Speaker: Inequality: Too big to ignore
104 Responses
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1: Dr RUSSEL NORMAN to the Prime Minister: Does he agree with the OECD that "when income inequality rises, economic growth falls"?
2: ANDREW LITTLE to the Prime Minister: Does he agree with yesterday's OECD report that "focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run"; if not, why not?
3: TIM MACINDOE to the Minister of Finance: What progress has the Government made in delivering on its economic objectives for 2014?
The first three questions for oral answer in the House today.
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How could we let this happen? Well, a quick perusal of the main media websites gives us some clue. On TVNZ, TV3, Herald and Stuff, the story is confined to the margins. Credit to Morning Report for leading with it (I only heard the headlines, not the interviews), but overall, a global report from the OECD is given less prominence than any press release by the "Taxpayers' Union".
Inequality depends on ignorance. In modern New Zealand it's got ideal conditions for growth.
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BenWilson, in reply to
How would you set up the necessarily-controlled macroeconomic environments in which to conduct such experiments? You need a country-sized (or at least one the size of a large city) economy with which to experiment, and another one to act as the control.
I don't know if that's true. You can experiment on a single subject without a control. My doctors have been doing it to me for years. Try a drug, observe effect. Try raising dose, observe effect, try dropping dose, observe effect. There's hundreds of variables they can't control, but over time, a pattern emerges, whether the drug has the desired effect, and what side effects it has. From the drug trials conducted on a massive scale they do know what to expect, but they still really can't be sure without just trying to see, what the effect will be on a particular subject. I buy in to the experiment because I'm even more interested in the answers than them, because it directly affects my wellbeing.
What I'm suggesting is that a social attitude about whether such controlled economic experimentation could be allowed might actually allow the society to genuinely discover what works for it. Since we're all subjects of such an experiment anyway, but just without any kind of methodology or consistency, or even plan, it doesn't seem like some kind of evil path to me. It seems like the difference between trusting medical science or runecasting and witchcraft.
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Matthew Poole, in reply to
You can experiment on a single subject without a control.
To something of an extent it can be observed in the US, where different states run different policy settings inside the same national-level policy framework and economy, but even then it is easier to disprove a relationship than to prove a causal one exists.
“Proof” to the standard required by economists *cough* could be achieved with a single subject, but actual scientific analysis to the point of being able to claim causality means controlled observational experiments. Willing to be contradicted by Bart, as our resident expert on “the one true scientific method”, but as I understand it you are on really shaky ground to make a change to conditions for a single subject and then claim causation of any observed outcome.
Also, because of the time scales involved in this stuff, you would have so many other potential variables that without a control you would really struggle to assess much of anything. A single subject under observation through the period 2007-2010, for example, would have been affected by the GFC as well as whatever policy tweaks were made, and good luck trying to accurately separate the effects of the two.
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BenWilson, in reply to
as I understand it you are on really shaky ground to make a change to conditions for a single subject and then claim causation of any observed outcome.
I don't think you even need to be a scientist to see that as completely and utterly false. I could drop a single rock repeatedly to observe extremely reliably that when I open my hand, it falls to the ground. It would only apply to that rock, at that point, but that might be enough. I could very reliably see that it was the opening of the hand that caused the rock to fall to the ground, not the other way around, just from the fact that causation can't flow backwards in time.
Anyways, I think you might be misunderstanding the level of proof that I'm talking about. There's a whole world between "we have no idea" and "we are absolutely certain" and it can take a long period of time to move from one to the other, and it is during that period that we are conducting science, not after it.
you would have so many other potential variables that without a control you would really struggle to assess much of anything
Can I ask whether you are aware of any such experiment being conducted to actually make that claim with any level of confidence? It sounds to me like you're saying no experiment can or ever has been conducted in macroeconomics. If so, I have to question on what basis you think we understand anything about it?
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The title of this blog post is sadly inaccurate. It seems the OECD report is very easy to ignore for the MSM as it's already relegated to the nether regions of Stuff and the Herald websites. Call me a left wing conspiracy theorist (let's face it, my friends do) but it seems rather odd a story so significant is shunted off the main pages so rapidly while stories about someone from another country losing their temper (nutting off?) on a plane maintain ascendency. At least it's still on the front page of RNZ's website even if is an article about Blingish's 'contesting' of the OECD report findings.
