Planning fads

Consigned to the dustbin of urban planning, at least according to Mario Polese in the City Journal:

• Tax breaks and concessions to strategic industries:
• Often had a negative effect on growth
• High-tech industrial parks
• Success highly contingent on complementary inputs not always there
• Targeting existing "clusters"
• Picking winners is harder than it sounds
• Community economic development and local business development grants
• City branding
• Targeting the "creative class"
• A vibrant arts scene tends to be a consequence, rather than a creator, of a prosperous town.

Nihilism? Not quite.

The conclusion to draw from all this isn’t that cities can do nothing to promote economic development. It’s that they should avoid academic fads and quick fixes, which are no substitute for obvious policy goals like competently providing mandated services at reasonable cost, keeping streets safe, and not taxing and regulating away businesses—good governance, in sum, and even that comes with no guarantee to work.

In post-quake Christchurch, these kinds of policies seem a bit like buying lotto tickets to pay off the loan shark instead of taking a second job and cutting back on dinners out.

Reports back from one economist who applied for the economist job with CERA were a little worrying. If we're lucky, there'll be an anonymous guest post sometime down the line.

Alberta nannies

Oh, Alberta. What happened? Back when I was in Manitoba, Alberta was the wild West of Canada - its Texas. Birthplace of the Reform Party, assassin of political correctness, emblem of everything that the rest of Canada wasn't.

And now Lorne Gunter tells me Nanny became Premier via a Tory leadership convention. She's pushing the drink driving limit down from .08 to .05 and aiming to ban smoking in cars. Writes Gunter:

When I pointed out in these pages that even the Traffic Injury Research Foundation thinks it’s a bad idea to impose harsh punishments on low-blood-alcohol drivers, and that instructing police to crack down on social drinkers will mean they have fewer resources to stop habitual drunks, who are the true problem, Ms. Redford had her Transportation Minister, Ray Danyluk, write the Post to say how wrong I was. Mr. Danyluk insisted that drivers above .05 but below the legal limit in the Criminal Code may have caused as many as 28 deaths over the past five years.

Yes, Mr. Danyluk, but would your premier’s intrusive new law have saved them all, or even most of them?

And, further, do we have any clue whether that's a high or a low accident rate given the number of drivers on the road who have BAC between .05 and .08? It's impossible to tell unless the police start releasing stats on the proportion of drivers on breath-check who have that BAC - we need to know the base rate.

Bad things will continue to happen no matter how much social engineering nanny statists engage in. What’s more, on a cost-benefit basis, trying to save 10 or 15 deaths over five years (two to three a year) by harassing tens of thousands of law-abiding drivers is a poor use of resources and could lead to that many extra deaths being caused by criminally drunk drivers who will now escape detection.

A statistical life is worth about $7 million. Suppose that the legislation worked and saved 5 lives per year: $35 million. Add to that a bit of reduced injury cost and property damage. But net out enforcement costs and reduced consumer surplus from folks now too scared to have a glass of wine with dinner... tough call to say there's any prima facie case that this passes cost benefit even assuming that Danyluk's numbers are right. And they're probably not because of failure to account for base rates.

But not content to stop with her pokenose new drinking and driving law — sorry, make that sipping and driving law — Ms. Rutherford now intends to crack down on smoking. She proposes to ban smoking in vehicles with passengers 16 and under and to ban the scourge of flavoured tobacco.

The American satirist H.L. Mencken once wrote that a puritan is a person with a “haunting fear that someone, somewhere may be happy.” Premier Redford is one of the new health and safety puritans who worries constantly that others may not be as informed as she is and so are engaging in vices that are bad for their health.

And, Alberta has a tendency of keeping Premiers around for a while.

Happy Festivus: shaky shaky edition

Despite this afternoon's 6.0 being centered 700 meters from our house, our Festivus celebrations proceeded, albeit with two fewer attendees - folks from the west side of town who sensibly worried about being stuck out here in the east.

Just a short note to let folks who aren't watching Twitter know that we're all fine here. Broken beer and wine glasses, but no broken bottles. Four 5.0+ quakes, smaller ones every ten minutes or so. We have company visiting from Canada; they'd have felt cheated if #eqnz didn't show them a good time. They got to help clean up broken glass after the 5.8, then again after the 6.

Power never went out; water dropped for about 5 minutes after the 6.0 - perhaps until they got backup power to the pumping station. 

We spent the afternoon enjoying the gorgeous sun in the backyard, watching the kids run around, and mostly ignoring the quakes.

In case of emergency, as always, catch me at @EricCrampton on Twitter.

Insider trading

Of the cohort of fellow students going through grad school at George Mason, one of the ones who went on to reasonable financial success left the programme after finishing his coursework but before the comps. He started working in a Senator's office, then went over to CBO before flipping to "the dark side". When we last chatted a couple years ago, he told me his main job was working out what was going on in one reasonably important policy area so as to advise hedge funds how to plan investments in that industry.

And so I was mildly amused to see The Wall Street Journal's minor outrage at that there's an industry that works to figure out what Congress is planning so they can trade based on the information. Here's the (gated) article, with the video embedded below.

 

I mostly don't see what the big problem is. Rent extraction is a problem: legislation designed never to be passed but rather to extract campaign contributions for abatement. That doesn't seem here to be the problem.

Everything that Congress does is going to have effects on the stock market. And so there'll be a big industry in trying to figure out what's likely to emerge from the Congressional sausage factory. If the information gets out sooner rather than later, that just helps prices more quickly towards equilibrium; there's some transfer from the dispersed folks who'd be well placed to move quickly after a public announcement to those who are politically connected. But if Congressmen get some value out of the exchanges in helping to craft better legislation, as the article does suggest, then perhaps the whole deal is efficient.

If I pull my Don Wittman hat on even tighter, it's efficient even in the case where the hedge funds are able to convince legislators to shift policy to avoid imposing capital losses on their portfolios. Legislation is presumably most likely to change where it would otherwise be imposing really large costs relative to expected benefits, so many such changes will be efficient rather than inefficient "logic of collective action" deals. Instead, it's more likely to push us to Peltzman-style regulations that balance the interests of the regulated with the interests of the public at large; the social welfare function also has to put some weight on the utility of the lobbyists' clients. </Wittman>

If you want to be outraged about anything, be outraged that Congress can quickly create or destroy billions of dollars of wealth through legislative acts. As long as that's the business Congress is in, there'll be a corresponding industry in trying to hedge folks' political risk. And, while I do wish that we were in a world in which Congress couldn't do that, how can we begrudge the Congressional Intelligence industry for doing exactly what it should be doing given the world we are in? Would you kill the birds for singing? Poison the fish for swimming? Shoot the children for laughing?

Pigovean paternalism

Frances Woolley reports on problems in her students' understanding of Pigovean taxes. After a set-piece question asking students to calculate equilibrium Pigovean tax in an externality case, students were told to answer this last bit:

Opponents of the tax on potato chips take a careful look at Dr. Economides’ study. It turns out that the only people harmed by potato chip consumption are potato chip eaters themselves, as potato chip consumption is associated with bad skin, weight gain and depression. Does this strengthen or weaken the argument for taxing potato chips?

