I have written a post for introducing why mathematics is needed for learning economics. The post is mainly a record of my response to two science-stream students whom I encountered during a past Orientation Day. Therefore, I made use of the math that science students should have learned in high school. This includes some basic calculus that enables us to identify the maximum value of a function. I want them to know why finding the maximum is useful in economics.
In another O-Day, I encountered other students who are not from science stream. So, they do not know calculus. But I still want them to know why math is needed in (university-level) economics. What can I do? Well, I decide to use money multiplier to explain.
Most high-school students should have learned a simple version of money multiplier. So, I can explain: if the central bank gives $100 to the public and the public deposits the $100 in commercial bank, the latter will lend, for example, $70 for earning interest income. But if the businessman who borrows the $70 from this bank deposits the $70 also in a bank (the same or another bank), there is another deposit of $70 created. With the $70 deposit, the bank can lend, say again, 70% of this money out, amounting to $49 to someone. Similarly, this someone will deposit the $49, and banks can make another 70% of $49 as loan. As such, many more new deposit is created. Let us count: in the first step, $100, second step $70, third $49, and so on and so on. High-school students should have learned the way to calculate the infinite geometric series. Thus, $100+$70+$40+... = $100[1+0.7+(0.7)(0.7)+(0.7)(0.7)(0.7)+...] = $100/(1-0.7) = $333.33.
In this case, both the multiplier effect and the math involved - sum of infinite geometric series - are something that students should have learned in high school. Hence, students, from science stream or not, should be able to understand. Of course, university economics frequently uses calculus while geometric series is not so often involved. As an example to illustrate the relation between math and economics, this is less ideal when compared to the example of calculus. Nonetheless, geometric series is also not rarely used. It is often applicable in economic forces involving chain effects while chain effects are also an important issue in economics. For example, economists mention not only money multiplier effect but also fiscal multiplier effect. The latter is also related to chain effect, which means the first event will trigger the second event, and then third event, and so on and so on. This is true for money creation and this is also true for fiscal spending. Although high-school economics students often have not learned fiscal multiplier effect but they will in university. At that time, they can also appreciate better why math is so important to economics.
Sunday, 3 November 2019
Sunday, 22 September 2019
Trade war and high-school economics
Since 2018, trade war has become a globally noted issue. US President Donald Trump initiated the conflict by announcing plans to increase tariffs on a large amount of imported goods from China. Then, it kicked off several rounds of China's counterattacks, US's counter-counterattacks, talks, truces, and then quarrels again, and so on and so on. It is obvious that trade war has become the most important economic news. Economics is certainly useful for analyzing the issue. The question is: armed with economics knowledge at only high-school level, perhaps one may find trade war is too complicated an issue, and will say that the issue is not understandable without more advanced knowledge of economics. Complicated as it maybe, however, I do believe that we can still learn some lessons from it, even if we know only high-school economics.
From the very beginning, China has insisted that trade wars generate no winners. The flip side of the same coin is that trade is a win-win situation for both countries trading with each other. From an economics viewpoint, this cannot be more correct. Any economics students have learned that trade is mutually beneficial. As we have learned, trades allow countries to specialize in producing goods that they have comparative advantages. This enhances each country's productivity. Hence, all trading countries are better off. Restricting trades is therefore damaging.
Trump's decision to wage a trade war reflects that he does not think so. He has repeatedly voiced out his concern about the US's trade deficit with China. From an economics viewpoint, this concern is not very sensible. While a company should always worry about its deficit, a country need not always worry about its trade deficit. A deficit to a company means that its sale value is smaller than its expense. A deficit will reduce a company's equity, which means the resource mastered by this company decreases. On the other hand, trade deficit means that a country can enjoy more goods from imports by supplying a smaller amount of export goods to another country. As a result, trade increases the resource that can be used this country, which is better off. Of course, there might still be a worry if we consider trade deficit is a debt of one country owing to another country. But trade deficit is not exactly equivalent to a debt. It is simply that one country (say China) takes up another country's (say US) assets in return for the goods supplied. If the assets (notably financial assets) are attractive, another country (say China) will be happy to hold them.
At this point, perhaps we have to conclude that Trump must be foolish, failing to understand even high-school level economics. But is he? Let us turn to a point where high-school economics students may often neglect: What does it mean when we say trade allows countries to realize their comparative advantage and so trade is "mutually beneficial"? Does it mean all the people in a country can benefit from trades? If so, we should expect that no one will complaint about trades. But this is obviously not true. Trade protests are very common. In fact, one particular relevant thing is: One reason why Trump won the US presidential election in 2016 is that his anti-trade position has attracted those losers in trade, basically the so-called blue-collar voters. They worked in traditional manufacturing industries but they lost their original high-paying jobs when companies moved to lower-cost countries. They hated trades and so voted for Trump.
Now, there is a problem: if not everyone gains from trade, why economists say that trade is "mutually beneficial"? You won't say a trade loser benefits from trade! Upon reflection, what economists say may simply mean this: trade increases the total value of products enjoyed in each trading country, and this is good for the country as a whole. Analogously, we may say trade makes the size of the cake bigger. Nonetheless, how to divide the cake is another matter. For example, suppose that before trade the size of the cake is 10 units. For two people to share it, each get 5 units. After trade, the size increases to 15 units. But now one person gets 11 units while another gets only 4 units. Though someone suffers, trade indeed brings about gains on the aggregate level. While it is not wrong to say trade is "mutually beneficial", the conflict hidden in the aggregate picture is not mentioned in this simple term "mutually beneficial".