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Bart Janssen, in reply to
How could we let this happen?
It's not just ignorance. It's also selfishness. The public voted for tax cuts and got them. The direct consequence of those cuts was in increase in the wealth of the rich and the simultaneous cutting of social welfare systems that help to lift the income of the poor.
The logic was by making the rich richer the economy would boom and the poor would become wealthier too. This is in effect the exact experiment that Ben is talking about in reverse.
Six and a half years later and the rich are indeed richer and the gap is wider - exactly the intent of the tax changes. The question of course is, did the economy grow? Well yes, it did. But the OECD says it grew less than it should have and the government says, no it didn't.
There is a circularity in the arguments but in the end as a lay person when it comes to macroeconomics I am faced with believing Key and his caucus or believing the OECD and their team of experts in the field.
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Bart Janssen, in reply to
Try a drug, observe effect. Try raising dose, observe effect, try dropping dose, observe effect. There’s hundreds of variables they can’t control, but over time, a pattern emerges, whether the drug has the desired effect, and what side effects it has.
But Ben you seem to be suggesting that such an analysis has not been done.
The OECD has access to economic indicators and political policies for nearly every country in the world over many decades. Their experts, yes I know they are merely economists, have looked at the data and concluded that there is a correlation between inequality and economic growth. They have concluded there is a plausible cause and effect relationship.
For some reason you are treating their statements as if they have done no analysis at all and have no experience and knowledge at all.
I get that you are playing devils' advocate but at some point it just becomes denial.
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izogi, in reply to
overall, a global report from the OECD is given less prominence than any press release by the “Taxpayers’ Union”.
Don’t worry, I’m sure the Taxpayer’s Union will come out to discuss this report soon enough.
And here it is (scroll down for the full media release). It basically seems to be attacking the opposition argument’s use of the term “trickle down economics”, claiming that the Taxpayer’s Union and “centre-right politicians” have never argued for a trickle-down theory, and so it’s a big giant straw-man being used as an evil debating tactic by Grant Robertson and Russel Norman to distract from the actual issues.
Apparently our taxes are in good hands with this government.
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Bart Janssen, in reply to
“Proof” to the standard required by economists *cough* could be achieved with a single subject, but actual scientific analysis to the point of being able to claim causality means controlled observational experiments. Willing to be contradicted by Bart, as our resident expert on “the one true scientific method”, but as I understand it you are on really shaky ground to make a change to conditions for a single subject and then claim causation of any observed outcome.
humphh
It is usually really hard to establish causation except in the simplest systems. For the most part science works on a cycle of observation
"hey these things seem to happen together"
through hypothesis
"hey what if this causes that"
through experiment
"lets wiggle this bit"
observation again
"hey it happened again, you go stand under that bit and I'll try it again"
failed experiment
"how was I to know you standing there would make it do that"
new hypothesis
"this causes that except when Fred stand under it"
new experiment
"woot ...see it did it again"
reviewers
"you forgot to account for Fred's body odour problem"
new experiment
"I know the water blaster hurts but it's the only thing that will remove the smell"
publication
"Beer!"
...The best you get is hypotheses that are consistent with repeated observations. Most hypotheses include some kind of cause and effect statement or inference and most hypotheses survive only until the experiment that disproves them.
But even then when a hypothesis survives a long time most scientists are nervous about hard cause and effect statements.
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It's fairly simple to understand how people at the lower end having more money stimulates the economy. Robert Reich has been explaining this for many years.
One of the flip sides (I reckon) is how the rich getting richer creates investment bubbles. People who have way more cash than they need or want to spend, have to find a home for it. They invest in things that will maintain or increase in value and/or deliver a good return- like property. All that money looking for a home fuels bubbles; housing is just one (and it's fuelled not just by the wealthy directly buying up houses; it's also banks being able to access large dollops of money -overseas money, for NZ - to lend.)
Also: Morning Report's interviews drove me a little crazy. No one even mentioned the one thing which a/ caused inequality and poverty in NZ to shoot up, and b/ is one of the most obvious ways to redistribute wealth - the 1991 benefit slashing, and the way no government since has considered redressing this. Instead we get harder and nastier daily on beneficiaries- with the implied assumption the only good beneficiary is an ex-beneficiary.
