Friday, 31 July 2015

The history and future of workplace automation

There is much written about the effects that automation and robots will have on human employment and normally we are told it's all bad. The Luddites are still with us.

In a new article in the Journal of Economic Perspectives David H. Autor considers the effects on automation on jobs and asks Why Are There Still So Many Jobs? The History and Future of Workplace Automation. The abstract reads:
In this essay, I begin by identifying the reasons that automation has not wiped out a majority of jobs over the decades and centuries. Automation does indeed substitute for labor—as it is typically intended to do. However, automation also complements labor, raises output in ways that leads to higher demand for labor, and interacts with adjustments in labor supply. Journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor. Changes in technology do alter the types of jobs available and what those jobs pay. In the last few decades, one noticeable change has been a "polarization" of the labor market, in which wage gains went disproportionately to those at the top and at the bottom of the income and skill distribution, not to those in the middle; however, I also argue, this polarization and is unlikely to continue very far into future. The final section of this paper reflects on how recent and future advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. I argue that the interplay between machine and human comparative advantage allows computers to substitute for workers in performing routine, codifiable tasks while amplifying the comparative advantage of workers in supplying problem-solving skills, adaptability, and creativity.
So machines are both a substitute and a complement to labour, and when thinking about the effects of automation on employment we need to keep both these factors in mind. Machines have not, so far, replaced all workers, in fact employment is growing, and it's unlikely that they will replace all jobs in the future. The complementarities between labour and machines are stronger than many people seem to realise.

Wednesday, 29 July 2015

Are NZ First really as xenophobic and economically illiterate as this makes them sound?

An article at Voxy.co.nz tells us that English concedes NZ farms better off in NZ ownership - NZ First. The article states,
The government has finally admitted its folly over foreign ownership of New Zealand’s farms, says New Zealand First.

"When questioned in Parliament yesterday, Finance Minister Bill English first parroted the government line that Landcorp buying Crafar farms is not an obvious advantage to Landcorp or the New Zealand economy," says Spokesperson for Primary Industries Richard Prosser.

"However, Mr English then confirmed what farmers know but the government would not admit, until yesterday. He compared foreign corporate ownership of NZ farms to a fashion trend that came and went, but then revealed his own view that the ‘New Zealand owner-operator model - those who live it and love it - tend to be the only ones who can make money out of NZ farmland’.
First, a little knowledge of economics would suggest that the fact that the owner-operator model, normally a family-owned model, tend to be the ones to make money out of framing should not surprise anyone.

In New Zealand, and most other places, it is obvious that family-based firms still dominate in agriculture? Which is odd if you compare agriculture with, say, manufacturing. Investor-owned firms predominate in manufacturing, So why not farming?

The short answer given by Allen and Lueck (1998) and Allen and Lueck (2002) is "nature". They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy. But thus far this hasn't happened.

Given the nature of farming, corporate ownership, be it local or foreign, isn't yet the most efficient form of ownership and thus it hasn't penetrated agriculture to the degree it has in other sectors of the economy.

So farms being in family ownership is simply a result of the economics of farming. It is the fact that the owner-operator model is the most efficient that is important here, not the nationality of the owner.

The economics of farming will give the result that most farms are in New Zealand hands, since family-owned business are most likely New Zealand owned business. There is no need for any xenophobic ownership restrictions to keep farms in New Zealand hands, the market will achieve this.

Also putting restrictions on ownership can prevent foreign investment in the situations where it is needed.

The Voxy article continues,
"Ownership of New Zealand property, be it residential or farmland, needs to be restricted to New Zealand citizens and permanent residents only, the end," says Mr Prosser.
Such restrictions are not need since as noted above when local ownership is efficient you get it, and there are times when you want foreign ownership. The point is that New Zealand gains the most when you get assets into the hands of those you value them most, who will use them most efficiently, and the restrictions on ownership can prevent this.

References:
  • Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
  • Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.

Tuesday, 28 July 2015

EconTalk this week

How important are basic skills for economic success and growth? Eric Hanushek of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the importance of basic education in math and literacy and their relationship to economic growth. Hanushek argues that excellence in educating people in basic skills leads to economic growth, especially in poorer countries where years of education may be a poor proxy for learning. He argues that the U.N.'s Millennium Development Goals should emphasize outputs rather than inputs--performance on skill-based exams rather than years of education.

A direct link to the audio is available here.

Sunday, 26 July 2015

Housing and productivity

Up until now I have never really gotten the reason for people getting so excited about the effects of housing on productivity. When the Productivity Commission looked into the problems with housing in New Zealand it didn't seem to me to be the obvious factor explaining New Zealand's low productivity growth.

