Reshuffles, downgrades and South Africa’s public finance drama

The last week has been tumultuous for many South Africans, not least if you are an economist concerned with public finances and the associated political economy dynamics. I had predicted that the President would make another attempt at a finance ministry-targeted reshuffle some time from the end of March onwards. The basis for that prediction was the timing of Parliament’s recess period, as I discuss in greater detail in this article.

1280x440q70170405dm
Zapiro: “Shift happens”

The new Minister has been brought in on the back of the President’s (empty) rhetoric about ‘radical economic transformation’ to benefit the majority of poor, black South Africans, but he is known more for his snappy dressing than radicalism; if the FT is correct about his favoured brand, then two of his many ties would equate to the proposed new monthly minimum wage. The combination of supposedly radical rhetoric with personal profligacy is on its own questionable, but there are many more reasons to be concerned.

It was therefore not a great surprise to many analysts when S&P downgraded South Africa’s foreign currency sovereign debt rating to sub-investment grade (‘junk’). After the downgrade by S&P, which I had also expected having paid close attention to presentations at their one-day conference in Johannesburg only a couple of weeks earlier, I provided some commentary with an emphasis on the reasons for the downgrade and possible economics and public finance implications. One of these interviews, with Ayabonga Cawe at PowerFM, is available here. In the first interview I did, on KayaFM, I made a deliberate point of stating that we should not allow anyone to mystify the obvious: that Gordhan has been removed for similar reasons to Nene, implying ‘capture of the state’ (as per the Public Protector’s report). In that context, the new finance minister simply lacks credibility and any statements made about continuity and protecting the fiscus will likely be taken with a pinch of salt.

With the inconvenient oversight of Minister Gordhan removed, the South African Revenue Services announced its final revenue collection figures for 2016/17 in a chummy press conference with the new Minister. This attempted to paint a R30bn revenue undercollection (relative to the revenue forecast in the 2016 Budget) as a success, because it exceeded the 2017 Budget forecast (i.e. the one revised down by R30bn) by R0.0003bn… Unfortunately, many journalists reporting on that event were taken in by the claims of success. I had already dealt with much of this in an article in the Finance Mail. In fact, given concerns about SARS delaying refunds to inflate collection figures, and given inadequate data submitted to Parliament, I have submitted a formal request for more detailed data to SARS and hope to follow-up on that in due course.

Needless to say, the capture of the Finance Ministry makes Parliament’s oversight role even more critical. But as I have argued in some detail (here and here), and ventilated in my CCMA case, the Parliamentary Budget Office is neither equipped, nor inclined, to provide the robust analytical support expected of it under the Money Bills Act (2009). I will have more to say about this in due course.

After the decision by S&P, Fitch has now also downgraded South Africa’s foreign and local currency sovereign debt rating: setting the stage for more dramatic consequences if another agency also downgrades local currency debt to ‘junk’.

These are dangerous times for the South African fiscus, economy and society at large.

Placeholder: A South African economics curriculum

In some previous posts [here and here] I discussed my experience of, and thoughts about, the University of Cape Town (UCT)’s undergraduate economics curriculum. I committed to writing a final, constructive post on what I think a South African economics curriculum (not particularly limited to UCT, or undergraduates) should look like.

That intention was partly overtaken by events and time constraints, but mainly I decided that the question deserved more lengthy treatment than just a blog post. So I am drafting a paper, which I hope to present at a few, relevant conferences/workshops, and once that draft is completed I will post a summary here.

Economics: scientists and plumbers, or bullshit and mathiness?

On the 6th of January 2017 the Annual American Economic Association conference is scheduled to host a plenary address entitled The Economist as Plumber: Large Scale Experiments to Inform the Details of Policy Making. The speaker is the academic economist Esther Duflo, widely-acclaimed for popularising the use of randomised control trials (RCTs).

Given my PhD work in economics on external validity of RCTs and implications for policy, and parallel work in philosophy, I have a few thoughts on this subject. In a draft paper (first presented in 2015) entitled When is Economics Bullshit? I argue that practitioners promoting RCTs have systematically overstated the policy-relevance of results and thereby produced ‘bullshit’ (as defined in the famous essay by philosopher Harry Frankfurt).

A consistent problem in critiquing so-called ‘randomistas’ is that the goalposts have been constantly shifted. Early advocacy for RCTs within economics reflected a ‘missionary zeal’ (Bardhan). It has been suggested that experimental methods have led to a ‘credibility revolution‘: giving credibility to applied microeconomic work that apparently did not exist before. One recipient of the Bates Clarke medal argued that the introduction of RCTs indisputably rendered economics ‘a science’. In the policy domain I, along with other economists, have come across much grander and/or more extreme claims. But when challenged, proselytisers scale back the claims and deny ever overclaiming. So from missionary zeal, revolution and science we now have plumbing….

