maketheworldworkbetter

Statistically informed ideas on how to make the world work better.

Category: Economics

Idea: How to solve Quebec’s budget problems: stop giving me money!

The logo for the Quebec government program that sends me money I don't need.

The logo for the Quebec government program that sends me money I don’t need.

Like so much of the rest of the developed world, Quebec has been going through a budget crisis recently. The supposedly left-wing government has threatened draconian cuts to health research, unemployment benefits, and a host of other popular programs. There never seems to be enough in the coffers.

Like much of Europe, Quebec has an extensive social welfare state. Free health care. $7/day subsidized public day care. A parental leave program that gives parents 1 year of paid leave (~60% of salary) per child. Incredible benefits to save for a child’s education. Heavily subsidized higher education. Generous unemployment benefits and an employment insurance program. Etc.

So why is a left-wing government cutting such things? That’s a subject for another post, but it’s clear that the cuts are politically unpopular, and that there is therefore some budget reality apparent to those in power that is not apparent to the average citizen. These are not the sort of folks likely to buy into all the austerity hype that was so popular elsewhere until recently.

The cuts proposed are not just unpopular, they are for the most part very bad ideas. For example, the government originally proposed cutting $10 million from medical research, or 30% of a $33 million budget. But research is a long-term investment – cutting so drastically would have stopped many projects in progress and made Quebec a much less attractive place for foreign researchers (like me) to come to. It’s like trying to save fuel by cutting the gas to an airplane engine in mid-flight… (The government eventually pulled back, under pressure.)

More importantly, what can the government do to solve the budget problem? The answer here is surprisingly simple: stop giving me money! Amidst all these budget crises in the news, my wife and I recently received a series of checks for about $800 from the Quebec government as child assistance payments, because we have a new son. The leaflet explained that everyone with a child gets such a payment, and that they are between $651 (for richer people) and $2319 (for poorer people) per year. And it’s tax-free.

I think child assistance payments are a great idea. They can (maybe) encourage people to have more children, which is good in developed countries with low birth rates. They also help defray the costs of raising a child and show a societal solidarity with families. I just don’t think child assistance payments for my family are a good investment of the government’s money.

My wife and I are both professionals with comfortable salaries. Our decision to have a child or not (or to have more children or not) is not affected in the smallest way by receiving $800 from the government. Maybe we’ll use it to get an even fancier stroller. Is this really what Quebec taxpayers should be paying for?

Of course, I’m not just talking about my family. I’m talking about all the families like mine. Anyone with a family income over $80,000 has absolutely zero need of government assistance to raise their kids, and the government gets very little benefit from payments to these families.  As I’ve argued elsewhere, $1 is worth much more to a poor person than to a rich person; following this principle, the $800 we’ve received could do a lot more good helping a poor family, or reinvested elsewhere in the budget.

More generally, my wife and I make too much money and are taxed too little. The Quebec tax brackets are 16% up to ~$40,000, then 20% up to about $80,000, then 24% after that. This is on top of federal taxes of 15-29% depending on income. This all seems high compared to the US, especially with 13.5% sales tax, and it is. But the social benefits here are incredible, and worth it. I don’t have to pay for health insurance, and I don’t have to worry about not having health care, to name just the most prominent.

Our current salaries – modest compared to doctors, lawyers, business people, and many other professsionals – nonetheless give us an excellent quality of life. All we could want in a home. Plenty to save for retirement or a rainy day. Plenty to eat well. Plenty to travel to see family abroad, or to vacation overseas. Whatever stresses we may have in life, money is not one of them. Of course we could always find a way to use more, but our quality of life would be essentially untouched if we gave $10,000 more per year to the government in taxes. Instead, the government is sending us checks.

So, my proposal to fix Quebec’s budgets: stop all child assistance payments to the richest 30% of families, and similarly cut back drastically on other benefits for the rich and upper middle class. Less retirement benefits, less pay during parental leave, less unemployment insurance benefits. All of these things could be capped at the amount that would be received by a family with an $80,000 income, for example. And then raise our taxes.