Frances rightly notes that weakens the case for Pigovean taxation; I'd go farther and say that it darn near obliterates it. If the argument for taxation is consumer irrationality, then, as Seamus has noted before, we've stepped rather outside of the rational choice framework that's necessary for assessing costs and benefits in the first place. What does a demand curve even represent in the case where consumers aren't competent to evaluate net personal benefits? Maybe we can derive it from observing consumer behaviour, but revealed preference goes away and the welfare analysis then has to start from a rather different place. Some of the behaviouralists have started building frameworks for that kind of analysis, with multi-self Pareto criteria, but it's hardly canon.

...it seems that some students really don't believe that people are rational decision-makers, fully taking into account the long-term effects of their consumption choices. Even when people are only harming themselves, they support Pigouvian taxes on paternalistic grounds, to stop people from harming themselves.

It seems to take irrationality of a very particular form for Pigovean taxes to be a solution to internality problems. We need it to be the case that consumers irrationally discount health costs of monetized value x but to respond optimally to taxes of equivalent value. If consumers are also irrationally price-insensitive, you've doubly hurt them by imposing the tax. And we still have the problems that arise once revealed preference can't form a starting point for welfare analysis.

And, despite the explicit framing of the question - that consumers only harm themselves - some students read into it that they were hurting the taxpayer through the public health system:

Some students disputed the basic premise of the question, the idea that potato chip eaters are only harming themselves. Bad skin, weight gain and depression, they argued, are harms to others, because we have a public health system. ...

What interested me about this response was how "health" becomes a lens through which public policy issues are viewed, and a justification of policy choices. Perhaps, though, the students were just mislead by the wording of the question. Guessing that the specific details about bad skin, weight gain and depression must matter in some way, they figured that the question must be asking about health care. 

These are upper level undergrads in economics, and they're messing up the distinction between pecuniary and technological externalities. Costs through the public health system are only a transfer unless these consumers are eating more potato chips than they would in a private system; in that case, only the deadweight costs of the increased portion of consumption get to count as policy-relevant on an efficiency standard.

I hate to keep banging on about this [hit the fiscal externalities tab below]. There's no way that the folks at Carleton wouldn't have hammered home the distinction between technological and pecuniary externalities. But fiscal externalities - externalities that work through the budget constraint but via the tax system - keep seeming technological to students when they're really mostly pecuniary. Partially this is because folks don't start with Buchanan and Stubblebine, but I expect that it has more to do with that fiscal externalities have seemed perhaps an interesting sidebar not worth extensive class time.

We are graduating too many students who know that negative externalities are bad and that government should tax negative externalities, but who have little sense of which ones actually have efficiency consequence.

Droit de Suite

A model of an artist's lifetime earnings is incomplete if it ignores complementary investments by early investors in the artist's works: the curators and collectors who buy early works and who work to make sure that it gets in front of the right people in the cultural elite. Unless you're born into an art family, you're just not likely to have the connections necessary for success.

And so I'm pretty sceptical about Droit de Suite - policies that seek to redistribute portions of realized capital appreciation in artworks back to the originating artist. At the margin, they reduce incentives for gallery owners, curators, and collectors to make complementary investments in new artists. What are the distributional effects?

• A windfall gain in the current period to established artists at the expense of those who made complementary investments in their success;
• A transfer to those artists who become successful from those who never do;
• For a successful artist, a transfer of income from when he's young and poor to when he's old and established.

None of these seem particularly desirable. The first has efficiency consequences as well as distributional effects. The latter two turn art into more of a winner-take-all market. Think of a work from a new artist as a lotto ticket that might or might not pay off if an investor makes a pile of ancillary investments. The value of that lotto ticket is lower if the winning tickets are taxed. So the initial price a new artist's works can attract is lower than it otherwise would be. So all new artists earn less on their early works while those who eventually become successful are paid back with interest. But that's when they're already well off and can supplement their income by doodling on folks' napkins at restaurants.

Note further that none of this requires that investors are only in it for the money; they're just less able to afford to keep making those investments where the returns are taxed. It wouldn't be surprising if the insult given by the implicit devaluation of their role were as motivating as the reduction in forward-looking returns. But budget constraints do bind too.

@CherylBernstein points to a newly introduced American bill that would implement Droit de Suite in the U.S.

The Equity for Visual Artists Act of 2011, would set aside 7% of the price for works resold for more than $10,000 at major auction houses, such as Christie’s and Sotheby’s, with half the proceeds going to the artists and half to non-profit art museums.

If the portion going to non-profit art museums goes into a common pool rather than to the museum that first exhibited the artist's work, or to the museum of the artist's choosing, recipient museums have free-rider problems in making investments in emerging artists. What do I mean? Consider two non-profit museums. The first makes large investments in figuring out which new artists in the community are worth promoting and works hard to help them become successful; the second spends the same amount of money hosting travelling exhibitions from other galleries. The first museum buys a lot of the emerging artists' work and hopes to use earnings from the small proportion that really pan out to help future emerging artists; the second just banks revenues from travelling exhibitions to fund later hosting of travelling exhibitions. The proposed policy takes money from the first museum and gives it to the second, reducing museums' incentives to invest in new artists.

The legislation, as it stands, would only apply to the resale of works at public auction houses “with more than $25 million in sales in the prior year”. Auction houses that operate only online would be excluded, as would private galleries.

Prediction: more sales shift to online and private galleries from public auction houses. I have no sense of how costly that is in terms of sale revenue foregone, but if most auctions are coordination games, and everyone's making the flip, it's probably not that bad. The big auction houses will be lobbying hard against the legislation and might find it worthwhile to flip to online-only auctions.

Update: Consider now the case in which curators and collectors really have no effect on an artist's success. In that case, the policy still results in reductions in the amount those folks are willing to pay for a new risky artwork and so still effects transfers from those artists who never become successful to those who do and from artists when they're young and poor to when they're old and successful. But there's less efficiency consequence as the ancillary investments by others are of less value.

GST and the price of meth

New Zealand's drug warriors laud their successes in the war on meth. Evidence of success? The price of a  gram of P is up from $723 last year to $768 this year.

Year on year CPI increase in the September quarter is 4.6%. But a big chunk of that is the GST increase.

If meth had followed the CPI, the price of a gram would have increased to $756, not $768, so maybe enforcement action pushed the price up a bit (although we ought to be pretty sceptical) . But the more interesting question is whether we should have expected price inflation in illegal markets to incorporate the GST increase.

Obviously, drug dealers don't charge GST on meth. But they do pay GST on a pile of their inputs where those inputs are bought in legal markets. And, they don't get to claim that GST back on quarterly returns either. So they'll have had a GST-related increase in their production costs. Since a smaller proportion of their inputs will be GST-affected, the CPI index for illegal sector goods should be lower than for other goods if we don't net out GST effects from either. So the real price increase is likely a bit bigger than a straight CPI-adjustment would have it.

It's worth noting the large disconnect between Key's rhetoric in the press release and the actual report's findings. Here's Key:

The fourth Indicators and Progress report for the Government's Tackling Methamphetamine Action Plan shows government agencies' work is continuing to contain the growth of methamphetamine ('P') supply networks, Prime Minister John Key announced today.

"This initiative has been in place for two-and-a-half years, and we can see that efforts to crack down on those who are importing, manufacturing and selling P and its precursors are working," says Mr Key.

