Monthly Archives: January 2018

Why I am not sold on @bryan_caplan’s The Case against Education

Bryan Caplan thinks 80% of education is signalling. I think it is no more than 50%. One reason is the times I have worked with managers and colleagues who are not economists doing policy analysis work.

If education is 80% signalling, people from noneconomic backgrounds should be as good as those with economic backgrounds particularly at the more senior levels as they gain experience and the economists forget their university training.

My experience with managers who are not economists at the Treasury, and the Department of Labour was they were difficult to deal with compared to the one manager I had that did have an economics degree. They simply did not know what they were doing on a number of occasions, often substituting their own opinions based on what they would say in the pub for good economic analysis. They did not know any better. They are not gone through microeconomics 101 that showed how many common explanations of things did not work if scrutinised according to the economic way of thinking. They are often resentful of economists as colleagues because they kept pointing out what they could not do or what unintended consequences might spring up.

When the manager had training in economics, considerable more progress could be made both in argument and then working out how to tailor it to a ministerial audience.

As for colleagues who were policy analyst with no economic training, they seem to lack the ability to define what the problem was, develop options and check for unintended consequences. They certainly had no idea how to marshal evidence to support competing options and test the evidence in front of them, much less have a general background knowledge of an area to be able to quickly change their mind away from their private opinions in the light of new arguments and evidence.

Most of all, both the managers and policy analysts who I worked with who did not have economic training did not know what they did not know. It was the Dunning Kruger effect. They did not know there are literatures on this issue and they could not remember even in sketch outline that there was research in this area and many well-known facts and results is what with a well-known uncertainties. They suffered the overconfidence of amateurs.

In time, it got so frustrating that I would ask a Socratic question about that was an interesting question be it about rent control, minimum wages, employment law, exchange rates, industry policy or financial crises, and wonder if anyone had looked into that at universities. Reading econometrics results taught me that if the main result is not in doubt, that there is at least not mixed evidence or a few countervailing studies, the econometricians are not working hard enough for PhD scholarships and academic tenure.

Luke Froeb made considerable progress by simply redefining market failure as a business opportunity, a missing market or missing product. Whenever people talked of the market failure, I would ask who could profit from fixing that market failure.

To be fair, I always thought the quality of economic analysis would double if everyone remembered the first 6 weeks of microeconomics 101. I gained the impression when I was a graduate at the Australian Department of Finance.

Watching non-economists do macroeconomic policies is frightening in that they have no idea how to tell fallacies from good analysis. I spotted that in the prime minister’s department in the mid-1980s in Australia when everyone got deeply concerned about the current account deficit because everyone else was deeply concerned about it and it attracted a lot of newspaper headlines saying it was a problem.

Also, I noticed as I got older, ideas rejected 10-20 years ago were recycled. Because I understood the economics behind those ideas, I remembered them in their new disguises and remembered the relevant literature that developed since their last appearance.

I also worked with many econometricians in the public sector. I learnt enough econometrics to the graduate level to be able to talk to them. I never pretended I could do their job and most of their job was based on what they learnt at University and then refined in the workplace.

Finally, I found out in the kitchen at parties in Canberra in the 1980s and 1990s that strangers would come up and abuse you as soon as they found out there is an economist about. They would tell me how ignorant economists were and did not know anything about this, that and the other. I would then point to the vast literatures on every one of those topics. They still has to be done these days even to academic economists who should know better.


Institutions are everything in adapting the sea level rise

Tol, Richard (2018) Economic impacts of climate change. Review of Environmental Economics and Policy. 

Brian Easton and trade agreements

With the US out of agreement, the gains are smaller and smaller with most of the losses still there in terms of the environmental chapters, labour chapters, intellectual property chapters, ISDS and government procurement of pharmaceutical chapters.

All in all, it is getting too hard to work out whether this shrinking gain has more costs because most of the costs cannot be quantified.

croaking cassandra

When the original TPP agreement was signed, various New Zealand economists weighed in.   There wasn’t a great deal of enthusiasm for the deal.  Here was Eric Crampton’s summary of a few contributions.

I think it’s fair to say that Brian Easton sits to the left of the NZ economist punditsphere, and that Mike Reddell sits to the right of the same.

In the past couple days, they’ve both put out their views on the TPPA. Reddell winds up arguing generally against it, though without saying it shouldn’t be signed, and Easton in favour, though not that enthusiastically. Both make nuanced arguments. Easton talks about the flow-on consequences of rejecting the deal at this point. Reddell talks about how the layers of bureaucracy to which we may well be signing up will do nothing to improve New Zealand’s declining productivity, though he falls short of saying NZ should reject…

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Trade agreements and the new TPP

croaking cassandra

And so it appears that agreement has now been reached on a TPP-like agreement, minus the United States.   We haven’t yet seen the details (although this MFAT note is useful), but all the comments late last year suggested that the new agreement would stick as closely to the previously-agreed, but not ratified, TPP as possible (but presumably without the Joint Macroeconomic Declaration).

I wrote a few posts a couple of years ago, expressing doubts about the then-TPP agreement.  I wrote –  and write –  from the pro-trade, pro-market side of the argument.   Which, of course, is not the same as a “pro-business” perspective.

Sadly, TPP (and its replacement), like the welter of preferential trade agreements various governments have been signing over recent decades, isn’t necessarily a step towards free-trade at all.  That is a point the Australian Productivity Commission has long been making about such trade agreements…

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Jordan B Peterson on “But That Wasn’t Real Communism, Socialism, or Marxism!”

What are the most progressive policies? Cutting bus fares!

The Curley Effect: The Economics of Shaping the Electorate

Boston Mayor Curley had the rare distinction of winning his first election from prison and his last while under federal indictment for corruption which he was soon convicted of while in office.

Curley won his first election in 1904 as an alderman on the slogan “he did it for a friend”. He sat a civil service exam for a friend to get him a job. He quickly then handed out 700 patronage jobs once he once he got out of prison to serve as an alderman.

In 1945, he was re-elected mayor. Truman commuted his 6 to 18 month sentence after 5 months in 1948 at the behest of the Massachusetts congressional delegation and later (1950) granted him a full pardon.

Curley was then defeated by the acting mayor during his prison term in the subsequent Democratic party primary in part because of the high taxes under the Curley regime. Naturally, during his lame-duck period, Curley granted many tax abatements to sabotage the public finances of his successor.

On Monopsony and Legal Surroundings

Peter Kuhn’s book review suggests the correct name for Manning’s excellent book is the far less catchy Search frictions with wage posting in motion.

Notes On Liberty

A few days ago, in reply to this December NBER study, David Henderson at EconLogquestioned the idea that labor market monopsonies matter to explain sluggish wage growth and rising wage inequality. Like David, I am skeptical of this argument. However, I am skeptical for different reasons.

First, let’s point out that the reasoning behind this story is well established (see notably the work of Alan Manning). Firms with market power over a more or less homogeneous labor force which must assume a disproportionate amount of search costs have every incentive to depress wages. This can lead to reductions in growth as, notably, it discourages human capital formation (see these two papers here and here as examples). As such, I am not as skeptical of “monopsony” as an argument.

However, I am skeptical of “monopsony” as an argument. Well, what I mean is that I am skeptical of considering…

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