Friday, 26 August 2016

Zero percent - redux

Earlier this week, we covered Labour's disappointing response to our report on zero-percent student loans. Other comment round the traps:

Stephen Joyce defended National's continued support for the policy National more sensibly opposed while in opposition:
He says the issue is about trade-offs and the government has it about right.

"There's those on the left that want to give students more stuff and those on the right who want them to pay more for stuff. Our view is that the settings are about right and have broad public support.

"There's a significant subsidy of tertiary students in New Zealand and it reflects about 80 per cent of tertiary costs, which is quite high given there's a lot of private benefit from it, but there's a broad public consensus that government should make a contribution," he said.
The Herald noted that our report has an ally in the Child Poverty Action Group's report, which also suggested considering reinstating interest for better means-testing.
In 2014, the Government's share of the full cost of each student's tertiary education was 71 per cent, rising to about 82 per cent after the subsidy provided by interest-free borrowing is accounted for.
If interest were reinstated with none of the savings going back into the sector with means-tested support, the government's share of the costs of a student's degree would still be substantial.

Rachel Smalley broadly agreed with our proposal:
Studying is never easy. You're always juggling a million things. Money is either tight or non-existent. Always. Is it worse now then when I studied? I'm not sure. I studied in a different era. I paid interest on my student loan and because I knew that debt was accruing-interest, it incentivised me to pay it off. I worked three jobs while I studied because I didn't want to rack up too much debt. I worked in a pub on a Friday night, in a bank one day a week and I wrote for the evening post on the weekends too.

I thought I had it pretty tough back then. It was a struggle. I was juggling work and study, but I survived, and within about three years I'd paid off my student loan -- a student loan that was interest-bearing.

Would I have benefited from an interest-free loan? Of course. That loan would have been paid off earlier -- perhaps six months or even a year earlier. But in hindsight, it did teach me a pretty valuable lesson in life.

Everything comes at a cost. Nothing is free in this world.

And while it will take a bold politician to admit it, the $6 billion decade of debt that we've shouldered subsidising student loans, is $6 billion that would have been money well-spent elsewhere.
RNZ's The Panel discussed it, but didn't really get anywhere. Newshub covered it as well, but suggested there would be little appetite for change.

Chris Hipkins continued to say silly things over on Newstalk:
Labour's education spokesperson Chris Hipkins says spending money on education is never a waste.

..."I'm firmly of the view that if we do a better job of educating New Zealanders, then we'll end up spending less money on the prison system, we'll end up spending less money on the welfare system."
Memories of the bumbling report on Adult & Continuing Education that got Really Big Numbers on the benefits of night courses in Indian cooking by assuming that anybody taking any such course was 50% less likely to commit any crime.

But leaving that aside, surely we do more good in getting at-risk kids into the right kinds of study by taking money given interest-free to rich kids and shuffling it over into better tertiary prep and guidance counselling at schools with a lot of at-risk kids, no?

David Seymour and Jacinda Ardern squared off on it in the Sunday Star Times. David rightly excoriated National for maintaining Labour's policy. ACT's newsletter summed things up very well as well, though it benchmarked the effects of reintroducing interest by reference to the equivalent tax cut. We'd proposed shifting the funding to other parts of the ed sector.

David Farrar agreed with us. The Standard didn't. 63% of readers at the National Business Review wanted interest reinstated.

Read properly, our report is decidedly left-wing. We suggest taking money currently provided indiscriminately to tertiary students, who disproportionately come from richer backgrounds, and targeting the money instead to schools with poor track records of getting kids into tertiary (which will disproportionately be serving kids from poorer backgrounds). Some could also provide means-tested support for tertiary students who are in more need. I'd expect that's best done through debt relief for graduates finding themselves in cases of real hardship, but it could also be used to strengthen means-tested allowances or provide scholarships.

I find it somewhat bizarre that this gets characterised as right-wing, but that seems the simplest way for partisans to divert attention from their party's failed policy.

Crossposted from The Sandpit

Thursday, 25 August 2016

One-way heritage bets

What a mess of a system.