"Six months ago, there were signs that supply chains were being disrupted, due to the efforts both at the border and domestically. We're now able to see that the dedicated resources on the frontline are continuing to squeeze the P trade."

..."The coordinated action against P by a number of government agencies is producing results," says Mr Key. "This report shows that, over time, the work to contain the methamphetamine trade is achieving the right results. All indicators suggest 'containment' and this should be seen as success.

"Any softening in our hard-line stance against P could undo several years of good work. Those who profit from the misery caused by P should realise we are committed to stamping out the harm this drug is causing New Zealand communities."

Here's the report (prior reports). Relevant findings:

• Purity is down a bit, decline "close to being statistically significant".
• What about availability?

  NZ-ADUM data shows a similar trend as IDMS, in that availability has remained stable/easier over the past two years. (p. 10)

  And, 60% of frequent users report no change in difficulty of getting P; rest split evenly between "easier" and "more difficult". (p. 14)
• Convictions for possession/use up from 1327 in October 2010 data to 1557 in October 2011 data; convictions for supply and dealing more than doubled. But still availability has either not changed or has increased.
• Customs is seizing less pseudoephedrine at the border and is instead seizing more P.
• But, the price of a "set" of ContacNT (pseudoephedrine precursor) hasn't changed since September 2009 (p. 13). Recall that the government only announced plans to make pseudoephedrine prescription-only in October 2009. So despite that none of us can get anything that works for a runny nose, the black market price of pseudoephedrine is unchanged. John Key and Peter Dunne have screwed over every New Zealander with a cold for absolutely no benefit.

Keep digging up, guys. You'll get out of that hole someday.

A lesson in contrasts

American legal scholars debate whether provisions in the latest defence appropriations bill would allow the government to hold citizens indefinitely without charge. Here's the latest summary:

The law provides that indefinite detention without charge may be imposed on anyone who has provided “substantial support” to groups that are “associated forces” of al-Qaeda; but it leaves undefined what constitutes “substantial support” and which groups might qualify as “associated forces.” Thus far, the lower federal courts have upheld detention of al-Qaeda or Taliban members, but not mere supporters, much less supporters of associated forces. And there is much dispute about whether the laws of war permit detention in those circumstances. Now Congress has essentially predetermined that question. Unless this and future administrations construe these provisions as limited by the laws of war, they risk authorizing detention that the laws of war would not. 

See also Volokh and Lawfare. And recall that American drug warriors have argued that marijuana users offer support to terrorist groups.

Meanwhile, in New Zealand, lawyers for the police have advised that sniffer-dog searches in schools breach students' civil rights, and so the police have stopped carrying out such searches, previously requested by the schools, pending further legal advice:

"Police are currently considering the legal implications regarding searches by drug dogs in schools," a spokeswoman said.

"Police understands the Ministry of Education is also working on good practice guidelines for schools so that they can search and confiscate items that may pose a safety risk."

She said police gave other support to schools, such as drug education, arranging counselling and prosecutions. "Where schools detect more serious drug offending, police become more actively involved."

Hutt Valley High School has historically had a police dog team conduct annual searches. But its request was refused this year "on the grounds that the police have no cause to search".

Entrepreneurial Winnipeg

After smoking in public places was banned in 2004, happy hour crowds dwindled in bars across the province.

In a bid to woo customers back to his lounge, Ron Petryna, the owner of the Headingley Hotel, began running conventional Friday night bingo games.

"We started off giving away pretty tame stuff -- cases of pop or boxes of candy," Petryna says. Then he recalled a Ladies' Night promotion he'd witnessed south of the border -- one that climaxed with a few rounds of "naughty bingo" where female participants went home with vibrators and such.

"So we began to introduce adult toys into our own bingo games," says Petryna. "Next we added special martinis and cocktails named after the games. This all evolved from there."

"This all" refers to the fact that Manitoba has quietly become the undisputed erotic bingo capital of the world. Sure, you can find comparable goings-on in places like Toronto, Ont., Portland, Ore. and Orlando, Fla. But "dirty bingo" or "X-rated bingo" or however it's billed in those burgs isn't a standard occurrence. Not like it is at Dick's Dylan's, the Stock Exchange Hotel and the Riverside Inn, to name a few local nightspots that now host erotic bingo on a weekly basis.

This didn't exist when I lived in Winnipeg. In those days, Bingo was the exclusive domain of the bored elderly and others with ridiculously low opportunity costs of time. Whoever first recognized the potential market for the combination of Bingo and titillation should get the Kirzner award for the year. Entrepreneurial alertness extraordinaire.

HT: @CJSnowdon

Is this also a joke? [updated]

Yoram Bauman is known for his econ-based stand-up comedy.

I wonder about his latest piece in JEBO. He shows that economics students at the University of Washington are less likely than other students to donate to two charitable organizations.

At registration, students were given the option to donate to two organizations: WashPIRG and ATN. WashPIRG's mission, quoted by Bauman, is "to deliver persistent, result-oriented public interest activism that protects consumers, encourage a fair, sustainable economy, and foster responsive, democratic government". ATN was a lobby group pressuring government for "sensible tuition rates, quality financial aid, and adequate funding of colleges...".

Bauman's substantive finding is that those who went on to major in economics were less likely to donate than others, even before having taken any economics. So econ majors are different than other folks even prior to training. Econ majors' donation rates vary little with the number of courses taken while non-majors' donations are sensitive to it.

In a few spots in the paper, Bauman frames these differences badly:

Are economics majors inherently less generous, or are the differences due to their training? We can start to answer this question in terms of the random effects model...

I just can't see how he concludes anything about econ student generosity from his data. But in the conclusion, he recognizes that perhaps econ students are less likely to view these organizations as providing public goods:

The interpretation of these results – in particular whether lower donation rates are a sign of “selfish” behavior – also depends in part on whether the requested donations are public goods. ATN is arguably a pure public good within the student body because the aim is to distribute resources to students from outside groups. Our results here echo Marwell and Ames (1981): economics students are more likely to free-ride. It is not so clear that WashPIRG provides a similar public good because the organization's agenda extends beyond the interests of the student body. Indeed, it is possible in this case – as in, say, a requested donation for an organization dedicated to replacing competitive markets with economy-wide price controls – that economics training would reduce donation rates not because students become more selfish but because they become more educated. Regardless of the cause, however, it is clear that economics training changes the giving behavior of non-majors.

Indeed! Further, if Econ students recognize that tertiary subsidies are already too high, they may also view ATN as providing a public bad!

But here's how he frames it in the New York Times:

THE stereotypes about economists are well known: that we’re selfish Grinches; that we don’t read human interest stories because they don’t interest us; that the only reason we don’t sell our children is that we think they’ll be worth more later.

But are the stereotypes true? And if so is the cause nature or nurture? In other words, are selfish people disproportionately likely to become economists? Or is there something about being an economist (or being on the receiving end of economics education) that makes people selfish?

...My recent research with the economist Elaina Rose, published in August in the Journal of Economic Behavior and Organization, has looked at a real-life public goods situation faced by students at the University of Washington. During our study period (1999 to 2002), when students went online to register for classes each quarter, they were asked if they wanted to donate $3 to support WashPIRG, a left-leaning activist group. Students were also asked if they wanted to donate $3 to Affordable Tuition Now (ATN), a group that lobbied for “sensible tuition rates, quality financial aid and adequate funding.”