At this stage, perhaps we may better understand what is going on. On the one hand, China is right in claiming that there are no winners in a trade war (or trade is mutually beneficial). On the other hand, Trump need not be stupid. On the whole, both China and US benefit from trade, and suffer from trade war. But this benefit (or loss) is at the aggregate level. Some US people benefit from trade. For example, US consumers get higher-quality or cheaper goods from imports. But behind the aggregate picture is that someone loses out. In particular, manufacturing workers lose out in the process. Trade theory says only that the total value of gain from trade is larger than the total value of loss borne by those losers. But it does not say the number of losers must be larger than the number of gainers.
If the number of angry workers is really large, and they are more willing to vote than those who marginally benefit from trade, their support may affect the election outcome. How crucial these angry trade losers' votes are is not exactly known. But it is likely that the number is really large as reflected in Trump's 2016 campaign, which was a success and made him the President. Of course, when time passes, this situation may change. What we can see from Trump's actions is, however, that he still believes that anti-trade policies will help him win the next election. On the one hand, he wants to get a better term in a trade deal with China. On the other hand, his tariff policies are reducing trade volume. While he may not be able to get the first thing, the second thing may already make certain voters, as losers from trade, happy. Are there sufficient voters who are made happier by the trade war? Will the trade war make Donald Trump be re-elected as president in 2020? We have to wait and see. But one thing is clear: whether one understands trade theory is an issue; whether one will wage a trade war is another issue.
From the very beginning, China has insisted that trade wars generate no winners. The flip side of the same coin is that trade is a win-win situation for both countries trading with each other. From an economics viewpoint, this cannot be more correct. Any economics students have learned that trade is mutually beneficial. As we have learned, trades allow countries to specialize in producing goods that they have comparative advantages. This enhances each country's productivity. Hence, all trading countries are better off. Restricting trades is therefore damaging.
Trump's decision to wage a trade war reflects that he does not think so. He has repeatedly voiced out his concern about the US's trade deficit with China. From an economics viewpoint, this concern is not very sensible. While a company should always worry about its deficit, a country need not always worry about its trade deficit. A deficit to a company means that its sale value is smaller than its expense. A deficit will reduce a company's equity, which means the resource mastered by this company decreases. On the other hand, trade deficit means that a country can enjoy more goods from imports by supplying a smaller amount of export goods to another country. As a result, trade increases the resource that can be used this country, which is better off. Of course, there might still be a worry if we consider trade deficit is a debt of one country owing to another country. But trade deficit is not exactly equivalent to a debt. It is simply that one country (say China) takes up another country's (say US) assets in return for the goods supplied. If the assets (notably financial assets) are attractive, another country (say China) will be happy to hold them.
At this point, perhaps we have to conclude that Trump must be foolish, failing to understand even high-school level economics. But is he? Let us turn to a point where high-school economics students may often neglect: What does it mean when we say trade allows countries to realize their comparative advantage and so trade is "mutually beneficial"? Does it mean all the people in a country can benefit from trades? If so, we should expect that no one will complaint about trades. But this is obviously not true. Trade protests are very common. In fact, one particular relevant thing is: One reason why Trump won the US presidential election in 2016 is that his anti-trade position has attracted those losers in trade, basically the so-called blue-collar voters. They worked in traditional manufacturing industries but they lost their original high-paying jobs when companies moved to lower-cost countries. They hated trades and so voted for Trump.
Now, there is a problem: if not everyone gains from trade, why economists say that trade is "mutually beneficial"? You won't say a trade loser benefits from trade! Upon reflection, what economists say may simply mean this: trade increases the total value of products enjoyed in each trading country, and this is good for the country as a whole. Analogously, we may say trade makes the size of the cake bigger. Nonetheless, how to divide the cake is another matter. For example, suppose that before trade the size of the cake is 10 units. For two people to share it, each get 5 units. After trade, the size increases to 15 units. But now one person gets 11 units while another gets only 4 units. Though someone suffers, trade indeed brings about gains on the aggregate level. While it is not wrong to say trade is "mutually beneficial", the conflict hidden in the aggregate picture is not mentioned in this simple term "mutually beneficial".
At this stage, perhaps we may better understand what is going on. On the one hand, China is right in claiming that there are no winners in a trade war (or trade is mutually beneficial). On the other hand, Trump need not be stupid. On the whole, both China and US benefit from trade, and suffer from trade war. But this benefit (or loss) is at the aggregate level. Some US people benefit from trade. For example, US consumers get higher-quality or cheaper goods from imports. But behind the aggregate picture is that someone loses out. In particular, manufacturing workers lose out in the process. Trade theory says only that the total value of gain from trade is larger than the total value of loss borne by those losers. But it does not say the number of losers must be larger than the number of gainers.
If the number of angry workers is really large, and they are more willing to vote than those who marginally benefit from trade, their support may affect the election outcome. How crucial these angry trade losers' votes are is not exactly known. But it is likely that the number is really large as reflected in Trump's 2016 campaign, which was a success and made him the President. Of course, when time passes, this situation may change. What we can see from Trump's actions is, however, that he still believes that anti-trade policies will help him win the next election. On the one hand, he wants to get a better term in a trade deal with China. On the other hand, his tariff policies are reducing trade volume. While he may not be able to get the first thing, the second thing may already make certain voters, as losers from trade, happy. Are there sufficient voters who are made happier by the trade war? Will the trade war make Donald Trump be re-elected as president in 2020? We have to wait and see. But one thing is clear: whether one understands trade theory is an issue; whether one will wage a trade war is another issue.
