Friday, 20 May 2022

Budget 2022

I have a hard time seeing how Budget 2022 is consistent with the new fiscal rules.

In shifting from a net debt target to a net debt ceiling, they added a requirement that budgets normally provide surpluses. It's the old Keynesean fiscal macro kind of idea: run small surpluses in normal times to build up padding for large deficits in bad times.

And it has the same political economy problem that this kind of thing has always had. Government prefers to ratchet up spending. The old net debt target helped to constrain against that. The new debt ceiling won't, until we hit it. 

So Treasury warned that the new setup required greater focus on fiscal discipline to make sure that dollars provide value for money. A "things must at least pass CBA" rule could take the place of a net debt target in preventing budgets from blowing out.

And yet.

We get hundreds of millions for cash for clunkers and piles of other climate initiatives and subsidies to corporates targeting emissions already covered by the ETS cap. 

We get an extension of the road user subsidy which makes no kind of sense. 

Instead of inflation-indexing the tax thresholds, the government gives a handout to lower-income households equivalent to the extra tax that was stolen from them through inflation pushing about $5000 in earnings from the 10.5% band into the 17.5% band - and packaged as government largesse rather than compensation for a small bit of the accumulated inflation theft. 

Government is running a substantial deficit while the economy is overheated. There's a strong positive output gap. Even on old Keynesean approaches, you're not supposed to do that. 

And think about some of the other ratchets that they've now set up.

They've adjusted one benefit setting that has been a bugbear for child poverty advocates for a long time. If you're on a sole parent benefit, child support payments from the non-custodial parent mean your benefit is clawed back. 

Why would they do that? Sounds mean right? 

The idea underlying it is that the government wants to target support, as much as possible, to those who don't have other means of support. So say that one uninsured parent dies in a car wreck and the other parent, who wasn't in the labour force before, winds up in a hard spot. The government wants to provide more support for that child than for a child where there's additional support coming in from a non-custodial parent. 

So they claw back some government support in the case where the non-custodial parent is able to provide support. That means government can afford to provide a higher baseline level of assistance, before clawbacks.

Now there can be arguments around administrative messes - if the government is not good at enforcing child support payments, or about ensuring that those payments get reported, then the system can encourage informal payments, or discourage all child support payments.

But in-principle, the setup isn't crazy. It at least tries to make sure that more money goes to kids in worse situations when there's a fixed pool of money available for support. And even if your political position is that that pool should be doubled or tripled, you would still do better with that kind of targeting if you wanted to make sure that the money went to where need was greatest.

They got rid of that.

So what's the predictable effect in a couple of years? A John Campbell special that will highlight the grave disparities facing sole parents who have no support as compared to those sole parents who receive child support payments? Is it fair that the kid whose parent died, or whose non-custodial parent has no income, has such worse circumstances than the kid whose non-custodial parent provides a lot of support? And then we run the ratchet again. Someone will recommend supplementary payments where there isn't that support, which will require monitoring and abatement when there is support, and then complaints about how that system runs and demands that the supplementary payments go to all parents, and we get to play the cycle again. 

The Dom wanted a short piece from me yesterday afternoon. I didn't attend the embargo this year, but pulled this together shortly after the embargo lifted. I hit on some of this. 

I wonder if there's anyone left in Treasury who would regret the new fiscal rules or whether all of that cohort left a decade ago. They should regret the new fiscal rules. The only real problem the rules work to solve is ensuring that debt targets don't unduly hinder infrastructure spending that does pass cost-benefit - and that problem would better have been solved through revenue bonds financed from fees or charges on the beneficiaries of the infrastructure, and separated from Council and Crown main balance sheets. 

Thursday, 19 May 2022

Dangerous Misinformation from the New Zealand Ministry of Health

I'm working from home for the next wee while.

Today, someone came into our office who'd just completed seven days of Covid isolation. 

I asked whether he'd cleared a negative rapid antigen test.

He said he hadn't taken one. And, shocked to hear that he could still be infectious, he went off to get a test - which came out positive.

The Ministry of Health guidelines say only to isolate for seven days and that no test is required. Indeed, the Ministry of Health says that a positive test after seven days can be ignored

You can end your self-isolation after 7 days

If you are still sick, stay home until you are well and for 24 hours after you no longer have symptoms. 

You do not need to wait for an official message to leave isolation. You may receive a text message confirming your isolation period has ended.

Your Household Contacts can complete their isolation at the same time as you, as long as their Day 7 test was negative and they have no new or worsening symptoms. If their tests are positive, they need to begin 7 days of isolation as someone with COVID-19.

You do not need a negative test result

You do not need a negative RAT result to return to work or school. If you did take a RAT, the result would likely show as positive but that does not mean you are infectious.

I drove home rather than stick around, and I'm not going back for a while. I'm the only one who wears a mask at the office, and everyone else will be a close contact. I err on the cautious side. Fortunately, our office respects a diversity of risk-tolerances and is happy to accommodate my working from home. 