Makes me feel sick. -
BenWilson, in reply to
I get that you are playing devils’ advocate but at some point it just becomes denial.
Believe me, it's not denial. My aim is more to question how it is that we can't adopt an attitude in which methodical experimentation is acceptable. That's not the same as just collecting data. It makes a conscious and deliberate attempt to discover the nature of causes. I'm not blaming anyone for not doing this, because it's not like there's someone even responsible. We're all responsible, and only in the way that people are responsible for not knowing something until they try to discover it. A quite normal kind of responsible, but also a changeable one.
For some reason you are treating their statements as if they have done no analysis at all and have no experience and knowledge at all.
Not at all. I'm asking some question, is all. I was actually hoping for this discussion not to be adversarial at all, and that you might have some useful insight into how economics could be more scientific, rather than concluding that the best we can do is collect some data and trust a bunch of experts to tell a good story, and throw up our hands in despair at the stupidness of people and the evilness of our political system.
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BenWilson, in reply to
The best you get is hypotheses that are consistent with repeated observations.
I’m really curious whether, in practice, you make your hypotheses in advance of your experiments.
ETA: Actually, to be a bit more general, I'm very interested in every bit of light you can shed about how hypotheses come to you.
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Rob Stowell, in reply to
I am faced with believing Key and his caucus or believing the OECD and their team of experts
Tough eh. But that nice Mr Key made millions, so he knows all about money. How much did any of these 'so called experts' make on the international money-markets?
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Bart Janssen, in reply to
I could very reliably see that it was the opening of the hand that caused the rock to fall to the ground, not the other way around, just from the fact that causation can’t flow backwards in time.
Which is great for a relatively simple system such as a rock and your hand, in the presence of a single large gravitational source, in a non-viscous fluid.
But macroeconomics? No way any experiment is simple enough to eliminate any doubt. Many sepaarte experiments with overlapping conditions can strongly support a hypothesis (that is exactly what the OECD and their economists are saying BTW). But nailing cause and effect level proof, no way.
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Rob Stowell, in reply to
I’m really curious whether, in practice, you make your hypotheses in advance of your experiments.
How could you design an experiment without doing this?
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BenWilson, in reply to
How could you design an experiment without doing this?
I'm not asking about the theory of doing experiments, I'm asking about the actual practice. It's quite possible to not make a prediction about what will be observed, but to just design an experiment that pits some variable against another, make observations, and then guess the hypothesis at some point that isn't right at the beginning.
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BenWilson, in reply to
No way any experiment is simple enough to eliminate any doubt.
Of course that's an impossibly high expectation. But it can be a lot better than having no idea at all well before then.
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Bart Janssen, in reply to
My aim is more to question how it is that we can’t adopt an attitude in which methodical experimentation is acceptable.
Ok I accept that.
So can you accept the in effect there have already been multiple experiments? Each time a government makes changes to policy that affect both inequality and economic growth an experiment is being performed.
But two problems exist:
1) multiple variables change simultaneously, even with the best will in the world it would be nigh on impossible to design a single variable experiment that examined this question.
2) For the most part no government actually tries to reduce economic growth.So none of the experiments are great, but there have been quite a large number over the last 5 or so decade over all the countries the OECD compares.
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BenWilson, in reply to
Each time a government makes changes to policy that affect both inequality and economic growth an experiment is being performed.
Is it really an experiment if no hypothesis is made beforehand, as Rob Stowell asks?
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Bart Janssen, in reply to
I’m really curious whether, in practice, you make your hypotheses in advance of your experiments.
Fuck yeah! it costs way way too much money, time and emotional energy to just wing it. We spend literally hours with whiteboards drawing models. Hours and hours. We spend ages with journal papers figuring out what other peoples experiments mean for our next experiment. All to get a good hypothesis.
It is ALL about the hypothesis.
ETA: Actually, to be a bit more general, I’m very interested in every bit of light you can shed about how hypotheses come to you.
Ok because I'm in avoidance mode (paper writing)
It really does work the way it is taught in high school.
We* make observations ourselves. We read the literature, which is all about the observations made by other researchers in the field** (and sometimes out of the field).