You may question whether these groups actually serve the common good, but that’s mostly beside the point. Regardless of the groups’ actual social value, a purely self-interested individual would choose to free-ride rather than contribute; after all, a single $3 donation is not going to make a noticeable difference in tuition rates.

...In line with previous research, what we found supported the Grinch stereotype. 

It wouldn't at all surprise me if economists were less likely to contribute to public goods. There's reasonable prior evidence for it. And, Bauman gives a nice bit of evidence on selection versus education effects in giving to these two groups.

But there's no way that you can conclude that economists are more selfish on the basis of their unwillingness to contribute to these causes. WashPIRG's current highlights: an anti-nuclear campaign and an anti-BPA campaign. Am I selfish for thinking the former campaign a horrible public bad that, if effective, makes global warming worse? Or for thinking the latter just a bunch of trendy anti-chemical scaremongering that makes baby gear too expensive for poor people? Maybe WashPIRG weren't a bunch of nuts in 2002 when the data was collected, but I'd sure like to see some evidence of it before concluding that economists are Grinches for failure to give these guys money.

As for Affordable Tuition Now, perhaps economics students recognize that government subsidization of higher education is largely a transfer to the middle class, the progressivity of which is at best debatable? Those kinds of concerns are alluded to in the conclusion to the JEBO piece but sure seem absent from the Times piece; there, if economists aren't selfish for free-riding on others' donations, we're selfish for not agreeing with the groups' objectives. Or at least that's how I read the piece's conclusion, which calls for greater balance in principles courses.

Worse, Bauman says that whether "these groups serve the common good" is "mostly beside the point". He's right that it's tangential if the question is whether education or selection drives differences between economists and others, but it's front and centre if he wants to paint economists as being the bad guys for failing to contribute to groups the aims of which reasonable people can very easily oppose.

Update: Ah, crud. Robin Hanson and Greg Mankiw said the same things, more concisely, already. But the truth bears repeating.

Update 2: Darian Woods reminds me of a nice piece by David Fielding and coauthors showing that Econ students are more generous than others in the case of contributions to a proper charitable cause - helping poor people with WorldVision.

And if you're looking for worthy causes: don't forget Seasteading.

Zoning costs

Delays in zoning more land for higher density residential use on Christchurch's fringes have very real human cost. Here's David Haywood's nightmare case, though it does have a happy ending.

Despite having total replacement cover for his house, his land having been "Red Zoned" meant the only way of not incurring substantial losses on his riverside Edwardian villa would be to move the house to a new section elsewhere. There is no shortage of land around Christchurch, but very little of it has zoning allowing for smaller section subdivision; consequently, there's been a boom in property prices near town.

And, sections available near town are encumbered. Here's David:

Fourthly, there’s the issue of ‘covenants’.

I’d never even heard of covenants before I started looking for a replacement section, but here’s how they work in New Zealand: when a landowner wants to subdivide rural land into residential sections they must obtain permission from their neighbours – and this usually involves the imposition of various ‘covenants’ that constrain the actions of any future owners of that land. These range from the permitted height of the hedges, to the permitted position of buildings, to the type of dog they’re allowed to own (I’m not kidding). The one covenant that invariably applies to any section within an hour’s drive of Christchurch is a prohibition against the relocation of old houses (no matter how nice), because neighbours fear that it might reduce the value of their own property.

I'd not heard of covenants either; I can't tell what proportion of covenants is demanded by neighbours as condition of a property's subdivision and what proportion is imposed by developers wanting to increase the overall value of the development.

He found an uncovenanted section through a bit of serendipity. But do read his whole article for the rather high costs that legal restrictions on subdivisions have had on his family.

Similar stories, with less happy endings, are surely playing out for lots of red zoned families.

The Productivity Commission rightly pointed to council plans and zoning as fuelling property price inflation, seconding very nice work by Arthur Grimes showing the effects of Auckland's restrictions.

Maybe Council was too busy in the earthquake's aftermath to think about redoing its zoning and subdivision regulations. All the more reason for other places to fix things now, so that property markets can adjust more quickly in case of emergency.

Pecuniary and Technological Externalities, and EQC

Recall that in standard micro, a pecuniary externality is one that affects you through your budget constraint, if you follow the standard Buchanan and Stubblebine definition, or one that is mediated through the market process, if you follow other texts. A technological externality is one that affects you through your utility function (Buchanan & Stubblebine) or operates outside the market process (others).

And standard theory says that pecuniary externalities are of no efficiency consequence. They don't result in sub-optimal decisions being made; further, we usually expect that they're offset elsewhere. If my bidding at auction forces you to pay more for your house, that's a loss to you but a gain to the seller and the house still goes to its most valued use. Technological externalities generate inefficiency. So we say that policy should generally ignore pecuniary externalities and focus on technological ones.

And in Friday's paper we read that New Zealand's Earthquake Commission withheld from neighbours information about dangers posed by neighbouring buildings. Why? Because of the potential pecuniary effects:

The Earthquake Commission (EQC) withheld information on a dangerous and ultimately deadly Christchurch building to protect privacy and property prices, a royal commission has been told.

Two women were killed in Wicks fish and chip shop in Worcester St after a brick wall from the neighbouring two-storey building collapsed into the shop during the February earthquake.

Natasha Hadfield, who owned the shop with husband Geoffrey, was serving Betty Dickson when they were both crushed by falling bricks.

The Canterbury earthquakes royal commission was told yesterday that on February 1 a commission inspection of the two-storey building found two walls were unstable and "in danger of collapse".

The EQC inspector urgently requested an engineering inspection of the building, but the request appears to have gone nowhere.

EQC chief executive Ian Simpson said yesterday the file had "gone into a hole", blaming a paper filing system that had since been replaced.

"I can't answer why an engineer was not contacted," he said.

After the September 2010 quake, the building sustained substantial damage. It had its eastern wall propped, and a hole in the roof was covered by a tarpaulin. It was cleared by at least one engineer as safe.

The western wall, which fell on to Wicks on February 22, was not braced.

EQC inspectors identified the western wall as dangerous, but the information was never passed on to neighbouring building owners or the Christchurch City Council.

Simpson said the policy had been to not release any information on inspections to third parties to preserve property prices and privacy.

"It was about bricks and mortar and property prices," he said.

The policy had reflected many residents' concerns that if information on quake damage was attached to their property, it could affect values, he said.

The policy was changed in October this year, largely because of the deaths at Wicks, he said.

The pecuniary effect is troubling enough; let's take that one first.

Let's start with the best case for EQC's information withholding being efficient. Suppose that a property's earthquake damage gets listed on the Land Information Memorandum (LIM) but the damage is fixed by the owner. If the subsequent repairs don't get noted on the LIM, or if buyers are irrationally risk averse, the owner may suffer a real loss despite having fixed all the damage. If buyers are rational, this only happens where property damage is a good indicator of likely damage in subsequent events despite the property's being repaired; in that case, we impose a cost on buyers if we fail to disclose. But if they're irrational, then we could perhaps view LIM listing as being akin to noting on the LIM that somebody was murdered on the property a few decades ago if everybody in town believes in ghosts. If ghosts don't exist, then both buyer and seller are better off by that the buyer never finds out that the property might have ghost-risk.

