Nudged or Nannied?

The BBC cover the continuing debate on behavioural interventions in the UK

Education cuts, the National Plan and class sizes

Because of the dire fiscal situation, it seems some cut-backs to educational spending would be inevitable. The National Plan is pretty vague on education (amongst other things). Discussing the plan in the Irish Times Colm McCarthy remarked “The plan reflects successful lobbying to exempt the education budget from severe cuts. This is being justified in terms of the importance of holding with existing targets for pupil-teacher ratios, notwithstanding the dearth of evidence that reducing these ratios weakens educational outcomes in any measurable way.”

Is this really true? Well no. Few parameters in the economics of education have been so well studied as the effect of class size on educational outcomes. There are dozens and dozens of studies. So what’s the answer then? Well this is where it gets complicated. Firstly, we have no good evidence for Ireland that I am aware of. If this is what Colm McCarthy means then he is correct but then we don’t have any evidence on lots of things for Ireland and absence of evidence is not evidence of absence. What does the international evidence say then? The first complication is that one should not expect one answer. Primary schools are different from secondary schools, a class of 40 is different from one of 20 and Korea is not Bangladesh so variation in measured effects is to be expected. A further problem, which non academics may not care about but is important, is that methods for estimating these effects vary widely and this partly explains some of the variation.

The most well studied country is the US. The STAR experiment in Tennessee is generally considered a well designed study and points to significant benefits from smaller classes but in that case the reductions were big (around 9 pupils on average). A “natural experiment” in Connecticut came up with a “precisely estimated zero” effect (Hoxby). The famous Maimonides Rule study for Israel (Angrist & Lavy) found positive effects of smaller classes but similar work for the Netherlands found the opposite (papers by Levin, Dobbelstein et al). A cross country study using TIMSS data (Woessman & West) found a mixed bag of results. Some reviews of the evidence point to negligible effects over all (see the work by Eric Hanushek) while other meta-analyses point to clear benefits from reducing classes. So rather than a dearth of evidence there is too much of it or at least there is not enough consensus and you can pick a study to suit your prejudice (or “prior” to give it its scientific name).

What’s striking about this literature is its near obsession with one variable, class size. Other measures of quality are almost entirely ignored. Ask yourself or someone else was their school good and they will quickly you reasons why it was or wasn’t. Class size tends not to be prominent a reason in my experience. This isn’t scientific but it does remind us that lots of things, some hard to measure, go into making a good school. One factor that everyone mentions is their teachers. Curiously, measuring the quality of teachers and the effect it has on outcomes does not feature much in the policy debates.

In the absence of clear evidence it probably makes sense that any damage from increased class effects is minimized by favouring more socially disadvantaged schools and those schools with the biggest class sizes.

Economic crisis and our elites

Ken McKenzie, formerly of the Geary Institute, offers an interesting psychological perspective on how the crisis might change how our elites do their business.

Ireland Bailout

The government statement on this is available on this link

Judging by the initial reaction to the release of the Wikileaks documents relating to US diplomacy and the fact that the world's media seems already to have gone home, it is likely that Ireland will not be in the limelight as much in the next few weeks. The agreement is very close to what has been discussed in the media in the last few days - a 50 billion fund that will fund borrowing on the fiscal side, 10 billion as a capital fund for the banks and 25 billion further for capital contingencies. We are kicking in about 12.5 billion from the pension fund. We have been given until 2015 to make the full fiscal adjustment down to three per cent. There is no proposal to share losses with senior bank bondholders though it is not clear what is implied for junior bank bondholders. If there are no further bank problems then debt will top off somewhere around 110 per cent and then start to decline. But if we have to eat into the contingency fund, the more unlikely this scenario will become. Also, it is so far unclear what is meant by a 5.8 per cent interest rate and I look forward to reading more detailed analysis of what this actually means.

Now switch to www.irisheconomy.ie for further enlightenment.

Added Material:

Paul Krugman asks "what is the Gaelic for you gotta be kidding me".

John McHale comment on the "dissappointing" rate of interest. Particularly disappointing that the EU is charging a lot more than the IMF.

