Who got hit worst in Ireland?

The authors of a new paper, "Crisis, Response and Distributional Impact: The Case of Ireland", are right when they say that "There is strong interest in many countries in assessing the distributional impact of austerity measures". Many people suspect that the impact may be regressive: in Greece, for example, efforts to raise tax have fallen on the ordinary guy who is visible to the PAYE system, and not on the wealthy guy, who isn't. The Irish example in particular is interesting, as Ireland has been the Eurozone economy most prepared to go down the austerity route.

Here's the income distribution pre- and post-GFC. Overall real per capita incomes dropped by 7.8% over the 2008-12 period: within that, the bottom decile fared worst (-18.4%) and the top decile was next worst off (-11.4%).

What caused this pattern of those at opposite ends of the income distribution bearing most of the brunt of the fall in incomes?

At the top end, the strongly progressive nature of the various austerity policies, as shown below.

The graph shows the percentage impact of all the various measures.on disposable income by decile. Austerity policies were heavily targetted towards the better off. There is a little bump in the progressivity, where deciles 2 and 3 got treated a bit less roughly than decile 1, the explanation being that old age pensioners are clustered in deciles 2 and 3, and the old age pension was one of the few social transfers that was not cut during this period.

At the bottom end, as the authors summarise it, "Tax, welfare and public sector pay changes over the 2008 to 2012 period gave rise to lower than average losses for the bottom decile", as we can see in the graph above. "Thus, the larger than average losses observed overall are not due to these policy changes; instead, the main driving factors are the direct effects of the recession itself".

Irrespective of whether you subscribe to austerity as the right plan for a country in Ireland's circumstances, at least there is the cold comfort that, when it came to the forcible whip-around to contribute to the state's coffers, Ireland's clampdown was heavily focussed on the richer half of the income distribution.

Last weekend's Applied Economics workshop at the University of Auckland

Earlier this year I got an invite from the MADE (Making A Difference with Economics) group at the University of Auckland, asking would I be a speaker at their second annual Applied Economics workshop. I said yes, and told them I'd like to talk about applying economics to issues of competition and competition policy. Two other invitees said yes, too: Kieran Murray, who co-heads the Sapere Research Group, came along to talk about the practicalities of economic consultancy, and Calum Gunn, chief adviser (regulation) at the Commerce Commission, came to speak about his hand-on experience of regulating electricity distributors.

So we all fronted up last Saturday for what was an impressive day from several perspectives.

First was learning about MADE itself, which was set up in 2010 by Associate Professor Rhema Vaithianathan. You can read the full background on why she set up MADE but in short "The idea behind MADE was to get young people to start learning how to be change agents for economic ideas", and "The potential for economics is immense. It has not reached its potential. Almost every medical researcher I have met thinks their research will ultimately relieve pain and suffering. Yet economics offers so much more in its ability for relieving human suffering. The 40-year difference in life expectancy between Japan and Burkina Faso is economics not medical science".

Second was meeting an interesting and very diverse bunch of students. Much more diverse these days than when I first studied economics: 36 out of the 40 in my first year economics intake in Trinity College Dublin in 1969 were male, a higher proportion even than in such bastions of male dominance as the engineering school. The workshop attendees were a very bright and very enthusiastic group, too: all of them were Stage 3 undergraduates or above, so the questions for the speakers were on the button, and there was high quality discussion throughout the day. And the whole day had been put together very professionally by a working committee of the students themselves.

MADE is a really worthwhile programme. Students can sometimes struggle to connect economics to the 'real world', and initiatives like this one show them how economics actually works to address practical problems as well as (hopefully) transferring some practical expertise and perspectives.

If you're asked to come along and present at one of these workshops, do - you'll enjoy it, all three of us had a great day - and if you feel like volunteering to support the programme at other times, give it a go. I see, for example, that they had Girol Karacaoglu, chief economist at the Treasury, along to speak to them last year. If you're applying economics in your career, you'll find a very receptive audience. Here's the link again if you'd like to help out.

How microeconomic reform helps the young find jobs

There's quite a bit of revisionism going on at the moment. In potted format the logic is that deregulation of finance helped, led towards, or even caused, the GFC, hence deregulation in general (or liberalisation, structural reform, microeconomic reform, 'economic rationalism', Rogernomics, call it what you will) is a bad thing, too. Given that microeconomic reform always had its sceptics or outright opponents even pre-GFC, people making this argument have got the wind in their sails. There's some risk that this is becoming the latest conventional wisdom.

