Thursday, March 31, 2011

Baba Booey Baba Booey, Howard Stern's xxx....

Alternative title: "He came from Northridge, he was a spammer...".

Full SiteMeter details posted below [yes, I check these after comment spam]. He posted a comment reading "TEST" on the first post, then one stumping for a US Senator. An identical comment showed up all over the place. No links, just the guy's name repeated a bunch of times saying he's best for UN President, US President, etc.

Both now deleted from here. Colour me confused. Is the poster trying to help or hurt the candidate?

Confused NZ readers: Baba Booey was the nickname of the producer of the Howard Stern radio show in the 1990s. Fans of Howard Stern would do their best to insert themselves into other live broadcasts and shout "Baba Booey, Baba Booey, Howard Stern's...". Link includes shouting of a mildly naughty word; don't hit it if your speakers are on loud....

The Cross-Weight Labour Supply Elasticity That Dare Not Speak Its Name

A Matter of Weight? Hours of Work of Married Men and Women and Their Relative Physical Attractiveness

We explore the role of relative physical attractiveness within the household on the labor supply decisions of husbands and wives. Using data from the Panel Study of Income Dynamics, we find that husbands who are heavier relative to their wives work more hours, while wives who are thinner relative to their husbands work fewer hours. We also find a 9% -elasticity of annual hours of work with respect to own BMI for married men, and a -7%- elasticity with respect to wife's BMI. For married women, we find an 8% -elasticity of annual hours of work with respect to own BMI, and a -6%- elasticity with respect to husband's BMI. While own BMI is positively related to own hours of work for married individuals, no statistically significant relatioship emerges for eigher unmarried men or unmarried women.
They estimated the elasticity of male labour supply with respect to the wife's weight.

They estimated the elasticity of male labour supply with respect to the wife's weight. And vice versa.

Before you critique for confounds that could have been present, check the paper. Long story short: the more attractive spouse, where BMI proxies for attractiveness, gets to work fewer hours; the less attractive spouse has to work more hours. The effect is basically symmetric. If the husband is substantially less attractive than the wife, he works more hours; if the husband is substantially more attractive, she has to work more hours.

As I've suggested before, people are Lancasterian goods in the marriage market and outcomes within marriages are the result of Coasean bargains. Confirmatory evidence? Oh yes.

HT: @CJFDillow

Wednesday, March 30, 2011

Path Dependence

Can an economic fallacy validate itself?

Through the 80s and 90s, Paul David made a minor career of shouting that path dependence made for pervasive market failure. His favourite example: the QWERTY keyboard. Tyler Cowen and I looked at path dependence in our 2002 edited volume on market failure. I'm going to self-plagiarise fairly liberally here from that book's introduction. Here's the summary of David's lock-in argument:
The basic argument behind lock-in is simple: collective action problems may cause individuals to end up stuck in a technology that is less than optimal. When compatibility plays a role in determining value, switching from an established standard to a superior standard may become very difficult. The market may fail to abandon the inefficient standard because it has no mechanism to coordinate the move to a new standard. When compatibility effects are strong, the private gains of an individual switch would be lower than the social gains of the switch. Each individual fails to take into account that a successful collective switch would yield significant benefits for others as well. This makes individuals more reluctant to switch than they should be, and the market may become “locked in” to an inefficient standard. Absent a centrally coordinated move, individuals and firms would stay with the old standard.
Liebowitz and Margolis examined the various cases David put forward for inefficient lock-in and found them wanting. DVORAK was only found superior to QWERTY because the tests were conducted by Lt. Cmdr. Dvorak himself; later tests found no difference. VHS beat Betamax not because of lock-in but because customers valued long recording time over image quality. Most businesses chose DOS over Apple because it taxed the operating system less and afforded more system resources for business applications. WordPerfect dominated word processing software only until Microsoft Word started providing a superior product, despite strong potential lock-in from users having memorized arcane function key arrangements - anybody remember the cardboard cutouts folks would place over their keyboards to help remember what the WP function keys did?

Perhaps the best case for inefficient lock-in and market failure is that people keep pointing to QWERTY as an inefficient market failure despite its having been refuted ages ago. Here's David Brooks:
John McWhorter, a linguist at Columbia University, wrote that people should be more aware of path dependence. This refers to the notion that often “something that seems normal or inevitable today began with a choice that made sense at a particular time in the past, but survived despite the eclipse of the justification for that choice.”

For instance, typewriters used to jam if people typed too fast, so the manufacturers designed a keyboard that would slow typists. We no longer have typewriters, but we are stuck with the letter arrangements of the qwerty keyboard.
Path dependence in stories about path dependence. It seems the QWERTY story can't be killed.

A reasonable case can be made that nuclear power generation technology exhibited lock-in where US Navy designs for submarine reactors were ported over into domestic power generation because they were proven to have worked; other designs may have been better, but the submarine engines had a head start.