Thursday, 20 June 2019
Economics students studying law
In Hong Kong, studying law and studying economics require almost completely different skills and almost no one will associate the two subjects together. This does not mean that the two subjects are inherently unrelated. As we can see, the situation is not true in United States where law and economics is a popular dual programme and the two subjects are considered to be closely related. But anyway I teach in Hong Kong and I know most students' focus is not very globally oriented. Hence, I do not expect that, in Hong Kong, I can encounter students who are interested in both subjects. To my surprise, in recent years I encounter three economics students going to pursue legal studies.
To introduce something basic first, these students all went or are going to pursue a JD degree, which is a common practice for those who have already taken a first degree for studying law. If students have no first degree, studying law requires taking the degree of LLB. The above students take JD because they are all economics students, already with a first degree.
The first student went to Harvard Law School some years ago and today I guess she has already graduated. I must make clear that I contributed nothing to her admission to Harvard although she was in my economics classes.
Normally my economics classes are very large and I cannot know most of the students. But I know this student because she had sought my advice over a topic that would be adopted in a student debate. I normally turned down requests from students over these advising issues but it happened that this time I was familiar with, and interested in, the topic, which is about one new policy in urban renewal. I accepted her request. She came to my office together with her debate team members. She asked many questions while her team members mainly took notes. I was impressed by her active attitude. And this attitude paid off. Later, I asked her about the result of the debate. She said they won, and their rival lost as they simply misunderstood some basic facts of the topic. Well, perhaps my major contribution to her debate was that I was a fact-provider.
Anyway, we didn't contact since then. After some while she graduate, I heard from another colleague (likely the one who wrote recommendation letter for her to Harvard) that she was accepted by Harvard. As I was not this student's referee, I don't know her "secret" method of getting into Harvard. But as far as I know about her, her spirit is good enough as can be revealed in her preparation for the debate. She should be well-deserved for what she got.
For the second student studying law, I know her better as I was her referee in her applications for the various law schools in US. Actually, before she made up her mind to pursue a law degree, she had ever talked to me about her study in economics. She was obviously very hard-working and motivated student. One thing that troubled her was: She had not yet got an A from me though she got some A- from me. I sort of forgot how I responded to her at that time.
Later, she decided to pursue a law degree in US partly, or probably, because she was motivated by the successful story of someone getting into Harvard mentioned above. Based on what she heard from some senior students, her applications should be lodged as soon as possible (not to wait until deadline) as offers are often made early and will no longer be given when schools have secured enough students.
She asked me to write her a letter and I was more than happy to do so. To me, the job is not very straightforward as I am only an economics teacher, not someone familiar with laws. Though I know these law schools will understand this situation, I want to write a more relevant letter for her. Fortunately I am not completely ignorant about laws, and I know that in US law and economics are closely related. I simply wanted to tell these law schools that what she learned in economics could be an asset for her study in law. I also mentioned several famous law-economics scholars in US, whose areas of study have some relevance to my own: Louis Kaplow, Steven Shavell, Richard Posner, and Jules Coleman. I think I at least can show that I am not completely ignorant of legal studies so that these law-school people will not undermine my opinions completely when I recommend students to them.
After some months of offers and acceptances/rejections, she eventually went to NYU. I must make it clear that her success in getting this offer is 100% due to her quality. If she was not so qualified, she won't get what she want.
The third student did not intend to go to US but wanted to become a lawyer in Hong Kong. He was also well-prepared for his pursuit. He had made an appointment with me for talking about his plan to study law almost two years before his final year. In fact, he had already talked to an admission offer at a law school. I am not quite sure why he wanted to talk to me as I was not supposed to be a person who knows these things. I was also not his designated academic advisor in the department. Anyway, we talked about the options to become a lawyer in Hong Kong. Fortunately, I am not completely ignorant of these options. I told him what I know but I must say that eventually he dug out what was the relevant information for him. And he eventually decided to take a JD degree upon graduation.
I am very happy that students studying economics have interests in studying law. As mentioned, most students are not very globally oriented. They may be very interested in economics. This is of course good. But I also want students to acquire a broader perspective as this is what university education (unlike high school) is about. Studying law requires different skill and, by paying some attention to it, you can acquire quite a different perspective of the world or society. One common thing between law and economics is that both emphasizes logical thinking. But economics' emphasis is on the logical rigor enabled by using mathematical models while legal studies' emphasis is on argumentation and persuasion. Economists often forgot that they have to persuade people to accept for what they say. A by-product of this attitude is that their theories are often misunderstood and sometimes ignored. I think economics students have much to learn from lawyers.
My research interest has only a very small part of overlapping area with legal studies. I am interested in some ideas about justice while this is also an issue concerned by jurisprudence, a course in a typical legal studies programme. In fact, for this very small overlapping area, the economic and legal approaches are also very different, and the latter approach obviously receives much more attentions. It seems that economists also have much to learn from lawyers.
To introduce something basic first, these students all went or are going to pursue a JD degree, which is a common practice for those who have already taken a first degree for studying law. If students have no first degree, studying law requires taking the degree of LLB. The above students take JD because they are all economics students, already with a first degree.
The first student went to Harvard Law School some years ago and today I guess she has already graduated. I must make clear that I contributed nothing to her admission to Harvard although she was in my economics classes.
Normally my economics classes are very large and I cannot know most of the students. But I know this student because she had sought my advice over a topic that would be adopted in a student debate. I normally turned down requests from students over these advising issues but it happened that this time I was familiar with, and interested in, the topic, which is about one new policy in urban renewal. I accepted her request. She came to my office together with her debate team members. She asked many questions while her team members mainly took notes. I was impressed by her active attitude. And this attitude paid off. Later, I asked her about the result of the debate. She said they won, and their rival lost as they simply misunderstood some basic facts of the topic. Well, perhaps my major contribution to her debate was that I was a fact-provider.
