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Insights 01: 22 January 2016
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Value-added follies
Dr Eric Crampton | Head of Research | eric.crampton@nzinitiative.org.nz
I prefer making New Year's resolutions for other people rather than for myself. And in that spirit, can we make 2016 the year of not obsessing about whether New Zealand Inc. is moving up, down or twirling sideways along some value-added scale?

You are all surely familiar with the usual story. It is pretty standard fare for after-dinner addresses. It goes as follows. New Zealand businesses are all either short-sighted or stupid. Kiwi companies export logs, fruit and milk powder when they could move up the value-chain by selling value-added products like knickknacks made of wood, processed food products, or high-tech milk enzyme derivatives. Sure, many businesses are already doing that, but New Zealand still exports a lot of logs, fruit, and milk powder – and that is a bad thing.

And it is the same story that I heard a lot growing up in Canada. In the 80s and 90s, Canadians agonized over whether they might forever be hewers of wood and drawers of water if they ever stopped subsidizing Canadian aeroplane manufacturer Bombardier.

I remain a bit surprised that Bombardier never tried for a government research grant to investigate modernizing Howard Hughes’ dream of a wooden airplane: imagine the number of times they could have written “value-added” in the application. It would have been impossible for Canadian politicians to resist.

But the story is, in a word, nonsense. Making airplanes when every airplane costs more to make than it is worth to customers should not be counted as value-added high-tech production. It destroys value rather than creating it.

And it is not that different from the fabled East German Trabaant plants that, after reunification, made Volkswagen execs cry: the raw materials going into the plant were worth more than the cars coming out at the other end.

Does that mean that firms should never try to process raw materials or try new things? Hardly! But who is better placed to tell whether logs, milk powder or any other primary product should be exported or processed: the business that stands to gain or lose if it makes the right choice, a bureaucrat at the ministry, or some after-dinner speaker without skin in the game?

The University of Calgary’s Trevor Tombe tallied some of the costs of Canada’s obsession with the value-added mythos. Beware of it in New Zealand as well. 


The business of educating
Khyaati Acharya | Research Assistant | khyaati.acharya@nzinitiative.org.nz
"Education is a right! Stop the debt sentence!" These were the slogans emblazoned on placards, held by students rallying against the University of Auckland’s 2015 fee hikes.

Any increase in university fees is guaranteed to incite ferocious student protests, and the costs of tuition in New Zealand have changed dramatically over the past three decades.

During the mid-1980s, tertiary fees were largely trivial for students. But university education was the preserve of a small number of elite students, who were subsidised at a much higher rate. Rapidly increasing student numbers have since rendered this situation fiscally untenable. Tuition at any of New Zealand’s major universities currently sits at around $5,500 per year, with annual increases subject to centrally-mandated tuition caps.

Yet, as Steven Schwartz reveals in a recent IPA publication, protests against increased tuition are often little more than hot air. In spite of fee hikes, students do not seem to be particularly deterred by higher prices.

The presence of a government-backed, income-contingent student loan scheme buffers the effect of fee increases. Students can defer the costs of a tertiary education to a future point where repayments are affordable.

And sharing in the costs of higher education through tuition fees necessarily reflects the private benefits that accrue to students.

Proclamations against the gross injustice of fees and fee increases ignore the considerable benefits that students derive from tertiary education. Like higher future earnings and increased job security.  And tuition is already heavily taxpayer-subsidised. Calls for greater public subsidies require either diverting funds from other activities, or imposing higher taxes, even on those who have never benefitted from a university degree.

But universities commonly suffer the same cost-disease as other labour-intensive industries –  barring changes to online platform delivery, like, for example, Khan Academy. The increasing price of labour potentially increases the costs of running a university faster than inflation. In real terms, universities have to deliver the same services each year, constrained against price ceilings and rising fixed costs.

Tuition caps can also prevent quality differentiation between universities, by limiting the ability of universities to invest in better, but more expensive labour and equipment that might improve the quality of their services.

Fee hikes are not necessarily a bad thing. But ensuring that students receive a high quality education commensurate with the sums they, taxpayers and donors pay, is essential.


Just give up
Jenesa Jeram | Research Assistant | jenesa.jeram@nzinitiative.org.nz
For all those who have set their New Year's resolutions, how’s that going? Will 2016 be the year you finally get slimmer, richer, and more attractive?
 
There will no doubt be some who have already fallen off the wagon. Taking a leaf out of behavioural economics, it was probably bound to happen.
 
Behavioural economics adopts economics and psychology to explain human behaviour. One of the more popular works in the field is Kahneman and Tversky’s Thinking, Fast and Slow. The book captures the cognitive limitations (non-science speak: logical screw-ups) that people tend to make that can stop them making the best decision for themselves.
 
The limitations the book describes go far in explaining why we don’t achieve our resolutions. We overestimate our abilities; favour small short term rewards over larger long term gains; we give in to temptations as if we function on auto pilot; and can delay receiving bad news because we assume it will stop the bad thing from happening.
 
The short version: People fail year on year to fulfil their resolutions because we’re slaves to our own stupidity. Like physical limitations, there is only so much people can realistically achieve without effort.
 
Resolutions are the first step towards exerting that effort, by committing yourself to changing your behaviour. But this needs to be teamed with some kind of penalty for failure (say, public humiliation or pledging money to charity if you do not achieve your goals).
 
And if that all seems too much? There’s only one thing to do: I say, give up.
 
I am not saying that this is right for everyone. But it’s time to be a bit honest here.
 
If you have been paying for a gym membership that you have not used since this time last year, chances are you are not really motivated to go to the gym.
 
We live in a world of trade-offs. We don’t all value – or need to value – the future over the present, or physical health over mental wellbeing. Some of us even derive pleasure from activities others find repugnant. We all maximise our utility (achieve optimal happiness) in different ways.
 
Just as not all of us aspire to be body builders, not all of us aspire to be masters of self-control.
 
Behavioural economics may give some insight into why we fail in achieving our resolutions. But basic economics tells us happiness involves trade-offs.
 
For me? While it would be nice to have an athletic physique, I’d trade that off for a mince pie any day.
 
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