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. Continue reading “Defending GDP”

A leaking student pool

Skills Australia chair Phil Bullock wasn’t happy, in a friendly sort of way, when I suggested that his organisation was a central planning agency (this was at a seminar to discuss the papers that ended up in this publication).

In their recent paper on ‘market design’, they deny that they favour central planning:

It is important to emphasise that Skills Australia does not advocate a ‘central planning agency’ approach based on detailed forecasting of skills.

It’s true that they don’t advocate the kind of micro-level central student place allocations we’ve sometimes seen in higher education. But Skills Australia does want what they call a ‘managed market’, in which governments purchase student places to align them with ‘community and industry needs’.

But I’m not sure that they have really thought enough about how this works in practice. With the central planner’s mindset, they want to shape student behaviour largely by restricting options: Continue reading “A leaking student pool”

Is the market the ‘greatest dissolver of the bonds of family’?

Unhappily, the democratic Left also now embraced the other dimension of the 60s revolution, the abandonment of social responsibility and the pursuit of self-interest at whatever cost. This eventually provided the opportunity for the neo-liberals, in association with another force on the Right, the neo-conservatives, to make further great headway among the Western working class by supporting the values of social conservatism. By doing this, the neo-liberals managed to disguise from both others and themselves an obvious truth, namely that the untrammelled market was the greatest dissolver of the bonds of family and community.

Robert Manne yesterday, in another of The Australian‘s What’s Left series.

But how obvious is Professor Manne’s truth about the market and families? There is certainly no direct relationship in our current society – those with most market experience, people with jobs and money to spend, are more likely to be in couple or family housesholds. And the period of ‘neoliberal’ policy has coincided with a fall in the divorce rate. In 2008, it was at its lowest point since the liberalisation of divorce law in 1975.

It is nevertheless true that the unmarried or separated proportion of the adult population is high by historical standards. There are a number of proximate causes for this, which are interconnected in a complex web of cause and effect. Continue reading “Is the market the ‘greatest dissolver of the bonds of family’?”

Public opinion on economic history wars

Pollytics blog reports on an Essential Research survey question on the economic history wars triggered by Kevin Rudd.

The question was:

Do you think that Labor or Coalition Governments have been responsible for the most important economic reforms in Australia over the last 25 years?

I’d give it to Labor on microeconomic reform but the Coalition on macroeconomic reform, while agreeing with John Howard’s argument that favourable judgment on Labor should be qualified by noting that the Liberals co-operated with reform while in opposition while Labor largely obstructed. Labor gets high marks 1983-95, but low marks since.

However it’s not a question most voters could easily answer, and so they will rely on party stereotypes. Along with a very large (and honest) ‘don’t know’ response the small advantage for the Liberals suggests that the strong economy under the previous government still gets some public opinion credit.


How relevant is ‘market failure’ to policy analysis?

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.
Continue reading “How relevant is ‘market failure’ to policy analysis?”

Some strange human capital economics

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.

Why pay more at Borders?

This week if you download a coupon you can get 30% off a full-priced book at Borders. They regularly offer similar kinds of specials.

So far as I know, this is a novel strategy for booksellers in Australia: not discounts on a particular book, and not discounts across-the-board, but one discount on a book the customer chooses (is there a unique barcode for each coupon which protects against fraud?). If the strategy is to get people into the store it is a clever one. It allows all books to attract customers rather than just the specials, but unlike across-the-board discounting it increases the yield on additional purchases.

What Borders don’t tell you is that sometimes you need a coupon for shopping at Borders to make sense. My weekly notice from Borders, which I received yesterday, advertises Colm Toibin’s new novel Brooklyn for $36.50. A Toibin novel is likely to be worth $36.50, but there is no need to pay this much. Other bookstores are selling it for the publisher-recommended price of $32.99.
Continue reading “Why pay more at Borders?”

Corporate welfare on the rise

As the Productivity Commission’s annual Trade and Assistance review revealed yesterday, corporate welfare is on the increase. After increasing at an annual rate of around 6% until mid-decade, it increased by 14% in 2006-07 and 23% in 2007-08.


But this is nothing compared to what is on the way. As The Age reported:

The Rudd Government’s spending plans for research and development, the car industry and the farm sector would add another $20 billion in coming years, it says. But the emissions trading scheme would put all that in the shade. The commission says free permits to emission-intensive firms alone would cost taxpayers $6.5 billion in 2011-12 under the original plans — now postponed for two years due to the global financial crisis.

The chapter called ‘Recent developments in industry assistance’ (pdf) runs to 35 pages, discussing over 40 developments – not all of them bad from an anti-corporate welfare perspective, but most of them. That’s up from 23 pages in the last full year of the Howard government.

The economics of graduate-entry courses

Last week the SMH reported that the University of Sydney was abolishing its undergraduate radiation therapy course in favour of a graduate course. The University’s explanation is that ‘the change was in line with a move towards graduate entry for many of its professional degrees.’

Since graduate-entry but initial professional entry degrees are relatively new in Australia we don’t have any strong evidence on their human capital economics. From a theoretical perspective, however, I would have thought there could be potential human capital benefits for occupations likely to benefit from study in more than one field (eg managers, public servants and other policymakers, lawyers, teachers, academics), and possible financial reward for having broader knowledge and skills. In any case, at least at the upper levels of most of those occupations have high earnings, and so additional degrees for general interest and enjoyment are affordable.

However financial rewards from added degrees are less likely for occupations which require highly-specialised technical knowledge but little else in the way of university-level education. All the health professions except perhaps those related to mental health would seem to fit into this category. And except for medical practitioners and dentists, the health professions generally pay salaries that could easily represent low rates of returns on investment if initial education cost significantly more.
Continue reading “The economics of graduate-entry courses”