Anyway, we didn't contact since then. After some while she graduate, I heard from another colleague (likely the one who wrote recommendation letter for her to Harvard) that she was accepted by Harvard. As I was not this student's referee, I don't know her "secret" method of getting into Harvard. But as far as I know about her, her spirit is good enough as can be revealed in her preparation for the debate. She should be well-deserved for what she got.
For the second student studying law, I know her better as I was her referee in her applications for the various law schools in US. Actually, before she made up her mind to pursue a law degree, she had ever talked to me about her study in economics. She was obviously very hard-working and motivated student. One thing that troubled her was: She had not yet got an A from me though she got some A- from me. I sort of forgot how I responded to her at that time.
Later, she decided to pursue a law degree in US partly, or probably, because she was motivated by the successful story of someone getting into Harvard mentioned above. Based on what she heard from some senior students, her applications should be lodged as soon as possible (not to wait until deadline) as offers are often made early and will no longer be given when schools have secured enough students.
She asked me to write her a letter and I was more than happy to do so. To me, the job is not very straightforward as I am only an economics teacher, not someone familiar with laws. Though I know these law schools will understand this situation, I want to write a more relevant letter for her. Fortunately I am not completely ignorant about laws, and I know that in US law and economics are closely related. I simply wanted to tell these law schools that what she learned in economics could be an asset for her study in law. I also mentioned several famous law-economics scholars in US, whose areas of study have some relevance to my own: Louis Kaplow, Steven Shavell, Richard Posner, and Jules Coleman. I think I at least can show that I am not completely ignorant of legal studies so that these law-school people will not undermine my opinions completely when I recommend students to them.
After some months of offers and acceptances/rejections, she eventually went to NYU. I must make it clear that her success in getting this offer is 100% due to her quality. If she was not so qualified, she won't get what she want.
The third student did not intend to go to US but wanted to become a lawyer in Hong Kong. He was also well-prepared for his pursuit. He had made an appointment with me for talking about his plan to study law almost two years before his final year. In fact, he had already talked to an admission offer at a law school. I am not quite sure why he wanted to talk to me as I was not supposed to be a person who knows these things. I was also not his designated academic advisor in the department. Anyway, we talked about the options to become a lawyer in Hong Kong. Fortunately, I am not completely ignorant of these options. I told him what I know but I must say that eventually he dug out what was the relevant information for him. And he eventually decided to take a JD degree upon graduation.
I am very happy that students studying economics have interests in studying law. As mentioned, most students are not very globally oriented. They may be very interested in economics. This is of course good. But I also want students to acquire a broader perspective as this is what university education (unlike high school) is about. Studying law requires different skill and, by paying some attention to it, you can acquire quite a different perspective of the world or society. One common thing between law and economics is that both emphasizes logical thinking. But economics' emphasis is on the logical rigor enabled by using mathematical models while legal studies' emphasis is on argumentation and persuasion. Economists often forgot that they have to persuade people to accept for what they say. A by-product of this attitude is that their theories are often misunderstood and sometimes ignored. I think economics students have much to learn from lawyers.
My research interest has only a very small part of overlapping area with legal studies. I am interested in some ideas about justice while this is also an issue concerned by jurisprudence, a course in a typical legal studies programme. In fact, for this very small overlapping area, the economic and legal approaches are also very different, and the latter approach obviously receives much more attentions. It seems that economists also have much to learn from lawyers.
Tuesday, 28 May 2019
To become a high-school economics teacher
In recent years, due to various reasons, I got the opportunities to chat to some students wanting to become high-school economics students. I must make clear that I did not give advice to them for how to become a high-school teacher. These students know better than me for how to do that. They talked to me simply because they needed various kind of supports from me, such as writing reference letters for them. In fact, I learned from them for how one can do something to pave the way for their goal: becoming a teacher.
They all wanted to first study for a Postgraduate Diploma in Education (PGDE) for one year. There is actually a PGDE with specialization in economics. Both HKU and CUHK offer PGDE for economics. I have a student accepted by CUHK and another one accepted by HKU for this programme. To my surprise, this is a competitive programme. Perhaps this is because of the very close relation between securing this Diploma and getting a job as teacher.
If it is competitive, what things one can do to improve the chance of acceptance? I of course do not have insider or even accurate information. But one student mentioned above was actually well-prepared. He came back to his own high school to act as a student helper, assisting his school teachers for tutoring economics. He also worked for an education page of a newspaper. Furthermore, he has re-taken economics in DSE (the public exam in Hong Kong for high school students) in order to get an even higher grade, which is believed to help him to find a better teaching job. Another student also has an experience as a teaching assistant.
Before I talked to these students, I already knew PGDE but I did not know the diploma offers special training in economics. I am more curious about this feature. Nonetheless, I was told that the diploma was still mainly about education although there would be a small part for economics. Who teaches this part? It is education scholar with some high-school economics teaching experience. I guess this is a reasonable arrangement as teaching economics in high school does not need the help from an economics teacher at university - university economics teachers normally do not know what is taught in high schools. An education scholar with high-school teaching experience should be more helpful.
PGDE offers internships: students will get the opportunity to work in high schools for a while. This is of course one important difference between professional training programme and academic programme. From an academic programme, students learn the knowledge of a subject, art or science. There is normally no guaranteed internship as this is not a vocational training. In contrast, for professional training programmes, internships are normally a must. Nurses have to get the opportunities to work in hospitals or they cannot become professional nurses. Hence, it is understandable that economics departments will not offer such guaranteed internships but a PGDE for economics will.