Suppose you want to force owners of heritage buildings to protect them for you at their expense rather than your own. You can lodge legal challenges to consents issued to the owner allowing changes.

If you win, you've succeeded in forcing the owner to provide you a service for free.

If you lose, you might have costs awarded against you. And if you do...
One of Auckland's most active, successful heritage groups is planning liquidation after a $27,000 bill from losing a battle to save one of the city's oldest hotels.
Devonport Heritage Inc is holding a special meeting on September 14 to vote on the appointment of a liquidator and a notice has just gone out to all members from chairwoman Trish Deans.
Margot McRae, deputy chairwoman, today said that liquidation was planned as a result of a $27,000 bill for court costs after the group's unsuccessful Environment Court attempt to save the Masonic Tavern in 2010.
The story goes on to talk about the hundreds of thousands of dollars in court costs faced by Councils defending issued resource consents against these kinds of collection-proof outfits. Left unmentioned are the even higher costs when a property owner's plans are put on the back burner for years while waiting for the legal challenges to wind their ways through - and the costs of unaffordable housing in Auckland when NIMBY organisations have an easy time doing this.

I had a chat yesterday with an interfaith group representing the owners of a pile of historic churches.

One of the costs of heritage building ownership that I hadn't considered: how it ramps up the cost of insurance. It's one of those things that's immediately obvious the second it's pointed out, but otherwise you might miss - and I'd missed it before. Insurers obviously demand more to insure a building that has to be reinstated to a historic standard than they do to replace a building with equivalent functionality.

A lot of small congregations would be more than happy to replace an older building with a new one with the same functionality anyway. But replacing a badly damaged old building with a new equivalent is tough when the old building is under heritage protection. And so these churches are facing substantial annual insurance bills reflecting the costs of rebuilding to an unwanted heritage standard.

There really should be a put option in there where the heritage people objecting to a change should have to purchase the building at its RV on request by the owner - or withdraw the heritage listing.

Who's progressive?

While we at The Initiative have been pretty happy with the hearing our report on zero percent loans has received, some of the partisan responses have been more than a little depressing.

It would have been surprising if Labour would have said, "Yeah, you know what, we messed that one up. Shouldn't have done it. Oops."

Here's Chris Hipkins:
Labour's education spokesman Chris Hipkins takes that a step further and says taking away interest-free student loans "reinforces inequity".

"It would make inequity worse because those on the lowest incomes would be penalised the most. It's an incredibly regressive system."

Hipkins said the think tank was taking a "narrow view of the value of tertiary education".

"This is exactly the type of ideological right wing clap-trap i've come to expect from the successor to the business roundtable."

"They assume it's all personal benefit, they don't look at the fact we put significant taxpayer subsidies into higher education...because it is not a purely personal benefit, the whole of the country benefits," he said.
Chris has things entirely backwards here, in a way that has me not sure if he knows what the word regressive means, or whether he doesn't know how the student loan repayment system works. Or maybe it's just a fingers-in-the-ears "If I say right-wing enough times maybe nobody will read the report" thing - I was a bit surprised by the twitter traffic following Labour's playbook on that one.

First off, we never assumed that the returns to education are entirely private. We noted that students currently cover 16-18% of their costs of study, but we didn't say that should go to 100%. Reallocating some of the money currently spent on tertiary subsidies back into secondary schools, as we recommend, would increase the private contribution towards tertiary education a bit. If we thought it was entirely private benefit, we would have recommended scrapping the remaining tuition subsidies built into the system. We didn't do that though.

The regressive part is at least as odd. We recommended taking something that's currently universal and targeting the spending in highly progressive fashion. Means-tested funding can include debt forgiveness for hard-cases down the track, as the UK does when it wipes out student debt that has no chance of being recovered. The reallocation of spending toward secondary schools with poor track records of sending kids to tertiary would disproportionately go to schools serving poorer kids. And the benefits of better guidance counselling, which we also recommended as part of the package, would disproportionately go to kids whose families don't know how to navigate NCEA and tertiary - again, not my family.