Well it turnouts I may have to rethink this issue. The Economist magazine has an article which explains How cheaper housing can boost productivity. They write,
To understand how cheap housing could boost productivity, consider the British economy. Inner London is by far the most productive region of the country, thanks to its clusters of finance, technology and nerds. More than one third of new jobs created in Britain since the recession have been based in the capital. London could create more still, but its lack of housing hems it in. The average house there now costs £370,000 ($577,000), nearly double the national average. Soaring demand has met stagnant supply. In the past decade the number of homes in London has grown by just 8%. The effect of high house prices is to push people out of London (or stop them moving in), and thus put them in less productive jobs. Others waste time on marathon commutes. From 2005 to 2014 the number of people commuting into London rose by 32%. One paper published in 2010 found that absenteeism among German workers would be 15-20% lower if they did not commute. If it were somehow possible to scrap commuting altogether, the British economy would see a productivity boost worth £12 billion a year, according to the Centre for Economics and Business Research, a think-tank.
Now if the effects of cheaper housing on productivity in New Zealand are of this order of magnitude then this is another big reason for doing something about freeing up the supply-side of the housing market. This makes reforming the local government regulation of building new homes or modifying existing ones look all that much more important. This is especially true of Auckland where the returns to reform will be the greatest since it has the greatest "clusters of finance, technology and nerds" in the country.

Friday, 24 July 2015

EconTalk this week

Wences Casares, bitcoin evangelist and founder and CEO of Xapo, talks with EconTalk host Russ Roberts about how bitcoin works, the genius of bitcoin's creator, and how Xapo is structured to create security for bitcoin banking.

A direct link to the audio is available here.

Government takes over Serco-run Mt Eden prison

That is the headline on an article at stuff.co.nz. In the article Aimee Gulliver writes,
Corrections Minister Sam Lotu-Iiga announces that the government is taking over Serco-run Mt Eden prison as of Monday.

The government is taking over the management of Mt Eden prison as of Monday, following serious allegations of prisoner mistreatment at the Serco-run facility.

Serco staff will remain on site but a management team will be put in place to oversee the day to day running of the facility.

The decision comes after a series of serious allegations at the Mt Eden prison, where inmates are claimed to have been thrown off balconies in a practice known as "dropping", and physically assaulted.
A question I would ask is, Should we be surprised at this outcome? One reason for saying no comes from the literature on privatisation, in particular the paper 'The Proper Scope of Government: Theory and an Application to Prisons' by Oliver D. Hart, Andrei Shleifer and Robert W. Vishny, "Quarterly Journal of Economics", 112(4) November: 1127-61, 1997. The paper considers the question as to which goods or services the government should provide, with an emphasis on prison services.

The HSV model considers the choice between in-house production and contracting out. The provider, government or private, can invest in improving the quality of service or reducing cost. Given incomplete contracts, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality. Cost are always lower under private ownership but quality may be higher or lower under a private owner.

Hence the focus of the HSV model is on quality. Here quality has a broad interpretation. It can stand for how well prisons treat prisoners, how clean utilities keep the water, how well schools educate their pupils, how long it takes for a letter to reach a remote area or how innovative car makers are etc. The basic idea is that the provider of the service, whether it be the government or a private firm, can made an investment to increase the quality of the service or a investment to reduce the cost of the service. It is important to note that quality is reduced by any cost reductions. Neither of these two investments are ex ante contractible. But to implement either of the innovations requires the agreement of the owner of asset. The asset can be thought of as, say, a school or a hospital or a prison. If the owner of the asset is the government then the provider of the service, who will be a government employee, requires the approval of the government to invoke either investment since, in this case, the residual control rights reside with the government. As a result, the employee will receive just a fraction of the returns to either innovation, even if implemented.

If on the other hand the provider is a private sector contractor, then the contractor has the residual control rights and thus does not need the government's agreement for a cost reduction. However, if the contractor wishes to improve the quality of the service and receive a higher price for it, then they have to renegotiate with the government since the government is the purchaser of the service. Under the assumption that the contractor is successful in obtaining an increase in price they capture all such gains. Thus a private contractor will generally face stronger incentives, than a government employee, to improve quality and reduce costs but the incentive to reduce costs can be too strong since the contractor ignores the negative impact this has on quality.

HSV examined the conditions that determine the relative efficiency of in-house provision versus outside contracting of government services. Their theoretical arguments suggest that the case for in-house provision is generally stronger when noncontractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant, and when corruption in government procurement is a severe problem. In contrast, the case for privatisation is stronger when quality reducing cost reductions can be controlled through contract or competition, when quality innovations are important, and when patronage and powerful unions are a severe problem inside the government.

