Tuesday, 9 July 2019

Demotion, or second chance?

My Newsroom column from last week looks at the Twyfortunity in the cabinet shuffle - belatedly posted here as I was off at the NZAE meetings last week. 
Cabinet shuffles provide great journalistic set-pieces.

For the politics-as-sport contingent, it provides all the narrative arc of changes to the Black Caps line-up for the World Cup: winners and losers, who’s in and who’s out, and whether the changes will do more to help the team score political runs or to defend against the Opposition’s bowling attack.

As expected, the Government’s changed the housing line-up. Megan Woods became Minister of Housing; Kris Faafoi took over public housing; Nanaia Mahuta took responsibility for Māori housing; and Phil Twyford took up Urban Development and Economic Development. Sporting commenters framed it as a loss for Twyford. But is it a loss for housing?

In last week’s column, I urged the Government to give Minister Twyford the chance to see through his housing supply agenda. I have argued that no one in Parliament better understands the underlying failures in local council incentives, regulatory settings, zoning, and infrastructure financing. And solving that complicated mess is what is required if New Zealand is to build its way back to affordable housing.

When it comes to housing, it isn’t just the batting line-up that’s out of order, it’s the selection process, the training system, and the club system generating the talent that might be picked. It needs fixing from top to bottom.

An optimistic read of the cabinet changes is that this is not a demotion for Minister Twyford, who maintains his ranking within Cabinet, but rather an unshackling. The Government’s housing supply agenda has not made necessary progress, at least in part because the Minister and the Government have been distracted by impossible-to-achieve Kiwibuild targets. Twyford will be able to focus on the areas where he can make the most difference.

But let’s step back to the mess of problems that yet needs solving and consider the way forward.
Minister Twyford’s supply agenda, on the surface, begins with a change to infrastructure finance. Rather than falling onto Council balance sheets, or onto homebuyer mortgages, the cost of new infrastructure will be covered by levies on the housing benefiting from the new infrastructure over the life of that infrastructure. Targeted rates on new developments will pay off the bonds issued to finance new infrastructure.

Separating infrastructure financing decisions from political processes helps set a longer-term platform for urban development. Even if a substantial Crown infrastructure push over the next few years was able to get around the very real capacity constraints in a sector already under strain, it would not set the foundation necessary for long term growth. It would instead help to perpetuate the boom-and-bust cycle that has bedevilled the construction sector for ages.

Infrastructure bonds whose financing depends less on political interest than on the commercial viability of the underlying development can set the stage for greater longer-term urban growth that is responsive to changes in demand. When demand for more housing makes it profitable to build more housing, the developer can issue infrastructure bonds and start building without having to convince the Crown to take on new infrastructure debt. It is a way of sustaining infrastructure investment beyond the current crisis.

But it also requires the buy-in of those who will be paying the levies. And here, I think, Minister Twyford may need to do a bit more work.

This kind of infrastructure finance, in the United States, typically has the assent of those who will be footing the bill. Property owners setting a new development establish infrastructure boards that will own the infrastructure, that will be responsible for paying off the debt through a tax on the properties within the development, and that will be governed by those who buy properties in the new development. Taxation is coupled with representation.

Here, so far, proposals for new infrastructure bonds do not require the assent of the levied. In greenfield sites, where the land’s owner or development partner might set the bond, that kind of assent process will matter less. But it will matter in brownfield sites where an Urban Development Authority might seek an infrastructure bond to allow for upzoning. Homeowners who do not redevelop in response to the zoning change would still be on the hook for contributions toward the new infrastructure.

And while that may be fair enough where the infrastructure increases the value of those properties, it can also be a problem. If an Urban Development Agency seeks a new infrastructure bond without some credible demonstration that the bond issue is supported by most of those who will be paying the levy, political opposition to the process can stymie development.

New Zealand’s business improvement districts may provide a useful model. Business improvement districts allow businesses in a village centre, for example, to levy themselves for the provision of amenities that are to their mutual benefit. But that requires the assent of the affected owners through a ballot. A double-majority requirement is there in place. A majority of business owners is required, as well as the assent of owners whose combined holdings represent a majority of the capital value of the businesses in the proposed district. That double majority requirement prevents a large number of smaller owners from preying upon a small number of wealthier businesses, and also prevents a small number of large owners from imposing too high of costs on smaller owners.

A similar double-majority threshold could provide democratic legitimacy to new infrastructure districts, while leaning on an established body of New Zealand practice.

It is all rather complicated, and hits only onto the infrastructure financing part of the work ahead for Minister Twyford. Unwinding the mess is not a small job.