I am indeed very supportive of economics undergraduates pursuing teaching positions at high schools. I like economics and want the subjects taught well at high schools. For this, we need good high-school economics teachers. Of course, having good teachers is only one step towards good economics education. Another condition is that the economics as what is taught in high school is good. Unlike university economics, there is almost always only one dominating syllabus adopted in high school for teaching in one location because senior-year high-school teaching is mainly for one public examination (DSE in the case of Hong Kong). As such, if the syllabus is not good, even good teachers may not make economics a good subject.
I indeed also talked about DSE economics with these prospective teachers. One student's view is by and large consistent with my impression (through discussions with other students): In three years, students have not learned a lot in economics. Students can choose either one optional topic: monopoly pricing or international trade. Hence, they may know only either one area in economics as schools may want to save time for teaching and aim at maximizing grades for their students. Nonetheless, in my view, this is too narrow a coverage. Students use three years to learn not substantially more than what students should have learned under the older public exam HKCEE (replaced by DSE), which gave only two years to students.
My student also told me that the current design of the curriculum is not helpful in nurturing students how to think. To my surprise, he said that students have to be good in memorizing things and must be very careful in order to get good grades. Students with higher or lower grades normally were distinguished by just very small marks. Thus, those with few mistakes made won. To me, as an university economics teacher, this is not a good feature of the syllabus (if what he told me really reflects the true situation). Economics, due to its nature, should differ from other social science subjects by its being more logically oriented and requiring more ability to think in the abstract. If today I were a student of DSE, perhaps I would never be attracted by economics (again, only if my student's description of the situation is correct).
What's more, my student told me that the trend was to reduce those elements involving logical thinking further in DSE but to incorporate more applications. Although I will never object to applications, when time is limited and we have to sacrifice some aspects, I think, and perhaps many economists will agree, the logical thinking aspect is the more important aspect than application aspect in teaching. Applications are often only finding cases in the real world through Google search in Internet, and students can do this without intensive helps from teachers. But the logical thinking part cannot be easily self-learned without teachers' teaching. If the curriculum does really develop along this direction, I think this is a not a very good news to economics.
Having said all these, I still have confidence in my students. They are good students and I expect that they will become good economics teachers, overcoming some hurdles of the syllabus and making the subject interesting and thought-provoking.
They all wanted to first study for a Postgraduate Diploma in Education (PGDE) for one year. There is actually a PGDE with specialization in economics. Both HKU and CUHK offer PGDE for economics. I have a student accepted by CUHK and another one accepted by HKU for this programme. To my surprise, this is a competitive programme. Perhaps this is because of the very close relation between securing this Diploma and getting a job as teacher.
If it is competitive, what things one can do to improve the chance of acceptance? I of course do not have insider or even accurate information. But one student mentioned above was actually well-prepared. He came back to his own high school to act as a student helper, assisting his school teachers for tutoring economics. He also worked for an education page of a newspaper. Furthermore, he has re-taken economics in DSE (the public exam in Hong Kong for high school students) in order to get an even higher grade, which is believed to help him to find a better teaching job. Another student also has an experience as a teaching assistant.
Before I talked to these students, I already knew PGDE but I did not know the diploma offers special training in economics. I am more curious about this feature. Nonetheless, I was told that the diploma was still mainly about education although there would be a small part for economics. Who teaches this part? It is education scholar with some high-school economics teaching experience. I guess this is a reasonable arrangement as teaching economics in high school does not need the help from an economics teacher at university - university economics teachers normally do not know what is taught in high schools. An education scholar with high-school teaching experience should be more helpful.
PGDE offers internships: students will get the opportunity to work in high schools for a while. This is of course one important difference between professional training programme and academic programme. From an academic programme, students learn the knowledge of a subject, art or science. There is normally no guaranteed internship as this is not a vocational training. In contrast, for professional training programmes, internships are normally a must. Nurses have to get the opportunities to work in hospitals or they cannot become professional nurses. Hence, it is understandable that economics departments will not offer such guaranteed internships but a PGDE for economics will.
I am indeed very supportive of economics undergraduates pursuing teaching positions at high schools. I like economics and want the subjects taught well at high schools. For this, we need good high-school economics teachers. Of course, having good teachers is only one step towards good economics education. Another condition is that the economics as what is taught in high school is good. Unlike university economics, there is almost always only one dominating syllabus adopted in high school for teaching in one location because senior-year high-school teaching is mainly for one public examination (DSE in the case of Hong Kong). As such, if the syllabus is not good, even good teachers may not make economics a good subject.
I indeed also talked about DSE economics with these prospective teachers. One student's view is by and large consistent with my impression (through discussions with other students): In three years, students have not learned a lot in economics. Students can choose either one optional topic: monopoly pricing or international trade. Hence, they may know only either one area in economics as schools may want to save time for teaching and aim at maximizing grades for their students. Nonetheless, in my view, this is too narrow a coverage. Students use three years to learn not substantially more than what students should have learned under the older public exam HKCEE (replaced by DSE), which gave only two years to students.
My student also told me that the current design of the curriculum is not helpful in nurturing students how to think. To my surprise, he said that students have to be good in memorizing things and must be very careful in order to get good grades. Students with higher or lower grades normally were distinguished by just very small marks. Thus, those with few mistakes made won. To me, as an university economics teacher, this is not a good feature of the syllabus (if what he told me really reflects the true situation). Economics, due to its nature, should differ from other social science subjects by its being more logically oriented and requiring more ability to think in the abstract. If today I were a student of DSE, perhaps I would never be attracted by economics (again, only if my student's description of the situation is correct).