They then apply this analysis to several government activities using the available evidence on the importance of various factors. They conclude that the case for in-house provision is very strong in such services as the conduct of foreign policy and maintenance of police and armed forces, but can also be made reasonably persuasively for prisons. In contrast, the case for privatisation is strong in such activities as garbage collection and weapons production, but can also be made reasonably persuasively for schools.

With regard to prisons HSV write (p. 1152-4)
Prisons seem to fit reasonably well into our framework. Although in some respects prison contracts are very detailed, they are still seriously incomplete. There are significant opportunities for cost reduction that do not violate the contracts, but that, at least in principle, can substantially reduce quality. Moreover, from the available evidence we have the impression that the world may not be far from the assumptions of Proposition 4. First, the welfare consequences of quality deterioration might be of the same magnitude as those of cost reduction (b(e) and c(e) are comparable). Second, the opportunities for quality innovation are limited (beta(i) is small). Under these conditions, Proposition 4 suggests that public ownership is superior.

Would ex post competition between prisons for inmates strengthen the case for privatization? One possibility is that convicts themselves choose the prison in which to serve their sentences, but this is probably a bad idea, since prisoner choice would encourage contractors to attract customers by allowing gangs, drugs, and perhaps even easy escapes. A more plausible alternative is to have judges choose a private prison to send a convict to, with the idea that judges would send more inmates to higher quality prisons and fewer to lower quality prisons. Private contractors would then have the appropriate incentives to invest in quality improvements, and to avoid excessive cost reductions, to bring in more business. At the moment, such schemes have not been tried, in part because there is a shortage of prison capacity in the United States, but it is possible that they could be tried in the future. One potential disadvantage of such judge choice is that some judges might actually choose lower quality prisons because they want the inmates to get a stiffer penalty, whereas other judges might choose prisons that are soft on inmates. Contractors would then cater to the preferences of the judges, which need not coincide with social welfare.

Finally, the choice of whether to privatize prisons depends on the importance of corruption and patronage. Patronage does not appear to be a huge problem in prison employment in the United States, since the union premium as of this writing is not large. Corruption appears to be a greater concern, at least judging from the available anecdotal evidence. To begin, private prison companies are very active politically. For instance, ESMOR evidently lobbies politicians and makes political contributions to receive contracts {The New York Times, July 23, 1995}. The wife of Tennessee governor Lamar Alexander invested early and profitably in the stock of Corrections Corporation of America, which subsequently got involved very deeply in the privatization of Tennessee prisons with the governor’s endorsement {The New Republic, March 4, 1996, p. 9}.

A related problem is that contract enforcement cannot be taken for granted. The INS report concludes that ESMOR’s changes in policies “hindered INS ability to effectively perform its oversight functions.” The report also notes that ESMOR told its guards not to share information with the INS officials working on the premises, and in one instance encouraged the INS to reassign an officer who complained about the performance of the Elizabeth, New Jersey, facility several months prior to the riot. The report indicates that ESMOR violated the contract in some instances, and also pursued policies preventing the INS from enforcing the contract. But it is also clear from the report that the INS did not do what it could to enforce this contract. The INS report vividly illustrates how a government bureaucracy with relatively weak incentives has trouble enforcing a contract with a private supplier determined to reduce its costs, even if this involves violations of the contract and not just the issues on which the contract is silent.

In sum, our model suggests that a plausible theoretical case can be made against prison privatization. This case is weakened if competition for inmates can be made effective, but strengthened by the relevance of political activism by private contractors. One instance in which the case against prison privatization is stronger is maximum security prisons, where the prevention of violence by prisoners against guards and other prisoners is a crucial goal {The New York Times Magazine 1995}. In many cases, the principal strategy for preventing such violence is the threat of the use of force by the guards.We have shown that it is difficult to delineate contractually the permissible circumstances for the use of such force. Moreover, hiring less educated guards and undertraining them—which private prisons have a strong incentive to do—can encourage the unwarranted use of force by the guards. As a result, our arguments suggest that maximum security prisons should not be privatized so long as limiting the use of force against prisoners is an important public objective. Consistent with this view, only 4 of the 88 private prisons in Thomas’s {1995} census of private adult correctional institutions in the United States are maximum security. In contrast, private half-way houses and youth correctional facilities, where violence problems are less serious, are common {Shichor 1995}.
So there is a case to be made for private prisons, but it may not be as strong as for other services currently provided by the government, and it is at its weakest for the case of maximum security prisons. Thus seeing Mt Eden prison back under government management may not be that surprising. Maximum security prisons are an area where government provision can be more effective.

Sunday, 19 July 2015

Why it is necessary to regulate doping in sports?

This is a question asked by Jeff Cisyk and Pascal Courty in a new column at VoxEU.org.