Focusing on the ballsports [EC: I wrote sportsball; I don't know who changed it to ballsports] parts of politics suggests the cabinet changes were a loss for Twyford. But if it allows him to focus on the parts of the portfolio that play to his strengths, it may instead be a win both for Twyford and for housing. Carving out the parts of the job that can be well handled by others, like social housing, makes a lot of sense. Letting Minister Woods take over Kiwibuild should let Minister Twyford make progress in the parts of the housing agenda that will matter the most over the longer term.

But we will need to see progress now that the barriers and potential excuses are out of the way.
 Ungated version here.

It is not hard to come up with scenarios where brownfield sites for the new bond-and-levy-funded projects get blocked because a small number of owners who'd be subject to the levy are very rightly aggrieved - they'd be paying for something for which they have no use. The levy has no particular democratic legitimacy. There are potential ways around it - like maybe you could accrue those levies against the property until sale or transfer. But things will get messy more easily, and the whole thing potentially binned as having proved too hard, if they get too many cases where the project's been blocked because they've tried imposing the levies on folks who don't agree to them.

Monday, 8 July 2019

Is this subsidiarity?

Subsidiarity is the principle that different levels of government should handle the tasks for which they are best suited. 

If you think about it with a bit of public economics in mind, you can see it as siting policy and regulation at the level that best internalises whatever externalities are at play. It makes little sense for central government to decide on whether a stop sign, traffic light, or roundabout is the best traffic management option in some local neighbourhood; local governments shouldn't run their own monetary policy. 

The Initiative has been pushing for greater subsidiarity and better frameworks for aligning local council incentives. Councils frequently, and rightly, complain about unfunded regulatory mandates from central government that do not suit local conditions. And councils also operate under often tight capabilities constraints. 

So a few bits at this week's Local Government New Zealand conference puzzle me.

Delegates at the conference voted to support a central government ban on the sale of fireworks. This could make sense if the cost of enforcing council-level bans on the use of fireworks were preventing councils from enacting their own bans in the places and times where the costs of fireworks are particularly high, but it doesn't immediately seem consistent with greater local control and subsidiarity.

The bigger and odder one though is Councils wishing remit over climate change policy.
Wellington City Council asks that LGNZ members collectively adopt the position that government should revise the Resource Management Act 1991 to adequately consider the impact of greenhouse gases when making decisions under that law and to ensure that the Resource Management Act 1991 is consistent with the Zero Carbon Bill.

The remit was passed with 64 per cent support of the sector.
If prices are working properly in the ETS, there is no more need for councils to consider GHG reductions in consenting than there is need for councils to worry about whether the world is running out of lithium or helium or anything else. Anyone doing anything will have worked expected carbon prices into their own planning. Councils will need to think about it for stuff like whether to renew old coal boilers or upgrade to electric kit on their own properties, and they could think about it in forecasting demand for public transport once carbon prices become more binding, but they needn't check off any particular activity against a zero-carbon priority. It's already worked into the price - if central government is getting things right in strengthening the ETS.

Where councils regularly worry about unfunded mandates and where council capabilities can be binding constraints, adding carbon planning to their remit seems inconsistent with subsidiarity (the carbon price is better handled through national level trading where international trading isn't there yet) and with council complaints of needing more resource to be able to handle their necessary functions.

Hopefully central government does not accede to local government pressure here and rightly views it as inconsistent with government achieving its objectives around affordable housing. If new subdivisions get bogged down into arguments about whether they're consistent with zero-carbon mandates, when petrol is already in the ETS and so the carbon costs of transport are already in the system - madness that way lies.

Update: a slide on what that could involve.

Tuesday, 2 July 2019

Taxing tobacco in a world of vaping

Here's the blurb; register at the link above.
Tobacco taxes are both an important source of revenue and an attempt to deter behaviour that can lead to social costs (e.g. healthcare costs from both active and passive smoking). Even in a world with just traditional tobacco products such taxes may not be as effective as their advocates would wish, leading to higher-quality products (e.g. filtered cigarettes) being substituted with lower-quality ones (e.g. unfiltered roll-you-owns). They can also be regressive, harming vulnerable communities like Māori, and in a “well-being” world, how do we balance pleasure and harm?

Like many other sectors, the tobacco industry is under “disruption”, with the advent of a range of alternatives to conventional tobacco products, such as vaping. Should these alternatives be taxed the same or less as conventional products, or possibly even encouraged? Will they result in less harms (and pleasure) then conventional products, or introduce whole new segments to the pleasures (and harms) of “smoking lite”?