I think this line of argument is deeply wrong, and jeopardises many well-deserved successes for microeconomic reform.

Putting finance to one side for a moment, the reality is that in many markets deregulation has produced more flexible, efficient and equitable outcomes than previously, and it is becoming increasingly clear that the economies that took the liberalisation route is the 1980s and 1990s are making a better fist of coping with the post-GFC world than the ones that didn't.

Here's one particularly good, though socially tragic, example of what I mean.

In an earlier post about how the OECD has come up with a very good way of presenting data on unemployment rates in the OECD area, I mentioned in passing the unusually high rate of youth unemployment in France (with its fossilised labour market policies) and how it compared badly with the US's 'sack at will' regime, and in another I noted how France's largely unreformed labour market compared badly with Germany's, which has had a dose of microeconomic reform (adding to the efficiency of a market that was already doing pretty well).

Now four researchers - two French, two German - have just published a discussion paper, "Youth Unemployment in Old Europe: The Polar Cases of France and Germany" (available here) which shows, first, the poor youth unemployment and inactivity outcomes for France and the much better ones for Germany, and second, goes on to analyse why the two large Eurozone economies have behaved so differently.

The relatively poor French outcomes came despite France being hit relatively lightly by the GFC: as this graph from the paper shows, the immediate post-GFC hit to French GDP was significantly less than the hit to Germany's (though Germany subsequently has recovered faster and more strongly).

Here's the NEET (not in employment, education or training) rate for 20-24 year olds for the same group of countries: the French rate has generally been high, and in the past few years has been rising, while Germany's has fallen substantially.

Why these patterns? It's down to the microeconomics of labour market institutions and policies.
Germany has a respected, effective apprenticeship system that efficiently matches employers' needs and education provided. In France, apprenticeships are somewhat sneered at (I'm  paraphrasing here, but that's the gist) and the link with business isn't there: "in particular [French] SMEs are reluctant to hire apprentices"(p12).

A national minimum wage in France shuts out many low-skill young workers: "A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be" (p13). Germany has more flexible, locally negotiated minimum wage rates, with the predictable result that "The vast majority of skilled younger workers still have good prospects of entering open-ended contracts in Germany" (p13).

The French labour market is also highly segmented, with an 'insider' group (my description) of "employees in permanent contracts, protected by many rules, often leading to contentious litigation, and not effectively protecting employees while at the same time resulting in very uncertain outcomes for employers" (pp14-15), and everybody else on, at best, short-term contracts. Germany's no paragon, either, but it doesn't have anything like the rigidity of the French system, which again hits the young and inexperienced particularly hard.

It doesn't help that the French network of local placement offices is nigh on useless (much like large swathes of the rest of the French bureaucracy), though to be fair there probably isn't a lot they could achieve, even if they got their act together, when faced with all the other institutional rigidities of the French labour market. And finally the demographics don't help, either, with modest increases in the size of French youth cohorts in coming years (Germany doesn't have the same issue).

The bottom line is that "The situation in France is very alarming and the future prospects of French youths are increasingly dire. This is a socially explosive situation and politicians must act now to avert a lost generation" (p21). The authors are unambiguous about the reason for this social tragedy: "The roots of the problem are located in the structural design of national labor markets and education systems. Hence, Europe’s youth unemployment disease has to be cured with structural reforms" (p25, their emphasis), and they've got a bunch of reform proposals lined up (see the Table, p22), recognising that you can't readily 'cut and paste' things that have taken decades to embed, like the German apprenticeship system, from one country to another.

There are over 5.5 million young people unemployed in the European Union. For them, liberalisation and deregulation isn't the problem: it's the answer.

Revealed preference

Despite TV2's programming schedule, which is strong evidence the other way, I'm generally inclined to believe that people aren't stupid, and I'm correspondingly inclined to believe that there are fewer markets than you might think where consumers are, supposedly, unable to spot or judge quality differences.

I'm not saying that there aren't any markets where people can't be sure in advance of the quality or features of the good or service that they are contemplating buying, and I'm not saying that we shouldn't use appropriate mechanisms (such as occupational licensing, or information disclosure regulation) in those cases to help deal with what could be a potential issue of market 'failure'. Of course there are, and of course we should.

