How relevant is ‘market failure’ to policy analysis?

July 17, 2009 ~ Andrew Norton ~ 12 Comments

The National Centre for Vocational Education Research this week published a series of papers on competition in the vocational training market, including one by me, and another by Australia Institute boss Richard Denniss.

The Denniss paper questions the role of markets in vocational education because of ‘market failure’ – defined as real-world markets not matching the theoretical perfectly competitive market of economics textbooks.

I would not contest the basic observations on which this claim is made. For example, there is ‘imperfect information’ in education markets (eg it is hard to know which education provider is best). There is scope for ‘inter-temporal mismatch’ (eg students may take courses for which there turns out to be no employer demand when they graduate; providers may offer courses only to find that student demand has changed by the time they start).

But describing issues like these as ‘market failures’ is not a good analytical approach. Rather, these are inherent problems in coordinating the delivery of education, with which any coordinating mechanism, market or state, has to contend.

So the policy question is not whether the education market meets theoretical standards rarely observed in the real world, but whether better long-term results are likely to be achieved through education providers and students interacting through free exchange, or through central direction and control.
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Would parents use league tables?

July 16, 2009 ~ Andrew Norton ~ 39 Comments

The NSW Opposition has landed itself in political trouble for cooperating with a Green proposal to ban league tables of school performance.

School league tables are part of a strange obsession with lists and rankings, which in my view are very rarely of much value (eg here, here, and here).

The public education lobby believes school rankings are worse than worthless, since any ranking system must have those who come last, and we can be pretty sure that public schools will be heavily over-represented in the lower ranks.

Implicit in this worry is an assumption that parents will misunderstand what published school performance data means and rely on rankings based on school academic performance, without taking into account the significant socieconomic factors which influence student results. An Essential Research survey, reported at Pollytics blog, starts to explore this assumption.

Given the choice between assessing a school’s performance by the percentage passing tests, and the improvement shown by students (the school’s value adding), 59% thought that the improvement was the better measure, with 30% going for the percentage passing tests.
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Confusing polling on tax

July 15, 2009 ~ Andrew Norton ~ 1 Comment

The latest tax poll from Essential Research, published on Pollytics blog, shows again that question wording effects make opinions on tax and spend hard to read.

In this latest poll, a question which did mention bigger tax cuts for high than low income earners, but did not mention the deficit or any spending trade-offs, found that 60% of respondents approved of the 1 July tax cuts. 23% disapproved.

The disapproval rate is only half the 47% of Newspoll respondents in early May who thought the tax cuts should be cancelled to reduce the deficit.

I don’t think that opinion could have changed that much in two and a bit months. Rather, question wording can highlight the otherwise not top-of-mind link between the size of the defict and the tax cuts.

Some strange human capital economics

July 14, 2009 ~ Andrew Norton ~ 18 Comments

Australian governments typically offer human capital or ‘equity’ justifications for public investment in higher education. So what should we make of claims for tuition subsidy that would reduce the value of Australia’s human capital?

In a follow-up Age story to the weekend article about full fees for TAFE students who already have higher qualifications, the paper reports that:

Malcolm King, who directed the program from 2000 to 2004, said most degree-educated students could not afford to pay another $8000 a year to study at TAFE.

Many of the students who enrolled in the creative programs formed part of Melbourne’s “cultural milieu”, fuelling the writing, film, media and advertising industries, he said.

“RMIT is freaky in that it always attracted high-calibre students like ex-doctors and lawyers who produced very fine work and have had a huge impact on cultural life in Melbourne,” Mr King said. [emphasis added]

So what Mr King is arguing is that we should offer public subsidy to divert people from an occupation of serious shortage (doctors) to an occupation (creative writing) in which supply always vastly exceeds demand – in the process wasting the $150K plus that taxpayers will already have spent training a doctor.

King has unwittingly highlighted another argument in favour of the Victorian government’s reforms.

When should education subsidies stop?

July 12, 2009 ~ Andrew Norton ~ 15 Comments

In yesterday’s Age, Sarah Blackman, who already has university degrees in arts and education, is reported as complaining that she will have to pay full fees for an RMIT course on writing and editing (this one, I think). This makes it about ten times more expensive than a subsidised place.

The requirement to pay full fees is, as I understand, part of the Victorian government’s reforms to their vocational education system. They have lifted quantity constraints on places available to students taking initial or upgraded qualifications, but are not subsidising people taking lower qualifications than those they have already.

Higher education also has restraints on subsidies. Sometimes these relate, like Victoria, to the student: limits on the number of years of subsidy. Sometimes it relates to the course, with most postgraduate coursework degrees being offered on a full-fee basis only.

