Sunk costs matter more in politics than in markets. They matter everywhere, but firms have better incentives to stop throwing good money after bad.
In politics, you have to keep throwing that money at things like the America's Cup because reversing would signal that you screwed up in the first place, and politicians expect voters to punish them more for admitting that than for just riding the damn thing out.
This was part of a longer thread from Auckland Councillor Richard Hills, some of which is now deleted.
Auckland Council voted to throw money at a yacht race - the America's Cup. And when it inevitably came back begging for more money, as everyone had to have known it would, "you can't stop half way... you're not going to stop it when you've spent so much."
I wish Councillors believed it politically possible to say
"Know what? We should have foreseen this pitch for extra cash, but we believed them when they said that this time is different. Our bad. But we're not going to give them any more money. If they want to cancel their boat thing or take it elsewhere, that's their call. But we'll want all our money back if they do - and we will never ever again put a dime of public money into a boat race otherwise."
I'm not blaming Hills here - he notes that he'd tried taking more expensive options off the table. But it is a nice illustration of political thinking around sunk costs.
Who knows what the true model here is. Whatever the true model, we simply don't know whether statements by New Zealand's Foreign Affairs Minister represent New Zealand foreign policy.
Here's Richard Harman. You should subscribe to his newsletter if you want to keep track of what's going on in NZ politics:
The Prime Minister, Jacinda Ardern, confirmed yesterday that she did not see Winston Peters’ major speech on NZ-US relations before he delivered it in Washington, DC, on Saturday.
The speech has raised questions about whether New Zealand is moving its foreign policy closer to the Trump administration and away from the independent stance it has pursued since the ANZUS breakdown in 1985.
It has surprised observers in Wellington that such a major speech could be delivered without at least the Prime Minister’s prior approval and probably that of the Cabinet as a whole as well.
And it has left unanswered, questions as to where New Zealand sits between the United States and China.
Harman has lots more at the link.
So it's impossible to tell whether Winston's speech represents the current view of the government, whether it's Winston off on a branch, or whether it's a deliberate coalition strategy to have someone who can be dismissed as the crazy uncle cozying up to the US to let other parts of the coalition stay friendlier with China: "Oh, that's just Winston. You have to forgive him. They're retail politicians. Retail politicians can get away with anything here. They just have to remind people that they're retail politicians when they're doing it."
The thing I hate most about MMP is the diffusion of responsibility. Given the limits of voter attention, the best we can hope for is that they dish out reward or punishment appropriately come the election, and that fear of that constrains government. But when everyone and no one is responsible for policy, that is a bit harder.
We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.
We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.
We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.
Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.
First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?
Rod Sims' report on the impact of Google and Facebook on Australian media and advertising could just as easily have been written for New Zealand.
Pity it wasn't.
The preliminary findings from the Australian Competition and Consumer Commission's (ACCC) Digital Platforms Inquiry confirm what most of us in the New Zealand news business are so painfully aware — Alphabet's Google and Facebook have decimated the revenues of traditional news media (print and digital) as they siphoned up the bulk of the advertising market.
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But despite the trend being obvious, Governments — current and prior — have not been troubled sufficiently by the behemoths predatory behaviour in the advertising market to do anything about it.
The Sun reduces demand for candles by being that much more efficient at providing light (in daytime) for those wishing to see; online platforms may reduce demand for advertising in traditional media by being that much more efficient at providing viewers for advertisements for those wishing to purchase access to those particular viewers.
What is admirable about the ACCC report is the forensic probing of the way Google and Facebook have effectively ripped off journalists' work.
"This reduces value for the news businesses that have invested a lot of money and time in creating the content. Journalists may work many days or weeks to break an exclusive online story and a competitor can quickly reproduce that story, post it on a rival site which, due to the reach of the digital platforms, may draw traffic away from the original source of the story," says Sims.
So when an outfit like the Daily Mail rips off an exclusive that another paper worked on, Google and Facebook are to blame? Was it never the case that stories broken by smaller newspapers were ripped off by larger ones with bigger reach before 1999? The public-good nature of this stuff is hardly new.
