Catallaxy Files

The Rudd government has been making the argument that their stimulus packages (there were two) have prevented unemployment from increasing to very high levels. They haven’t always been on message – poor Nick Sherry got his numbers mixed up and was quite insistent in early January that unemployment would rise above 8 percent in the second half of this year. Last November Treasury was forecasting 6.75 percent by the end of this year. That doesn’t look like happening. The unemployment situation has not been nearly as bad as was feared in late 2008. Rudd has even tried to claim that his government has created jobs. Well, no. Unemployment is higher than when they were first elected.

But they seem to have followed an ‘avoid unemployment at any cost’ type strategy. Here is David Gruen explaining the logic of that strategy.

It is worth providing a brief summary of some of the benefits of avoiding a recession that would not be relevant if a recession was instead simply an equilibrium market outcome.

The first, and most obvious, benefit is that involuntary unemployment is lower than it would otherwise be. Among other things, lower involuntary unemployment implies less long-term unemployment and hence less skill atrophy and less general disaffection with society on the part of the long-term unemployed. The Treasury estimates presented in Chart 9 imply that the fiscal packages reduced the peak unemployment rate by 1½ percentage points. I suspect, however, that this is an underestimate, both because it was calculated using conservative fiscal multiplier estimates, and because it takes insufficient account of the favourable feedback loop that I spoke about earlier when discussing the impact of expansionary macroeconomic policy on confidence.

But there are further benefits to avoiding a recession that would need to be taken into account in a realistic cost-benefit analysis of discretionary fiscal stimulus. Recessions break productive links between firms, and between firms and workers, when firms that would otherwise be viable over the long-term are driven into bankruptcy by a recession. In other words, plenty of the destruction that occurs in a recession is not creative destruction.

Finally, recessions do long-lasting damage, particularly to that cohort of people entering the labour market at the time the recession hits. Thus, for example, university graduates entering the labour market in a recession suffer sizeable initial earnings losses, losses that persist for a period estimated at between eight and fifteen years – that is, long after the recession has ended (Oreopoulos et al., 2006, Kahn 2009).

So how much has this strategy cost us?

What I have done is graph the size of stimulus pacakges releative to 2008 GDP and the increase in unemployment for some OECD economies. All data are from the OECD and the increase in unemployment is calculated as the difference between 2009 and the 2007 unemployment rate.

As can be seen the Australian stimulus was massive compared to most other OECD economies while our unemployment performance was average. As I keep saying, the government panicked and spent far too much money – money that we now know was poorly allocated on projects that were not carefully thought through.

Update: A comment at Bolt’s place asks about the New Zealand experience. I don’t have equivalent unemployment data for New Zealand, but I did discuss New Zealand here.

John Roskam stirred up a hornets nest on ABC Q and A. Apparently he quoted Phil Jones on climate change.

JOHN ROSKAM: Kevin Rudd is running a million miles away from the ETS. You had, the other day, one of the leading climate change scientists in the world say the world hasn’t warmed since 1995.

(GROANS FROM AUDIENCE AND PANEL MEMBERS)

JOHN ROSKAM: Now, we can run, and Malcolm you can sigh, Mungo you can sigh, those are not my words. The point is whether…

MUNGO MACCALLUM: Whose words are they?

JOHN ROSKAM: They’re Philip Jones, the head of the Climate Research University, the basis of climategate, so whether you believe in climate change or not, undeniably the public is losing faith in the debate.

Matthew Knott at Crikey is very upset.

Phil Jones did not say there had been no global warming since 1995; in fact, he said the opposite. Global temperature records show there has been warming since 1995, he says, but it is difficult to establish the statistical significance of that warming given the short nature of the time involved. The warming trend consequently doesn’t quite achieve statistical significance.

So to remind ourselves, what did Jones say?

B – Do you agree that from 1995 to the present there has been no statistically-significant global warming
Yes, but only just. I also calculated the trend for the period 1995 to 2009. This trend (0.12C per decade) is positive, but not significant at the 95% significance level. The positive trend is quite close to the significance level. Achieving statistical significance in scientific terms is much more likely for longer periods, and much less likely for shorter periods.

Let’s do that again.

B – Do you agree that from 1995 to the present there has been no statistically-significant global warming
Yes …

Roskam has accurately reflected what Jones said. Now as Knott at Crikey indicates we can debate about sample sizes and whatnot all we like. An estimate that is not statistically significantly different from zero is not an increase, it is zero (it is a flat line not an upward sloping line). Knott might want to argue that the statistically insignificant trend of 0.12C per decade has oomph, or that there are other factors that are important, and so on but Roskam’s interpretation of Jones’ answer to question B is correct. To be sure Jones’ answer to B isn’t the final word, but that is the complete answer that he gave to that particular question. The answer is not convoluted as Matthew England suggests but rather is incomplete as I have argued before. The other thing to remember is that these are not off-the-cuff comments in an interview. According to the BBC

Some brief answers have been slightly expanded following more information from UEA.

Jones had time to fully reflect on the answers and provide additional information. The answer to B is well considered and complete to Jones’ satisfaction.