But earthquakes are real and ghosts aren't. Even if there aren't any technological effects, policy then effects a transfer that may not be desirable: buyers can't tell which properties are subject to greater earthquake risk and so we get a transfer to the owners of risky buildings from buyers and from the sellers of relatively safer buildings who then are pooled with the owners of risky buildings.

Bringing back the potential for technological externalities, things look worse. In order to avoid a pure transfer, EQC induced a technological externality.

It's not likely that different policy would have affected outcomes in the case noted in the paper; unless the inspector finding problems immediately went next door to warn people, the information would have been lost in the system until after the 22 February earthquake anyway. So it's wrong to blame this EQC policy for these two deaths. But that sure doesn't make it good policy to trade a pecuniary externality for a technological one.

Bennett's (hopefully not Last) Stand

Joe Bennett ably defended his right to live in his own home today on Radio NZ. Council claims his home stands in extreme danger of rockfall, but has refused to provide him any evidence to substantiate the claim. By his assessment, there is negligible risk. Here's the Press story.

The Council's "Regulation and Democracy Manager" now promises to arrange for that Bennett be able to chat with their geotech engineers. But he also threatens a court order.

I love Joe's stand in favour of individual autonomy and liberty:

The Council is not responsible for my personal safety. It is not a public safety issue as they claim. It is a private safety issue... I can understand their legal fear of being held in the gun... but I accept responsibility for my fate. I could go and climb Mt. Cook naked singing the Hallelujah chorus and the Council won't stop me and nor should they... please, I don't need another mother!"

I've also enjoyed Joe's series of columns in the Christchurch Press in which he warns Council of the Bulgarian transvestite sniper who lies in wait for their officials.

Dairy population

Canada has roughly thirty million people and about a million dairy cattle [update: 1.4m including replacement heifers]. Its dairy markets are completely controlled by the government through supply management which works to make poor people pay too much for milk and inflate the capital value of dairy quota owned by relatively wealthy dairy farmers.

New Zealand has roughly four million people and about six million dairy cattle. It has the world's most free dairy markets and relatively rich dairy farmers; rents capitalize not via quota but rather via the relatively small proportion of land suitable for irrigated pastoral systems (most of the country isn't green pastures; rather, it's mostly mountains and dry steppes).

But isn't supply management wonderful?

And let's bat down a few defences I've heard of supply management.

First: without it, Canada wouldn't have a dairy sector any more; they'd just be swamped by American dairy imports because shipping costs are so low from the States. Interesting. Note that it's as cheap to ship milk powder from the US to New Zealand as vice versa. We have 1.5 cows per capita and ship large volumes of milk to the US every year. And NOTHING stops the Americans from selling us milk other than the basic economics of our being better at it. Our free markets have not resulted in our being swamped by foreign milk. Not that I'd particularly complain if that were the result; I don't mind that we export milk and import cars rather than the other way round, but either one's fine by me. Keith Ng's post of a few years back was great fun on this point.

Second: without it, Canada would be swamped by GE-modified, chemical-additive-ridden milk. Free markets would only supply adulterated awful product. This is utterly insane. Complete madness. First, it isn't the case here in NZ. Second, it only would happen to the extent that consumers value a price reduction over a quality reduction. Third, even if most consumers want lower quality product at lower price, the granola folks can still pay extra to get higher quality product. On the grocery shelves here, I can pay a bit more to get certified organic whole milk; I also can get raw milk, but not from the supermarket. I don't attach pejorative weight to granola here: I often get raw milk and buy the organic milk when the supermarket's out of whole (silver-top) milk. Free markets generally mean product diversification and market segmentation, not homogenization. The most reasonable, but still repugnant, form of this argument would be that the current system lets granola people satisfy their preferences at the expense of poor people who'd prefer cheaper product; economies of scale get granola folks product a bit cheaper than they otherwise would if everyone's forced into buying the no-hormones version. Why not ban cheap cars on similar argument?

Third: without it, Canadian farmers would be beaten down by some kind of big multinational to which they'd be forced to sell their milk. Again, this is utterly insane. First, here in NZ, Fonterra is a cooperative owned by its farmer-members and has the vast majority of dairy production. Nothing stops Canadian farmers from setting up their own cooperatives. Co-ops have a long history in Canada; my grandfather was on the board of one for decades. Second, nothing would stop any dairy farmer who has a tiny bit of nous from branding himself and taking his own product to market. Third, dairy companies have to compete with each other for milk.

I really don't get the status quo bias among otherwise sane Canadians about dairy. I've heard these arguments from reasonable people whose rationality flies out the window when thinking about cows.

Do hit the dairy and "transitional gains trap" tabs below for prior posts in the series...

Graduation

I attended the University of Canterbury's graduation ceremonies on Wednesday afternoon. I'd avoided attending each of my own graduations other than high school, mostly because I expected them to be mind-bogglingly boring. I also had the handy excuse of being well out of Winnipeg by the time of my undergrad graduation ceremony, in New Zealand by the time of my doctoral graduation ceremony, and of its being a faux pas for a PhD student in the States to attend his Masters conferment (signals that you think you won't finish).

Don't get me wrong - the speeches from our Chancellor and Vice-Chancellor, and from Ruth Richardson, were excellent. The awarding of the research medal was nice. The pomp and ceremony of the event is also itself important. Getting all dressed up in regalia is great fun for staff and students alike. A graduation ceremony consisting of those speeches, and some abbreviated degree-conferment ceremony with appropriate pomp, would be great. But I struggle to understand the utility function of those who attend graduations as they currently exist: a half-hour of good content interspersed among a couple of hours of watching, and applauding, a bunch of people you mostly don't know walking across the stage to be given their degrees in alphabetical order by degree.

I can imagine, as a student, the value of getting to walk across the stage and shake hands with the head of the University. And parallel benefits for the parents. But is that benefit worth the couple of hours of watching a few hundred^* other people doing the same thing? Can it really be the case that the median student prefers the current form of graduation to one where we keep the nice speeches but forego handing out the diplomas to each graduand?

The first response is that students attend because parents demand it. But that just pushes the problem back a level: why should any parent prefer sitting there for two hours, watching a bunch of people they've no chance of knowing walk across the stage in exchange for the 45 seconds in which their kid gets to walk across the stage? The parents definitely enjoy watching their kid cross the stage, and I can understand getting utility that way; I would too. But at that cost? Surely there are other ways of celebrating your child's achievement: a graduation party at home with friends and family instead of formal graduation, for example. Even more puzzling: parents of international students fly in to attend; the two hours at graduation are a trivial part of the overall cost.

