Monday, September 22, 2014

Classic from the textbook–Election 2014

There is a substantial body of work in the areas of behavioural economics and cognitive psychology which shows that the record of political pundits, political forecasters and the media is appalling in forecasting all but the most obvious of outcomes (a comprehensive review is to be found in Nate Silver’s The Signal and the Noise).

Kahneman shows that we tend to have a systematic bias which involves:

  1. Consistently underestimating extremes – National won and by a significantly greater margin than was forecast while the left suffered greater than expected decimation; and,
  2. that we are very poor at estimating ranges or spreads – much the same thing here too. The gaps between the factions were not well estimated as forecasters cramped things around the averages.

Did forecasters do better than a random pick would have? Yes – very likely they did. Even the Peters NZ First result has become systematically bizarre to the point where it is unlikely to be the result of a coin toss (the main guy who ran the coin toss – Hone Hariwera dipped severely).

Did the pundits and forecasters do any better than an amateur would have done? Very unlikely – and they got the extremes wrong – just as the amateur would have.

Moral? Don't pay forecasters much attention and certainly not money unless you are wanting to buy moral support – and even that is a dubious purchase – just ask the left.

Wednesday, September 17, 2014

The most boring bankrupt economic argument–“we export raw logs when we could be adding value and making jobs”

The rot set in in the late 1940s on this. Jim Anderton was maybe the first in the modern era to believe we wantonly refused to profit from the blindingly obvious money and jobs to be had from processing timber.

In recent times only Winston Peters has been bright enough to see what the entire business sector has apparently completely missed.

Now, joining him as a value add timber processing expert we have the lawyer from Herne Bay – Mr Cunliffe who has spotted the opportunity.

It is, you understand, not so profitable that any of them would give up their day job… it never is, is it?

It seems that only these elite economic whizz kids can see what needs doing. Mr Cunliffe even wants to stop Fonterra doing the unthinkable – exporting what people want to buy and what they will buy – and focussing instead on processing raw product here in NZ.

Apparently there is more money to be made ignoring the reality which sees us export what people want and instead “processing” here in NZ… at an uncompetitive wage rate all these people, in a curious coincidence, want to hike.

Evidently the business sector, with skin in the game and a shirt to lose – not just “the baubles” knows we are more than lucky to be able to export the logs and milk fat – and doing that is far from a cinch.

Shouting “value add” does not make one a competitive processor, it does not convince consumers in a world full of competitively priced product they should buy from you, and it will never justify giving up the hard earned offering you do have.

Besides… 50 years of bleating about this wrong headed nonsense produces boredom by the tonne none of which can be exported.

Sunday, September 14, 2014

Measured views of minimum wages

Eli Lehrer September 13, 2014

Highly relevant in NZ – none of the parties have a measured view – the polar positions are BOTH WRONG…. but it still doesn't help the poor.

The ground has been shifting in the battle over the minimum wage. With President Obama's proposal to hike the national minimum from $7.25 to $9 an hour stalled in Congress, local labor activists have been aiming even higher, getting behind a vastly higher minimum wage of $15 an hour.

The proposals are gaining steam. The small city of SeaTac, Wash., which includes Seattle-Tacoma International Airport, already has a $15 minimum in force, while Seattle plans to implement one over time. Similar "super-minimum" proposals also are under consideration in cities like San Francisco and Chicago. Recent state-level legislation will phase in a minimum wage of greater than $10 in California, Connecticut, Maryland, Hawaii and Vermont. Massachusetts' minimum will rise to $11 by January 2017, while the District of Columbia's is set to rise to $11.50 by July 2016.

Predictably, market advocates and business interests warn that such laws portend disaster: layoffs, benefit cuts, huge surges in consumer prices, mass unemployment and business closures.

Just as predictably, labor unions and their allies on the left paint the subject in terms of "fairness," arguing the higher wages will be paid out of what one SEIU lawyer called "billions and billions" in “extra” profits earned by fast food restaurants and others.

In truth, while the proposals are deeply flawed, the projections of economic catastrophe are at least somewhat overblown. The best reason to oppose a $15 minimum wage is that it's a bad way to help the very people it is intended to help.

Though the economic literature on the subject is mixed, a comprehensive review done in 2013 by the National Bureau of Economic Research found most studies do find a small but measurable increase in unemployment in response to minimum wage hikes.

The effects tend to be concentrated in a few industries that employ lots of low-wage workers, often teens and seasonal employees.

That a rising minimum wage would have only a small impact on unemployment shouldn't be terribly surprising, because government regulation doesn't have that large an immediate effect on jobs anywhere.

The Bureau of Labor Statistics regularly asks employers the reason behind layoffs. Those attributed to "government regulations/intervention" are routinely less than 0.5 percent of the total.

Both because they want to take care of their employees and because they would lose customers if service levels get cut sharply, business owners will avoid layoffs if they can. Nor are the costs of higher minimum wages simply passed on to customers. While a portion of almost any cost increase will almost certainly be passed on to consumers in the form of higher prices, price competition alone means that consumers will rarely have to pay all of it.

Instead, businesses may look to cut the cost of non-labor inputs, or to slow cost-of-living adjustments, cut raises for employees earning more than the minimum wage, or increase employees' share of health-care costs.  And yes, some will accept lower profits.

Of course, none of this makes a vastly higher minimum wage a good idea.  Higher labor costs will encourage businesses to automate more tasks and, over time, look for creative ways to avoid filling vacancies.