I look forward to reading Duflo’s speech/paper, but my own view of the methodology and philosophy of economics and RCTs suggests that plumbing is a very poor analogy.

In my own paper, motivated in part by claims that RCTs render economics ‘a science’, I tackle the question of scientific status head on. Using a revival of the so-called demarcation question (basically: how do we demarcate science from non-science or pseudoscience?) in philosophy, I argue that economics cannot (yet) be classified as a science, may never be classifiable as such and in the way it is used by some economists too-often verges on pseudoscience and/or bullshit.

The similarities between this very critical view and that of Romer’s recent critique of macroeconomics (which was made public later) are interesting. Romer focuses more on the use of mathematical modelling whereas my focus is on empirical methods. I will write a detailed comment on Romer’s piece later this year; I agree with some aspects but strongly disagree with others.

In its two presentations so far, my paper on bullshit has been relatively well-received by philosophers of science but not so well-received by philosophers of economics. There is good reason for this: the paper is even more an indictment of the current trend in philosophy of economics than it is of economics itself. The paper notes that in the absence of sufficient technical training and understanding of economics, philosophers in this area have increasingly taken the safer route of becoming apologists for the discipline. In effect, they compete to provide explanations of why economists are correct in their approach. (Exceptions to this, such as Nancy Cartwright – who has collaborated with Angus Deaton in providing important and influential critiques of RCTs – arguably prove the rule: Cartwright’s reputation was already established in philosophy of physics, causality and metaphysics).

The result, unfortunately, is that philosophy of economics currently has very little to add to economists’ critical understanding of their own discipline. Some critics, such as Skidelsky, argue that economists should read more philosophy, but while I am sympathetic to his overall stance I do not think economists would find much worth reading at present. Combining the abject failure of the ‘mainstream’ of philosophy of economics with the low quality of most economists’ reflections on methodological issues leaves us with few critical insights that could move the discipline beyond parochial or self-interested debates.

Updated reference list on external validity

My review of the external validity literature is slowly working its way through the peer review process. Parts were presented from 2011 onwards, but it was first published as a full working paper here and then updated for the Annual Bank Conference in Development Economics in 2014. A short version of one key contribution from that work has been published here.

Since these pieces, however, the reference list has been expanded in two important ways.

First, I became aware of a number of references and parallel literatures outside of economics that had either been missed in the original review, or published subsequent to the first version. Notably: in biostatistics (Elizabeth Stuart and co-authors), educational statistics (Elizabeth Tipton) and causal graphs (Elias Bareinboim and Judea Pearl).

Second, feedback through peer review questioned the omission of structural contributions to the topic – suggesting that this favoured the ‘design-based’ literature most closely associated with randomised control trials (RCTs). That was certainly not the intention. The rationale of the original review was to focus on the problem of external validity within the theoretical framework used by most RCT studies, in order to clearly delineate structuralist critiques from more fundamental external validity challenges.

I still think that it is absolutely critical to emphasise this distinction. However, there are contributions from the structural literature that propose something of a middle ground. Notably, work by Heckman, Vytlacil and co-authors argues for the merits of using the theoretical framework of Marginal Treatment Effects (MTEs). And one interesting recent, empirical contribution (by Amanda Kowalski) which has done so is forthcoming in the Journal of Economic Perspectives. Given this, I have added a number of references from that literature and expanded the review to cover this middle-ground between structural and design-based contributions.

While the paper proceeds through the publication process, I thought it would be useful to post the most recently submitted (May 2016) version of the reference list for those who may be interested. It can be found here.

The Undergraduate Economics Curriculum at the University of Cape Town: Part II

At the end of Part I of this comment on the UCT economics curriculum, I identified two further issues for immediate consideration: the nature of textbooks, and problems arising from academic incentives. The textbook issue also raises the important role of history of economic thought and economic history courses.

Continue reading “The Undergraduate Economics Curriculum at the University of Cape Town: Part II”

Links: universities&growth, good podcasts and bad philosophy of economics, external validity, etc

Papers, blogs, podcasts

Do universities cause economic growth? Anna Valero and John Van Reenen have a paper saying yes

In my past engagements with higher education policy this question has annoyed me a lot, and I’ll post more about that in future posts. I get even more annoyed when I see definitive headlines based on papers with questionable identification strategies. We need a bit more humility about empirical work.

 

In which regard, I’ve recently been catching-up on some EconTalk podcasts. I enjoyed these two:

Heckman on econometrics, with some useful comments about ‘Hayekian humility’, failures of prediction and the like.

Phillip Tetlock on ‘superforecasting’

 

Even closer to the subject of my own recent work, two interesting-looking papers relating to RCTs and external validity:

Bentley Macleod on an issue I’m interested in: performance of subjective expertise

Banerjee, Chassang and Snowberg on decision-theoretic considerations relevant to external validity

I covered aspects of this in my PhD and published working paper on external validity, but look forward to reading this contribution.