But again, we have to ask the questions Liebowitz and Margolis highlighted:
  • Was the choice suboptimal ex ante? Likely not. The US government was in an awful hurry to get civilian reactors going, not least of all to help produce plutonium. Delaying things a decade while deciding which design was best would not have met the political goals sought.
  • Was the choice suboptimal when viewed ex post? Possibly - we now have rather better reactor designs. But nothing requires that new reactors follow old designs. Legacy reactors get mothballed when they reach end of life; if new ones are built, they can use the updated designs.
And it would be a bit rich to point to nuclear technology lock-in as having anything to do with market choices and market failure.

As Tyler and I argued in the book introduction, there are two possible policies for mitigating inefficient lock-in.

First, government can impose delays on standard adoption in hopes that delay ensures that the best choice is made. But we have to weigh both the losses that accrue in the interval in which no choice is made and the possibility that it's only through market experimentation that we can discover which standard really is best. The techies would have chosen BetaMax over VHS; it was user choice that showed that what mattered most was recording duration, not picture quality. Delay in that case probably would have enforced the inferior product choice.

A second policy option would be helping in coordinating ex post moves away from inefficient standards. But even this is perilous: just look at how many people would still want to force us all to flip from QWERTY to DVORAK. And do we really want to open up that avenue for lobbying?

Income splitting

Canada's Conservative Party seems to be running on a version of income splitting. Consequently, Canada's economics Twitteratti (most notably @kevinmilligan, @MikePMoffatt, and @StephenFGordon) have been mulling over the proposal's merits.

We've been having similar debate in New Zealand, albeit far less prominently. Only Peter Dunne seems to like the idea. New Zealand's Finance and Expenditures Committee deemed the proposal here too costly and full of fishhooks, but worthy in principle.

Kevin Milligan pointed to some of the more important summaries of findings on income splitting: Kleven, Kreiner and Saez's Econometrica piece of 2009 (almost incomprehensible if you're not really into the chicken tracks); Kesselman's IRPP summary on income splitting and fairness; and an IMF summary on Canadian family taxation issues.

Kleven et al work through optimal taxation of a second earner given the existence of a first earner. If a family has two working parents because both parents have high earnings capacity (relative to their home production opportunities), then it might be optimal to tax the second earner relatively more heavily; if the family has two working parents because they're forced to by dire financial straits, then optimal taxation puts less tax burden on the second earner. The neat result is that for high-earning couples, the second earner's optimal tax is high but decreasing with the partner's income; for couples where the second earner's labour force entry is due to poor home production abilities rather than to strong labour market opportunities, the second earner's optimal tax is lower but increasing in the partner's income. I'm not quite sure how these could simultaneously be operationalized.

I'm not a fan of family-based taxation. I'd worked through some of the effects last year. Matt Nolan also argued against the legislation.

Folks who've already decided to be a single-earner family will get a big tax break; folks who've decided to have a two-earner family might see a tax reduction if there's a big difference in marginal tax rates between spouses but are otherwise more likely see a tax increase if the change is kept revenue neutral. Folks on the margin are more likely to choose to keep one parent out of the workforce. Single parents and single persons either see a tax increase or a reduction in services.

Frances Woolley also reminds us that single earner families are better off than two earner families with the same income. Why? The two-earner family has a pile of child care and second-earner expenses that the single-earning family doesn't have, not to mention the value of all the stuff that's done at home by the stay-at-home parent that isn't taxed. The partner who stays at home isn't paid, but neither is that parent taxed for the value of household production. A two-earner family hiring someone to do all the things that would otherwise be done by the stay-at-home parent in the single-earner family would have to pay taxes on the services provided (at least in NZ) and the domestic worker would also have to pay income taxes.
People sometimes think “the work done by parents who stay home looking after their children is valuable, therefore those people deserve a tax break.” They’re already getting an enormous tax break. They’re getting thousands of dollars worth of in-kind income – the value of the work that is being in the home – and not being taxed on it.
I could be brought around to favouring family-based taxation. But only if we value all the services performed by the stay at home parent and charge the single-earner family GST and income tax on the imputed value of excess household production (gardener, cook, maid, daycare, personal assistant...). I'm not sure Peter Dunne would follow me there.

And we shouldn't forget that we already have a form of income splitting in New Zealand: the Working for Families tax credit programme is based on family income. A two-earner couple with two young kids, each parent earning $30,000, gets a $118 weekly family tax credit; a family with one parent earning $60,000 and the other staying at home with two young kids gets the same family tax credit. Check for yourself.

I'd much prefer that tax cuts work to reduce effective marginal tax rates for all cohorts than increase them for some (second earners) while decreasing them for others (single earner families). One stylized fact is that second earners' labour supply is far more elastic than that of first earners'; it's then unlikely that increasing most second earners' marginal tax rates while decreasing them for some first earners is consistent with efficiency.