Mortgage Ad from 2007

A nice one from the Youtube Vaults (thanks to a student for sending this on),

The proposed reduction in the National Minimum Wage

The government has proposed reducing the national minimum wage (NMW)by €1 per hour (see discussion pp35-36 of the National Plan). This has generated a lot of comment in the media and the blogosphere. Here is my reaction.

While economics is often castigated for what it doesn’t know, it is generally accepted that the demand for labour does slope down and the supply slopes up. This means that a minimum wage above the equilibrium will increase unemployment. There are circumstances in which this does not happen (labour market monopsony) but I think the presumption should be that these are the exception in the absence of evidence to the contrary. Unfortunately, as with so many other things, we have no real evidence for Ireland. The international evidence, of which there is a lot, is mixed but one has to question how relevant much of it is to the current Irish situation anyway.

For reasons I don’t entirely understand, discussion about the minimum wage evoke visceral and often incoherent responses- see the rants on the “Irish Economy” blog of late. Even amongst the more coherent, dogma seems to lie close to the surface: those who question the merit of a NMW or advocate its reduction are accused of some ideological bias. Note that only other people suffer from ideological bias, not oneself. Clearly Vincent Browne, the Labour Party and the trades union leadership are above having any ideology. I think the probability of there being a reasoned public debate on the subject is precisely 0. Those who argue against the present proposal (& similar policies) are often motivated by a genuine concern for the less well-off, something which is to be applauded. But, in my view, they do not seem to be able to grasp that a NMW can actually help condemn someone to unemployment.

So will the policy matter? It is hard to say: like most things “it depends”. It depends on how it is implemented. The newspapers today suggest that it will only apply to new hires. This is not mentioned in the plan. If this is the policy it is both stupid and cynical. One would not expect many new hires in the present market so why bother? It looks like a cosmetic nod to the outside world – who are funding us- with a broad wink to the domestic world “Ah, we’re not really reducing it, lads”. Nobody is fooled by this. Do we really want international observers to think that we are not serious about getting our economy going again? According to one report the leader of the Green Party is trying to distance the government (& presumably himself) from the policy by claiming that Commissioner Olli Rehn required it (shades of "An older boy made me do it, sir"). There is also the possibility, if the policy applies to new hires only, that firms react to it by letting workers go simply so they can hire others at the lower wage.

The interaction between the NMW and other policies (Martin Ryan touched on this in comments below) is central. One has to compare the rate with the alternative, one element of which is the level of unemployment benefit. It is important remember that replacement rates are complex because of various social welfare entitlements (including medical cards) that the unemployed may receive. So there are policy complementarities that need to be worked out. If replacement rates remain high – as they are for some in the population- then any positive employment effects will be attenuated. Another detail is what happens to the various sectoral arrangements where a lot of the low paid workers actually are.

My guess is, the government is right to do what they are doing (assuming they are serious about it), it might do some good, is very unlikely to do much harm but the devil is in the details.

Krugman on Ireland

Via IrishEconomy Paul Krugman on the Irish Economy. Krugman is arguing that the Irish taxpayer is practically being eaten to bail out reckless lenders and financial institutions.

Risk Taking and Attractiveness in Chess

New IZA Working Paper

Anna Dreber Almenberg, Christer Gerdes, Patrik Gränsmark

Beauty Queens and Battling Knights: Risk Taking and Attractiveness in Chess

Abstract:
We explore the relationship between attractiveness and risk taking in chess. We use a large international panel dataset on chess competitions which includes a control for the players' skill in chess. This data is combined with results from a survey on an online labor market where participants were asked to rate the photos of 626 expert chess players according to attractiveness. Our results suggest that male chess players choose significantly riskier strategies when playing against an attractive female opponent, even though this does not improve their performance. Women's strategies are not affected by the attractiveness of the opponent.

http://ftp.iza.org/dp5314.pdf

Behavioural Economics on RTE Radio 1

Earlier today, behavioural economics featured on the Pat Kenny show (there are some problems with this link) on RTE Radio 1. I don't think the podcast is available yet, but details about the show are available here. I happened to be listening earlier; the application of behavioural economics to consumer behaviour was the main theme. A talk by David Laibson from earlier this week in Brussels (who also spoke in UCD this week) was mentioned, as was a talk by Cass Sunstein.