Just saw your piece on wealth. To add to the points you make:
Strongly agree with your point about the use of cross sectional data. This is particularly true in a country where a large number of people in the first ten to 15 years of adulthood go abroad. We would expect the distribution to be highly skewed if the most effective means of building capital is to go abroad.
There is likely to be a depressing effect on saving associated with the generosity of the state superannuation scheme. Or to be more precise: people have an implicit overlapping generations model in the minds that sees long run intergenerational transfers by government as credible. This means they see the tax and transfer system as an implicit saving scheme. When combined with home ownership and universal health care, it is a reasonable question to ask what purpose would it serve people in the lower half of the income distribution to build up assets? (there is a paper by Andrew Coleman somewhere on this)
Both points are good. The latter one especially should be better recognised. NZ Super guarantees you a decent basic retirement income. NZ Super currently pays $926 per fortnight if you're single, or $701 per fortnight per person in a couple. After tax, it's $617 per person in a couple.
So a retired couple gets $1234 per fortnight after tax in NZ Super, so $32,000 per year. That's in the middle of the second decile of equivalised household income for a couple, before housing costs. So anyone earning less than that could easily be forgiven for not building any retirement savings: they would be reducing their current consumption in order to gift themselves higher consumption in retirement than they were ever able to afford when working. What does that mean? It is completely rational for the lowest income twenty percent of the population to not be building wealth.
Or, to put it another and perhaps better way, we should view NZ Super eligibility as being equivalent to lump sum wealth holdings for each person, rich or poor, equivalent to the present discounted value of the stream of entitlement payments once you turn 65. But that's not all! Government provides other services as well. There's a retirement care subsidy (which draws against your Super entitlement, but also involves additional subsidy from the government). Government provided health care too. Entitlements to all of these should be viewed as part of the lump-sum entitlement that's fairly evenly distributed.
And what happens to any inequality measure if you ignore a giant lump sum that's provided across-the-board? The inequality measure will overstate real inequality.
The Household Net Worth survey by Statistics New Zealand shows the wealthiest one percent have 20 percent of all assets and the wealthiest tenth have 59 percent. The poorest half of adults - 1.8 million New Zealanders - have just 2 percent of all wealth. Māori net wealth is significantly lower than that of Pakeha.
These figures are broadly unchanged since the last such survey in 2015. But that's barely reason to celebrate.
Wealth - in the sense of things that people own, like houses, cars, financial investments and cash in the bank - provides security and stability. It is something people can draw on during tough times, a stake in the community, a base from which to plan for the future.
So it is hugely concerning that so many New Zealanders have so little wealth. And their position is not improving. Statistics New Zealand reports that the poorest 40 percent have seen no increase in their wealth in the last three years.
But look at the chart underlying this:
There was a half a percentage point increase in the number of people with net wealth of less than $100,000: those will be people with substantial debt. When I check the student loan tables, about 0.075% of the domestic population has student loan debt into those figures - the rest has to be other stuff.
Once we get into the positive net wealth categories, every net wealth category up to and including the $400-500k band had a smaller proportion of the population falling into it. Most bands above that saw an increase in the proportion of the population in the band, barring the $700-900k group. And the proportion of people with more than $1.5m in net wealth increased from 8.3% of the population in 2015 to 12.5% of the population in 2018.
It would then be fair to characterise this as an overall upward shift in wealth, barring a small increase in the proportion of the population with substantial net debt.
The median person in 2015 would have been in the $200-$300k net wealth range. The median person in 2018 is in the $300-$400k net wealth range. But note that the figures are not inflation adjusted.
The overall curve looks to me to have shifted to the right, barring the increase in the proportion of people with substantial net debt of more than $100,000. All the focus on what proportion of the population has what proportion of overall wealth misses what looks like an overall increase in wealth.