I don’t argue this because I feel we have to always soak the rich. I argue this because this extra money could be used so much better to strengthen great government programs. It’s not just a question of giving money to the poor (though I’d be all for increasing the child assistance payments to the poorest families); it’s a question of smart investment in society. Medical research is the example I know best, of course. Funding medical research attracts educated, foreign professionals like myself. We then set up shop here, and we hire people to work in our labs using money we obtain from research grants. At any given moment, I am supporting about 5-8 students or employees in my lab, and I’m young and just getting started. These people will then go out and spend their salaries, and there is a multiplier effect. And we generate the results of the research, which is (we hope) of great use to society. Some discoveries by researchers like me become patented and create business opportunities, creating more jobs.

So, Quebec can tax me more and hire more people like me, or it can let me keep my money and put it into a savings account, or (if I were a completely different person) buy an Audi, a pool, and a vacation home in Miami. Most of the things a rich person could do with extra money have relatively modest benefits for the Quebec economy; not so for money invested in society, or given to those with modest incomes.

No, I’m not about to donate my extra salary to the government. But it seems silly to talk of a budget crisis when the simple solution is to cut government support to the better off, and to tax them more heavily. This doesn’t have to be exorbitant – there is probably some truth to the idea that higher taxes can slow growth – but a moderate hike could go a long way.

The costs of too much choice: How the science of evolutionary development justifies Obamacare

One of the more difficult and technical fields one could choose to study is Evo-Devo, or the evolution of development. Briefly, it is the field that studies how genetic programs determine the developmental process, how these programs evolve, and how the types of programs available constrain the directions evolution can take. For example, if humans were to evolve wings (an essential impossibility for many reasons), Evo-Devo lets us make the clear inference that we would not evolve them as sprouting from our shoulders like angels, but rather as modifications of our arms. Why? Because in all tetrapods (i.e., eptiles, amphibians, birds, and mammals) there is a developmental program to produce four limbs. Limbs can be lost (snakes, whales) and modified for flight (bats, birds), but they cannot be added.

One of the key insights to emerge from Evo-Devo is that developmental programs are highly organized. They have evolved ways to facilitate future evolution, called evolvability. They achieve this using mechanisms known as gene regulatory networks, compartmentalization, and canalization. While the details of these mechanisms are beyond the scope of this post, they have in common that they are ways to facilitate long-term evolution at the cost of flexibility. That is, they standardize the developmental process to give consistent results, but limit the forms that can be arrived at. Again, tetrapod limbs are a good example: if tetrapod limbs were not the result of a fairly standardized genetic module, we would be able to evolve them anywhere any time – the nose could become a hand, we could evolve rows of wings up and down our backs, etc. However, the  result would be chaos. It would be too easy for a minor mutation to mess up development, too easy for the final form to depend too heavily on what gene combinations one has (image if parents regularly “accidentally” gave birth to children with 6 or 10 limbs, just because of  how their genes got combined…), and too hard to control the evolution of limbs as the environment changed and a specific sort of form became necessary. In other words, we gave up flexibility for stability and predictability.

How does all this relate to Obamacare?  Read the rest of this entry »

Optimized charitable giving, evidence-based medicine, and the risk of thinking we can measure everything

GiveWell logo, taken from there website.

The GiveWell logo, taken from their website.

I read an interesting blog post this morning on Wonkblog about how some people are getting jobs on Wall Street in order to save the world: the idea is to make as much money as quickly as possible, live on next to nothing, and then use the saved money to save the world more efficiently than one could by joining the Peace Corps or becoming a doctor.

The post discussed a website/organization called GiveWell that takes a very hard-nosed, analytical approach to how we should most efficiently use our charitable dollars to do good in the world. The ballet or the symphony is nice, but by buying bed nets to prevent malaria you could be saving children’s lives for very little money, so guess which GiveWell recommends you to donate to? They choose a small number of top charities among a large number they review, and they are very careful not to make claims that the non-top charities are not useful, only that there is very good evidence that the top charities are useful. I am truly impressed with the thoughtfulness of the approach and the quality of the research they seem to have done.

But – and there’s always a but – it struck me that there is a limit to this approach to charitable giving, and it is strikingly similar to a limitation of evidence-based medicine that I’ve been bumping into recently. Read the rest of this entry »

What crime statistics, standardized tests, and scientific researchers have in common

I had thought about calling this post “Cohen’s law for predicting distortions in incentivized systems.” Tongue-in-cheek of course – it’s approximate, and thus not really a law. And I don’t like the self-aggrandizing habit of naming a law after oneself. And it would have been a dry title, and you probably wouldn’t be reading this. Nonetheless, this post is about the single most important thing that everyone designing public policy should understand. It is about the principle that makes most public policy fail (or work less well than intended).