Behavioural Economics in Song: Kate Bush

In 1985, Kate Bush released Hounds of Love. In the eponymous title track, she sings:

"I don't know what's good for me, (Well) Here I go... Help me, someone; Help me, please".

On a lighter note

Five Years

Gerard O'Neill on Turbulence Ahead points to the apt song for the day that's in it

Main Points of Four-Year Plan

From the RTE website, below are the main points of the four year plan.

Main points:
* €15bn correction over four years
* Public expenditure down €10bn, tax up €5bn
* Corporation Tax will remain at 12.5%
* Social Welfare to be cut by €2.8bn by 2014
* VAT will rise to 23% by 2014
* Health spending to fall by €1.4bn over term of the plan
* Minimum wage to fall to €7.65 per hour
* Property tax in place by 2012
* Domestic water charges to be in place by 2014
* Plan includes 'full implementation of the Croke Park deal'
* New entrants to Public Service will face a 10% pay cut
* Public Service pensions to be cut by an average of 4%
* A new government could renegotiate plan - Enda Kenny

Ireland's Fiscal Adjustment

Ireland's four year fiscal strategy is available on this link

Like most people here, I will be digesting this over the course of tonight.

Education and health behaviours

A priori it seems reasonable that one of the benefits of more education is better health. For a start there is a positive socioeconomic gradient: more educated people have better health on average. That does not imply one causes the other: both are forms of human capital so it could be some common factor like discount rates that drives the association. But one might think more educated people make better health investment decisions if they are more aware of health risks and there may also be direct cash effects. This paper however finds no evidence of effects.

The causal relationship between education, health and health related behaviour: Evidence from a natural experiment in England
Nils Braakmann (Newcastle University Business School)
I exploit exogenous variation in the likelihood to obtain any sort of academic degree between January- and February-born individuals for 13 academic cohorts in England. For these cohorts compulsory schooling laws interacted with the timing of the CGE and O-level exams to change the probability of obtaining an academic degree by around 2 to 3 percentage points. I then use data on individuals born in these two months from the British Labour Force Survey and the Health Survey for England to investigate the effects of education on health using being February-born as an instrument for education. The results indicate neither an effect of education on various health related measures nor an effect on health related behaviour, e.g., smoking, drinking or eating various types of food.

Brendan Walsh on Leaving Cert. Points and University Performance in Economics

Title: Leaving Certificate points and performance in first arts economics: a study of the 1987/88 UCD class
Authors: Walsh, Brendan M.; Garvey, Padhraic
Date: Apr-1989; UCD Centre for Economic Research Working Paper Series WP89/6

This paper shows that there is a weak association between Leaving. Cert points-scores and university performance in Economics. The authors recommend that the optimal scoring scheme for entry to university Economics would give more weight to Mathematics. It is also recommended that Irish should be given less weight, or indeed none at all. Finally, the authors recommend further research that would include socio-economic and psychological factors amongst the variables explaining academic performance at university.

Mortality consequences of receiving income

Given the falls in income that people in Ireland are experiencing & will continue to experience one might wonder is there upside? Well it turns out that the receipt of income can have a short run effect on mortality: increasing it, that is. So given that there is less of that around, maybe its not all bad news.

The short term mortality consequences of income receipt
William Evans Timothy Moore

Many studies find that households increase their consumption after the receipt of expected income payments, a result inconsistent with the life-cycle /permanent income hypothesis. Consumption can increase adverse health events, such as traffic accidents, heart attacks and strokes. In this paper, we examine the short-term mortality consequences of income receipt. We find that mortality increases following the arrival of monthly Social Security payments, regular wage payments for military personnel, the 2001 tax rebates, and Alaska Permanent Fund dividend payments. The increase in short-run mortality is large, potentially eliminating some of the protective benefits of additional income.

Losers from the Recession

I have been coming back to this topic more or less since this recession started. There are very few in Ireland who have not now been sizeably affected in terms of economic welfare by the recession.