But the more I observe how people actually behave when buying supposedly 'hard to tell what you're getting' stuff like medical care or an education, the more I'm leaning towards the view that people can make quite a good practical fist of judging quality, that 'market failure' on this score is less significant than you might think, and that there is a stronger case for letting markets do their job and a weaker case for non-market mechanisms.

Earlier I posted about the latest heavy duty research on US charter schools. Consider this quote from the Executive Summary (p8): "Charter school students now comprise more than four percent of the total public school population in the United States, a proportion that continues to grow every year. There are estimated to be over 6,000 charter schools serving about 2.3 million students in the current 2012-2013 school year. This represents an 80 percent increase in the number of students enrolled in charter schools since CREDO released its first report on charter school performance in 2009, Multiple Choice: Charter School Performance in 16 States".

What this says to me is that very large numbers of parents and students in the US (and the equally large numbers of families in Sweden and the UK who have been queueing to get into new private schools there, too) are capable of spotting differences in educational quality - indeed, capable of spotting quite small differences in quality (at least in the US), and acting on them. To think otherwise is to argue that 2.3 million American students and their families are systematically deluded, and on a matter that is of high priority to them.

I very much doubt that, not least because Word Gets Round. People can generally judge whether they or their neighbours have had a good outcome, and they adjust their behaviour accordingly. As one big study of offering more choice in the UK health system unsurprisingly found, when given a menu of hospitals to choose from, "A patient with a bad experience of their local hospital was much more likely to choose a non-local provider compared with someone who had a positive experience at their local hospital" (p65 of the report). People also use workably effective rules of thumb as guides: as the same report noted (p93), patients rated facilities on three big criteria, "cleanliness, quality of care and the standard of facilities", with cleanliness apparently being not only valued for its own sake but also being used by patients as a rough and ready way of steering themselves away from hospitals with high infection rates from the likes of "superbugs".

And people share their experiences, good and bad. I've swapped notes with others about our eye cataract operations, like (I'd guess) every other parent in New Zealand I've discussed the local schools and local teachers with other parents, and I'm a member of the support organisation for people who've been through through the barrel of laughs that is an acoustic neuroma. Do we have useful ideas to share about what worked or didn't? You betcha.

It is of course true that what many professional services provide is multifaceted, and not easily reducible to a single criterion of better or worse. And it is easy to take the next step and say that only the professional gatekeepers can make a good job of telling good from bad, and that consumers don't (or will never) have the information or analytical nous they need to be able to make socially effective decisions, and that markets can't therefore be the way to allocate things.

But that can be a step too far. The marketplace of consumer revealed preference may often need a bit of supplementary regulatory or supervisory assistance to work well: fair enough. But personally I'm becoming more impressed by the growing evidence that in many markets people are adequately capable of sorting the good from the bad.

Did Keynes really say, "When the facts change...."?

Economists are good at making assumptions, and one of the assumptions I've always made is that John Maynard Keynes was the source for what is usually quoted as "When the facts change, I change my mind. What do you do, sir?"

It certainly sounded like something he would have said, and the ad hominem counter-punch at the end, in particular, seemed pretty Keynesian to me.

Turns out though that I'm very probably wrong. Thus far, there's no evidence he said it. The best article I've found on it is on the Quote Investigator website ('Dedicated to Tracing Quotations'). By coincidence, the latest quote investigated on the site (as of today) is also about economics, "Teach a Parrot to Say ‘Supply and Demand’ and You Have an Economist".

This article "Keynes: He Didn’t Say Half of What He Said. Or Did He?" from the Wall Street Journal also doubts that Keynes ever said it, and to boot argues that he didn't say "The market can remain irrational longer than you can remain solvent", either (and has put up a modest prize, US$10 per quote, to anyone who can prove he did).

"When the facts change, I change my mind. What do you do?"

The relevance of the title will become apparent, but first some context.

I've been researching a book, which has largely been on the benefits that increased competition and greater operation of market forces can bring to sectors such as health and education, which tend to use largely non-market methods to commission and distribute their services.

Along the way I've been looking at the literature on new private schools competing with the traditional public system schools - Sweden is often credited with giving this initiative its start, and it has been spreading elsewhere, notably in the UK ('academies') and the US ('charter schools'). And it's reached here, too, with the proposed launch of our version of the idea ('partnership schools').

