Organised common sense

21/04/2014

Thomas J. Sargent delivered a graduation speech at his Alma Mater, University of California at Berkeley:

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

Hat Tip: AEIdeas

 


Welfare reform that works

15/04/2014

Robert Doar writes on welfare reform that works and he does it from the inside:

. . . From early 2007 until the end of 2013, I was the commissioner of the New York City Human Resources Administration (HRA), the agency with the 1960s-era name that occupies 180 Water Street. And before 2007, going back to early 1996, I worked at, and for a time led, the state agency that was responsible for overseeing many of the government-assistance programs administered by the city. But while my perspective is that of an insider, the facts speak for themselves: From 1995 until the end of 2013, New York City’s cash-welfare caseload shrunk from almost 1.1 million recipients to less than 347,000 — a drop of more than 700,000 men, women, and children.

The achievements of welfare reform in New York City were about more than reducing the number of people on cash welfare. There were also big increases in work rates for single mothers (up from 43 percent in 1994 to 63 percent in 2009) and large reductions in child poverty (down from 42 percent in 1994 to 28.3 percent in 2008). Even in the wake of the 2008 recession, child poverty in New York City in 2011 was almost ten percentage points lower than it had been the year before welfare reforms started.

Welfare-caseload declines, work-rate increases, and child-poverty declines all happened largely because, for eight years under Mayor Giuliani and twelve years under Mayor Bloomberg, New York City required welfare applicants and recipients to work, or look for work, in return for benefits. We aggressively detected and prevented fraud and waste (although we didn’t stop all of them); and we enforced these requirements with a vigilance that every day led to hundreds of case closings and welfare-grant reductions as we made clear that welfare came with responsibilities. . .

He gives 10 tips on welfare reform which includes:

Always promote personal responsibility. The minute an applicant believes that government will solve all of her problems, she loses. Accepting responsibility for one’s own future is the vital first step to moving up. . .

Employment is far better than training and education. In the years leading up to the passage of the federal welfare-reform legislation, study after study showed that programs that encouraged training and education over rapid employment proved less successful at getting people into jobs that lasted.  . .

The priority should be work first, then education or on-the-job training as a supplement.

Making work pay is welfare reform too. Being off of cash welfare does not mean a person is off of all assistance. Not only are a lot of former cash-welfare recipients still dependent on some form of assistance, but the increasing use of these programs means that total spending has not been reduced as a result of federal welfare reform. It has actually increased.

Food-stamp benefits, child-care vouchers, and public health insurance all were part of this arsenal of non-cash “work supports” that we promoted in New York. And so long as these forms of government assistance went to working people, the public was supportive. . .

Be honest about the importance of married two-parent families. Very few families with married and involved parents, both working, ever need any form of welfare. This is why I came to believe that it was dishonest for us not to talk about the importance of parents’ marriage in reducing the poverty of children. Children need stable, two-parent families. No government or public program can replace a missing parent. It was the recognition of government’s inadequate response to the problem — and my desire to be honest about it — that led us to put together the city’s public-messaging campaign about the consequences of teen pregnancy.. . . 

Caseworkers don’t cost much; benefits do. I understand the temptation to rail against bureaucrats and bureaucracy, but in welfare the money is spent mostly on benefits to clients, not the administrative costs of the agency. Welfare-administration costs are typically less than 5 percent of a program’s total costs. . .

Welfare recipients (and workers too) will try to “get over.” “To get over” is a very New York expression meaning to steal – usually from government and usually to obtain benefits that one isn’t entitled to. There’s no better opportunity for it than welfare programs. Turning a blind eye to the potential for fraud and abuse is naïve.. .

The vast majority of expenditures in welfare programs are consistent with program rules and not fraudulent. But the overall size of the spending is so great that even a 5 percent error rate is significant. And, more important, taxpayers have a right to expect that spending on programs be managed properly. . . .

When it comes to the disabled, trust but verify. Obviously a work-based welfare program can’t be successful if someone is too sick or disabled to work. But accepting disability claims at face value isn’t the right answer either. That’s why we set up a whole separate (and, yes, bureaucratic) process for welfare applicants who claimed they could not work because of some physical or mental condition. . .

Over the years, we found thousands of people who said they could not work but in fact could. We helped an equal number improve their underlying conditions so that they could go to work. And we helped those who really did qualify for the federal program gather the documentation necessary to apply.Always cheer for the economy. I spent seven years running New York City’s welfare programs for Michael Bloomberg, and as proud as I was of what our social-service programs provided to poor New Yorkers, I never forgot that perhaps the most important key to helping struggling families was a vibrant economy that offered an abundance of entry-level jobs. That’s why I was always first in line to support and encourage every kind of thoughtful economic-development idea that promised job creation.   . .

To make welfare programs succeed, always cheer for the economy, and those who nurture it. . .

All of these factors apply just as much in New Zealand as New York.

Welfare reforms that work are better for the people who move from welfare to work, or who get the right help because they can’t work.

The benefits aren’t just economic they’re social too with improvements in positive statistics like health and decreases in negative ones like crime.

Welfare reforms that work pay-off for us all.

Hat Tip AEIdeas


Where the living wage will lead

06/03/2014

One of the criticisms of the living wage is that it takes no account of the relationship between the cost of an employee and the value of his or her work.

If the cost gets out of kilter with the value the employer is going to look for alternatives like this:

. . . In the new concept video, Pizza Hut swaps out the tables at its dine-in restaurants for massive touch-screen displays. Once you sit down, the first thing you’ll do is place your smartphone on the electronic table, activating the display and automatically signing into your own personalized account. Then you’ll design your pizza using the interactive screen before finalizing your order and paying through your device. Finally, the display lets you and your friends play popular mobile games while you wait. . .

This is only a concept, it will be a long time before it is implemented, if it ever is.

People will still be needed to cook the pizzas, bring them to the table and clean up after the diners but technology like this could reduce the number of waiting staff needed.

The more expensive staff become, the greater the cost of employing people in relationship to the value they provide, the more attractive technology to replace them becomes.

Hat tip: AEIdeas

 

 


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