Wednesday, 8 December 2021

Stupid government tricks

Last night's chat with Bryan Crump on RNZ Nights covered the ComCom supermarket inquiry.

Remember the old Johnny Carson Stupid Pet Tricks bit?

This stuff should be classed as stupid government tricks.

Here's the trick.

First, set a pile of rules that make it neigh-on impossible for new competitors to really set up. If you want to open up a new supermarket chain in New Zealand, just think through how impossible it would be. Not many sites have the right zoning. Of those that are zoned, many will be tied up in covenants preventing them from being supermarkets.

If you find a network of sites that might work, you face impossible-to-gauge months to years of consenting processes before you find out whether you'd be allowed to put a supermarket on the spot. So you can't plan out a distribution network. And remember that consenting processes treat competition as a harm to be mitigated rather than a benefit to be sought. 

And who knows whether the Overseas Investment Office would decide that, because your proposed site is adjacent to a reserve, everything gets additional holdups. 

Small countries with difficult logistics can't set up these kinds of regulatory barriers to entry if they want people to consider opening here.

The whole thing is set up to make it effectively impossible to enter. Maybe that wasn't the intention of anyone along the way, but it's the effect.

So government sets a pile of rules that act in restraint of competition. 

Then it observes that grocery prices are higher than government would like.

So it sics the Commerce Commission onto the supermarkets to run a two-week beat-up of supermarket chief executives about the apparent lack of competition. They didn't haul a single Council Planner over the coals for making it impossible to build a new supermarket. Funny that. 

Government gets to play the hero coming to the rescue, and nobody much notices that there'd have been no monster there to fight in the first place if government hadn't put it there. None of the proposed remedies will help either, except ones that free up entry. That's the underlying problem. Some government-backed KiwiGrocer would fail for exactly the same reason KiwiBuild failed - it didn't address the underlying problem. 

So that's the stupid government trick. Cause a problem in a way that nobody will blame you for, then come charging out with a bunch of nonsense populist purported solutions that draw plaudits from those who neither understand the underlying problem nor care that the proposed solutions won't work. All they care about is the perceived monster-fighting. 

Bit depressing. 

But makes for a fun chat with Crump. You can listen here.  

Tuesday, 7 December 2021

Solutions in search of problems

Proper policy starts with problem definition. Define the problem that needs to be solved, establish that it really is a problem, assess alternatives including the option of just leaving things be, and go from there.

If you start instead with a solution, you then have to go looking for problems. 

And so we come to New Zealand Post's new fleet of electric vehicles. 

Stuff reports that NZ Post is shifting to electric vans. And that could be a great move - they're currently not paying road user charges, and could work out to be a bargain for the state-owned delivery company. I certainly wouldn't second-guess that commercial decision. 

NZ Post isn't a small shop. They've recently invested $170m in processing infrastructure. 

But to get the vans, they're going through another state-owned outfit. NZ Green Investment Finance. Here's how they describe themselves.

New Zealand Green Investment Finance is a green investment bank established by the New Zealand Government to accelerate investment that can help to reduce greenhouse gas emissions in New Zealand.

NZ Post is working with NZ Green Investment Finance to fund the fleet vehicle purchase though a complicated lease plan. 

The state-owned postal service and the state-owned green finance investor will each put up $10 million through Sustainable Fleet Finance to provide attractive and competitive finance for electric vans or low-emission vehicles. Sustainable Fleet Finance is majority owned by NZ Green Investment Finance.

The investment will initially be used to finance an order for 60 Mercedes eVito panel vans for the NZ Post fleet which will arrive in the second half of 2022. Under a four-year tiered lease plan, the vehicles will first be leased by NZ Post and then offered by Sustainable Fleet Finance to NZ Post’s delivery contractors at more affordable rates as second and third owners.

Ok. So one SOE with the implicit backing of the Crown against losses, and with a balance sheet big enough to handle fleet renewal, is running financing for fleet renewal through a finance company part-owned by another government outfit, all aimed at preventing 7.8 tonnes of emissions per diesel van per year.

Every tonne of which is already covered by the ETS, which has a binding cap.

And the annual value of the emission reduction, per vehicle, is about $500. 

So if NZ Post, backed by NZ Green Investment Finance, fails to purchase 8 carbon credits per vehicle per year, somebody else will buy the credits instead. 

I've occasionally heard arguments around credit market barriers that might be some kind of market failure. They seem ridiculous when there are plenty of non-government outfits that will finance your car for you, whether privately or for a company fleet. There's a whole industry association of the outfits that finance peoples' cars for them. And EVs being expensive isn't a market failure. They're just expensive. 

Using a government-backed investment fund to finance vehicle purchases by an SOE that doesn't have obvious barriers against just buying its own vans - that's the kind of mess you get when you set up a policy without really thinking through the problem you're trying to solve. 

This place is rapidly losing its "Outside of the Asylum" status. At least they haven't yet gone for anything as absolutely stupid as cash for clunkers. 