What's more, my student told me that the trend was to reduce those elements involving logical thinking further in DSE but to incorporate more applications. Although I will never object to applications, when time is limited and we have to sacrifice some aspects, I think, and perhaps many economists will agree, the logical thinking aspect is the more important aspect than application aspect in teaching. Applications are often only finding cases in the real world through Google search in Internet, and students can do this without intensive helps from teachers. But the logical thinking part cannot be easily self-learned without teachers' teaching. If the curriculum does really develop along this direction, I think this is a not a very good news to economics.
Having said all these, I still have confidence in my students. They are good students and I expect that they will become good economics teachers, overcoming some hurdles of the syllabus and making the subject interesting and thought-provoking.
Tuesday, 2 April 2019
With deadweight loss, why should goods be taxed?
In my past post on cigarette tax, I argue that one should not ignore the purpose of taxing a good when using economics to analyze problems. In fact, policy objective is so important that, when it is ignored, almost all economic analysis on taxes will simply lead to ridiculous results. Sadly, to my understanding, this is exactly ignored in the way we normally teach economics students.
What normally we will teach economics students (high school students in particular) about tax? Answer: tax burden and deadweight loss. Normally a demand-supply diagram is presented. A tax is levied on the good. Both the buyers and the sellers are said to share some burden of tax. But the consumer surplus and producer surplus are reduced by an amount greater than the total tax collected, so a deadweight loss is said to exist. This analysis is known to be included in DSE, GCE AL, IB etc.
While this is widely taught, the following question is rarely asked and answered: if taxing goods generates deadweight loss, why should we tax goods from the very beginning? If this question is not answered, students might be misled when learning this analysis.
Why they will be misled? This is because deadweight loss is also taught in another occasion: monopoly. Students are often taught that monopoly generates deadweight (because it charges too high a price and produces too low a quantity) when compared to a perfectly competitive firm. In this context, a policy suggestion is often explicitly given: as a monoply generates a deadweight loss, it should be regulated or broken up into smaller firms in order to eliminate the deadweight loss.
Hence, whenever deadweight loss exists, it should be eliminated, or at least reduced. But should we? Should we eliminate the deadweight loss due to taxation of goods? If so, how to? Well, if we don't tax goods, there will be no deadweight loss. So, the suggestion appears to be to avoid taxing goods. But should we?
You may answer "yes". But then the government will have no money to spend. What about simply avoiding taxing goods but taxing only income? In fact, students have never been taught in high school that taxing income also generates deadweight loss. If this is true, the method is good enough.
But what is not taught does not mean it is true. If income tax generates no welfare loss but commodity tax will, it is reasonable that all countries should rely only on income tax. But the premise of this suggestion is of course not true. Taxing income also generates welfare loss: higher income tax induces productive persons not to work so hard as they would rather enjoy more leisure than working hard to earn so little (after tax).
Another drastic answer may be: eliminating all taxes should be done. Though the government may then have no money to spend, this is a good thing. Some extreme free-market supporters, who hate any government activities, will find this answer good enough. But is it the purpose for us to teach deadweight loss? We don't tell students the purpose of taxing goods but tell them the welfare cost (deadweight loss) of taxing goods. Is it because our hidden agenda is to support minimum government? I don't think this is the teachers' or the curriculum designers' intention. But if we leave the purpose untouched, the unintended consequence will really become in line with free-market advocates' political agenda. In fact, in the same curriculum, we often also teach students the functions of a government, such as providing public goods (e.g. national defense). In other words, we assume some government expenditure must be involved. If so, the question should never be about eliminating all taxes, cutting off the source of revenue. The question should be how to collect taxes.
Thus, we have to make clear why goods are taxed and why deadweight loss is taught. The answer for the former is obvious: the government need money to finance its expenditure (e.g for public goods). However, its financing, mainly via taxation, almost always generates welfare cost, namely deadweight loss. So, the answer to the second question involves how we should use the concept. In fact, if the benefit of government (e.g. providing public goods) is always lower than the cost of government (deadweight loss), we cannot but support the extreme free-market position: let's avoid asking government to do anything for us. So, the necessary implicit assumption for the existence of a government must be: its benefit is higher than the cost. Then, the question is not to eliminate all the deadweight loss, but choose a way to minimize it. The deadweight loss analysis is useful in the sense that it enables us to judge taxing which good generates more or less deadweight loss. The policy suggestion should be to choose the tax that generates smaller deadweight loss. One should not misunderstand that the analysis of deadweight loss is to justify elimination of it as this simply means elimination of a government.
What normally we will teach economics students (high school students in particular) about tax? Answer: tax burden and deadweight loss. Normally a demand-supply diagram is presented. A tax is levied on the good. Both the buyers and the sellers are said to share some burden of tax. But the consumer surplus and producer surplus are reduced by an amount greater than the total tax collected, so a deadweight loss is said to exist. This analysis is known to be included in DSE, GCE AL, IB etc.
While this is widely taught, the following question is rarely asked and answered: if taxing goods generates deadweight loss, why should we tax goods from the very beginning? If this question is not answered, students might be misled when learning this analysis.
Why they will be misled? This is because deadweight loss is also taught in another occasion: monopoly. Students are often taught that monopoly generates deadweight (because it charges too high a price and produces too low a quantity) when compared to a perfectly competitive firm. In this context, a policy suggestion is often explicitly given: as a monoply generates a deadweight loss, it should be regulated or broken up into smaller firms in order to eliminate the deadweight loss.