So I've had to wade into the politicised jungle of quantitative research on how these schools have been performing.

With that as background, here's the news.

For a long time one of the key pieces of evidence on US charter schools was a 2009 study from the Center for Research on Education Outcomes at Stanford University, a body with the snappy acronym, CREDO. It was a big piece of work - the authors called it "the first time a sufficiently large body of student‐level data has been compiled to create findings that could be considered "national" in scope" (here and later, I'm quoting from the 2009 report's Executive Summary). It covered the learning gains in English and maths of 70% of the total student body then in charter schools, and compared them with demographically matched comparator students ('virtual twins') in the public school system.

One of the headline CREDO results was seized on by opponents and critics of charter schools: overall, 17% of charter schools were better than the public schools, 46% were much the same, but 37% were worse. The differences in actual outcomes were not large, but they were statistically significant. It was a widely quoted result and the study received broad coverage in educational circles everywhere: our own PPTA, for example, had a link on their website directly to it.

There was a range of other interesting findings, too, notably the differences in quality across charter schools ("tremendous variation in academic quality among charters is the norm, not the exception. The problem of quality is the most pressing issue that charter schools and their supporters face") and the fact that charters seemed to do better with students from more difficult backgrounds ("two subgroups fare better in charters than in the traditional system: students in poverty and ELL [English Language Learner] students"). As the report said, though, some charter success with sub-groups shouldn't be allowed to dominate the big picture finding: "greater attention should be paid to the large number of students not being well served in charter schools".

For people (like me) who believe that greater competition and better consumer choice are the first-best path to improved outcomes in many areas, this was, frankly, a disappointing though credible result.
CREDO said at the time that a follow-up research project was in the works, but then they went off the air, and over the years and from a distance I'd rather assumed they'd run into funding or other problems.

Fast forward to June 25 this year: CREDO reappeared with the second, even bigger report covering not just the 16 states of 2009 but another 10 states and New York City (looked at on its own for reasons we needn't bother with here), and using the school records of over 1.5 million charter school students.

Charter schools now outperform the traditional public schools (TPSs), mainly on the English side, with no real difference on the maths side. For English, charters are ahead 25% of the time, the same 56% of the time, and behind 19% of the time. For maths, it's technically a  small win for the TPSs though effectively a draw (charters ahead 29% of the time, behind 31% of the time, 40% no difference).

The 2009 result that charters were doing better with some disadvantaged groups came through again. As the 2013 Executive Summary puts it (p23), "Enrollment and persistence in charter schools is especially helpful for some students, particularly students in poverty, black students, and English language learners all of whom post significantly higher learning gains in both reading and math. Hispanic students are on par with their TPS peers in both reading and math. For students with multiple designations (such as being black and in poverty), the impacts of charter schooling are especially positive and noteworthy".

This, by the way, as I've posted before, is exactly what you'd expect from first principles: the people most likely to benefit from greater choice are those with the least opportunities now.

The report argues that one of the reasons for the better performance of charters is holding them to proper accountability and quality standards (8% of the original 2009 sample have closed), a conclusion I endorse, though I can't say I see the same principle of 'perform or get shut down' being invoked to the same degree to deal with the worst of the US public schools.

In any event, while it's hardly a knock-out win for proponents of greater choice and competition in education, it's a clear improvement on where we were four years ago. On the latest data and analysis, charter schools have a slight edge.

Hence the heading for this post: virtually every man and his dog in the educational establishment were keen to wave the first CREDO report around when it was critical of charters.

What are they doing now?

NZAE conference update - some slides from Maurice Obstfeld's speech

I posted earlier a summary of Prof Obstfeld's impressive keynote speech at the NZAE conference on  "Finance at Center Stage: lessons from the Euro Crisis". At the time I mentioned I'd write some of his slides when they became available on the NZAE conference website, so here they are.

The first one that especially piqued my interest was this one about house prices in the Eurozone (with the US included for reference). Bubbles had developed pre-GFC in a wide range of housing markets, and are mostly deflating since, notably in Ireland (green), the US (dashed red), Greece (solid red), and Spain (light purple). On the downside, the unwind poses major problems for banks (who lent on the boom-time valuations of property) and households (negative equity and serviceability issues), but, on the upside, at least the process of setting saner prices and cleaning up the mess is underway.