Monday, 6 December 2021

Afternoon roundup

High time the computer gets a reboot. And so, the closing of (some of) the browser tabs:

A politicised central bank

Politik this morning reports that the Reserve Bank Governor has lost the support of the National and ACT Parties. Or, at least, they would not be keen on his being reappointed.

Now that Simon Bridges is National’s finance spokesperson, the future of Reserve Bank Governor Adrian Orr will be an issue.

Orr’s contract as Governor expires in March 2023, outside the three months prior to an election when Governments normally defer significant appointments.

But with the election expected in September that year, a move in March to reappoint him would be bound to be an election-year issue.

If the decision were to be left to ACT and National, Orr would go. Both ACT Leader David Seymour and Bridges confirmed that on a podcast last week, and Bridges has confirmed again to POLITIK that was his position.

But at the same time, Bridges has to be careful.

The Bank is supposed to be independent, and one of National’s criticisms of Orr is that he has allowed it to become a little less so under Labour and Finance Minister Grant Robertson.
And this is why Reserve Bank Governors ought to stick to monetary policy and why prudential regulation colonising other policy areas far outside of their proper domain without any evidential basis is risky.

Last week, we hosted John Cochrane to talk about central bank independence and the problems they can get themselves into. 

The video is here:


My column in our Insights newsletter summed it up:

Central bank independence matters.

The grand bargain struck between governments and their central banks, coming out of the turmoil of the 1970s, and led by New Zealand in the late 1980s, was simple.

Governments stopped meddling in monetary policy. Central banks were given operational independence to pursue low and stable inflation. It was a difficult bargain for governments who preferred to avoid interest rate hikes as elections loomed.

That independence required Banks stay within limited bounds.

Monetary policy and prudential bank regulation are powerful tools with economy-wide consequences. They need to be used only toward the core ends of central banking: low and stable inflation, and the stability of the financial system.

Straying to pursue other objectives, regardless of whether they match the goals of the government of the day, is dangerous.

On Thursday, the Initiative hosted a webinar with John Cochrane – one of the world’s leading experts working at the intersection of macroeconomics and monetary policy and financial regulation. That he has a stronger record of published work in this area than the entirety of the Reserve Bank of New Zealand is a safe bet. Whether he has three times the work in the area might depend on how you weigh pages in different journals.

John has been increasingly critical of worldwide moves by reserve banks to consider climate change as a risk to financial stability. While it is very clear that temperatures are rising and that sea levels will rise with them, with obvious consequences for storms and beachfront properties, evidence of risks to the financial system is wanting.

Not everything that is a globally consequential risk is also a risk to the financial system. Systemic financial risk requires a particular kind of fragility. And the financial system, here and abroad, simply appears to be robust to the kinds of shocks that climate change will bring.

Indeed, earlier this month, the Federal Reserve Bank of New York published work showing that storms increase, rather than reduce, bank profits. People take out loans for rebuilding. Storms are bad, but they are not a risk to the financial system.

Using prudential regulation to address political concerns takes the regulator’s eye off the ball. More substantial risks can be missed. But, more importantly, doing so politicises their operations, putting their independence at risk.

And that may yet be the biggest systematic risk of them all.

Shortly after the webinar, one of the RBNZ's board members decided to weigh in. Draw your own conclusions about the adequacy and rigor of governance at the Bank. 

Wednesday, 1 December 2021

Cochrane on Reserve Banks

John Cochrane will be joining us at the Initiative for a webinar tomorrow. The topic: What central banks should and shouldn't do. 

We've been increasingly concerned by the Reserve Bank of New Zealand focusing on a rather wide range of policy areas far from their remits in monetary policy and prudential bank regulation. 

The case for incorporating climate change into prudential regulation looks particularly weak; the Bank simply hasn't any evidence of systematic risk to the banking system from either rising sea levels or carbon price risk that might justify its expeditions into climate regulation. There's plenty of evidence that sea levels will rise and that carbon prices will as well. But that doesn't in itself make a case for the Bank's getting involved. 

Central bank independence in the matters properly in its jurisdiction matters. But the deal has been that Banks get necessary independence, with a quid pro quo that they don't abuse that independence to stray into areas that are really Parliament's concern. 

John Cochrane has been looking at similar issues in Europe, and at the Federal Reserve. 

And I'll be very keen to hear what he has to say about it. 

The blurb for the event, along with Zoom links and Slido links for questions, is below. Note that times are New Zealand time. Not Pacific Time. 

Webinar tomorrow with John H. Cochrane: What central banks should and shouldn't do

Central bank independence in monetary policy was hard fought and desperately needed. The deal was simple. Central government would stay out of a Reserve Bank’s way as it dealt with monetary policy, and the Bank would not abuse its independence in pursuing other agendas.

That deal is fraying badly, if it has not fundamentally broken. If central bank independence in monetary policy is lost as consequence, rebuilding the institutions will be costly.

Join us for an insightful webinar with John H. Cochrane, Senior Fellow at Stanford University's Hoover Institution.

Event details:
Time: 11.00am – 12.00pm
Date: Thursday, 2 December
Registration: Please register for this event via Zoom.