Barnaby Joyce has an op-ed in the Australian.

Debt is less of a problem when it is backed by an asset that is readily exchangeable to restore the wealth of the public coffers. However, I do not know how exchangeable the ceiling insulation will be when we need to repay the debt.

Previous posts on Joyce and debt are here and here.

Those who find fault with the EMH, and suggest that profit opportunities are available for exploitation, should be subjected to the empirical test. Are they billionaires or are they not? Yes, Warren Buffet passes that critical test. Others who put their faith in Buffet typically do not fare quite so well. Many others lose their shirts on their market gambles. Talk is cheap, and for the most part should be downplayed for what it is. Actual market success is a better guide; and remember that we define efficiency as a long-term concept, rendering transient short-term market successes less relevant for EMH.

Readers should be alert to the fact that many of those who criticize EMH also criticize free markets more generally. By instinct, they are interventionist, by nature they are paternalistic (albeit with other people’s wealth). In essence, they tend to be advocates of Lange-Lerner, advocating the substitution of socialist calculation in place of free market values. They believe that a central planning agency (in the United States read the Federal Reserve Board and/or the Treasury Department, and/or the FDIC) is able to determine stock prices more efficiently than the free market; that such a central planning agency should oversee the stock market with detailed financial regulations, in order to head off unjustified market movements. Well, we know what such central planning did to the economies of the USSR and its Evil Empire, do we not, Dear Readers? We know, pretty much, what is happening in Venezuela and Bolivia, to say nothing of Cuba and North Korea; is that not so?

Read the whole thing.

Robert Barro has an analysis of the US stimulus in the WSJ.

We need to ask whether the government’s spending reduced or enhanced private spending and whether public-sector hiring lowered or raised private hiring. This requires an empirical model based on the history of past fiscal actions in the U.S. or other countries. The administration must have such a model, but my own analysis makes me skeptical about the numbers they’ve reported about GDP increases and saved jobs.
…
Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.

When the so-called $42 billion ‘economic stimulus plan’ was announced on 3 February 2009, the Prime Minister stated that it was to support jobs during Australia’s response to a severe global recession.

One of the measures was the ceiling insulation program which has been badly mismanaged and now cancelled. The Government has announced a replacement program.

Yet we have not analysed the existing program for its efficacy and whether it met its objectives:

The Energy Efficient Homes investment will:

Install ceiling insulation in around 2.7 million Australian homes;

Cut around $200 per year off the energy bills for households benefiting from these ceiling insulation programs;

Reduce greenhouse gas emissions by around 49.4 million tonnes by 2020, the equivalent of taking more than 1 million cars off the road.

Did it meet these objectives (notice that the Prime Minister on 3 February 2009 used the word “will” not “should”?

Haven’t we learned that rushed policy tends to have unfortunate side-effects and creates various distortions? And that among these distortions is to bid up substantially the cost of the labour being employed in the subsidised activity?

In the case of the insulation program, the cost per job has been estimated to be between $300,000 to $600,000.

And wasn’t the raison d’être of the stimulus package to assist Australia during a downturn? Well why do we need a stimulus package now when growth is solid and unemployment low?

In truth the Government’s stimulus package was far too much and focussed on spending measures which it was incapable of managing and that significantly distorted activity in the construction sector. In addition, the stimulus is likely to have been ineffective in its purpose, crowding out private sector activity.

But whatever the merits or demerits of a stimulus in February 2009, it is very clear that it is unnecessary in February 2010.

So the Government should take the opportunity of the cancellation of the failed insulation program to move on – accept that it was a mistake and use the money saved to reduce the deficit. Perhaps it might have some legal obligations for compensation, but it does not need a replacement program.

Unfortunately the Government hasn’t learned from its failure and is about to throw good money after bad.

The Rudd government is trying to introduce a backdoor Australia Card. All school kids will be given a unique number that will allow the government to track their progress through the education system. I agree that using unique numbers is often more useful than using names – for example some universities use student numbers in examinations to anonymise exam scipts to prevent favoritism. Numbers also allow institutions to separate common names. People have a host of different numbers for different purposes. These numbers are usually either temporary or situation specific.

I can imagine Gillard’s unique student identifiers taking on a more permanent status. It also misses the point about school performance. The Australian has a ghastly op-ed today defending the program.

Tracking students through school and comparing their results from year to year, or test to test, measures the improvement students make. Students are compared against themselves rather than against one another. Schools are compared on the progress their students make, rather than the absolute scores their students achieve, which is dependent more on social background than the teaching.

It places all students and schools on a level playing field, because every student is capable of improving, and it provides teachers and schools with a more accurate picture of a student’s strengths and weaknesses.

The only way to track individual student progress is to know where the students are in the school system, when they change classes, schools or states so you know you are comparing the same student, and not roughly the same group of students.

As a parent I want to how well my kids are doing at school and how well they can be expected to do. One very easy way of finding that out is by having a comparison with a controlled sample – like their class mates. But that is what the education officials want to avoid doing. This proposal allows the government to better understand how kids are doing at school but not parents.