We then draw models, paper, whiteboards, napkins, shower door, whatever is handy. The models try and incorporate all the observations. If we have enough observations and put together a good model the next experiment is obvious. That is, the model makes a prediction that something will happen when you perturb the system. An arrow leading from A to B suggest if you break A then B will do something, or stop doing something.
Then it's simply (snort) about figuring out how to break A and only A.
* We is a team, at the moment our group is three and a half plus two students plus a collaborator plus anyone else around the place who will help us if we get stuck.**field in this sense means our research subject
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Matthew Poole, in reply to
Each time a government makes changes to policy that affect both inequality and economic growth an experiment is being performed.
Is it really an experiment if no hypothesis is made beforehand, as Rob Stowell asks?
Unless one attributes to politicians in democracies an extraordinarily-cynical level of bad faith in their dealings with their electorate, the hypothesis behind any policy change is “This will make things better for people in our electorate by delivering xyz outcome,” surely?
Economic policies changes are, generally, about encouraging increased economic activity, tempered against the aim of not triggering excessive levels of price inflation. That’s the hypothesis, in a nutshell: we pull this economic lever and the economy will perform in a more-efficient manner thus delivering growth.
ETA: As much as I loathe National and what they stand for, I don't think they actually, actively aim to make things worse for the population as a whole with the policies they pursue. That might be the result of their ideologically-driven policies, but it is easy to see the misguided belief in "the market will deliver better outcomes for all" in what they do.
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Bart Janssen, in reply to
It’s quite possible to not make a prediction about what will be observed, but to just design an experiment that pits some variable against another, make observations, and then guess the hypothesis at some point that isn’t right at the beginning.
Sure. You could do that, if you were independently wealthy and never had to justify your work or apply for funding or publish you results. Or you were blindingly lucky.
But really we actually do make hypotheses.
To be fair we sometimes know that our hypothesis is incomplete or even likely to be wrong. The key is not that the hypothesis be right but that it defines an experiment that is possible and will test the hypothesis.
Note also that hypothesis driven science is not the only type of science, just the only type I do.
It is possible to do discovery science, or exploration science. But even then there is the underlying hypothesis that if you look this way or with that tool you will observe things that are interesting. Things that will enable you to develop hypotheses ...
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Ben,
You are describing a single case crossover design, and Matthew Poole's dismissal of your suggestion leads me to think he might be a Rocket Scientist rather than a Statistician. ;-)
I'll try and keep this to a level which is appropriate here in a place of intelligent people who aren't statisticians, but be warned I don't always succeed.
As to how strong the inference is from these sorts of international comparison studies, it depends on whether the OECD and the IMF have considered each country separately (as a single case crossover design with substantial policy changes within each country representing changed treatments) and then looked at whether they find the same effects (magnitude and direction) replicated across counties. If instead they have done what is far too commonly done in macroeconomics and international comparisons and looked at ecological correlations based on using the countries as cases (albeit in some cross-correlation in a lagged time series style) then the correlations they are working with are unrelated to the real underlying correlations (let alone causes) and are not particularly informative.
Reference to ecological correlations
Since I haven't read the analysis methodology of the studies in question I don't know what they have done. What I do know is that rather a lot of international economic and social comparisons suffer from this. It seems to be accepted practice to interpret analysis based ecological correlations as if they tell you something useful. The only redeeming thing is that if both sides of the debate are using the same approach then this OECD work acts as another refutation of some beliefs (eg "trickle down") by people working in the same analysis paradigm. Much of macroeconomics and international comparisons seem to be based on "ecological correlations" and relatively decoupled from microeconomics. I agree that you are right to feel uneasy about that.
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BenWilson, in reply to
If we have enough observations and put together a good model the next experiment is obvious.
Yes, that's pretty much what I was suggesting to Rob before. It's not like it's a crime to look at your observations and then predict a model that looks like the pattern you see there. It's probably not going to shed huge light, but maybe what you're seeking at that point isn't insight, but greater certainty. But I suppose you could technically say that such a hypothesis has no place in that experiment, but could be in the next one.
But really we actually do make hypotheses.
I'd hope so. What I'm interested in is the way in which they come about - ultimately the aim IS the hypothesis, rather than just an agglomeration of unanalyzed data.
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