(i) People between the age of 25 and 40 who purchased at the top of the market and are now struggling to make mortgage repayments. Those outside of the country should realise that Ireland has extremely punitive bankruptcy regulations. "Jingle mail" is rare in Ireland partly for cultural reasons and partly for legal reasons. The upshot is that an increasing number of predominately younger families are living in houses they can no longer afford, with almost 40,000 mortgages now in 90 day plus arrears. Morgan Kelly raised the possibility of a wave of defaults further destabilising the banking system. The basic human cost is also worth considering. A group of Irish economists proposed a debt forgiveness arrangement last week and a government advisory group proposed a part-freezing scheme, whereby mortgage-holders in distress could put up to a third of their mortgage "on ice". I honestly can't see these helping people who were given 100 per cent mortgages on the basis of two-incomes and are now trying to service those mortgages with only one income and the other coming under pressure. While many have pointed out that older people have not borne much cost from this recession, one channel where they might be taking a big hit is through their children with a lot of anecdotal evidence of parental bailouts of children's mortgage payments. The policy needs to be given to someone with a proper mandate to deal with it, including the development of a wide range of policies including some element of freezing, but also more active sale-and-lease-backs and reform of bankruptcy laws. Leaving people in limbo is not a humane strategy and it is getting to the stage where those who can't as opposed to wont pay may simply need, hard as it will be for them, to call the authority's bluff.

(ii) We have blogged continuously on unemployment. It is unfortunate that the ongoing emergency nature of the financial situation is placing this issue on such a back-foot. We are spending a large amount of money on welfare payments and also on the state training agency. As of yet, despite the announcement of a replacement of this agency, there has been no real coordinated effort to utilise the various government agencies to provide a buffer to the problem of unemployment. Our live register figures are nudging 450,000. While ultimately, the best solution to unemployment is a solution to the financial position, there absolutely needs to be urgent focus on the short-term labour market situation in Ireland. In particular, young people are not getting sufficient opportunity to signal their productivity to the wider labour market. The youth labour market problem is both potentially the most costly in the long-run for the country and the most fixable. We are dealing with a cohort of people with very low debt and earnings expectations who, for the most part, will be happy to work for low wages provided they are well-position when the Irish and global economy settles down. For older workers, cheap and cheerful internship-type solutions may be less feasible. There are certainly a cohort of older workers in sectors such as construction for whom it may not be possible to attain long-run employment again. Given that many construction workers begin work far earlier in life, it is worth strongly considering the extent to which it would be possible to allow those who wished to, to simply retire and take the state pension rather than going through a farcical process of retraining reluctant workers who have spent 40 years or more in a given sector into careers they have neither interest nor aptitude in. For workers who are still desperately seeking employment within construction, it is worth strongly considering redeploying capital spending programmes such as Metro North toward labour-intensive repairs and other shovel-ready spending.

(iii) The effect of the growing levels of unemployment on the expectations of children and teenagers coming through is something that is worth considering. Unemployment and economic insolvency are intergenerational phenomena but it would be nice to think that the younger teenagers of today who will likely see better times by the time they reach the labour market do not set their sites too low just because we are going through a period of economic turbulence and likely ensuing stagnation. Current conditions in Ireland have never been a very guide to ensuing conditions and it would be a shame to see people diminish the sense of enthusiasm that is required to get out there.

(iv) Regardless of the severity of the economic conditions, it should be remembered that being lonely or suffering chronic illnesses that involve physical pain are still two of the main negative impacts on well-being along with persistent mental problems. I won't try to put numbers on this during this post but it is worth remembering that countless studies show that the fixed component of well-being and the component related to defined states such as disability and chronic illnesses far outweigh the component explained by fluctuations in economic conditions.

