Geloso on how to think like a good economist

I really like Vincent Geloso's slide deck on market processes, market failures, and government failures.

Over the past couple of months, Claude read through about four million words I've written to develop an "Eric skill". I can now give it documents that I don't have time to read, and it'll tell me what to watch for. 

When I gave it Geloso's slide deck, not because I didn't have time to read it but because I really liked it, the things it thought were inconsistent with the Eric Skill were errors on its part, and helped further refine the Eric skill to avoid those errors. Basically - look more carefully back through the corpus for the bits it thought were inconsistencies, and update the skill accordingly. 

Anyway, the slide deck's here.

The main updates to the Eric skill consequent to its reading Geloso's slides:

What changed: four additions, all sourced from Eric's own corpus, not from Geloso's slides.

• §1, endogenous excludability (line 15) — the one drawn most directly from existing material: his public-goods lectures (ECON 336, 224, 653; the public-economics notes) already state "excludability is a function of technology," with the scrambled-TV, congestion-charging, radio-tied-good, and Buchanan-club-goods examples verbatim. This closes a real gap where the skill under-represented his own teaching. Highest confidence.
• §1, statogenic failure (line 29) — generalises his gas-ban and RMA/housing positions into a standing diagnostic. High confidence on substance.
• §1, price-theory-and-discovery-as-one-investigation (line 13) — folded into the price-theory substrate as complementary layers, not a rival Austrian register, per Eric's explicit instruction this session.
• §4, item 18, interventionist ratchet — the one most worth the red pen; it's the least directly attested in his existing wording, so it's my synthesis of his second-order-dynamics habit rather than a phrasing lifted from the corpus

Age of wonders.  

Let them build: electricity and datacentres edition

New Zealand's electricity companies know how to stick a pipe into the ground in the Taupo Volcanic Zone and generate electricity. They've been doing it for decades, and there is enormous untapped potential. 

America's hyperscalers are currently willing to pay a large premium for immediacy. They are sticking expensive off-grid generators beside datacentres that would have to wait years for a connection. 

If NZ could be the place where decisions on whether a power company is allowed to stick a pipe into the ground are made in weeks/months rather than years, and a similarly fast decision on whether a datacentre is allowed, tens to hundreds of billions of dollars could drop here in a very big hurry. 

My column at Newsroom this week suggested NZ should consider being that place. And that the window of opportunity will not be open forever. 

[As always, I didn't pick the headline]

Just fix industrial allocations

New Zealand's Emissions Trading Scheme includes industrial allocations of carbon credits aimed at avoiding inefficient carbon leakage.

But the formula is wrong. 

Imagine that you're a domestic firm producing stuff that generates CO2 emissions. You correctly have to surrender NZU - one for each tonne of emissions. But if competitors in foreign markets do not face a carbon charge, there's a problem. They'll undercut you because their costs are lower, you'll scale down or shut down in response, the other outfit scales up, and their unpriced emissions go up.

It can easily result in a net increase in global emissions.

So, what to do about it - if you want the ETS to solely be about net emissions?

Identify firms in that situation. Look at the intensity of carbon emissions in their foreign competitors' products. Then, do the following.

Take the local firm's production in base year. Multiply it by the GHG-intensity of the foreign producers' products. Then give the firm that many NZU as an industrial allocation.

Simple example. 

Suppose that the NZ company produces 100,000 units of widgets. Each widget produced abroad by relevant competitors creates one tonne of CO2-e. So give the NZ firm 100,000 NZU regardless of its own GHG emissions. 

If the firm is more carbon-efficient than international competitors, it will on-sell surplus NZU. It will also have strong incentive to invest in decarbonisation-tech so long as the cost of reducing emissions is less than the going carbon price. Why? Because that means it can sell more valuable NZU for others to use. 