And recall too that life-cycle stuff enters heavily here. These annual snapshots give a picture of the cross-section in any particular year. But people accrue wealth as they age, then start consuming from that wealth in retirement. Stats' press release has young people (age 15-24) with median net worth of $2k and older people (age 65-74) with net wealth of $416k.
Every year, new people are born, existing people age, and some people die. Looking at annual snapshots doesn't tell us anything about how people move through the life cycle. Every person in 2015's bottom 40% could have increased in wealth, with no change to the wealth band of 2018's 40th percentile person, as the 2015 people move up through the age ranks and new people come in at the bottom.
I'd also be pretty nervous about claims around the proportion of wealth held by different quintiles if substantial net debt held by a small proportion counts at the bottom. Some of it is student loan debt where the human capital generated by that education is not counted in the wealth tables - but only a small amount. I wonder if some of it is mortgage debt where the corresponding housing asset is held in a family trust not included in the wealth. Does it really seem likely that anybody would lend over $100,000 to those unlikely to be in a position to be able to pay it off?
Treasury has updated its CBAx cost-benefit analysis tool to bring in some of the measures from its new Living Standards Framework.
And I think I can get a proper* hockey rink out of it.
Let's walk it through.
According to the CBAx tool, being able to express your cultural identity is worth $9,563 per year per point of increase on a four-point scale. Canadians living in the Wellington region would enjoy at least a one-point increase in their ability to express their cultural identity if there were a hockey rink here. It's plausible that it could even increase from zero to four. Let's call it only a two-point increase, to err on the side of being conservative here. So that's then about $19,000 per Canadian per year. Over a 20 year lifespan of a rink, at a 6% discount rate, that's worth $218,000 per Canadian.
Winnipeg's MTS Place cost $134m CAD - let's call it $150 million NZD.
But wait! I've forgotten the deadweight cost of taxes needed to fund the thing. That $150m rink really costs $180m. And projects like these always have cost blow-outs. Let's say $250m all-up to be conservative.
That really isn't a problem that cannot be surmounted by CBAx and the World-Leading Living Standards Framework™.
You see, all season ticket holders, and anyone going to more than three games per year, would also be a member of the Canadian Hockey Club. Being a member of a club, per membership, is worth $2,536 per year in Treasury's new framework. And gaining a friend is worth $592 per friend gained. Everyone who joins Hockey Club would be making at least two friends. So we're already at an additional $3,720 per year - if we conservatively estimate only two new friends. Friends!
And let's say that one Canadian in ten would report a one point reduction in their feelings of loneliness. A one point reduction in loneliness, on a 0-4 scale, is worth $17,633 per year. Since we are being very conservative here and assuming that only one Canadian in ten would experience that reduction in loneliness, that's $1,763 per Canadian on average.
So we've already added another $5,483 in benefits per person per year - in addition to the $19,000 in cultural identity benefits. So $24,500 in annual benefits - capitalised over 20 years, that's $281,000 per Canadian.
If there are at least 890 Canadians in the Wellington area, (let's round up to 900 Canadians - again to err on the side of being very conservative here), then building us a hockey rink totally makes sense. All of my assumptions have been conservative here too. And I've not considered the benefits to others in Wellington. For example:
Hockey improves mental health. Every one point change in mental health (on a 100-point scale) is worth $4,608 per year. Really, claiming a point or two increase on this one across a big enough population can justify just about anything.
People could go skating and become more fit. Every one point improvement in physical health (on a 100-point scale) is worth $1,158 per year.
Anyway, I think we can easily conclude that Treasury's World-Leading Living Standards Framework™ completely overturns what every other economist in the world has ever concluded on the economics of stadiums. We've just shown it with a series of very conservative assumptions.
Oh - and the memberships thing also means that the government should pay my membership fees at the Wellington Club if I would otherwise let my membership lapse because of the cost. The benefits outweigh the club fees.
* Hockey is played on ice with skates. It shouldn't need an 'ice' prefix to distinguish it from that NZ game played on grass with comically tiny sticks.