Potential explanations:

• The 45 seconds' utility trumps the time cost for most people; Crampton is a pod-person.
• Note that the second clause can be (is almost certainly) true regardless of the rest.
• The ceremony with public awarding of degrees is a binding enforcement mechanism preventing students from lying about their academic progress.
• But a lot of US schools run graduation with fake certificates because final grades haven't yet been tabulated!
• It's a horrible showing-you-care equilibrium. Parents attend because they want to demonstrate how much they appreciate their kids' having worked really hard to get their degrees; kids attend because their parents want them to and they want to show their appreciation for parents' financial support. Both would be better off if they could agree to a graduation party at home instead, but the one proposing it risks being seen as not caring.
• But then a University could do well at the margin by offering a more efficient graduation ceremony. Maybe they wouldn't really attract more students by it, but they'd at least save the opportunity costs of the stage party. That nobody does this suggests the median student isn't in the showing-you-care equilibrium.
• People attend to feel validated about having purchased this educational bundle. Sure, it's after the fact. But a nice ceremony makes the degree feel more credible both for those getting it and for those who funded it. It's a bit irrational: you should seek quality signals ex ante, not ex post, and I don't know of anybody who decides which school to attend ex ante on the basis of graduation ceremonies. But if it makes appliance buyers happy when their fridge's instruction manual starts out with a friendly "Congratulations on having chosen wisely in purchasing our brand!" maybe this holds here too. The obvious inefficiency of the ceremony, and observing that other parents attend, somehow signals the strength of the brand and the wisdom of their prior investment decision. In this version, waiting through all the other kids is a benefit, not a cost: "Look at all these fine young people among whose ranks my child now stands!"

Best guess: a good quarter of folks are there only because it's a bad equilibrium (as in the next-to-last bullet), another quarter are there because the disutility from waiting through the other graduands for their kid isn't that high, and the rest split either between validation or simply attending because it's the thing to do.

Note also that I completely understand the University offering the event given that parents and students seem to demand it - none of this is meant as critique of Canterbury, or of any University's putting on these ceremonies. And I also understand Faculty attendance as part of the job. I'm struggling to understand the demand side, not supply.

Could somebody who is not a pod-person help explain why they enjoyed attending their graduation or their kid's?

I wonder whether there are testable hypotheses in here. We have records on student characteristics - tons of records. We know who attends graduation and who stays home. Some hypotheses:

• If students from lower-decile high schools are more likely to attend than those from higher-decile high schools, that's consistent with either opportunity costs of time being lower among attendees, or benefits of seeing the kid's graduation being higher where college attainment is less common. 
• I'd predict higher proportionate attendance among those receiving first class than third class honours, mostly on the benefits side of the calculus (being announced to everyone as having first class honours)
• I'd predict higher attendance among those from underrepresented ethnic groups holding constant incoming school decile - benefits of seeing graduation higher where college attainment is less common.
• If the "showing you care" story is right, we expect highest attendance among those departments where "showing you care" is integrated into the discipline's way of being - Social Work, Cultural Studies - and lowest attendance among departments like Economics. 
• Others?

^* Canterbury splits its graduation ceremonies across different days for different faculties to make things tractable. Commerce, Laws, Engineering, and Fine Arts was Wednesday afternoon. Relatively few Econ graduands attended graduation, suggesting their utility function is more like mine.

It's the bet, not the stakes

Robin Hanson wonders why folks have taken offence at Mitt Romney's holding fellow GOP nomination contender Rick Perry^{*, **} to account by offering a bet: $10k if Perry could prove what he claimed existed in Romney's book. Here's Robin trying to make sense of things:

The idea that a presidential candidate couldn’t afford a $10,000 bet is crazy, as is the idea that ordinary folks don’t know this fact. Candidates pay for TV commercials, which cost lots more than $10,000, and they fly all around the nation in planes, which gets expensive.

So clearly we have moved high up into belief meta-levels here. “Yes, most people know Romney can afford $10,000, but some aren’t sure that most others know this, and so this shows that Romney doesn’t know about such folks.” Or “It is rude to point out that you are rich, even when everyone knows you are rich. Yes wearing nice suits shows he’s rich, but not wearing suits is socially unacceptable. Offering smaller bets is acceptable, however, so offering a big bet could be interpreted as bragging about wealth. Not that I’d interpret it that way, but someone might, and this shows Romney doesn’t realize that.”

I'm not generally one to disagree with Robin, but I think explanations based on voters' having sophisticated conjectural variations models in their heads is a bit of a stretch.

My hypothesis: there'd have been just as much offence taken if he'd offered $100 or $1000 stakes. A non-trivial proportion of statements made in political debates are demonstrably false. They're thrown out in the heat of debate with little chance that the opponent will have ready access to counterevidence; worse, there's risk that bringing up counterevidence moves the debate to where the opponent wants to go anyway. Sure, plenty of online armchair quarterbacking lists all the falsehoods. The candidates never have to front up and answer FactCheck or the news articles. But paying up on a bet is far more humiliating, both for the candidate and his supporters. No partisan wants to witness his idol's humiliation in having to pay up. And so they come up with other reasons for being offended.

If partisanship is more faith-based than fact-based, offering a bet in political debate is akin to going into a Catholic Church with a gas chromatograph in the middle of Mass and offering to bet the priest $10,000 that the wafers are chemically identical before and after purported transubstantiation. The followers might say they're offended about the stakes, even though the Church could back it. But the real problem is nobody wanting to see that their prophets are false.

^* Rick Perry's campaign ad, nicely lampooned here, reminded me a lot of the old Dead Milkmen^*** song Stuart. Rick Perry's supporters aren't like the other people here in the trailer park - the ones who don't know what the queers are doing to the soil....

^** Why hasn't anyone done anything useful RickRolling Rick Perry?

^*** First, footnotes in footnotes is cool. Second, the Dead Milkmen are awesome. And "Big Lizard" is the 3-year old's current favourite bedtime song. But I have to Bowdlerize it. And I don't know whether it's better to keep him away from Dead Milkmen 'till he's ready for the proper version, or ease him into it with Bowdlerized versions. Tough problems.

Flattery is a Prisoners Dilemma game

If you're not already reading Xavier Marquez's Abandoned Footnotes, you should be. N is low and quality is very high. His latest post works through status, inequality, and flattery in the Roman empire.

Augustus pretended humility and kept a lid on excess flattery to allow the Senate to pretend that it continued to have status equal to the Emperor.

The Republic was built on norms that rejected kingship and competitively allocated relatively “equal” high social status among the senatorial class, so that any credible signals of an intention to re-establish kingship seem to have greatly lowered the coordination costs of dissatisfied senators for conspiring against the emperor.

Caligula wanted to move toward Kingship, so fuelled flattery inflation:

Strategically speaking, the point of this seems to have been to lessen his dependence on the senatorial aristocracy and to move the regime towards a Hellenistic model. (Winterling discusses some suggestive evidence that Caligula might have been planning to move to Alexandria, an obviously symbolic move to the historic capital of Hellenistic dynasts). Runaway flattery inflation not only makes it exceedingly difficult for conspirators to succeed (even the most innocuous comment can be used against you when flattery inflation is in full swing) but also succeeds in completely humiliating the flatterers (in this case the senatorial aristocracy) and lowering their collective social status vis a vis the ruler. If flattery hyperinflation is not stopped, the end result is that the ruler no longer has to use "ambiguous" language to manage his relationship to the selectorate. He can just order them to do things, without worrying about slighting their status.

Individual Senators could do no better than flatter, though it debased the Senate.

I think one can extract a more general model of flattery inflation from all this. When material resources are more much more unequally distributed than status, and status is competitively allocated, flattery inflation can result. But rulers (or those who control material resources) will usually try to dampen or manage this kind of inflation, since flattery has obvious disadvantages from their perspective. Yet there seem to be circumstances under which they will try to encourage flattery hyperinflation, e.g., when the costs of coordination for challengers are relatively low and the maintenance of "low inflation" requires extensive communication management.