In general, a well-being approach to the recession would focus less on income fluctuations in the middle and top brackets and far more on the components that actually influence well-being, namely ensuring that people are not trapped in an untenable debt position and are not trapped in unemployment. It is unconscionable to leave people in a situation where they simply cannot pay their mortgage yet are receiving letter after letter demanding payment, just as it is completely wrong to make no attempt to mobilise the still vast capabilities of the state to give young people a chance to develop a labour market track. Unfortunately a lot of commentators think of this stuff as fiddling while Rome burns but this is simply a wrong view. A team of people in government will work out a deal with the EU/IMF group and the upshot will be that we will finally have full numbers on the extent to which we have fallen as a country and hopefully things then people will become convinced that we are actually looking at the bottom rather than a fudge. Things will then progress at a much more subdued overall level and trajectory of income than reigned for the Tiger years but we will still be a relatively high-income country by any standards with no excuses for not getting to grips with these issues.

Honohan on IMF/EU Loans

Those of you looking for a clear explanation of what is going on in Ireland at the moment would benefit from listening to Patrick Honohan's interview on Morning Ireland this morning. It is available on this link Honohan's "expectation" is that Ireland is about to receive a "contingency loan" that could be drawn down, if needed, to secure our ailing banks. The Governor refused to give a precise speculation and also acknowledged that it wasn't his decision but stated that his expectation was that agreement will likely be reached very soon, and he did not think that 80 billion at roughly five per cent interest were bad guesses (he uses "tens of billions") when they were put to him by the interviewer.

Nov 18th: IMF Arriving at Terminal 2, Dublin Airport

(HT: Cathal G)

Shocking news about progression to university in Ireland

The news from this years' Irish Times "feeder lists" is... well not news at all since it tells a depressingly familiar tale of unequal access to university.
Going to university and higher education generally is not, of course the be-all and end-all of secondary education but the government does not allow any other comparative data on educational attainment to be published at the school level, lest people be allowed to make informed decisions.

Irish Economic Association Call for Papers

2011 Irish Economic Association Annual Conference - Call for Papers

Venue: Radisson Blu Hotel, Ennis Road, Limerick

Date: 14/04/2011 to 16/04/2011

The twenty-fifth annual conference of the Irish Economic Association will be held from 14th to 16th April 2011 at the Radisson Blu Hotel, Ennis Road, Limerick. The Association invites submissions of papers to be considered for inclusion in the conference programme.

Download the details of the submission procedure below. The deadline for submission is Friday 14th January 2011. Contact: john.sheehan@ucd.ie.

www.iea.ie.

Download 'Call for Papers' Details

ESRI Geary Lecture: Canice Prendergast

ESRI Geary Lecture: "Is Pay-For-Performance Effective?"
The second Geary Lecture of 2010 will be given by Professor Canice Prendergast, W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.

Venue: ESRI, Whitaker Square, Sir John Rogerson's Quay, Dublin 2
Date: 25/11/2010
Time: 4 p.m.

For the last couple of decades, there has been a large body of work arguing for the widespread use of pay-for-performance as the appropriate means of aligning the interests of workers with those of their employers. This lecture outlines recent contributions to this body of work, and focuses on a number of general themes. First, the successes of pay-for-performance schemes are limited to a small class of agency settings that do not seem to generalise to other settings. Second, the literature has now begun to consider instruments other than pay as the most natural way to align interests. Finally, there iscontroversial literature in psychology that now challenges the basic assumptions of this strand of economic literature. The talk will review all these recent contributions, and likely directions for future research.

Canice Prendergast, who was a research assistant at the ESRI from 1983 to 1985, is now one of the world's foremost researchers on workplace incentives and their impact on productivity. He is currently the W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business. More information on Canice Prendergast.

The Geary lecture is organised each year by the ESRI and honours Dr R. C. Geary (1896 –1983), the first Director of the Institute. Click here for information on the ESRI Geary Lectures.
This is one of the special events being held during 2010 to mark the Institute's fiftieth birthday.

Booking
Attendance at the event is free but must be pre-booked. There are a limited number of places available and early booking is encouraged. To book a place, please send details of attendee's name, organisation and contact telephone number by email to admin@esri.ie. Details of ESRI's location are available at http://www.esri.ie/about_us/contact_details/ or telephone (01) 8632000.

Ends
The Economic and Social Research Institute
Whitaker Square,
Sir John Rogerson's Quay,
Dublin 2.
Telephone: +353 1 8632000;
Fax +353 1 8632100;
email: admin@esri.ie;
web site: www.esri.ie.