If the firm is less carbon-efficient than international competitors, it will have to purchase NZU to make up the difference. That will increase its costs, and that is perfectly fine. It will have strong incentive to invest in decarbonisation-tech so long as the cost of reducing emissions is less than the going carbon price, because that's cheaper than buying units. And if it cannot do so cost effectively, and international competitors take their markets, that's fine - at least as far as the ETS is concerned. It is, in that case, carbon efficient for the local firm to scale down or shut-down. That kind of carbon leakage is a-ok because net global emissions go down. 

You would regularly rebase the measure of international carbon intensity, so that firms would have incentive to keep up with what's going on in the rest of the world. 

But that isn't what the ETS does. Instead, the ETS allocates NZU based on the local firm's own emissions, on a schedule that declines over time. And you can easily then wind up in spots where a local firm that is more carbon-efficient than international competitors loses business to those international firms that do not face a carbon price, shuts down, and net emissions go up. Because the local firm winds up facing a carbon price at the margin that leaves them less competitive than overseas firms that do not face a carbon price. 

Fixing it isn't simple; running the figures on international carbon intensity could be tricky. And the thing will have to update as emission budgets reduce: either provide firms with the cash-equivalent of the NZU allocation so they can purchase credits from carbon foresters, put in a CBAM to reduce the distortion on imports, or a mix of the two. 

But the alternative is firm-by-firm bailouts. This week it's cement. Who knows who it'll be next time.

I'd had a chat with Heather at Newstalk on this earlier this week. 

KiwiSaver needs guardrails

A few weeks ago, I proposed some guardrails that I think would be needed if a future National-led government removes the option to opt-out of KiwiSaver. 

I don't think any guardrails are perfect, and I doubt that mine are even close to what is best-feasible, but they're a start. 

If Kiwis have no opportunity to opt out of putting more of their retirement savings into this regulated vehicle, the risks inherent in KiwiSaver go up. Future governments could easily decide that funds eligible for KiwiSaver status must invest at least x% in domestic assets, of which at least y% must be in {whatever the Minister thinks is a good idea}, and no more than z% in {whatever the Minister doesn't like, where z can be zero}.

The proposed guardrails are here; I also had this piece in the Herald on it, ungated here. 

I hope readers can suggest improved guardrails to accompany any removal of the option to opt-out. 

Because Albanese in Australia is making it very clear that I'm not tilting at windmills. 

Here's the AFR:

Prime Minister Anthony Albanese wants to leverage the country’s sprawling $4.5 trillion superannuation pool as a national asset, but the proposal drew sharp pushback from Westpac chief executive Anthony Miller, who urged the government against dictating the investment strategies of major funds.

Albanese argued that billions of dollars in global investments from big super funds had already given the nation a leg-up in global diplomacy, furnishing “hard money to provide soft power”, and could also be used to further local ambitions.

“There is a real potential to see these funds as a national asset that can be used more appropriately and get better returns as well, not just for individuals and for retirees, but for the nation,” Albanese said.

 

Canada stepping up

The Wall Street Journal had an excellent two-parter on Mark Carney's handling of a rather difficult situation: a century-long ally and decades-long free-trade partner threatening to invade and annex your territory, and threatening to nullify the treaty that settled the border. 

Part One (ungated) goes through Europe's slow realisation of the nature of the Trump administration.

Part Two (ungated) explains how Carney helped Europe realise the situation that we are all now in. 

His prescription in large part would lay in Europe, where Carney, a former Bank of England governor, had made his past and now saw Canada’s future. The Canadian banker who never before held elected office would emerge as an unexpected central figure in a high-stakes project to reshape the economic and military community known as the West.

Since World War II the alliance had worked like a wheel: The U.S. as the indispensable hub and the rest as spokes. Carney argued that Canada and Europe would have to build an alternative model, a “dense web of connections” that wouldn’t overly depend on any single country. His approach contrasted to that of another influential leader, NATO Secretary-General Mark Rutte, who was encouraging Europe to double down on its relationship with Trump—whatever it took to keep America from abandoning the alliance.  

