Archive for the 'Economics' Category

The misguided critique of GDP

In yesterday’s Weekend Australian, Mike Steketee joined the list of GDP critics.

Some high-profile economists have given this critique some credibility. And it certainly needs some big names to rescue a very small idea.

There are two components to the critique, one resting on a mistaken assumption, and the other true but irrelevant.

The mistaken assumption is that we inappropriately use GDP as a measure of broad national welfare. Steketee uses as his examples of this:

When the Reserve Bank decides whether to raise or lower interest rates, it looks at a range of economic indicators, but none is more important than the quarterly GDP figures. The same applies to the government when it is framing its annual budget. GDP has become the de facto measure of national welfare.

But these examples are less than compelling proof of this assumption. The RBA’s major indicator isn’t GDP growth, it’s inflation. GDP is one of many indicators considered in the budget, but it is hardly inappropriate – since the government primarily taxes income and consumption, GDP is a crucial indicator of its fiscal capacity, as well as being correlated with other important indicators such as employment. Read the rest of this entry »

The economics of Christmas cards

Commenting on the inefficiency of Christmas gift giving is now almost as much a Christmas tradition as Santa and Christmas trees. The Australia Institute was at it again this year.

But the odd economics of Christmas cards has received less comment. It’s hard to buy cards without contributing to a cause, typically noted on the back of the card. The people who have sent me cards this year have supported: the Australian Red Cross, a British disability charity (promising that money from their cards helps disabled people express themselves through photography and other technology), the Make-A-Wish foundation, the Peter Mac Cancer Centre, the Ovarian Cancer Research Foundation, the 1959 Group of Charities (26 charities listed), Kids Helpline and the Smith Family.

And even when you buy a card from a for-profit company there is no escaping your environmental obligations:’This card is made with recycled paper (20% recycled fiber)’, ‘This card is made with paper from sustainably managed forests’, and my favourite this year ‘it’s good to be green – this paper is 30% recycled, processed chlorine free and manufactured with wind energy’, though I suspect they did not use wind energy to transport it from Canada, where it was printed, to Melbourne, where I bought it.

Is all this part of a strategy to get us to pay $5 or more for a bit of card with printing costs of perhaps 50 cents? That we don’t mind paying far too much if we are contributing to a good cause or helping to save the environment? There are many other examples of bundling products with causes or charities – eg fair trade coffee, The Big Issue – but Christmas cards are a rare product line where bundling seems like the norm.

As my family solves the Christmas gift-giving inefficiency by buying from co-ordinated lists everyone has a pretty good idea of what they are going to get, so I want to buy a good card as it is the only real thought I put into the gift. If it’s clever or pretty (for female gift recipients; guys don’t do pretty) I don’t mind paying the price. But sometimes I’d like more of a choice just to buy the card, without the charity or cause.

Should student contributions be paid upfront?

In starting work on a paper about the student loans scheme, one thing I wanted to investigate was a finding of a survey of first-year students (pp.71-72) that a significant minority – ranging from 23% of those aged over 25 to 38% of 19 year olds – work while studying ‘to save for repaying future HECS-HELP or FEE-HELP debts’.

I wasn’t sure that this would be the right financial strategy for students with cash to spare while studying. The apparent incentive in the HECS-HELP scheme is to pay on enrolment. If a student pays at least $500 upfront, he or she will get a ‘bonus’ of 25% on the amount paid. In one of the examples I use below, an Arts student with an annual charge of $5,310 who paid $2,000 upfront would have $2,500 wiped from their balance, leaving $2,810 to be paid off through the tax system.

If a student makes a later voluntary repayment using their savings they get a bonus of 10%. For example, once they already had a debt they could pay $2,000 and get $2,200 taken off their balance. Could the benefits of saving the money and accruing interest compensate for the bonus shrinking from 25% to 10%? Read the rest of this entry »

Let students decide how much their education is worth

The UK’s public sector financial crisis is putting university tuition fee deregulation on the political agenda there in a way that it is not here. The Browne review of higher education funding, set up by the previous Labour government, is widely expected to recommend at least some deregulation of tuition fees.

This has of course set off the usual worries about affordability and access. In this context a survey of how much existing students are willing to pay by the Opinionpanel organisation is particularly interesting. It asks two questions, one about what price the student would think so cheap that they would doubt the course’s quality, and another about what price would be so expensive that they would not consider paying it at all. They respond by dragging a marker on their computer screen in £100 increments.