And remember too that loan repayment under the income-contingent repayment scheme is highly progressive. On leaving study, student debtors are charged 12 cents on every dollar earned above $19,084 until the balance of the loan is paid off. So the marginal tax on every dollar above that threshold is 12%, but the average tax rate starts off very low and then rises. A person earning $19,085 pays 12% on the last dollar earned, but only pays $0.12 in loan repayment tax on $19,085 in earnings: a 0.0006% average tax rate. A person earning $119,084 on graduation pays 12% on the last dollar earned, but pays $12,000 in tax: a 10% average tax rate.

A tax schedule where the marginal tax rate is always above the average rate is the definition of a progressive tax. The income-contingent student loan repayment scheme is then rather progressive. If you take out $100,000 in loans and only ever earn $19,000 per year, you will never pay off your loan, but neither will you ever make a payment on your loan. The effective burden (on the debtor, but not the taxpayer) is zero, except in cases where the existence of the student debt makes accessing other credit more difficult. Those on the *lowest* incomes wind up paying nothing back.

I'd have thought that our policy proposal, which takes money that is currently given indiscriminately as interest rate subsidy to every person taking out a loan for tertiary study, regardless of their means, and targets it instead to poorer cohorts and poorer schools, was really rather strongly progressive. But Hipkins calls it 'inequitable'.

I'll turn to what the Ministerial Consultative Group had to say on "ensuring equity" in their 1994 report:
Both society and individuals benefit from higher education. For this reason both should be expected to contribute. Until now, most direct costs have been met by taxpayers. However, unless those who benefit contribute in an equitable manner, as demand increases, the needs of others will go unmet.

Ensuring fairness requires individuals to contribute to the costs of their tertiary education in accordance with their ability to pay. This is best measured by their lifetime incomes. Individuals who earn significantly higher lifetime incomes should be expected to make a greater contribution to the cost of their tertiary education.

As an illustration, the present average value of the additional income earned by a male graduate is around $150,000. Currently, such a graduate would typically contribute no more than 20% of tuition costs. The balance of tuition cost is met by the taxpayer. In effect, the taxpayer confers a large capital grant to graduates. Similar grants are not made available to people who want to establish a business. For example, a young farmer buying a herd to become a sharemilker could not expect the taxpayers to meet 80% of the costs.
The income-contingent repayment scheme achieves the kind of equity that the Ministerial Consultative Group here talks about. That doesn't require zero percent interest rates.

In our view, the real inequity is in access to tertiary study. If you're coming out of a school with no guidance about which NCEA courses to take, no idea what's involved in tertiary, and poor preparation in those courses you have taken - that's a far bigger barrier to tertiary success than potentially having to spend an extra year or so making student loan payments at the end of study.

Crossposted from The Sandpit

Monday, 22 August 2016

Zero Percent

Every year, the New Zealand Government writes off hundreds of millions of dollars from the value of the loans it provides to tertiary student borrowers. It has been doing this for a decade now. Ten years on, it looks like the scheme has done nothing to improve access to tertiary education, to reduce student debt, to reduce debt repayment times, or to discourage Kiwi students from heading abroad. Instead, students leave university with more debt that they take longer to pay off, more overseas based borrowers have outstanding debt, and tertiary enrolment rates have dropped.
What are we doing?
Last week, The New Zealand Initiative released its report on our Decade of DebtWe there argue that the government should reinstate interest on new lending, from 2018. The savings should be put toward measures that improve real tertiary accessibility, like better tertiary preparation at secondary schools with little history of sending kids on to tertiary study.
The report’s drawn a bit of attention and consequently kept me pretty busy last week. I chatted with Mike Hosking on Newstalk before heading over to cover it with Paul Henry.