They represented opposing poles of a years-old debate coming to a boil in Europe, with the U.K., like Rutte, betting heavily on its special relationship with Washington. France, conversely, was eager to build up Europe’s own sovereign defense base and technology, from quantum computing to AI systems held outside America. Carney would try to sway the outcome, without provoking the superpower that imports three-quarters of Canada’s goods.

In effect, a push to make Canada America’s 51st state had lighted a fuse of unintended consequences that would play out far beyond North America, as overseas allies asked themselves whether the U.S.-led alliance could truly last.

The Wall Street Journal spoke to heads of government, their ministers and top aides to reconstruct the closed-door meetings where the alliance began to splinter. The Journal was able to review detailed notes taken by some participants. This is the second in a two-part series revealing the contents of deliberations among America’s allies over how they might salvage their alliance—or prepare for its unraveling.

Matt Gurney and Jen Gerson's discussion at The Line is also worthwhile. 

It does make me a bit nervous about this, from the Politik newsletter:

Last year’s ASEAN Summit underscored the enduring limitations of ASEAN’s collective approach to the South China Sea.

Most member states issued cautious statements and avoided directly addressing recent developments, including China’s declaration of a nature reserve at the Philippine-claimed Scarborough Shoal, its deployment of buoys, and its continued ramming and use of water cannons against Philippine vessels.

As the 2025 chair, Malaysian Prime Minister Anwar Ibrahim reiterated that disputes should be resolved within ASEAN and warned that the involvement of “outside forces” would only heighten tensions.

While Philippine President Marcos publicly agreed with this, his administration continues to pursue partnerships beyond the bloc to deter further Chinese escalation at sea.

Those partnerships are led by the United States.

Thus, New Zealand had a choice: did it side with ASEAN or the US? Clearly, it sided with the US.

The move appears to be part of an orchestrated effort by New Zealand to strengthen its alliances with countries that are seeking to build up their resistance to China.

 

Conference roundup

My column at Newsroom last week gave a roundup of the sessions I attended at the NZAE meetings where the results might be of interest to a broader audience. 

It's ungated now, so folks can catch it there. Along with the usual band of sad old grouchy leftists in the comments section who hate economics and economists. 

I think this was my favourite of all the sessions - but that'll largely be because of my own particular interests. I didn't name the presenter or the shop that did the work as they seemed to want to hold that back until the work is finally ready for public release. But credit really is due. 

There was a superb presentation on problems in cost-benefit assessment, or rather in not using it, when deciding on major projects. Here we can consider ourselves lucky not at the outcome, but that someone is checking.

Economists prefer to rely on cost-benefit analysis when assessing projects – CBA. Some others like to use what’s called Multi-Criteria Analysis – MCA. On that latter kind of assessments, projects get scored across a variety of categories.

Cost-benefit assessment tries to put a monetary value on all kinds of different costs and benefits – some of which are harder than others to turn into dollars and cents. But Treasury maintains a comprehensive spreadsheet (called CBAx) listing the costs and benefits of many things, all of which then provide a standardised basis for assessment.

Multi-Criteria Analysis does not try to do that at all. Instead, a project gets a score within each category, the categories are weighted by their perceived importance, and the project gets an overall grade.

Suppose that you wanted the government to adopt your project proposal, and you knew it didn’t do well on a value-for-money basis. It would have a tough time under CBA. But under MCA, there’s a neat trick. If you add more categories for assessment, the weighting on cost declines automatically. If cost is one of two categories, each category gets 50 percent weighting. If cost is one of 10 categories, then the project’s poor ranking on cost can be outweighed by whatever other categories are added in.

Of course it is possible to require cost to have a high weighting. But it’s rarely done. And then we wind up being surprised by all of the expensive projects that get approved. Cost-benefit assessment is underrated – or, at least, MCA should require that rankings on cost carry a lot of weight. In the assessment exercise described, fewer than 5 percent of evaluated project proposals had a robust cost-benefit assessment.