Most public policy is designed to achieve certain goals – lowering crime, improving education, advancing scientific knowledge, improving health care etc. And most of the time, these goals are achieved by trying to get the right people to do the right things: police to arrest criminals, teachers to teach well, researchers to perform well, doctors to treat patients well, etc. In order to encourage this, most policy incorporates some form of incentives: tax structure, salary scales, rewards for good performance, and so forth. Police departments are judged by their crime statistics, and in turn find ways to pressure their officers to deliver these stats. In US education policy, No Child Left Behind was supposed to implement standards to encourage schools and teachers to perform better. Researchers who are productive are more likely to get funded for their next research grant. And so forth.

Read the rest of this entry »

A modern history of Japan and Korea in one figure

jap-kor fig

The y-axis? Whatever you want it to be…

We can, of course, add in the West:

jap-kor-west fig

 

Ah, the beauty of the logistic function…

Higher tax rates are “hire” tax rates: Raising marginal tax rates on the rich should help create jobs for small businesses

Federal_Income_Tax_Rates_in_the_US,_2009

In all the US economic and political debates these days, one of the primary claims of conservatives is that raising marginal tax rates on the rich – the percentage of tax the rich pay on their income in the highest brackets – will hurt job growth because many small business owners, who file taxes as individuals, will have to pay higher taxes and will thus have less money to hire new workers. The typical response of those on the left and center is to argue that the tax only affects net income, after deducting expenses like workers’ salaries, and the effect shouldn’t be that large. The left thus argues that whatever harms may befall the job market are minor compared to the benefit of increased revenue.

I think both sides are wrong and missing something important. Raising marginal rates on high income brackets should actually have the opposite effect: it should encourage small businesses to hire more. I am not an economist, and there are numerous empirical studies dealing with this issue, often reaching varied conclusions. The analysis here cannot compete with a solid empirical study, but given the lack of empirical consensus, I think it is important to point out the logical error being made based on economic theory.

Read the rest of this entry »

Idea: A better way to allocate grants for research

There is a paradox that most granting agencies face when they fund research: Researchers have a strong incentive to ask for as much money as possible even if they don’t really need it. One reason is that researchers are evaluated by both their institutions and their peers based on the number of grant dollars obtained (rather than on the quality of their research or their productivity). Another reason is that it’s always better to have a little too much money in the budget than not enough – we might as well estimate high.

These incentives are at work all the time in subtle ways. They mean that researchers ask for more money than they need. There is thus a slow inflation in the accepted “cost of doing business” and in the amounts viewed as normal. There is no reason at all for researchers to try to get by on a shoestring. Perhaps most insidiously, there is an incentive for young researchers to choose research topics that require more money for the same amount of productivity. Several years ago at the University of Michigan, I heard that one of the deans wanted to hire fewer faculty in ecology and evolution and more in lab-based biology because the latter brought in larger grants.* I often see colleagues in developing countries finding cheap and inventive ways to do the same things we do here, just on a fraction of our budgets.

In addition, most granting agencies demand detailed budgets for submitted projects. These budgets require lots of time to prepare, lots of time for peers to review, and are mostly made up anyway – people say in the budget what they need to say to get funded, knowing they can use the money as they wish later. I have even been told by CIHR representatives that I should fudge my budget because it is the best way to get funded!

One reason these problems persist is that in most cases successful grants are chosen with regard to quality but without regard to value. In other words, if there is $1 million left in the budget and a $1 million grant is ranked just above 10 grants that are $100,000, the $1 million grant will be funded and none of the next 10 will be, even if the total value of the next ten projects is 9.5 times that of the $1 million project.

I’ve just devised a system that I think elegantly solves this problem and substantially reduces paperwork. Here is a summary:

1)      For competitions, the funding agency decides a priori on a number of funding tiers (say 7, ranging from $80,000/year to $1 million per year). Each tier has a number of slots available based on the total budget, with many slots available at the lowest tiers and very few at the highest.

2)      Each researcher does not fill out a budget, but simply selects a tier he or she wishes to be considered for. If the grant is awarded, this is the amount that will be received – no more, no less.

3)      All applications are ranked based on quality, without regard to the budget tier chosen.

4)      Funded applications are chosen starting at the lowest tier and choosing the best candidates who applied for that tier, until the number of slots allotted for that tier are filled.