My more extensive talk with Kathryn Ryan on Radio New Zealand’s Nine to Noon is here; I also chatted with John Gerritsen about it for RNZ’s Checkpoint.
At the NBR, I contrasted the $602 million interest-rate subsidy with the $504 million in means-tested student allowances targeted at lower income students, and noted a few other problems:
Similarly, without caps on borrowing for living costs, students may be tempted to borrow rather a lot of money at ‘zero percent’ and put the money into term deposits. The scheme would collapse without caps on borrowing. But with caps on borrowing for living costs, students without family resources to rely on have to take on part-time work to cover rising accommodation costs. They would often be better off if they could take on more debt, even at interest, and pay it back when in employment. Instead, these students struggle to juggle employment and study.
The Child Poverty Action Group’s report on student debt, released last week, reaches some similar conclusions. It has further found some students at the bottom have turned to credit card debt to make up the gap between living costs and what they are allowed to borrow at zero percent. The constraints established to keep rich students from rorting the system have real costs for those at the bottom. And more than twice as many students from decile 9-10 schools go on to tertiary study as do students from decile 1-2 schools. Does this make sense?
…It is time to stop seeing the government’s interest-free student loan policy as simply being “bad economics, but good politics.” It is bad for a lot of students, bad for the tertiary sector, bad for tertiary accessibility, and bad for equity. Train-wrecks should not be good politics.
At Interest, I reminded worried would-be borrowers that, under New Zealand’s income-contingent repayment scheme, the only thing that reinstating interest does is lengthen the term of repayments:
New Zealand has an excellent income-based student loan repayment system. Everyone with student loan debt pays a 12% tax on every dollar earned over $19,084 until the debt is paid off. Whether the interest rate is 0%, 2%, inflation plus 3%, or any other percent, the minimum fortnightly payments would not change. What changes instead is the duration of payments. If the interest rate is higher, every dollar borrowed takes a little while longer to pay off. But the fortnightly repayment burden is no different.
How much longer would repayment take? Suppose you left tertiary study with the median student loan balance, inflation adjusted upwards from the most recent stats available: $16,700. And suppose that you followed the typical earnings path for someone with a Bachelors degree, as published in the most recent StudyLink data. Finally, suppose that you paid only the minimum 12% on every dollar earned above the threshold. If the interest rate were 2%, it would take an extra three months to pay off your loan. If the interest rate were 4%, it would take an extra 6 months. At 6%, it would take an extra 10 months. At 8%, 14 extra months. None of these are especially terrifying figures.
Of course, not all investments pay off. The dairy farmer who borrowed at 8% to buy paddocks just before the crash in milk prices might have debt that outstrips the farm’s assets and wind up going bankrupt. And someone taking on tens of thousands of dollars in student debt in pursuit of degrees with little to no chance of employment will take a very long time to pay off their debt, regardless of the interest rate.
Let’s consider a plausible bad case. Suppose you took out $60,000 in student loans for a degree that had no real payoff. Your starting salary winds up being $20,000, then you follow the normal path of annual salary increases after that. Even under zero percent, it would take over 23 years to pay off that debt. Even a 2% interest rate would add four years of repayment. But the problem really isn’t interest, is it? The problem is taking out tens of thousands of dollars of debt for a degree that doesn’t lead anywhere.
And that’s why we recommend a strong refocusing of how government spends its money. If the point of the zero percent policy was to improve tertiary accessibility, and to reduce the student debt burden, the zero percent policy has failed. We suggest better uses for the money currently going toward interest rate subsidies.
Again: we don’t recommend putting interest on existing debt. People signed their loan contracts under certain expectations, and it wouldn’t be right to mess around in that. But we sure as heck could start doing it on new lending as students get better advice about tertiary options.

What’s been most fun since the report came out was watching who provides partisan defences of a failed Labour-National policy, and who thinks things through a little more. More on that to come.

Thursday, 18 August 2016

And now for a word for the sponsors

Canadian Senator Ratna Omidvar talks with the Center for Global Development about Canada's refugee sponsorship programme.

Hit the link for a longer, wider ranging interview.
While other countries, including the UK and the US, have seen their politics dominated by domestic concerns about refugees and migrants, Canada prides itself on a sunnier narrative.

“Canada’s approach to migration is increasingly different from that of the rest of the world,” Omidvar says.

“Different” in this case means “much friendlier.” Canada has accepted more than 25,000 Syrian refugees, many more than the US, and Canadian prime minister Justin Trudeau has personally welcomed refugees upon their arrival in the country.