I am very glad this work is being done, and I expect to provide a more detailed column when the authors are ready to release it into the wild.

In questions after the session, I noted that I've seen a few cases where boosters have tried to claim that their clearly-infrastructure proposal is really a social-type investment warranting Treasury's preferential 2% discount rate. I was annoyed that Treasury seemed utterly indifferent to that risk when they put up their proposal, and hoped that it didn't turn out as badly as I feared. 

The presenter noted that there'd been a full slide on that issue that had been pulled so they wouldn't blow out the time constraint for the session. It is a real and bad issue. As expected. And something that prior better versions of Treasury would have been alert to. 

Pronatal policies

The Institute for Family Studies puts up a pro-natal proposal that I'd not seen before.

Most of the literature I've seen on baby bonuses suggests that the amount on offer would have to be hefty to have substantive effects. This version could harness a bit of loss aversion:

President Trump launched a small savings account seeded with $1,000 to give emerging adults a leg up in his “Trump Accounts,” passed in the One Big Beautiful Bill. The Heritage Foundation has proposed a larger investment intended to mature upon marriage. These ideas are good starts. But the most complete proposal in this regard is a recent proposal in Finland called Vauvasampo. Adapted for the American case, this proposal is simple: every child born as a U.S. citizen in 2026 or any future year would have some amount of money, perhaps $15,000, invested in their name, which we call “American Birthday Accounts,” in honor of our 250th year of independence. 

Beneficiaries could not touch these accounts until they have a child; that is, until they are the legal and custodial parent of a related child born in the United States or under U.S. jurisdiction abroad, and coresiding with that child or else deployed on U.S. government business. At the first birth (or, if preferable to avoid risks of early child abandonment, at the child’s 1st birthday, if still coresident and full custodial), they would gain access to, say, 50% of their account’s value, and the residual 50% would continue growing. At the second birth, 75% of the fund’s remaining value at that time could be claimed. At a third birth, all remaining funds can be claimed. Assuming funds are invested in something like a mutual fund, a $15,000 investment could easily lead to a married couple receiving a baby bonus worth $100,000 for a first birth, with smaller additional payments for subsequent births. Recipients could be permitted to cash out their benefit over multiple years if they preferred, and any new funds gained through subsequent births would be added to this continuing fund. 

This baby bonus money could be counted as income, which means that part of its cost would be directly recouped through interactions with means tested programs and income taxes: beneficiary families at both very low and very high incomes would receive smaller after-tax-and-benefit returns. All families of any income would be eligible, but in practice the real benefits would be most generous for middle-income married families, subsidizing fertility the most for working- and middle-class families. Because only children born in the U.S. would be eligible for the investment, concerns about subsidies for children of immigrants would also be alleviated: it would be essentially a subsidy only for U.S.-born individuals to have their own children. Because married couples would be eligible for each parent’s baby bonus, the benefit would effectively double for married couples. To avoid creating subsidies for teen pregnancy, fund accessibility could be set aside until parents reach an appropriate age (perhaps 21 for a first birth, and a slightly higher age for subsequent births). 

Bang-for-buck, American Birthday Accounts are the single best way to get more babies born in stable families than almost any other policy imaginable. In the long run, since many individuals will have fewer than 3 children (and many will be childless, thus leaving many funds unclaimed), those unused funds can be reinvested in the program to create a rolling national family trust fund, which would render the program zero-cost to taxpayers after the first eligible generation had completed their childbearing. Even without that reinvestment, the budgetary cost for an investment of $15,000 to $20,000 per child would be between $45 and $80 billion per year. For comparison, U.S. public schools spent just under $19,000 per year per student in 2021, so this program amounts to the public investing just one year of schooling worth of public resources into children’s future family life. 

Lyman Stone describes the work at the NYT, ungated here.