Objections to the introduction of unique student identifiers, as they were called by Julia Gillard, are misplaced. To suggest as the opposition has that “children have names and we should use them” is nonsense.

The only advantage I can see to life-long tracking through the school system is that Centrelink will have access to ‘Days Absent’ statistics when calculating welfare benefits. Its almost worth it. All up, however, this provides no new information to parents, reduces our civil liberties, and is unlikely to benefit school kids.

Possum has a very interesting argument and analysis that suggests ‘no’. Well, at least, ‘probably not’.

What he does is compare the rate at which houses with insulation burn down and tries to differentiate between the stock and flow effects that we might observe. He actually comes up with the counter-intuitive result that the Garrett program has reduced the risks of house fire.

Under Scenario 1 where 90% of fires are attributable to new installations, 1 in 909 installs lead to fire. Under Scenario 2 it’s 1 in 1636 installs lead to fire while under Scenario 3 it’s 1 in 8182 installs.

Under the Garrett insulation program, the rate is 1 in 11,828 – a much smaller rate of fires than what existed before the program.

The Insulation Program Safety Multiple is simply the Garrett program rate divided by the 2008 rate – it shows how many times safer the Garrett program is compared to each of the three scenarios for 2008.

While I’m not sure that his final analysis is correct, I do think he is on the right track and asking exactly the right question; what is the marginal increase in housefires due to the Garrett insulation program?

First we have to think about the ‘stock effect’. Each year there will x number of housefires due to existing insulation. Second there is a flow effect. Each year there will be y number of housefires due to newly installed insulation. We will probably only observe z housefires due to insulation in any one year, where z = x + y. Possum cites the federal government as saying that each year there are 80 – 85 housefires associated with insulation. So 82.5 = x + y (to take an average).

Possum tells us that in 2008 there were 3,183,265 houses with insulation and the rate of increase each year was 67,500. Okay. The Garrett program insulated 1,100,000 houses since July 2009. (That seems a bit high.) There are 93 housefires associated with that program – maybe more, but lets stick to Possum’s numbers. Remember also that this program only started eight months ago – so those 93 house fires are not an annual number. What we don’t know is whether that 93 includes the stock of house fires that we would normally experience or not. But going back to our equation we have x + 93 = z so far for the year. Adding to the complication is that some houses with insulation already were reinsulated. We don’t know whether that reinsulation has added to the risk of housefire or not.

Possum works out rates – what is the rate of increase in housefire risk due to insulation? The analysis here turns on how we allocate housefires to either the stock or the flow. The increase in housefires does look very large, but the flow in the past eight months has been massive relative to previous years (1,100,000 v 67,500). Possum is able to show, so far, that the increase in housefire risk is lower. But he is comparing the eight months of this year to the whole of 2008. Furthermore, I think, he has made the implicit assumption that shoddy workmanship will result in a housefire almost straight away and that the future stock of housefires will be unaffected by current shoddy workmanship. So we could be facing a housefire epidemic (not sure if that’s the correct term).

So where does this leave us? Possum could well be correct and people could well be over-reacting to a massive increase in the flow of insulation that would statistically give us an increase in housefires. Given their behaviour I don’t think the government believes this to be the case. They could have said this three weeks ago. I can’t believe that they couldn’t articulate this argument if they believed it to be true. Afterall they would have expected this to happen. Of course, that doesn’t change the fact that Possum could be right. On the other hand if, as I suspect, he has under-estimated the marginal effect of the new insulation on both the flow and the stock then we might have a massive increase in housefires due to this program over the next few years. Unless, of course, if an audit is undertaken of the work already undertaken and any problems fixed (at great expense).

Given the paucity of data I don’t know how Possum’s analysis could be improved upon to get a better feel for the numbers. But he is very handy at monte carlo analysis so it would be nice to see some scenario analysis using that technique.

Boskin’s article in the Wall Street Journal is worth reading and outlines how politicians have been seeking to change statistical collections to achieve better results. Fortunately most people can see through such charades.

I have a significant concern that the wellbeing framework (which comprises the triple bottom line of economic, environmental and social) promoted by the Sarkozy Commission including Stiglitz will result in meaningless, symbolic statistics.

It would be nice to directly measure utility, but the Sarkozy approach is in the wrong direction. The status quo – national accounts with GDP etc – remains the most useful such statistic until an alternative is proven to be superior.

Earth Hour is this year being held on Saturday 27 March at 8:30pm. That otherwise sensible people can think that turning off their lights for an hour demonstrates their commitment to the fight against climate change shows the morphing into a religion is this cause.

And as the Canberra Times on 23 February demonstrated, it is symbolic. The article says that the ACT’s environment minister Simon Corbell said that Earth House was

more than a symbolic gesture.

Later in the article Corbell was quoted as stating:

Turning off lights for one hour is an important symbolic gesture to help protect the world from the threats of climate change …

So there you have it: Earth House isn’t a symbolic gesture, it’s an important symbolic gesture.

And finally we have it confirmed that the ACT government is a local council. By no less an authority than the WWF.

When Earth Hour arrives, I won’t be doing anything differently. I won’t be specially switching lights off, nor on.