LEANZ is delighted to bring together a panel of prominent experts to traverse these questions, from medical, economic and fiscal perspectives.

Panel Details

Professor Marewa Glover is a New Zealand public health academic specialising in smoking cessation. Her research includes comparisons of electronic and traditional nicotine delivery, as well as of different types of conventional tobacco products. She has also researched the impacts of smoking cession programmes and tobacco taxes on Māori. Professor Glover was a Finalist in the 2019 New Zealander of the Year Awards.

Dr Eric Crampton is the Chief Economist at The New Zealand Initiative, and has published on the challenges of regulation in a world of disruption. He served as Lecturer and Senior Lecturer in Economics at the Department of Economics & Finance at the University of Canterbury from November 2003 until July 2014. He is also the creator and author of the well-known blog “Offsetting Behaviour”, in which he has discussed the pros and cons of tobacco taxation.

Peter Wilson is Principal Economist and Head of Auckland Business at NZIER, which he joined in 2015. He has over 30 years’ experience in the public and private sectors, including time as a senior policy manager and economic adviser on tax policy at the Treasury. His professional interests range over regulatory economics, local government and planning to climate change and social policy.

Burton on the OIA

Tony Burton, ex-Treasury Deputy Chief Economist, lays out some of the problems in the OIA over at The Spinoff.

He describes an incident in which a minor letter from him to DoL in preparation of the annual minimum wage review became, after an OIA request, well, this:
As a Treasury adviser on labour market and welfare issues I was asked to see if DoL could be encouraged to improve the report. I thought, naively as it turned out, that if I discussed evidence in bite-sized chunks some of it might sneak into the report. This was the content of my email. Labour market economists would regard what I wrote as anodyne. They would not all agree with it – academics never all agree on any matter – but it would be unexceptionable. The DoL officials ignored my email and the subsequent meeting when writing their report.

Described this way I imagine the eyes of most readers glazing over. “Conversation on academic evidence between unimportant people makes no difference” is not an attention grabber. But when released through the OIA, in the midst of an election campaign, the issue turned into “Mr Key ‘sat on’ the advice for 18 months and ‘tried to fool people’ by using only a later Labour Department review to back his argument”.

This version became one of the issues in a television debate between the party leaders.

A cursory glance at the emails would have made clear they were not sent to ministers. They did not include any reference to a Treasury report to ministers because there was no report.
Tony links through to some reporting by Andrea Vance on it, but that's perhaps because linkrot has set in on TV3's coverage. It was a TV3 OIA.

Here's how Gower reported it at the time, which I'd then blogged. This is the blockquote from Gower:
Everyone knows it’s got bloody hard to live on the minimum wage - even John Key admits that. His defence is that a rise from $13 to $15 an hour will cost jobs.

Key has used this defence in a televised debate, and he's used it to workers on the shop floor at McDonald's as seen in my story last night. But what Key doesn't want to admit, is that this claim is not the full picture and may just be fear-mongering - a rise may not cost jobs at all.

That's what Treasury says in this advice from March 2010 obtained by 3 News under the Official Information Act.


Yes, that's right - the Treasury.

The Treasury are the big guns - Government's quasi-independent economic advisers.

And the Treasury says the "claim" (yes Treasury calls it a "claim") a minimum wage rise may cost jobs - "has not been true in the past".
I'd then written:
Gower tries to frame this as a scrap between Treasury and the Ministry of Labour over estimates of the disemployment effects of minimum wages.
So the Department of Labour report actually mentions about 6000 forecast new jobs that might not happen under a theory that the Treasury doesn't believe.
But absolutely nothing in the OIAed email from a single Treasury analyst speaks to the Ministry of Labour's estimates. Nothing.
Gower wanted a gotcha, and he framed what he had as a gotcha.

When I asked about that a couple years later when the issue popped up again, I got this answer (which I still don't really understand).
The term 'fake news' hadn't yet been invented, but Gower's reporting here surely would have made the cut. An email between analysts hardly constitutes an agency's position.

What are the consequences of this kind of use of the OIA? Burton describes a culture akin to prey animals approaching a watering hole in the savannah, constantly scanning the horizon for predators.
Public servants experience the OIA the way savannah animals experience crocodiles lurking under the surface of a river. The animals have to go to the river but do so aware that random attacks are a moment of inattention away. If this metaphor seems over the top, I invite the reader to look over the last few weeks of everything they wrote, typed or texted. Imagine someone had a legal right to publish any three consecutive words, without context or explanation, and with the potential that you might lose your job. Would that make you a little more guarded about what you wrote? Within the public service, versions of this thought experiment are called the “Dom Post test”.