5)      At each higher tier, any applications not chosen for the lower tiers are retained in the competition, and will still be funded at their requested (lower) tier if they rank sufficiently high among the higher-tier applications. In other words, at each tier the highest-ranked applications are funded, including those at that tier and those not selected at lower tiers.

6)      Any remaining funds (due, for example, to lower-tier candidates winning higher-tier slots) can be given to the remaining candidates in order of their rank, irrespective of tier.

 

This system has a number of clear advantages:

1)      It removes a huge amount of work from both writing and reviewing grants – everything related to budgets, which are usually fudged anyway.

2)      It gives a strong incentive to researchers to conduct their research on the smallest budget possible, since the chances of obtaining a grant are much larger for those with smaller budgets.

3)      It gives a way to fund larger-budget projects or programs when justified, and lets the competition incentivize the researchers to make the determination about necessity.

4)      It gives an incentive to young researchers to choose relatively cost-effective fields of study, improving the cost efficiency of research for decades to come.

5)      It rewards overall candidate quality and frugality simultaneously, in such a way that budget does not become a perverse incentive to do other than the best research.

 

What do you think? Would it work? What are the challenges?

 

*Caveat: I heard this story second-hand years ago, and may have misremembered something in the details. But there was unquestionably a perception that expensive research was prioritized by someone higher up.

Oops, erratum…

Well, I’ve just made my first major blunder as a blogger: posting something I immediately need to retract. My last post, on how to use the threat of giving Republican districts what they’ve asked for in order to break the debt ceiling impasse, was completely off-base. Here’s why:

First, it would be completely unconstitutional, given the equal protection clause of the 14th amendment. This states that “no state shall … deny to any person within its jurisdiction the equal protection of the laws.” So there is no credible way to threaten to withhold benefits just from districts that vote a certain way.

Second, and perhaps more importantly, it would set an awful precedent. Even though in this case (as I believe) it is not a raw political threat, but is actually giving voters what they asked for jurisdiction by jurisdiction, the same principle, if legal, could easily be applied to much more raw political threats, such as to withhold all benefits of certain types from districts held by the opposition as a way to compel people to vote for the majority party. This sort of practice would fundamentally corrupt the functioning of a democratic society.

So, as much fun as the idea was for the debt ceiling crisis, in all practical terms the suggestion was way off base. Thanks to my father for pointing this out.

Idea: How to get Republicans to raise the debt ceiling without a compromise

Much has been written about the debt ceiling, particularly in the summer of 2011 when we had the last showdown. It looks like another is looming. Briefly, the US has already authorized lots of spending on things like Social Security benefits, government contracts, etc. This spending exceeds the amount of money being taken in through taxes, etc. This means that the US needs to borrow money to cover what it has agreed to do. However, in order to borrow more money, congress needs to separately authorize an increase in the total amount of debt that can be taken on. And Republicans, not wanting to have more debt, don’t want to raise the debt ceiling this way.

This is as if you signed a contract for renovations on your house knowing you’d have to borrow money for it, but after the work is done you tell the contractor you can’t pay because you’d have to go too far into debt. You shouldn’t have done the renovations to begin with. The Republican goal is to use the threat of defaulting on our obligations to force cuts in spending they want. It seems to me like blackmail – holding the credit rating and the moral reputation of the country hostage to their political goals. And here is how to stop them:

Read the rest of this entry »

Guns are (probably) not responsible for the high murder rates in the US: how to understand the stats

As I stated in my last post, I support gun control, and I am really appalled by what happened in Newtown. But this is one (rare) case where I think the people on the right may understand the facts better than those in the center and the left. Two of my favorite columnists, Charles Blow at the NY Times and Fareed Zakaria at the Washington Post, had recent columns (here and here) on how the US is the clear exception in the developed world on both gun ownership and murder rates, and suggesting that solution is simple: limit guns, have less murders.

These are nice, well-argued columns. Unfortunately, they appear to be wrong. I’ve been digging in the data a bit, and I think both of these columnists have taken correlation to be causality. (Note: Correlation can sometimes imply causality, contrary to popular belief – one needs to know how to do the right analyses and have the right data. But this is not the case here.) So I will work you through the data, as an example of how to do a more thorough statistical analysis of a question like this. Don’t worry, I won’t get too technical, and I’ll keep it intuitive…

Read the rest of this entry »