That performance-enhancing drugs are used and that this use is a controversial issue has been clear since competitive sports first began. You could argue that drugs are just another way of improving performance, like better training methods or improved nutrition, so what's the problem? The Cisyk and Courty column argues that of the three major rationales for regulation – athletes’ health, fairness, and audience losses – the damage to audiences is the most convincing rationale for regulation. The evidence they discuss shows that doping causes measurable economic damage. Teams and leagues competing for audience attention may not internalise all externalities associated with doping, and they face a time-inconsistency problem when they discover it.
Doping has been a controversial issue since competitive sports first began. There is even evidence of drug use by ancient Greek and Roman athletes. The first modern regulation of doping was instated in 1928. Since then, bans on performance-enhancing drug have received constant attention in the media. While most people believe doping should be regulated, few agree on why, where to draw the line, and how to manage enforcement.

  • The main rationale offered by the medical community and some sports experts and ethics scholars is that constraining doping is necessary to protect the health of athletes.

However, many sports themselves are inherently dangerous. Taken literally, the protection argument would call for pro-safety interventions that go beyond regulating such drugs. This would not be supported by most people.

  • Others argue that sports competition requires a level playing field.

However, doping is just another technology to improve performance and there are rules to deal with what contestants can and cannot do to win.

  • A final rationale is that doping harms the public.

Broadly interpreted, this means that doping imposes a negative externality. A sport generally involves many stakeholders (athletes, teams, league, broader sports organisations, sponsors, and the public) who have vested interests in organised competitions. Fans commit to a sport and make specific investments to support a team. When doing so, they care about the quality of future events and may suffer a negative externality if they value the sport less when athletes do not comply with doping rules.

With prevailing large stakes, athletes and teams benefit from doping if it increases the chance of winning. A league may also benefit if doping increases the entertainment value; that is, as long as the public does not find out. The economic rationale for regulating drug-use rests on the assumption that fans value a sport less when athletes use them.
But is such an assumption reasonable?

The research that Cisyk and Courty discuss is the first work that offers definitive evidence that the demand for a sports event is negatively affected by news about drug use. The evidence is based on ticket sales (rather than random respondents interviewed in surveys) and measures actual demand responses instead of consumer opinions. A basic rule of economics is, take notice of what people actually do rather than what they say they will do.

Cisyk and Courty  leverage the 2005 introduction by Major League baseball of a new set of random tests for drug use. Under this new policy, a positive test is immediately announced publicly and the player is removed from the team. This policy yields unique data for investigating the impact of drugs violations on attendance.

Obviously if the public really cares about drug use, you would expect a decrease in attendance following a suspension and what we see in the data is such a decrease. Interestingly, there is no decline in attendance for injury announcements.

So a reason to enforce doping regulation is to protect consumer interest. But who should regulate doping? Cisyk and Courty comment,
Teams lack motivation to align with the public interest. The same holds for leagues. The incentives to self-regulate and honour the interests of fans are limited. Again, this is because leagues compete for audience attention and they may not internalise all externalities associated with doping. Leagues also face a time-inconsistency problem when they discover that doping takes place. Our work demonstrates that doping reduces fan interest, and players, teams, and leagues may not fully internalise these losses.

Tuesday, 14 July 2015

But what affect are the Chinese actually having on house prices?

With all the xenophobic rubbish we are getting from Labour and bizarre calls for bans on foreign ownership of housing by the likes of the BNZ's Tony Alexander I find myself asking, But what is the actual effect of foreign buyers on the prices of homes?

I mean if I go to a house auction and bid $X for the house then all a foreign buyer has to do to get the house instead of me is bid $X+1. So the actual effect on the sale price of the house of having a foreign buyer in the market could be very small. But everyone seems to be assuming that the effect of foreign buyers is huge, But is it? What do we actually know about the effect of foreign buyers on house prices? What studies have looked at this?

I'm guessing the answer to the question is we know nothing and thus we get the sort of mindless, ill-informed scaremongering we see from Labour.

From what studies I have seen about housing problems, in particular Auckland's housing problems, its the lack of supply that is the issue not demand. The likes of Labour and Alexander seem to want to fix a supply-side problem by affecting the demand-side. Well, that just won't work. To lower house prices we simply need more homes. No amount of demand-side tinkering will  increase the supply of housing.

EconTalk this week

Lee Ohanian, Arnold Kling, and John Cochrane talk with EconTalk host Russ Roberts about the future of freedom, democracy, and prosperity. Recorded in front of a live audience at Stanford University's Hoover Institution as part of a conference on Magna Carta, the three guests give their perspective on the future of the American economy and the interaction between politics and economics. Each guest makes a brief presentation at the start followed by a moderated conversation.

A direct link to the audio is available here.