Why the difference? Omidvar, founder of the Ryerson University Global Diversity Exchange think tank and former chair of Lifeline Syria, a group that helps private citizens sponsor refugees to come to Canada, calls it “Canadian exceptionalism.”
I was happy to see that New Zealand will be at least looking more closely at this kind of model, with a small limited trial coming.

Next week, The Initiative will be hosting the final of its Next Generation Debates. Canterbury and Auckland Universities will be debating the moot "New Zealand should accept 60,000 refugees per year". Come join us. Our panellists will be Hon. Paul Goldsmith, Minister of Commerce and Consumer Affairs, and the Greens' Spokesperson for Immigration, Pacific Peoples, and Ethnic Affairs Denise Roche.

I'm agnostic about what the 'right' number of refugees is. But I think that the Canadians have a process that lets that number emerge endogenously when people are willing to help. And I think Kiwis are ready to help.


Wednesday, 17 August 2016

Irrational surplus

In 2009, Matt Burgess and I argued that irrationality isn't a reason for abandoning consumer surplus. If flaws in perceiving the cost of some kind of potentially risky consumption activity lead to overconsumption relative to a fully informed or fully rational norm, that means there'll be some excess cost associated with that level of consumption. 

The true marginal cost curve then lies above the perceived one, with the perceived one affected by, say, the consumer's preference to believe that he's less likely to suffer harm than the average person. Some in the public health crowd were trying to argue that the potential for irrationality meant we couldn't use consumer surplus anymore. We showed instead that it might imply more consumption than the person would find optimal, but that just gives us an excess burden equivalent to the red area. You could benefit those consumers by encouraging them to shift to the left a bit, but that's hardly the same thing as saying they get no consumption benefits at all.

We got yelled at a bit for (in others' views) not being sufficiently cognisant of the behavioural lit which (in my view of their view) means anything goes and welfare economics disappears.

Levy, Norton and Smith take on consumer surplus in tobacco cost-benefit assessment in July's set of NBER working papers. They provide a behavioural welfare economics where consumers might overconsume a bit due to some irrationality. They argue that the optimal tax in that context, for a biased consumer, puts in place a price wedge equivalent to the consumer's overestimate of the benefits of consumption. 

So the consumer whose biased view leads him to a demand curve of Db, where an unbiased one would have Du instead, can be made better off by t* bridging the gap; in the absence of that, you'd have deadweight costs of the same size, represented by the triangle bounded by P+t, Db, and Q0. 

Either way, consumer surplus remains the best framework for analysis. And their behavioural welfare graph - same deal as Matt and I argued in '09. I'm not trying to make any priority claim here - this is just bog standard "what is totally implied by intermediate microeconomics" stuff. 

In Appendix Figure 3B, they also show the analytics where taxes are above the optimal level with biased consumers. As you'd expect, there's a welfare gain from the first bits of reduced consumption, followed by welfare losses that increase in the the deviation of the actual tax from the optimal tax. 

I particularly liked this part:
A third implication is that we can rely on consumer surplus calculated using the unbiased demand curve for welfare analysis, because the unbiased demand curve reflects the value that fully informed and rational consumers place on different aspects of well-being (e.g., their own health versus the enjoyment from smoking). In particular, it is not necessary to calculate the health gains of a particular policy and then calculate an offset for foregone enjoyment; it is sufficient simply to look at changes in consumer surplus. 
They conclude:
Even if consumers are not rational, the correct response from an economic perspective is not to abandon welfare analysis in favor of policies that maximize health; rather, it should be to figure out how to perform welfare analysis when consumers are not rational. We propose that health economists should embrace the behavioral welfare economics framework developed for this purpose, developed primarily with reference to environmental economics.

We acknowledge, however, the practical difficulty of implementing this framework. In particular, the behavioral welfare economics approach requires knowing the shape of not only the biased market demand curve, but also the shape of the hypothetical unbiased demand curve. This is a tall order. Once again, we propose drawing on the literature in environmental economics and behavioral welfare economics for inspiration (Allcott and Sunstein 2015; Chetty 2015; Mullanaithan et al. 2012). Researchers in this literature have for some time focused on the empirical question of identifying the extent of bias in consumer choices.
And it would get more fun where consumers vary in their deviation from rationality.