It's more troubling, however, that some markets rose strongly but haven't dropped from their pre-GFC levels, notably France (bright blue), Finland (brown), and Italy (purple). It may be that the underlying supply/demand characteristics of the French housing markets genuinely explain the ongoing high prices: Paris for example is still a highly desirable city with limited supply. And there may be good reasons for the behaviour of the Finnish market (about which I know nothing). House prices holding up in Italy, however, look harder to explain.

Overall, you're left with the queasy feeling that there is still quite a bit of house price adjustment yet to happen in parts of the Eurozone, and on the policy front some urgency to have Eurozone-wide bank assistance programmes in place before it happens.

The second slide that caught my eye was this one, which shows real interest rates in the PIIGS (Prof Obstfeld prefers to call them by the less offensive GIIPS) compared to Germany. And the lesson here is that one monetary policy did not fit all. In Ireland, in particular, the economy pre-GFC was very strong, prices and wages were rising, and real interest rates were piffling or negative. No wonder the house market ignited.

This is all, of course, with 20:20 hindsight, but even at the time it would have been a good idea to have had some levers to pull to offset an ECB setting of monetary policy that was wildly too loose for parts of the Eurozone (or possibly this is a roundabout way of saying the Eurozone economies never met the criteria for a monetary union in the first place). Either way, the lesson here is something to remember if the idea of a common currency with Australia ever resurfaces.

And the third and final one I'd like to show you is this, which charts the competitiveness of the peripheral GIIPS back to the start of the Euro: a rising graph means worsening competitiveness. If you want to look at the data for yourself, these are the Harmonised Competitiveness Indices that the ECB prepares, they come in three flavours (based on consumer prices, GDP deflators, or unit labour costs), and you can access them here. 

Very notably, competitiveness in Ireland (green) and Spain (red) deteriorated badly in the early 2000s - but only Ireland has been able to do anything effective about it, and without getting into the whole austerity debate, you can see why it has been the poster-child for getting its act together. You can also see where Greece's reputation for failing to deliver on reforms has come from, and what effect its inactivity has been having on its eventual ability to trade its way out of its problems. And while Italy's and Portugal's competitiveness never blew out the way it did in Greece, Ireland and Spain, they haven't been doing much to improve theirs, either. 

Finally you can see how well Germany has been doing, at least in part because it was fortunate to do some labour market reform before the GFC struck. As a result its latest (May) unemployment rate is 5.3%, under half the rate of largely unreconstructed France (10.9%). Prof Obstfeld's graph didn't include France, so I've dug out the data: on the same basis (Q1 1999 = 100 to Q1 2013), French competitiveness on a unit labour cost basis deteriorated by 1.7%, whereas Germany's improved by 18.5%.

From zeroes to heroes: the OECD gets its online presence right

Used to be, the OECD's website was one of the most user-hostile around. Finding anything with the help of its alleged search engine was hopeless.

And now look at it. It's improved so much, that it's actually provided me with one of the best bits of data presentation I've seen in a long time.

I was looking up its summary of its latest Employment Outlook 2013 - which is just as grim as you'd expect - and at the bottom of the page I found a magnificent and interactive way of showing overall unemployment, youth unemployment, long-term unemployment and the age structure of employment.
The gizmo loads the overall OECD data for each variable, and you can then choose whatever countries you like to compare with it. I picked youth unemployment as the variable, and New Zealand as the comparator country. The result looked like this. Answer: we're about par for the course.

Have a play with it. If you didn't know already, some of the numbers (eg for Greece, Ireland, Spain, Portugal) will make you realise just why the austerity protesters are so infuriated.

Though that's only part of the story. Labour market over-regulation  in some countries benefit a privileged 'insider' group, on permanent contracts that are hard to terminate. The impact of austerity (or other economic setbacks) consequently falls on the less privileged, particularly the young, who at best get short-term employment contracts. As the accompanying country report on France points out, for example, in 2011 78% of all hirings and 71% of all firings were of people on short-term contracts.

The somewhat paradoxical outcome is that a country like the US, with effectively a 'fire at will' employment regime, has lower overall and lower youth unemployment than a country like France which supposedly 'protects' employees.