 

Chris Blattman has a useful summary of recent developments among development NGOs relating to basic income grants (an idea that was debated at some length in South Africa over a decade ago):

http://chrisblattman.com/2016/04/15/ipas-weekly-links-57/

 

Came across a truly terrible piece on experimental methods in economics and ‘economics imperialism’. The saddest part is that this is often the only kind of ‘philosophising’ tolerated in parts of the discipline.

I had similar sentiments about this related podcast with Russ Roberts.

I have one draft paper and a sketch of a research programme on this topic, and the coverage given here to the issue is really bad. (That’s as nicely as I can put it). Classify both as links to avoid

 

A lot’s being said about the Panama Papers. People and companies should not evade taxes. The notable absence of some countries’ citizens from this particular database, though, does raise some interesting questions about possibly selective leaks.

Events and initiatives

On the 28th of April Thandika Mkandawire is speaking in Cape Town on panel discussion entitled:

Africa and the Millennium Development Goals (MDGs): Progress, Problems and Prospects

Details here

 

In London, CEMMAP recently held a one-day conference on econometrics for public policy:

http://www.ifs.org.uk/uploads/cemmap/programmes/Econometrics%20for%20public%20policy%2C%20methods%20and%20applications%20040416.pdf

Looks like a great programme.

 

Economic Research Southern Africa has a new initiative to train academic economists in quantitative methods:

http://www.econrsa.org/call-application-skills-development-training-econometrics-0

On the one hand, this is a good idea. On the other hand, it’s a real slap in the face for those who have these skills but still can’t get academic jobs. However, it usefully supports a point I’ve been arguing for some time: in most disciplines, academics in South Africa are amongst the most protected of workers regardless of their competence or effort. (For international readers: in South Africa formalised ‘tenure’ processes don’t really exist.) Much more on both issues in future posts.

 

Forthcoming deadlines

The Campbell Collaboration annual conference is open for submissions:

http://www.campbellcollaboration.org/news_/What_Works_Global_Summit_Request_for_Submissions.php

The economics curriculum at UCT: Part I

It would be no exaggeration to say that I have taken a critical interest in UCT’s economics curriculum for over fifteen years, and some of the associated dissatisfaction has shaped my career and approach to the discipline as a whole. As an undergraduate majoring in economics I was bored stiff for the first two years by being taught how to regurgitate graphs and solve equations from American textbooks. I seriously thought of quitting – this was not what I had signed-up for. There were some useful ideas about the functioning of markets and individual behaviour, but they were so obviously crude, decontextualised and evidently infused with free-market, anti-poor (pro-rich) ideology that as a student it was not possible to separate what was useful from what was irrelevant, implausible or ideological.

For example, minimum wages were stated as definitively reducing employment (with no reference to possible effects on effort or aggregate demand), but higher taxes on the rich were stated as negatively affecting economic activity (without any reference to benefits from public expenditure or reduced inequality).

Economist readers might want to note that this was 10 years after publication of Akerlof and Yellen’s paper on efficiency wages. It was 5 years after publication of Card and Krueger’s landmark book on minimum wages, challenging the ‘conventional wisdom’ on the minimum wage in economics with empirical evidence. I had to find that book in the library on my own to get an alternative view. Scanning library shelves also led me to Thorstein Veblen’s Theory of the Leisure Class, which introduces the notion of conspicuous consumption, and JK Galbraith’s History of Economic Thought.

Our lecturers did little to assist: they were mostly graduate students, rushing to get through material that they did not have the incentive, inclination, or intellectual foundations, to critically evaluate or present differently. Only in the third year electives did I finally find a reasonable amount of intellectual stimulation, evidence of alternative views and explicit reference to the South African context.

For this reason, I am sympathetic to the recent criticism of UCT’s curriculum by Ihsaan Bassier. He notes, among other things, that:

“I find myself at the end of my undergraduate degree without the tools to interrogate the economic situation surrounding me”.

“Critical economic thinking is simply not taught during an economics undergraduate degree. The department attempts to push mathematical concepts, but only succeeds in promoting rote learning, characteristic of a production centre for ideology.”

Such concerns can be located in broader, international student movements to change the undergraduate curriculum. In general, I support those movements as well. However, they have a tendency of conflating a number of important issues: ideology, academic incentives, bureaucratic obstacles, fetishisation of quantitative methods and the problematic status of economics as a ‘science’.

Students are driven by a well-founded instinct that something is wrong, but they struggle to decipher what the causes are. In my view this is entirely understandable given that undergraduates cannot be expected to have a uniformly better understanding of the discipline than those teaching them! But muddling of issues is often used by those favouring the status quo to deflect otherwise legitimate criticism. The points I make below can be applied as much at Harvard or Oxford as at UCT, because they pertain to deep problems with economics as a discipline and universities as institutions, but I will use UCT as my working example – having studied and lectured there.

Continue reading “The economics curriculum at UCT: Part I”