Tuesday, 16 August 2016

Not even wrong

Some policy proposals are just so end-to-end nonsensical that it's hard to know where to start.

Today's example:
Tagging booze products with "irremovable stickers" to track where problem drinkers get their grog is being debated for Wellington.
The city's district licensing committee mulled over the idea as police and alcohol industry groups debate issues around booze-fuelled crime, litter, and disorder.
Let's start by assuming the thing could be done. Should it?

Suppose you found that people who go on to litter or cause other trouble primarily buy their liquor from Retailer X. The best you might then hope for would be some checks that that retailer is upholding standards on not selling to drunk people. But beyond that, what do you want them to do? Refuse to sell to people who they think might go on to litter? How should they judge that?

Look at it from another perspective. Everybody knows, but nobody can show, that at least some opposition to new liquor licenses comes from agents of those who have existing licenses. What happens if a licensee knows that it could get its competitor in trouble by leaving some of that competitor's bottles lying around in playgrounds. Might be tempting.

This really seems a "if you could push a button to magically implement the policy, it still wouldn't be a great idea" thing.

And then we start thinking about practicability.
Stephen Palmer, Medical Officer of Health, said the idea emerged at a licence renewal process for Liquor King in Kent Terrace.
Palmer said a neighbour objected to the Kent Terrace licence renewal, using photos of littered booze products at a nearby school.
Both the retailer and Lion queried suggestions that any particular outlet could be blamed for the garbage.
"It's very easy to put a sticker on things at the point of sale ... that seems to me to be the most simple thing," Palmer said.
It might seem simple to people who've never, say, bought a case of beer or seen anybody else ever buy a case of beer or seen a case of beer at a store. Everybody else in the world might recognise that the retailer would have to open each case and label each beer, either at point of sale or when it's stocked.

A couple other notable problems:
  • In my cupboard at home is a beautiful bottle of a Garage Project beer that's wrapped in paper, tied at the top. Would the retailer put a sticker on the paper that might be discarded before point of consumption, or on the bottle underneath? Would they have to rip open the packaging for the useless label's insertion?
  • If the labels are put in at time of sale, that causes queues. If it's done when the product's received at the store, you lose flexibility: stores can shift product across outlets if something sells unexpectedly quickly at one shop rather than another.
The Police figure that the labelling could be done by the producer:
Wellington Police alcohol harm reduction officer Sergeant Damian Rapira-Davies said it was important to understand the "causal nexus" connecting liquor retail, consumption and abuse.
People breaking alcohol laws or bylaws were often committing "gateway offences", which led to fighting, sexual assaults or domestic violence.
"It's about looking at a range of things that create a lot of problems we've got."
He was confident brewers or distillers could comply with any requirement for tracking labels. "If there's a demand for particular packaging, then the industry will meet it."
The only way I can imagine this working is numbered bottles and cases, with a back-end database matching bottle numbers to case numbers through to distribution. And where the producer sells directly to a retailer, that might work. But you'd then be requiring that all the distributors keep logs on which batches wind up where. It really quickly looks like an administrative nightmare.

But it's all simple, so long as you don't start thinking about it too hard.

Even if we assume this mess could be done, to what good purpose could the stickers really be put? And if it's such a great idea, why not:

  • Tag houses with the last real estate agent who sold it, then have the cops lean on any realtor who sells to somebody who uses the house for selling or making P.
  • Tag cars with the car dealer, so that cars bought by dangerous speeders can be tracked back to the real criminals: the person who sold the car to somebody who went on to speed.
  • Tag police officers with the name of the university that gave them a sociology degree, so we can appropriately assign approbation when things like this came up.  
Fortunately, there's no way that Wellington Council would go for this. 

Unfortunately, given the police's recent behaviour, we may reasonably expect that the police will start leaning on off-licenses to 'voluntarily' sticker their products as part of license renewal processes.