Read the rest of this entry »

John Carroll repents

In 1992, John Carroll and Robert Manne published Shutdown: The Failure of Economic Rationalism. This was the book that prompted me and two university friends, Chrises Jones and James, to co-edit A Defence of Economic Rationalism.

Eighteen years on, Carroll has written to The Australian to explain that he no longer supports the book’s conclusions:

To me now, the past two decades support the maxim: if in doubt, trust the free market.

Moreover, if the GFC signals anything it is to beware irresponsible government

Shutdown co-editor Robert Manne is hoping that he will be second-time lucky with Goodbye to All That: On the Failure of Neoliberalism and the Urgency of Climate Change.

It’s rare that public intellectuals will admit that they were wrong, so Carroll deserves congratulation for doing so.

What’s happening to Liberal economic credibility?

The part of this morning’s Newspoll that stood out for me wasn’t the down in the usual ups and downs of party support and leadership satisfaction, it was the results of the question on which party the respondent thought would ‘best handle the issue of the economy’.

Labor was five points in front (44/39), the first time it has been in front under Rudd, and indeed the first time it has been in front since March 1990. Admittedly Newspoll didn’t again ask this precise question between 1990 and 2005, but chances are that if they had Labor would not have been in the lead. The ‘recession we had to have’ took hold shortly afterward, and on more precise economic questions on inflation, interest rates and unemployment Labor was behind.

Perhaps this bad result for the Liberals on the economy is a residual Barnaby effect – a finance spokesman vague on the difference between a million and a billion is not exactly confidence inspiring – plus a downward general ‘Liberal performance’ perception that seems to infect all their issue ratings, regardless of whether or not anything relevant to that issue has occurred. Read the rest of this entry »

Stand-up economics

Yoram Bauman is an economics stand-up comedian:

My dad said, ‘Yoram, you’ll never make it as a stand-up economist. There’s no demand.’

“I said, ‘Don’t worry, Dad; I’m a supply-side economist. I just stand up and let the jokes trickle down.’”

“Auwgkh!” the audience moans.

“I believe in the Laffer curve.”

Bada-bing?

Auwgkh indeed.

Do ‘social returns’ justify higher education subsidies?

In his Henry tax review paper, Andrew Leigh says:

The principle that education subsidies should be increased (or graduate taxes decreased) if there is a social return to education fails to hold only in very special circumstances.

These ‘special circumstances’ are that

1. Subsidies or taxes would be ineffective, i.e. would not increase educational attainment.
2. Everyone is already getting the maximum level of education.
3. Lumpy investments, e.g. where the optimal level might be 1 year of post-compulsory education but only 3-year degrees can be purchased.

But is circumstance 1 really so ‘special’? As noted in an earlier post Andrew’s empirical evidence suggests that circumstance 1 may common rather than special. Read the rest of this entry »

How education subsidies can reduce educational participation

In a paper for the Henry tax review on the impact of the tax-transfer system on education and skills, Andrew Leigh concludes:

Contrary to theoretical predictions, I find no significant evidence that more
generous [educational] subsidies or lower tax rates on the rich have the effect of raising educational participation.

The economics of human capital provide the contradicted theories. Human capital economics assumes that the decisions of potential students are sensitive to the private financial benefits of investing in education. If these benefits are made higher, then all other things being equal we will see more people invest in education.

One way of increasing private benefits is to offer subsidies, or more subsidies where they exist already. If part of the cost of education is met by subsidies (mostly from the taxpayer, but also from private philanthropy) lower future private financial benefits will be needed to earn an adequate rate of return on the educational investment. The justification for this is that there are positive ‘externalities’, or spin-off benefits, from having more educated people. Read the rest of this entry »

Defending GDP

Of all the statistics produced by the ABS, GDP stirs the strangest reactions. In Fairfax papers over the weekend, Don Edgar tells us that:

Gross domestic product has failed as an indicator of either national progress or individual happiness.

That’s quite probably because it is not a measure of national progress or individual happiness. It measures the value of goods and services produced over a particular time period. Pointing out, as Edgar does, that ‘GDP goes up with increased spending on crime, natural disasters’ is true but a silly criticism. We would be better off if crime and natural disasters did not occur, but spending on them usually leaves us better off than we would be if we did nothing (the ‘gross’ is intended to explain that no account is taken of capital depreciation, or destruction in the case of crime and natural disasters).

GDP clearly cannot be taken as equivalent to national progress or individual happiness. But one reason that it is a very useful statistic is, as Will Wilkinson points out, that it correlates with other statistics that get closer to progress, such as levels of health and education. Read the rest of this entry »