This will encourage elimination of many of the easiest-to-replace jobs.  And while mass insolvencies and rampant unemployment may be unlikely, there will certainly be some effect. Some already teetering businesses will almost certainly be pushed over the edge and some jobs that could have been taken by teenagers, the disabled and those lacking familiarity with work itself will never be created in the first place.

What's more, raising the minimum wage is simply a terrible way to help the poor. Only about 7 percent of those below the federal poverty line work a full-time job of any sort. Meanwhile, many of those who earn the minimum wage aren't poor at all. Roughly 42 percent live with a parent or relative, while another 18 percent are married second income earners, which helps explain why the average family income of a minimum wage earner is $53,000 per year.

Expanding the Earned Income Tax Credit, a direct subsidy for those who work for modest wages, is a much better and much more direct way to help the working poor.

Changes to healthcare, nutrition and education programs could do still more to help those in poverty. By comparison, a $15 minimum wage, even if not as disastrous as some market advocates claim, is likely to do more harm than good.

Eli Lehrer is president of the R Street Institute.

Monday, September 8, 2014

The Rough Guide to Voting on Policies

Finding the “signal” in the “noise” is close to impossible in an election campaign… and the effort can soon become boringly tedious. Here is the rough guide.

For any policy ask:

  1. Is this actually a problem? Or is it a “nice to have” for some self interested group who would like a better ride at everyone else's expense.
  2. Could a government, any government, actually solve it? Governments move motions (lots of them), pass resolutions and pontificate but their abilities to achieve are limited.
  3. What would the cost be – the full cost after paying for enforcement and all the knock on costs no one is mentioning – if they actually know them.
  4. Who exactly is going to pay those costs? Is it the people who will benefit or is it “us”, the tax payers all governments hope will not add up the bill of all those motions.
  5. Finally – a first rule of economics – pay attention to what politicians actually do – never what they say, or what they say they will do. Only behaviour counts.

Hints – to help you along try these tips as well:

  • never assume the “goodies” wouldn’t go for self interest. Be very careful of “goodies” in health, education and welfare. These “goodies” are just as self interested as the rest of us – and they are typically smarter at speaking, writing, persuading and being moralistic.
  • you don’t have to enjoy policies for them to be good for you. I don’t like not getting subsidies for economists and not having guaranteed markets and all the competition that drives down what I can charge and mechanics being picky about my WOF… but I know there are long term benefits for everyone here.
  • be very, very careful of policies which “won’t cost much when spread over all the tax payers” or which involve “only a a couple of cents more on the tax rate”. These marginal costs are what kill us. It is not inability to pay the first $10.00 of your mortgage which hurts… its the last $1.00 you can’t pay that bankrupts you. Same with the country’s budget.

None of this will guarantee a good outcome… which brings the final rule “there is no free lunch”. There is always a cost even if you can’t see it.

The old poker player’s adage applies – if you can’t figure out who the fool in the room is after 40 minutes – it’s you.

Investment–Harmless Superstition NOT

Numerous pieces of irrational nonsense are passed off as “harmless superstition” . Nowhere is this more the case than with investment advice where the search for the holy grail of riches without risk, fear or hard work ever beckons.

Is superstition harmless….. actually no. And that, according to the Economist report of August 30 2014.

Thus we find that the Chinese love of the number “8”  (which sounds similar to “prosperity” in Chinese) and their studious avoidance of the number “4”  (which sounds similar to death) leads to investment strategies which seek prices for assets ending in “8” rather than “4”.

The consequence? The research shows, for the studies examined and more broadly “superstition driven trades” on the Taiwanese stock market, returns diminished by around 2%.

Before concluding that Chinese culture and superstition is a returns killer though, consider the very widespread research on “anchoring” a phenomenon whereby people of all colour and hue attach unjustified significance to round numbers (e.g. those ending in zero), “certain” numbers e.g. 100 (rather than 99) or perhaps 1,000 (rather than 1002) or the first number they were confronted with at an auction.

The lesson? Eschew and avoid witchcraft and clear nonsense just as you would avoid walking under a ladder.

Wednesday, August 27, 2014

So useless we can’t even “become unequal” ??

Tyler Cowan at Marginal Revolution notes….

I sometimes say it is coming first to Israel and Singapore (and England?), but the Kiwis are a different case.  Eric Crampton quotes from an NZ Ministry report:

Overall, there is no evidence of any sustained rise or fall in inequality in the last two decades. The level of household disposable income inequality in New Zealand is a little above the OECD median. The share of total income received by the top 1% of individuals is at the low end of the OECD rankings.

You also will note that New Zealand has been a steady under-performer in terms of economic growth, despite a lot of good policy decisions.  This has helped keep income inequality down.

It does rather show that if you grow slowly enough, or not at all or decline rapidly – you can have all the equality you want……

Tuesday, August 5, 2014

Some science about what is fashionable in clothing

Abstract

Fashion is an essential part of human experience and an industry worth over $1.7 trillion. Important choices such as hiring or dating someone are often based on the clothing people wear, and yet we understand almost nothing about the objective features that make an outfit fashionable. In this study, we provide an empirical approach to this key aesthetic domain, examining the link between color coordination and fashionableness.

Studies reveal a robust quadratic effect, such that that maximum fashionableness is attained when outfits are neither too coordinated nor too different. In other words, fashionable outfits are those that are moderately matched, not those that are ultra-matched (“matchy-matchy”) or zero-matched (“clashing”).

This balance of extremes supports a broader hypothesis regarding aesthetic preferences–the Goldilocks principle–that seeks to balance simplicity and complexity.

Here is the source and reference. Thanks to MR