachers actually scored lower in math gains among pupils than other schools. They also find a slightly negative effect on test results for schools with smaller class sizes, higher per pupil expenditures, and a relatively smaller share of uncertified teachers. However, schools that offered feedback ten or more times every semester, and those that tutored students at least four days a week in small groups (six or less), had annual math and English gains that were higher than those of other schools without such programs.

This study comes with two important caveats. First, the five factors that predict student success might be the results rather than the causes of school effectiveness. The authors didn't study other potentially important inputs, such as the principal's skills, or the effects of the lottery system in selecting students. Second, this study didn't examine all of New York City's charter schools, so there may be other dynamics at work that make it hard to generalize the results for other charter schools or public schools.

The authors summarize their findings by writing that: "While there are important caveats to the conclusion that these five policies can explain significant variation in school effectiveness, our results suggest a model of schooling that may have general application."

Economic conditions have an effect on CEOs

Lester Picker writing in the latest NBER Digest says,
In Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Style (NBER Working Paper No. 17590), authors Antoinette Schoar and Luo Zuo find that economic conditions at the start of a manager's working life have lasting effects on his or her career path. Those CEOs who begin their careers during recessions take less time to become CEOs, but end up heading smaller firms, receiving lower compensation, and being more likely to stay with a given firm, rather than to move across firms and industries. Managers who start in recessions also have more conservative management styles once they become CEOs: they spend less on capital expenditures and R and D and show more concern about cost effectiveness.

Early economic conditions also affect the career path of a manager along the way to becoming CEO, according to the authors. The number and speed of outside offers, and industry switches during the career, increase when the manager starts his or her career in better economic conditions.

The authors also find that accepting a first job at a firm that is one of the ten firms that are most likely to be a source of CEOs is associated with favorable outcomes for a manager. Those CEOS end up heading larger companies and receiving higher compensation. However, it may be that people with certain skills self-select into jobs early on, and that the firms that are sources of CEOs attract particularly talented workers in the first place. In either case, the effects of a good start on the career path are quite persistent: they are related to the managers' career choices even twenty years later.

Saturday, 3 March 2012

Greece and the Eurozone: political leaders should get off their high horses

In this audio from Willem Buiter talks to Viv Davies about Greece and the Eurozone. Buiter believes that Greece’s public debt should be written off, it’s banks recapitalised and that the country be provided with sufficient conditional support to grow its economy. They discuss the LTROs and the risks of loss of control over the aggregate size of the balance sheet and potential national central bank insolvencies. Buiter suggests that now is not the time for self-righteousness amongst European policymakers.

Thursday, 1 March 2012

Economists lie more

From the Economic Logic blog comes this comment on some recent research.
Raúl López-Pérez and Eli Spiegelman performed some experiments where lying could be a winning strategy. While religiosity or gender does not impact the propensity of lying, one's undergraduate major matters, and the Business and Economics students fare the worst. And this does not come from selection into the major, it is acquired. So economists do lie more, because they see incentives to do so. Hence journalists should learn to interview economists that have no incentives to lie.
So non-economists don't lie because they are not smart enough to workout there is an advantage to doing so? So they are honest but dumb. If you point out the incentive to lie, do non-economists then lie? If the result is due to training, they should. If they don't then is the result really due to training?

Also shouldn't journalists learn not interview anyone who has an incentive to lie? Of course this would mean they would have no one to interview!

Too little reform

There has been much talk about the government's reforms of welfare recently. One issue I have with the reforms is that they don't go far enough. Reforms aimed at getting people into work need to have jobs available for these people to go to. That is, if the government is serious getting people into jobs then it needs to reform the labour market at the same time it reforms welfare.

An unreformed labour market will have trouble adjusting to having a new intake of people looking for work. Given the level of unemployment we have at the lower skill/experience end of the labour market having a whole bunch more people entering it isn't going to end well.

So if the government is serious about reform, rather than  just pulling a political stunt, then it needs to reform the labour market if it wants its welfare reforms to work.