I would be so poorly cut out for that kind of world.

On the other hand, if you flip the word Senate for Faculty and Emperor for... ah, well, never mind. It's an exercise best left for the reader.

Heart monitor

The University of Canterbury's seen some declines in student numbers since last February's earthquake. The New Zealand Herald last week gave some details.

"We have lost a whole pipeline of students," said Keith Longdon, the university's acting chief financial officer.

The university, which had 15,500 students enrolled this year, expects to lose about 20,000 full-time students over the next eight years. The number of first year students discontinuing or failing to complete study fell 25 per cent, international students by 30 per cent and continuing students 8 per cent.

Student tuition fees are $5 million below its 2011 forecast while operating costs are $12 million more than projected, partly reflecting a more than doubling of insurance costs to $6.2million from $2.5 million and a $1.8 million increase in energy costs, the university says.

The University's fortunes in the longer term seem tied to the speed and strength of the Christchurch rebuild. If things perk back up quickly, students will want to live here and the University will be in fine shape. If the ancillary amenities that students expect from a city take a while to come back, and if the government doesn't fill the temporary gap, there's risk of downward spiral where worsened conditions lead to the loss of our best academic staff which, eventually, cuts enrolment.

As Canterbury's bonds are traded on NZX, it's probably worth my keeping an eye on yields there. Here's a bit of fun though. First, here's the two year yield history on Canterbury's bond issue:

The bond was issued with a 7.25% coupon rate. It rose a tiny amount with the 4 September earthquake, and had returned to pre-quake lows immediately prior to the 22 February quake. We see bits of movement upward subsequent to the half-year report released 1 September, but nothing huge - just bouncing around between 6.9% and 7.35%. 

If you zoom in to the last four days, you see a 10,000 unit move at 10 am 7 December pushing the price up to 7.75%. At 12:38 PM, this story came out, with sensational headlines on whether Canterbury could meet its bond obligations but concluding that there's pretty much no chance we fail to meet bond payment obligations. Another 10,000 unit trade pushes yields up to 8.6% at 1:35 PM before they fall at 11:40 am 8 December on a 25,000 unit trade back to 8%; it's been flat at 8 on low volumes since then. 

Weird things happen in thin markets on low volumes. I'm not sure there's anything substantial in the newspaper article that wasn't in the University's 1 December forecast statement other than that the news story frames things in terms of students lost where the forecast was in dollars. But the market didn't move subsequent to the forecast, only subsequent to the news story. 

Alas, staff who might be worried about redundancy as part of any temporary restructuring at the University can't really use the NZX contract as a hedge except against exceedingly unlikely Armageddon events where the government withdraws financial support, bond default looms, and many staff are set for redundancy. But for more minor transitional changes, we could as easily see yield drops with redundancies that are part of a bailout package as yield increases where redundancies give new news about finances. 

As for me, I'm looking forward to today's graduation ceremonies; I'm especially looking forward to Ruth Richardson's Honorary Doctorate. Her work on the Fiscal Responsibility Act alone would have qualified her for it, but she's achieved rather more than that. Congratulations Ruth!

Dignity of work

Most of the time, I'll count work as a bad rather than as a good. We shouldn't evaluate policies on whether they make or kill jobs, except where they are specifically labour-market policies. Green policy shouldn't be judged on its job-creation propensities but rather on whether it achieves environmental objectives most efficiently.

But I'll make a slight exception for sheltered workshops. Employers finding ways to provide employment to the mentally disabled provide a sense of self-worth that's more valuable than wages paid. Where wages reflect marginal revenue product, they'll often be very low. But that's not the point. The business, whether charitable or commercial, has to at least not make losses if it is to survive. Absent strong wage subsidies, whether from government or from civil society, paid wages will have to be low where marginal product is low.

And so changes to New Zealand minimum wage legislation extending minimum wage protection to those in sheltered workshops, and lobbied for by advocates for the disabled, did harm when they, in conjunction with policy shifts at IHC, led to the closure of sheltered workshops.

Meanwhile, in Manitoba, Bill Redekop reports on the success of Mountain Industries, a sheltered workshop in the village where I went to elementary school. Manitoba sheltered workshops are allowed to pay sub-minimum wages, though there's some pressure to eliminate those provisions. I don't know whether Mountain takes advantage of sub-minimum wage provisions or whether those provisions will be eliminated. But I do hope that Mountain remains able to provide valuable opportunities for their workers.

I have an incredibly hard time seeing what public purpose is served by requiring that severely disabled workers be paid the minimum wage; an alternative policy instead providing wage subsidies for those workers achieves any reasonable equity objective sought by minimum wages but spreads the burden equitably across the community.

Which inequalities matter?

Pity the borderline Asperger's investment banker who, despite his financial success, seems at a bit of a disadvantage in dating. Reddit posted the 1600 word email that the would-be suitor sent to the woman who dumped him after the first date; it's since shown up all kinds of places. But folks snickering at it seem an awful lot like a rich one-percenter laughing at a pleading email from a starving man.

If I can play armchair psychiatrist, the same Asperger tendencies that helped this poor guy in investment banking have killed him in dating.

If you're an egalitarian, what is appropriate policy? Is this guy better or worse off than the poor musician who dates easily? With whom would you rather trade places, taking both their positions and their characteristics? If we redistribute income because the investment banker's last dollar is worth less to him than it would be to the poor musician, think too about the marginal utility of the musician's last date relative to the banker's.

Nova Scotia reductio

I'd suggested mandatory ski helmets as the the absurd end of the logic requiring the internalization of costs externalized by the public health system. There was a brief subsequent push for mandatory helmets in New Zealand, but it came to nothing.

But Nova Scotia's going to go there. Here's Chris Selley at the National Post:

Nova Scotia bolted into the lead this week in the epic race among North American jurisdictions to make us slightly safer - barely overtaking King County, Wash., which in June banned swimming and wading in rivers without wearing a life jacket.

Bill 131, tabled Tuesday at the House of Assembly in Halifax, would make it illegal to ski or snowboard without a helmet, effective Nov. 1, 2012. A helmet cuts the risk of head injury by at least 60%, according to a news release from the Nova Scotia Department of Health and Wellness. And Minister Maureen MacDonald assures me there will, indeed, be helmet cops on the slopes. The minimum fine is $250.

Ms. MacDonald offers two justifications for this: brain injuries, and the terrible consequences they often entail; and the money it costs to treat them. According to the province, a "traumatic brain injury" costs roughly $400,000 a year to treat. And since 2000, 11 helmetless skiers and snowboarders have suffered such an injury on the slopes of Nova Scotia. Call it one a year.

Selley starts pushing to see how far Nova Scotia Health Minister Maureen MacDonald will toboggan down that slope:

People who slide quickly down mountains put a huge burden on the public health system, if you're inclined to look at it that way - I'm certainly not, but clearly many Canadians are - and that will still be true when the last dinosaur buys a helmet. Most snow sports injuries aren't head injuries anyway. All four people who died at Canadian ski resorts last season were wearing helmets.

So, aren't we trying to save lives? Aren't we trying to save the healthcare system money?