Hence, whenever deadweight loss exists, it should be eliminated, or at least reduced. But should we? Should we eliminate the deadweight loss due to taxation of goods? If so, how to? Well, if we don't tax goods, there will be no deadweight loss. So, the suggestion appears to be to avoid taxing goods. But should we?
You may answer "yes". But then the government will have no money to spend. What about simply avoiding taxing goods but taxing only income? In fact, students have never been taught in high school that taxing income also generates deadweight loss. If this is true, the method is good enough.
But what is not taught does not mean it is true. If income tax generates no welfare loss but commodity tax will, it is reasonable that all countries should rely only on income tax. But the premise of this suggestion is of course not true. Taxing income also generates welfare loss: higher income tax induces productive persons not to work so hard as they would rather enjoy more leisure than working hard to earn so little (after tax).
Another drastic answer may be: eliminating all taxes should be done. Though the government may then have no money to spend, this is a good thing. Some extreme free-market supporters, who hate any government activities, will find this answer good enough. But is it the purpose for us to teach deadweight loss? We don't tell students the purpose of taxing goods but tell them the welfare cost (deadweight loss) of taxing goods. Is it because our hidden agenda is to support minimum government? I don't think this is the teachers' or the curriculum designers' intention. But if we leave the purpose untouched, the unintended consequence will really become in line with free-market advocates' political agenda. In fact, in the same curriculum, we often also teach students the functions of a government, such as providing public goods (e.g. national defense). In other words, we assume some government expenditure must be involved. If so, the question should never be about eliminating all taxes, cutting off the source of revenue. The question should be how to collect taxes.
Thus, we have to make clear why goods are taxed and why deadweight loss is taught. The answer for the former is obvious: the government need money to finance its expenditure (e.g for public goods). However, its financing, mainly via taxation, almost always generates welfare cost, namely deadweight loss. So, the answer to the second question involves how we should use the concept. In fact, if the benefit of government (e.g. providing public goods) is always lower than the cost of government (deadweight loss), we cannot but support the extreme free-market position: let's avoid asking government to do anything for us. So, the necessary implicit assumption for the existence of a government must be: its benefit is higher than the cost. Then, the question is not to eliminate all the deadweight loss, but choose a way to minimize it. The deadweight loss analysis is useful in the sense that it enables us to judge taxing which good generates more or less deadweight loss. The policy suggestion should be to choose the tax that generates smaller deadweight loss. One should not misunderstand that the analysis of deadweight loss is to justify elimination of it as this simply means elimination of a government.
Wednesday, 6 February 2019
Why cigarettes ought to be heavily taxed?
"Smoking is hazardous to your health". I heard this slogan of government, who wanted to persuade people to quit smoking, a long time ago. This is perhaps a justification for various policies to deter people from smoking. In fact, I think many people, including the government officials, believe in such an argument, supported especially by medical doctors. Therefore, cigarettes are heavily taxed and the government will also ban electronic cigarette as a recent initiative to curb smoking.
I write this blog post not because I hate or like smoking. However, I have read one article that uses "economics" arguments to criticize the high cigarette tax policy. I am concerned with economics and I found the "economics" arguments in this article are problematic in some aspects. So, let me share with you.
The Hong Kong government has increased cigarette tax quite frequently in recent years. The said article aims at criticizing this policy. Its arguments are summarized as below:
For Point 1, if tax is simply to reduce the number of smokers, it is perhaps justified to argue that tax is of no use anymore when demand is already vertical (though I doubt this is true: if tax is further increased, some very addictive smokers might also consider, by incurring a high cost, to quit, or at least they may reduce smoking). But tax also serves another purpose, i.e. collecting revenue for the government to provide its services to citizens. Normally, tax is a necessary evil: Taxation generates distortions and deadweight loss. Even so, the government still has to collect tax, or no service can be provided. Now, taxing cigarettes is another story: It is not a necessary evil. Taxing cigarettes already serves a positive function (however small): controlling a bad behaviours, namely, smoking. At the same time it also collects revenue. So, you can't simply say the tax is useless if it does not reduce smoking significantly, provided that it still generates revenue: without this tax, the government would have to collect more revenue from other taxes of necessary evil nature.
For Point 2, taxing cigarettes increases the profits for smuggling. This is true. But this is also true for any taxes on any goods. Does it mean that we therefore should not tax any goods (whenever smuggling may be triggered by taxes), or not to raise the tax rates for these goods (so as to avoid triggering smuggling)? The answer to the first question is (quite obviously) "No", and it is not hard to arrive at this answer. The answer to the second question, however, depends. If there is a better way to achieve what the tax can achieve (but will not trigger smuggling), of course the answer should be "Yes". But is there? Of course, there is another way to reduce smoking but will not generate more smuggling, e.g. banning smoking in more locations. But is this a better way? We must consider the cost of enforcing such a policy (by sending law-enforcers to more non-smoking zones) and ask: Is it relatively less costly to ban smoking or to increase tax but devote more resource to anti-smuggling? There is no presumption that enforcing a ban must be less costly. Hence, unless we accept that reducing smoking (further) is not supportable (anymore), what we need to consider is the relative cost of achieving the goal, not to abandon the goal (whenever a bad side-effect is involved).
For Point 3, this really touches upon the core issue: Why do we tax cigarettes but not other unhealthy goods such as junk food if the policy is to promote health? It seems that the current policy is unfair to smokers. Nevertheless, is cigarette taxed simply because of the health of the smokers as what the slogan in the first sentence of this blog says? I think this is the key point and the major blind spot. Most people, for or against cigarette tax, focus exclusively on this reason - the smokers' health - and nothing else. If so, we really should tax or ban also other unhealthy goods, including most wines and junk food. Why should we target only at cigarette? The answer, to me and many textbook authors of economics, is very clear: taxing cigarettes is for the health or benefit of the non-smokers.