As much as a number of commentators and one justice minister like to paint it thus, the apparent flouting of a suppression order that has revealed the identity of her alleged killer is not.
Frustrating? Yes. A challenge to our slow-moving justice system? Maybe. But certainly no tragedy.
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Many will struggle to remember both by the time of the trial, probably at least 12 months away. Some may even have forgotten by the time the 26-year-old alleged killer makes his next appearance, when suppression is likely to be dropped.
It's worth remembering, too, that the murder of tourists in this country, and associated overseas interest, is still rare. Suppression is observed in the great majority of cases that make their way through our courts.
Those relaxed about the impact of such indiscretions on justice also have evidence to back their ambivalence.
They concluded that "publicity both before and during the trial currently has little, if any, effect on jurors".
So there is every reason to believe that, despite the level of interest in this case, justice will be served.
Another Law Commission report, 2009's Suppressing Names and Evidence, suggested the issuing of orders to force internet providers to remove information in breach of suppression orders.
But if the internet is a new frontier, then social media is the wild, wild west: once the horse has bolted, it's next to impossible to bring it under control. Even after a person is named, officially, people may be able to track their footprints through Facebook, Google and other sites.
So the challenge is significant, perhaps even insurmountable.
One that our justice system may have to live with, but one we are confident it will survive.
Not only does the editorial make sense, it also links through to the cited work. Many kudos.
Law and regulation always has to be able to respond to large cost shifts in the underlying environment. Suppression orders were pretty easy in the 80s. Anyone who might report on the trial would know that the order was in place. The number of media outlets was limited. And when you needed to get a permission note from Reserve Bank to get the foreign currency to subscribe to a foreign newspaper or magazine that might show up a few weeks after publication - risks that way were pretty trivial.
All of that would lean toward relatively liberal use of suppression orders. If the judge thought that there was at least some benefit in it, enforcement costs weren't much worth worrying about. Enforcement was easy. So the orders could be used in a broader range of cases.
Susie Ferguson's interview this morning with Bar Association's Jonathan Eaton QC had the Bar Association wanting strong enforcement of the existing rules without regard to the tech change that's happened. Susie's questions were great. But Eaton seemed to be expecting the impossible. Google's said that they were never notified about the order; Eaton imagined a world in which Google would somehow back-check, in every jurisdiction in the world, for each and every court case ever as they came up and ongoing in case the situation changed, whether there were a suppression order in place so they could make take the appropriate measures. That seems ...nuts.
Maybe there's some tech way around it, where courts would put suppression orders up into a central repository that were machine readable and Google (and others) could have a running check on that list.
Australia currently has a suppression order out on the verdict in the trial of an Australian high-level Catholic official (he's guilty). New Zealand media's reported broadly on it; I even got a push notification on it from the Washington Post. There'll always be a way for Australians to read that stuff. And are newspaper apps supposed to run a GPS check on where the phone's owner currently is located before running a push notification? It's just dumb to expect it. It would be completely unreasonable to expect Google's Blogger to be able to tell what the trial is at the start of this paragraph and block it for Australian readers too. And given that mess, it is an absolute nonsense that Australian media has to censor the verdict. Some folks just aren't living in the real world.
Some bottom lines then:
Tech change means the costs of implementing a suppression order in high profile cases are very high. Courts should then be more reluctant to issue them than they were in a prior era when those costs were lower.
If they want these things to have half a chance of working, they need to figure out the tech of getting a repository of decisions rather than expecting every platform to be watching every court case for every change in whether a suppression order is in place or not. And that's something that should be set through international cooperation so there's one repository for the things using a common standard rather than a pile of them.
And even if the order doesn't work, it's not much of a worry given LC's work on whether jurors are prejudiced by it. That's good, because it is impossible for an order to really work unless it is enforced globally. VPNs exist. And even if platforms like Twitter or Facebook tried to geoblock particular key words, there are a billion ways around it. China has an army of internet censors trying to keep up with the ways that social media users develop euphemisms for things they're not supposed to say.