Unsurprisingly public servants take steps to avoid the crocodile. The OIA is meant to include verbal exchanges, but in practice that is hard to enforce. The result is the habit of minimising the written record if there is a risk of failing the Dom Post test. This habit is so endemic it is applied semi-consciously and only noticeable when someone, usually a junior official who has not been fully acculturated, needs to be reminded to “take the discussion off-line”.

Of course there are many occasions when it is common sense to have a quick chat rather than to draft documents and set up meetings. (And anyone who has wasted time in pointless bureaucratic meetings will wish for more of this common sense.) However, extending this to replacing written comments is not in the spirit of the OIA.

In truth, any criticism of OIA avoidance of this sort needs to recognise it is a pragmatic response by people who want our government institutions to function. Public servants are meant to both serve the minister and have some level of independence. In practice this means some of what they do is not what the minister would want them to do were they simply serving the minister. Strict adherence to the spirit of the OIA would see these differences continuously used to attack the minister. It is hard to see how ministers could use their ministries effectively when the process of generating advice would be so damaging to what they were elected to achieve.

In as much as the OIA puts pressure on public servants to only write what they are personally prepared to defend in the full glare of the public they serve, it’s a good thing. The problem is that’s not the reality of how it is experienced, which means people do not just respond by improving what they write but by trying to avoid the lurking crocodile.
The OIA is broken, but so are the underlying incentives. Trying to fix the OIA without addressing the underlying incentives won't work well. 

Monday, 1 July 2019

Meth and availability cascades

Over at Stuff, Susan Edmunds goes through the meth testing mess in which ridiculously tight standards were taken as a requirement. 

I provided a minor bit of comment on it:
Eric Crampton, chief economist at the New Zealand Institute, said it was probably a snowballing moral panic that went something like this.

"Nobody wants meth users as tenants. They're too high risk.

"Some at Housing New Zealand started applying far too stringent a test. It's easier to make those kinds of mistakes when it's on the public's account rather than coming out of a landlord's own back pocket.

"That then started triggering news stories about meth contamination, making the issue salient for others. Some tenants started demanding them, and some landlords started running them, taking the Housing New Zealand example as what good landlords should be doing.

"And every meth contamination and clean-up provided another news story that fed demand for more.

"It's an example then, of what Timur Kuran calls an 'availability cascade' – a few news stories on a weird scary thing has journalists watching out for more of them, so they all become more likely to be published but at the same time, in this case, also increase the number of real events because it fuels demand for more testing."
We still need better mechanisms to insulate regulation against this kind of nonsense. You know how we keep pushing for cost-benefit testing?

Timur Kuran's piece with Cass Sunstein on availability cascades is great, and is here.

An availability cascade is a self-reinforcing process of collective belief formation by which an expressed perception triggers a chain reaction that gives the perception of increasing plausibility through its rising availability in public discourse. The driving mechanism involves a combination of informational and reputational motives: Individuals endorse the perception partly by learning from the apparent beliefs of others and partly by distorting their public responses in the interest of maintaining social acceptance. Availability entrepreneurs - activists who manipulate the content of public discourse - strive to trigger availability cascades likely to advance their agendas. Their availability campaigns may yield social benefits, but sometimes they bring harm, which suggests a need for safeguards. Focusing on the role of mass pressures in the regulation of risks associated with production, consumption, and the environment, Professor Timur Kuran and Cass R. Sunstein analyze availability cascades and suggest reforms to alleviate their potential hazards. Their proposals include new governmental structures designed to give civil servants better insulation against mass demands for regulatory change and an easily accessible scientific database to reduce people's dependence on popular (mis)perceptions.

Regulatory icebreakers

Not too long ago, Canada’s Northwest Passage was effectively unnavigable. The ice was simply too thick for sailing ships to make it through during the too-short summers.

And while Netflix’ excellent miniseries The Terror brings an additional supernatural element to the horrors of being icebound on the Royal Navy’s Arctic expeditions of the mid-1800s, the reality was awful enough.

It took more modern icebreakers, and global warming, to make the route more viable.

And for one part of the global regulatory pack-ice, it took Uber.

Imagine, if you will, a heavily armoured icebreaking cargo ship designed to plough through the Northwest Passage. Once the path through the ice is cut, other ships can follow more easily. The icebreaker will get its cargo through first but at a much higher cost per container than the ships that follow in its wake. The armour and the fuel to push through the ice do not come for free.

Over the past decade, Uber has been breaking a lot of regulatory ice.