"This legislation doesn't ban skiing," says Ms. MacDonald, sounding a bit exasperated.

According to her own logic, and in her own words, I have to ask: Why not?

My short answer: social stigma doesn't yet attach to skiers. Politically disfavoured groups that impose costs through the public health system see taxation, regulation, and eventually bans on activity. Tobacco's nearing the end of that slope, alcohol's moving along, and fat people are next at the gate. Bans don't come until participants have been sufficiently stigmatized - anti-smoking ads don't just encourage people to quit smoking, they also do a nice job in painting smokers as antisocial people who hate their kids. Dodgy cost reports painting costs borne by smokers, drinkers, and the obese as costs to the country help fuel demand for greater regulation and taxation.

If every sort of risky activity that potentially imposed cost through the public health system merited tax or regulatory treatment, it is hard to think of any part of private life that would escape attention.

The lucky country

New Zealand beats itself up a fair bit over its failure to keep up with Australia.

But we're not alone in it. Possum Comitatus over at Pollytics makes the case for Australian exceptionalism.

So let us take a hard look at our economic reality.

Over the medium term, our broader economic performance has been nothing short of astonishing. Before the resources boom was even a twinkle in the eye of Chinese poverty alleviation, our performance was world beating – that is worth keeping in your thought orbit. Big Dirt has a bad habit of propagandising about their own contributions and the Australian public has a bad habit of believing them when it comes to our own national development of late.

He does a great job showing just how well Australia has been performing. But, I don't think he demonstrates that it isn't largely the resource price boom. Showing growth figures pinned at a 1985 start date, when iron ore was going for $11.50 per metric ton (now $150, both figures nominal), and when the commodity metals price index that normalized to 100 in 2005 was at 50 (now 200) - I'm going to need some convincing that Australia's success is mostly due to policy rather than due to a massive resource boom feeding Chinese growth. As best I understand things, resource royalties accrue to state budgets; this site notes resource royalties in Queensland increased, in nominal terms, from $192 per capita in 2002/03 to $700 per capita in 2010/11. I'd love some numbers on the time path of resource royalties as percentage of all-level government revenues over the last twenty-five years.

Possum lauds Australian policy, which combined a slow push to market liberalization with maintenance of a pretty rigid labour market apparatus with high minimum wages (though a set of minimum wages which vary a lot by industry and by worker's experience). I'm pretty unconvinced that Australian success was underpinned by high minimum wages; the resource boom plus liberalization elsewhere more likely allowed it to happen despite labour market rigidities. I suppose some future resource price crash might provide information.

In the meantime, New Zealand can beat itself up a bit less over failures to keep up with Oz. Nobody's keeping up with Oz. We can do better, but even if we adopted the 2025 Taskforce recommendations in toto and they were effective, I'd be really surprised if it led to our catching Oz. That's not an argument against improving policy but rather for having realistic expectations.

Post Kyoto

Andrew Leach discusses the mechanics of Canada's withdrawal from Kyoto. In short, if Canada gives notice of Kyoto withdrawal before year-end, it suffers no penalties from current non-compliance. To become compliant, Canada would need to spend perhaps $19 billion on international carbon credits. But the only penalty for non-compliance relevant to Canada, even if they stay in, is a harsher target in a second period regime from which they're abstaining anyway.

Meanwhile, we're getting set to sign on for the second Kyoto period, if any deal goes forward, though Tim Groser seems less keen on any deal that doesn't include the US or major developing-country emitters.

I've noted before that NZ's excess emissions are only a cost on the public purse if we choose for them so to be; if there's no second Kyoto period, there may be no point in buying up credits for first-period non-compliance.

But there's one consideration here relevant that isn't for Canada: non-compliance also keeps us out of the international market for selling carbon credits. And that would hit forestry guys selling credits abroad. And so there could be distributional issues domestically if New Zealand were to be non-compliant.

Disclaimer, as always: I reckon buying insurance against bad case global warming worth the investment. But I'm not convinced that New Zealand's ETS is at all worthwhile unless it's part of a global agreement for emission abatement. Absent that, I still reckon we do better by making higher variance plays on technology development.

NZBR Blog

I miss Roger Kerr's blog.

The New Zealand Business Roundtable has resumed blogging, though, at Policy Matters.

Roger Partridge points to some of the NZBR's resources on school choice and to a 2006 report by Caroline Hoxby for the New Zealand Education Forum.

Great to see the NZBR back to blogging; I've added Policy Matters to my RSS feed.

Reserve Generation

Labour Energy Spokesman, David Parker, is quoted in the paper today defending the Labour government’s decision in 2004 to commission the reserve-generation plant at Whirinaki. Parker says that

there was a need to do something in the short term to get over the problem [of thin generation margins].

The idea of “reserve generation” has always seemed crazy. Electricity generation typically implies relatively high capital costs relative to operating costs, so the idea of commissioning a plant with the express purpose of having it lie idle except in the event of a one-in-sixty-year drought seems extraordinary. Add to that Parker’s view that it was only needed to get over a problem in the short term, then the period over which that capital cost can be amortised is also short.

Let’s do some back of the envelope calculations. According to the article, Whirinaki cost $150m and has been sold 7 years later for $33m, so depreciation costs are approximately 11%. Add in a very conservative 5% opportunity cost on the $150m (nominal interest rate since the purchase and sale prices are nominal), and to get a 16% opportunity cost of capital which equates to $24m per year. Again using the figures from the article, it has operated less than 4% of the time, which is roughly 350 hours per year. Whirinaki has a capacity of 155 MW, so if (another heroic assumption that understates the costs), it was running at full capacity for each of the 350 hours, it would have produced a bit over 54,000 MWh. To cover the capital costs, therefore, this would have required a price of around $450 per MWh in excess of operating costs. The Wolak report estimated that the marginal operating cost for other thermal plants at full capacity to be around $50/MWh, but it is acknowledged that Whirinaki was more expensive than this, so we would need a price of in excess of $500/MWh to enable Whirinaki to cover its costs. And this is without considering maintenance costs and general staffing throughout the year. There is no way that wholesale prices were consistently that high during the period Whirinaki was operating. Of course, this is hardly surprising since no private companies were clamouring to build it based on market prices, and funding had to be through a compulsory levy.

The other statement by Parker that caught my eye was this:

The real criticism that should be levelled here is what was wrong with the so-called “market solution” that left New Zealand short of generation capacity.

There are two quick responses here. First, as above, if New Zealand was genuinely short of generation capacity, why could the government not successfully enter the market and run Whirinaki at a profit rather than through a compulsory levy? Second, if you want to make the criticism that the problem with the New Zealand market in the early years of the century was that we were short of generation capacity, then you must also emphatically reject the conclusions of the Wolak report that claimed $4.3b of market-power overcharging based on an analysis that depends totally for its numbers on an assumption of excess generation capacity in New Zealand. In other words, you can’t say this

“The Commerce Commission report (22 May 2009), based on an in-depth study by Professor Wolak of Stanford University, a world authority, found NZ$4.8b (sic) of overcharging by electricity companies, equivalent to 18 per cent overcharging”, David Parker said.

(For more on why I think the Wolak report is wrong, see Working Papers 11/08, 11/09, and 11/10  here.)