Last year, when RATs were first coming in, the Ministry had been looking at using them as a way of clearing people after a period of infectiousness rather than as primary diagnostic. While they're far less accurate at the start of infections, and especially with Omicron, they're decent at clearing people after a period of infectiousness.

And I'd remembered actual-expert Anne Wyllie having said that this was not a crazy way at all of using RATs. 

So I asked Wyllie what she made of the Ministry's advice. Perhaps some new research had come out that I'd missed; I asked what she might point to. 

She replied:

So.

Yale's expert on Covid testing, who had just cycled home with a giant novelty cheque for getting a well-deserved prize for her work on Covid testing, describes the Ministry of Health's advice on return-to-work/school as "dangerous misinformation." 

We have gotten ourselves into a bad spot here.

For two years, everyone trained themselves to just do whatever Bloomfield said. And that was basically good enough at a population level. But now what MoH says is taken as "must dos" for schools and places of employment rather than dangerously misleading lower-bounds on what should be done. 

It would be great if any of the various research groups funded to study misinformation ever turned their eye to Ashley Bloomfield. He provides a fair bit of it. 

Morning roundup

The computer begs to be rebooted. But the tabs...

  • There's an underlying demand-side problem to misinformation. You can't con an honest man...

  • Some days, I love our Environment Minister. Here's David Parker giving Auckland Council a deserved slap for nonsense around character designations. People who want to protect character are "entitled to do that in respect to their own property. But in other parts of their suburb, there will be areas where more intensive housing will and should be built." EXACTLY!! If only central government would fix the incentives that encourage councils to do this...

  • New Zealand regime around medicinal cannabis remains a broken mess. I think it was allowed to fall into disrepair on expectation that legalisation would be coming and make it redundant. It has to be very frustrating for anyone who needs cannabis as treatment, and anyone who wants to supply it. The Newsroom column is gated today, but I think will ungate tomorrow if you pull out the /pro from the link. In addition to all the other problems, medicinal cannabis suppliers have a tough time finding banking or insurance. 

  • Kate MacNamara keeps digging on the messes around Covid testing regulation. Just impossibly frustrating. You can use a LAMP test to meet the testing requirements to fly to NZ. It's way more accurate than a RAT. But they're banned in NZ. If you try begging permission to use one here just to give some added assurance before going to visit a vulnerable relative, the Government just doesn't answer. Vogons would give the MoH an award for being more Vogon than anything they'd ever come up with. 

  • One problem for all the "let's base policy on happiness" people at Treasury and elsewhere: the measures are crap and you can't do anything with them. Here's Bond & Lang, JPE 2019:
    "The necessary conditions for nonparametric identification are strong and unlikely to ever be satisfied. Standard parametric approaches cannot identify this ranking unless the variances are exactly equal. If not, ordered probit findings can be reversed by lognormal transformations. For nine prominent happiness research areas, conditions for nonparametric identification are rejected and standard parametric results are reversed using plausible transformations."
    If you can just run a plausible transformation on the dependent variable to reverse a result, you've got another degree of freedom to justify whatever policy you'd wanted to rationalise. 

  • National Party leader Chris Luxon says he doesn't like corporate welfare in the climate response. Good! But the ETS revenues are hypothecated. Does he support putting them back into general revenues? Or, better, would he support a carbon dividend? I like National's emphasis on an ETS led approach, but that's harder if you don't rebate ETS revenues back to households. If he's not going to, he should promise to end the hypothecation that's let Robertson have a slush fund. 

  • Princeton no longer supports academic freedom.

  • Regulatory regimes can embed fragility against shocks. NZ building materials supply, US baby formula...
Ok. I think I can reboot now. 

Tuesday, 17 May 2022

Cash for Clunkers with New Zealand Characteristics

Monday's column in the Stuff papers went through America's failed experiment with Cash for Clunkers, anticipating that the government was about to announce our own version. 

A snippet:

As an economic stimulus, it failed. Rather than encouraging a lot of new car purchases, the programme mainly subsidised purchases that would have happened anyway. Some households brought forward a new car purchase by a few months to get the subsidy; others had already planned on purchasing a car during that period.

In other words, it was a very expensive way of getting people to slightly change the timing of a new car purchase. It did not otherwise succeed as a stimulus – it had no effect on employment or other indicators.

And because it only really shifted the timing of new car purchases, it was not particularly effective as support for the car industry.

But it also failed as an environmental programme, unless cost really is no object. People did buy more fuel-efficient vehicles, but the programme was far less effective than a carbon tax in encouraging emission reductions. Every ton of carbon dioxide avoided cost between $106 and $335 in 2009 US dollars – or between $245 and $772 per tonne in current New Zealand dollars.

On a related topic, Tom Puller-Strecker has a bit of a whip-round on the waterbed effect; I'm quoted in it. As refresher: this is the effect where a regulation targeting things inside the ETS cap just frees up credits for others to purchase instead, so has no effect on net emissions.

I do better sending in emailed comments rather than bits on the phone that are transcribed correctly, but could have been worded better. Ah well. 