Most here will remember Uber’s 2016 Parliamentary hearings. Uber’s Richard Menzies had to explain to a Parliamentary committee, some members of whom may have gotten just a little too accustomed to chauffeured services, that there was no risk of someone trying to flag down an Uber as though it were a taxicab. The cars could only be hired using an app on a phone.

Perhaps because our MPs so badly embarrassed themselves in those hearings, New Zealand wound up with workable regulations. It would have been hard for Parliament to recover from a second demonstration of technological incompetence.

But New Zealand is only one country in a big world. And most other countries start with far worse policy than New Zealand. Their pack-ice is thicker than ours.
I go through some of the regulatory ice-breaking that Uber has undertaken, and note the work yet necessary in sorting out reclassification risk.

I conclude:
Principles-based regulation establishing safe harbours against reclassification risk for those providing greater benefits to contractors seems a useful path forward but the path to get there is not free and clear. It takes an icebreaker.

In other areas we talk of first-mover advantages. That is not the case when we think about icebreakers. Breaking the ice is something of a public good. It is a difficult job, and I expect the terrors of trying to make Uber’s model work in France were only slightly less terrifying than being icebound in the Northwest Passage.

But once the ice is broken, anyone can follow. In those cases, there is some merit in being a fast-follower – unless someone is willing to pay an awful lot to have their container be first through the passage. Those of us along for the ride might raise a glass from time to time to the icebreakers.
An ungated version will be up on the Initiative's site in due course and will be linked at that point [Update: it's here].

Friday, 28 June 2019

MBIE and the signalling model of education

What's the point of education anyway?

The usual story is that you pick up skills that improve your human capital, and that you then go on to apply those skills in ways that provide value. So training improves wages because you're more productive due to the training.

Bryan Caplan's been an advocate of an alternative story around education. In that version, education isn't really about skills, or at least mostly isn't about skills. Instead it's about signalling. If employers really cared about specific skills, there are way more efficient ways of getting those than a 3 or 4 year university degree. Instead, education is more like an arms race. The point is to demonstrate through costly effort that you're smart and diligent enough to make it through. If it were just smarts, an IQ test would suffice. But it isn't. It's also being the kind of person able to slog through an undergrad degree and consequently likely able to put up with the drudgery parts of normal jobs.

So, let's have a look at MBIE's policy graduate programme. It gives 16 months of policy training to fresh university grads with at least a B average in their Bachelors. That training part seems like actual skills-conveying.

Now if university provided skills rather than a screen and signal, you'd think there'd be some amount of matching between the grads' training and the policy areas they're working in.

Here's what we've got. Note - this is absolutely not meant as criticism of the fresh grads doing this work. I'm just curious about how they line up training and tasks.

  1. An Honours History grad, with an undergrad in History and Sociology, who notes working on the KiwiSaver Default Provider Review. You'd think this would be a task suited to a grad with training in behavioural economics, economics, or finance. 
  2. An Honours History grad, undergrad History and Spanish, working on consumer policy issues ranging from ticket reselling and access to safer credit, to country of origin labelling for food. This is microeconomics work. 
  3. BA in Public Policy, Political Science, and IR, with a minor in Development Studies, reviewing the Crown Minerals Act to ensure it remains fit for purpose, with specific work looking at iwi engagement and opportunities to better involve Māori in decision making processes. This seems a decent fit. 
  4. BA Pols and IR, and Anthropology, working on regulations for dams and dam safety, and has been lead author on a Cabinet Paper. I'd have thought that would either be an engineering role, or econ looking at CBA, or laws. 
  5. Bachelor of Law and BA majoring in Pols and Psych, looking at corporate governance. Laws can fit with that. 
  6. BA majoring in Pols and Film & Media Studies, looking at temporary migrant worker exploitation and engaging with the ILO in Geneva. Labour economics could have helped, or laws. 
  7. Honours Pols, looking at housing policy and housing affordability. Again - microeconomics, urban economics, laws with focus on RMA / district plans. 
  8. BCom Accounting and Management, and BA Pacific Studies, Pols and IR, working in prep for the APEC meetings. Seems a good fit. 
Maybe I'm way out in this, but it feels like maybe three of the eight are hitting areas where the undergrad or honours training would have provided particular help in the policy areas.

These aren't jobs for life - it's the grad training programme. Could be that grads progress from there to policy work more aligned with the things for which they'd trained. MBIE is big enough that you'd think they'd be able to find a policy area that's a decent match for most incoming grads if it mattered. 

Overall it seems more consistent with the signalling model of education than the human capital model.