In principle, these seem like fair ways to ration limited resources. In Victoria, the savings from not subsidising a would-be triple-dipper like Ms Blackman are being redirected to people who have had far fewer opportunities. People with postgraduate qualifications have typically already enjoyed significant subsidy and are in a better position to finance further study.
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Has the High Court imposed spending constraint on the Commonwealth?

July 9, 2009 ~ Andrew Norton ~ 11 Comments

In the Fairfax broadsheets this morning, constitutional law academic George Williams gives his reading of the High Court’s judgment in Pape v Commissioner of Taxation and the Commonwealth of Australia.

As readers may recall, earlier in the year UNE academic Bryan Pape challenged the constitutional validity of the government’s tax bonus payments. Unlike the whinging cultural offspring of the welfare state who missed out on it, Pape was among other things seeking an injunction stopping the ATO paying him the money.

The High Court decided against him, but as is common in constitutional cases there were many different arguments made. Williams argues that though the Commonwealth persuaded the Court on enough of these to get a verdict in its favour, comments made by the judges on their other arguments raise questions about the validity of other Commonwealth spending.

The issue here is that the Commonwealth has long spent money on things for which it has no legislative power under the Constitution. Various additional spending powers have been read into the Constitution as relating to the executive power of the Commonwealth or an implied ‘nationhood’ power. As Justice Mason put it in 1975: Continue reading “Has the High Court imposed spending constraint on the Commonwealth?” →

Off the happy planet

July 7, 2009 ~ Andrew Norton ~ 10 Comments

Yesterday the SMH gave some publicity to the latest version of the so-called Happy Planet Index, another of those dubious indexes that combines incommensurable things – in this case a nation’s life expectancy, life satisfaction, and ‘ecological footprint’ – into a single number.

According to the SMH article,

The results turn our idea of progress on its head,” the report said.

“It shows that a good life is possible without costing the earth.”

Alas, not only is the methodology dubious but the results don’t support the conclusion reached. They show how hard it is to achieve life satisfaction on low levels of consumption (as measured by the ‘ecological footprint’). Only a dozen of the top 50 ranked countries achieve ‘normal’ 7+ (out of 10) life satisfaction ratings. And all but three of these twelve are in Latin America, which repeatedly scores much better on life satisfaction and happiness scores than other places with comparable economic, political and social development. You can be poor and happy, but only in one part of the world.

Several countries in the top 50, including Bangladesh, Nepal, Armenia and Yemen, score below 5.5, suggesting that much of the population in these countries is very unhappy. That the ‘planet’ might be happy at the low levels of consumption in these places is not likely to be much consolation.
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Will Wilkinson isn’t impressed either.

Do governments assume citizen rationality and self-control?

July 6, 2009 ~ Andrew Norton ~ 15 Comments

The latest Per Capita paper summarises the research on various cognitive biases (loss aversion, endowment effect, etc) and makes suggestions for policymakers about ‘choice architecture’ that helps people make better, less irrational, decisions. For example, default options of sensible choices where people have to opt out to avoid them preserves freedom to choose while encouraging decisions that will benefit most people.

It’s the kind of argument Cass Sunstein has been making for years, and on which he co-wrote with Richard Thaler a widely-cited 2008 book called Nudge: Improving Decisions About Health, Wealth and Happiness (which is strangely not cited in Jack Fuller’s Per Capita paper; if Sunstein did not coin ‘choice architecture’ he’s certainly its main populariser).

I don’t doubt that these cognitive biases exist, or that their negative effects can be reduced by ‘choice architecture’. But I do want to take issue with another example of the annoying rhetorical strategy of setting up straw man opponents:
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Does winning the lottery make you more happy, or less stressed?

July 2, 2009 ~ Andrew Norton ~ 11 Comments

This week’s $100 million lottery prize prompted ABC radio to ring me about the research finding that winning the lottery doesn’t make you happier. I declined the interview after discovering that I would be talking live to the nation’s insomniacs at 4.20am next Sunday morning (though did suggest a solution to this problem – find an overseas interviewee in a day time zone).

Though one early paper – which is cited in books on subjective well-being published up until a few years ago – did find some evidence for negative effects of lottery wins, it was never an especially strong finding. Winners in the sample experienced lesser ‘mundane’ pleasures than members of a control group, but their present ‘general happiness’ was higher. The authors of this paper also stressed that their survey was at a single point in time, and could not do genuine before and after tests of happiness changes.

This later paper by Andrew Oswald was able to use the British Household Panel Survey to do a genuine before and after examination of lottery winners. It found that
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