I wouldn't have viewed it as a 'concession' to say that if your basic model of the world is that future governments will renege on cutting the ETS cap in line with getting to Net Zero, then policies that cost more than the current ETS price could make sense. It's the main sane reason for preferring those measures. 

Similarly, Crampton says the best argument against the waterbed objection to emissions reductions measures that sit outside the ETS is “a political one”.

“If you believe that future governments will lack the commitment to maintain the reductions in the cap and you want to ‘lock things in now’ to force changes, then you would want to use regulatory moves even if they are far more costly than just working through the ETS.”

That sounds like an important concession?

It does.

But Crampton argues that a better option than “a bunch of clunky regulatory interventions” to shore up confidence in the ETS would be a bipartisan agreement on the total quantity of net emissions that the Government and Opposition would be willing to allow between now and 2050.

Arguably that might be a bit like setting a 5-year-old a total quota of screen time to see them through until they were 16.

Crampton also believes that if the Government followed the example of Canada and gave the money it received from selling carbon credits back to the public, then that would improve the popularity of the ETS and in turn might make people more confident its targets would stick.

Some Associate Prof of Finance at Otago has at me in the piece as well. 

It’s a heated debate.

Diaz-Rainey sees the waterbed argument against targeted emissions-reduction policies as “a way of trying to kick things into the long grass”, arguing that impressive cuts to emissions in the United Kingdom would not have been achieved through an emissions trading scheme alone.

Those who oppose such policies should take “a hard look at themselves”, he says.

“Given what's going on in the world and looking at what is happening again in Brisbane at the moment, it's scary. We really don't have time to play these games.”

Not fair, Crampton suggests.

“One of the biggest mistakes in Wellington is viewing that the degree to which one cares about something is best reflected in the amount of money you want to spend on it, or the amount of regulatory effort you want to put into it.

“That is a very poor measure of caring. The best measure of caring is effectiveness. Climate change is too big to try to approach it through radically inefficient measures,” he says.

This is basic maths. The government issues X credits. A policy reducing demand within the covered sector means fewer bids for credits from that sector, which means the next bidder in line gets them instead. 

And while government can decide to reduce the cap even more to offset that effect, it could do so even without the policies - which would be more cost-effective than using the policies unless there's a darned good reason to think that the specific policy abates emissions at lower cost than the going carbon price. 

Where government really likes running populist messes like Cash-for-Clunkers, or corporate welfare like paying companies to buy boilers that were already cost-effective for the company to buy on their own, there needs to be a decent bar for rigour in these things. 


Afternoon roundup

So many tabs across so many windows. A selection:

Stupid government tricks: supply chain rigidities edition

America has a big shortage of baby formula. 

Simplest explanation: piles of regulatory and procurement decisions worked to make it effectively impossible to shift supply chains in response to shocks, and one of their larger manufacturers suffered a shock. 

In the midst of the shortage, Department of Homeland Security is seizing baby formula like it's cocaine. 

NZ could laugh at stupid US Government tricks, but Customs here is seizing Covid tests that are good enough to be used to get you into the country, but not considered good enough for use here. 

And NZ's current plasterboard shortage comes down to the exact same kind of mess: protectionist regulatory constraints that combine to make it impossible to import and use plasterboard. so the system is highly fragile to shocks. 

Thursday, 12 May 2022

Mystery solved?

Over at Newsroom, AUT lecturer William Cheung wonders why Kiwis don't seem to worry much about flood risks when buying a house.

Similarly, a few years ago, Arthur Grimes found that the Christchurch earthquakes meant that properties in Wellington subject to liquefaction traded at a discount for a couple of years, and then that risk stopped being noticed.

Maybe I'm nuts, but there seems a pretty simple explanation.

  1. The Earthquake Commission covers damages from natural disaster events. The EQC cap is high enough to cover most stuff that isn't going to be a major structural issue. 
  2. EQC premiums vary with the sum insured, not with underlying risk. The EQC premium will be the same for a $2m house that sits underneath a cliff that's ready to collapse, a $2m house that's right beside a flood-prone river, a $2m house in Petone that'll get wrecked by the combination of tsunami and liquefaction in any real earthquake, or a $2m weatherboard house in the safest part of Karori. 
  3. Commercial insurers could very reasonably fear that the government would slice them in two with breadknives if they charged premiums that reflected actual risk in places like Petone. That whole model starts to fall apart the second some new entrant comes in and decides only to insure safe places at lower premiums. But there are regulatory barriers to entry that can result in low-risk places being overcharged and high-risk places being undercharged, and less competitive pressure than there might be in getting finer risk gradations. 
If that's all right then there's no mystery at all. 

If you live in a flood-prone place, you'll deal with the hassles of being flooded, and maybe people who haven't experienced dealing with insurers in a really bad event affecting lots of properties underrate just how much they should be trying to avoid that. 

But insurance in those places is at a hefty discount relative to the real risk, and if you set policy to subsidise living in risky places, expect that people will do so and that property prices won't much reflect that risk.