We encourage you to ask questions you have through Slido.
The access code for our event is: #024262

About the speaker:
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution. He is also a research associate of the National Bureau of Economic Research and an adjunct scholar of the CATO Institute.

Before joining Hoover, Cochrane was a Professor of Finance at the University of Chicago’s Booth School of Business, and earlier at its Economics Department. Cochrane earned a bachelor’s degree in physics at MIT and his PhD in economics at the University of California at Berkeley. He was a junior staff economist on the Council of Economic Advisers (1982–83).

Cochrane’s recent publications include the book Asset Pricing and articles on dynamics in stock and bond markets, the volatility of exchange rates, the term structure of interest rates, the returns to venture capital, liquidity premiums in stock prices, the relation between stock prices and business cycles, and option pricing when investors can’t perfectly hedge. His monetary economics publications include articles on the relationship between deficits and inflation, the effects of monetary policy, and the fiscal theory of the price level.

Cochrane frequently contributes editorial opinion essays to the Wall Street Journal,, and other publications. He maintains the Grumpy Economist blog.

If you wanted to hear John range more broadly, his conversation with Tyler is here. We'll be keeping to a narrower remit. 

Tuesday, 30 November 2021

Afternoon roundup

The closing of the browser tabs brings some worthies:

  • The shift to Zoom, and away from face-to-face, is costly. Fund managers losing access to the kind of information you can get through local contact reduces fund returns. "We show that soft information originates mainly from physical human interactions, primarily in cafes, restaurants, bars, and fitness centers; and the virtual world based on Zoom/Skype/Team fails to substitute physical interactions fully, thus cannot provide sufficient soft information." Now think about NZ firms seeking capital internationally, and the long-term effects of border systems that prioritise Ministerial pet projects over business travel. 
  • The blackouts back in August? It was a Transpower screwup. Here's what we'd said at the time.
  • Wellington ICU's co-director pleads that ICU nurses be added to the immigration skill shortages list.
  • Avoiding Tarras while on any South Island holidays might be advisable. If they haven't enough vaccinated people to staff a cafe...
  • Another Commerce Commission market study is coming: building materials. Like supermarkets, any lack of competition here is mainly due to crazy regulatory barriers to entry. For supermarkets: zoning and the Overseas Investment Act and consenting processes and uncertainties around liquor permits make it hard to be a new at-scale entrant. For building materials supply: good luck getting a house signed off by council if you've built it with imported materials. Ideally ComCom will recommend fixing the regulatory barriers to entry and easing councils out of joint-and-several liability for buildings they consent. But they could instead recommend breaking up each of the existing suppliers into little pieces and forcing separation between them and retailers. The latter would be stupid. The starting question really should be: if I get a container ship in Vancouver, fill it up with all the pieces needed to build a house there (flipping the 110 volt electrics to 220), would I be able to use it to build a house? If not, why not?

Enabling housing and the longer term

Right now, there's bipartisan consensus on the Enabling Housing Supply legislation that basically abolishes single family zoning across most urban centres. 

I hope that that consensus survives the National Party's current leadership turmoil.

While Labour has the votes to just pass the thing on its own, bipartisan consensus matters in setting longer-term expectations. And I worry that National pulling out from the thing could bring about the kinds of development that the legislation's opponents feared all along.

Suppose everyone expects that, because there's consensus on the legislation, it is politically durable. It will stick across changes in government. That sets expectations about ongoing development priorities, infrastructure needs, and the kinds of housing that's worth developing. 

There's a housing shortage and a building boom currently. With the legislative change, townhouses will be allowed everywhere. But if you slap something together in a hurry that isn't great quality (but still meets code), you shouldn't expect much buyer interest. They'll know that more houses are coming. And they could just wait for one that doesn't suck. 

Developers will know that and optimise accordingly.

Now suppose instead people expect a 40% chance that the legislation flips in 2023 and a 60% chance it flips in 2026. Under those incentives, you might want to rush to have things all signed off before any potential legislative change that would thwart you. You might at least want to get projects started, so that they'd be in ahead of any legislative change, on expectation that they can't retrospectively require that started projects need consent to finish. 

And that risks getting you a bit of a mess. Projects will start where they can get going in a hurry, rather than where they might make more sense if developers knew they'd be competing also against the new homes that buyers would be expecting to come on-stream after 2023. 

Or another way of thinking about it. Suppose you expected that, after the election, import of all non-electric cars would be banned. Do you maintain or lower the standards of cars that you might want to rush into the country ahead of the ban?

And if that happens, and it's all a consequence of short-term incentives provided by the prospect of a hammer coming down, nobody will see that that's what happened. They'll just blame liberalisation and work to stop its ever happening again. 

Anyway. I'd said on Twitter that I don't care about anything in the National leadership race other than that cross-party consensus on the Enabling Housing Supply legislation is maintained. I just can't care about the internal faction stuff. I hate soap operas. But it would be nice if they didn't wind up breaking important stuff in the process.