When a person smokes, a non-smoker will also suffer, breathing unhealthy second-hand smokes. In economics, this is called externality. On the other hand, drinking wines or eating junk food normally will not affect other people. It affects only the consumers' own health. There is no externality. In campaigns of public policy promotions, surprisingly, this is rarely mentioned. What is mentioned frequently is only the health of the smokers. This practice perhaps makes people forget what is the most crucial difference between smoking and other unhealthy goods. In fact, smoking is in a way not different from pollution. Regardless of whether it is good to the smokers or not, it affects other people (non-smokers) adversely, and in most circumstances the smokers will not take their harms on others into account when choose to smoke. That's why smoking should be, from an economics perspective, controlled by public policies.
So, even if public policy makers forget this purpose, we should not: controlling smoking is for a good economics reason, i.e. externality. In fact, I think the article author mentioned above is not bad in applying economics. The article author knows how to use high-school level economics concepts for arguments. These concepts include demand elasticity, substitutes, and fairness. However, it misses something important: what is the purpose of taxing a good from the very beginning?
I write this blog post not because I hate or like smoking. However, I have read one article that uses "economics" arguments to criticize the high cigarette tax policy. I am concerned with economics and I found the "economics" arguments in this article are problematic in some aspects. So, let me share with you.
The Hong Kong government has increased cigarette tax quite frequently in recent years. The said article aims at criticizing this policy. Its arguments are summarized as below:
- With these frequent tax hikes, those who still smoke are someone who will never quit. Their demand curve is nearly vertical. Further taxes cannot induce them to quit.
- Smuggled cigarettes are substitutes for legally sold cigarettes. Further tax hikes simply encourage more smuggling.
- Alcohol and junk food are also hazardous to health. But the government has chosen to cancel tax on red wine instead of banning wines, and it does not tax junk food. It is unfair to smokers.
For Point 1, if tax is simply to reduce the number of smokers, it is perhaps justified to argue that tax is of no use anymore when demand is already vertical (though I doubt this is true: if tax is further increased, some very addictive smokers might also consider, by incurring a high cost, to quit, or at least they may reduce smoking). But tax also serves another purpose, i.e. collecting revenue for the government to provide its services to citizens. Normally, tax is a necessary evil: Taxation generates distortions and deadweight loss. Even so, the government still has to collect tax, or no service can be provided. Now, taxing cigarettes is another story: It is not a necessary evil. Taxing cigarettes already serves a positive function (however small): controlling a bad behaviours, namely, smoking. At the same time it also collects revenue. So, you can't simply say the tax is useless if it does not reduce smoking significantly, provided that it still generates revenue: without this tax, the government would have to collect more revenue from other taxes of necessary evil nature.
For Point 2, taxing cigarettes increases the profits for smuggling. This is true. But this is also true for any taxes on any goods. Does it mean that we therefore should not tax any goods (whenever smuggling may be triggered by taxes), or not to raise the tax rates for these goods (so as to avoid triggering smuggling)? The answer to the first question is (quite obviously) "No", and it is not hard to arrive at this answer. The answer to the second question, however, depends. If there is a better way to achieve what the tax can achieve (but will not trigger smuggling), of course the answer should be "Yes". But is there? Of course, there is another way to reduce smoking but will not generate more smuggling, e.g. banning smoking in more locations. But is this a better way? We must consider the cost of enforcing such a policy (by sending law-enforcers to more non-smoking zones) and ask: Is it relatively less costly to ban smoking or to increase tax but devote more resource to anti-smuggling? There is no presumption that enforcing a ban must be less costly. Hence, unless we accept that reducing smoking (further) is not supportable (anymore), what we need to consider is the relative cost of achieving the goal, not to abandon the goal (whenever a bad side-effect is involved).
For Point 3, this really touches upon the core issue: Why do we tax cigarettes but not other unhealthy goods such as junk food if the policy is to promote health? It seems that the current policy is unfair to smokers. Nevertheless, is cigarette taxed simply because of the health of the smokers as what the slogan in the first sentence of this blog says? I think this is the key point and the major blind spot. Most people, for or against cigarette tax, focus exclusively on this reason - the smokers' health - and nothing else. If so, we really should tax or ban also other unhealthy goods, including most wines and junk food. Why should we target only at cigarette? The answer, to me and many textbook authors of economics, is very clear: taxing cigarettes is for the health or benefit of the non-smokers.
When a person smokes, a non-smoker will also suffer, breathing unhealthy second-hand smokes. In economics, this is called externality. On the other hand, drinking wines or eating junk food normally will not affect other people. It affects only the consumers' own health. There is no externality. In campaigns of public policy promotions, surprisingly, this is rarely mentioned. What is mentioned frequently is only the health of the smokers. This practice perhaps makes people forget what is the most crucial difference between smoking and other unhealthy goods. In fact, smoking is in a way not different from pollution. Regardless of whether it is good to the smokers or not, it affects other people (non-smokers) adversely, and in most circumstances the smokers will not take their harms on others into account when choose to smoke. That's why smoking should be, from an economics perspective, controlled by public policies.
So, even if public policy makers forget this purpose, we should not: controlling smoking is for a good economics reason, i.e. externality. In fact, I think the article author mentioned above is not bad in applying economics. The article author knows how to use high-school level economics concepts for arguments. These concepts include demand elasticity, substitutes, and fairness. However, it misses something important: what is the purpose of taxing a good from the very beginning?
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