I don't think income splitting has much traction in NZ - Labour and National both haven't seemed keen. Labour recognizes that most of the benefit would go to families with a high-earning dad and a stay-at-home mom while much of their constituency of two-earning low-to-middle income families would see no benefit. But National could see a form of income splitting as a potentially cheaper replacement for Working for Families. We should fix Working for Families, but not via income-splitting.

Full disclosure: Susan and I both work. We have the same marginal tax rate. However, I'd say the same thing were Susan engaged in household production rather than other work (despite Frances's cheeky tweet)

Update: Mike Moffat makes a similar argument.

Tuesday, March 29, 2011

A spike for happiness

Fortunately, we have not introduced Gross National Happiness as maximand.
Psychologists investigating the well-being of patients with an acquired brain injury (ABI) have documented a curious phenomenon, whereby the more serious a person's brain injury, the higher their self-reported life-satisfaction.
...
'Sustaining a head injury does not always lead to a deterioration in one's quality of life,' the researchers concluded. '...[D]ata from this study serves to tell a coherent story about the way in which the quality of life of those who experience ABIs can be enhanced by the personal and social "identity work" that these injuries require them to perform. ... Nietzsche, then, was correct to observe that that which does not kill us can make us stronger.'
Ministry of Health guidelines for minor head injuries might recommend driving a spike into the wound and swirling it round a little to help encourage a happier recovery.

Don't tell Bhutan.

From BPS Research Digest, courtesy of Barking Up The Wrong Tree.

Monday, March 28, 2011

Asset forfeiture

Radley Balko points to asset forfeiture as cause of much of the rise in police corruption in the US.
Not only was the seizure of Simpson's property perfectly legal under Michigan's asset forfeiture laws; this sort of confiscation is encouraged. In 2009 The Detroit News reported that forfeitures in some Michigan jurisdictions had jumped 100 percent or more in recent years, as police departments used the procedure to supplement budgets strained by the bad economy and government debt. Police need not charge someone with a crime to take his property, and it can cost thousands of dollars to get it back. One former prosecutor told The Detroit News: "Forfeiture laws are being abused by police and prosecutors who see only dollar signs. It's a money grab, pure and simple—a sneaky way of getting a penalty on something prosecutors can't prove. It's like shooting fish in a barrel." It is not terribly surprising, then, to read that the same Lt. Luke Davis who oversaw the raid on Rudy Simpson's home was later arrested because, as the local news station WXYZ reported, "he and...others sold off drugs and confiscated goods for their own profit."
Read the whole post for some of the recent outrages.

Radley's soon off to blog for Huffington; excellent that he'll be reaching a broader audience.

Meanwhile, Christchurch demolition contractors seem to have been doing a bit of their own asset forfeiture from the properties they're demolishing at Civil Defence's behest. Demolition guys salvaging from properties they're wrecking is great where it's by contract with the property owner. But where the owner hasn't even been informed that the property is going under the wrecking ball, it's an awful lot more like looting. And preventing looting is one of the reasons Civil Defense has given for banning property owners from entering the cordon - too hard to maintain security if they let property owners in.

Stephen Franks worries that insurers might well be off the hook for businesses destroyed by Civil Defense where the buildings were otherwise salvageable.

Sunday, March 27, 2011

Earthquake photography

And now I know why a plane kept making passes over our house shortly after the quake. High res aerial photography that's now been uploaded as a layer for Google Maps. Very nicely done. And if you hit this spot, you can see me driving our old blue Rav 4 away from where I'd abandoned it late in the afternoon of the 22nd. Traffic was entirely stopped, and I had no way to tell if the other bridges were open or closed [turns out they were all closed]. So I left the car on the side of the road and hiked the rest of the way home.

If you hit the link then pan a bit south-east, you'll see why the bridge wasn't entirely serviceable. And the lake of sewage at the end of Bridge Street which I avoided by use of crafty woodsman skills through the park. Susan, who didn't have the benefit of a childhood spent mucking about in boggy parts of cattle pastures, ruined a pair of shoes in her trek through the woods [we'd commuted separately].

The image layer file is huge and so takes a long time to load up. So you get to watch the pre-quake image slowly be overtaken by squares of more dimly coloured quake pictures...a creeping doom.

Other highlights:
Do note and link to others in the comments.

[Updated with links to faster pictures that seem to work better; thanks to Sally for the pointer.]

Saturday, March 26, 2011

Roissean explanations

A study suggests churchgoers are more likely than non-religious folks to get fat in middle age: it apparently doubles the risk. Now, I've not looked at the study - only the reporting on it. But this is the kind of explanation I'd expect from Roissy:
Kenneth F. Ferraro, author of similar studies linking obesity with religion, suggested that marriage may have played a role in the weight gain.

"The time period studied is when many Americans get married," said Ferraro, director of the Center on Aging and the Life Course at Purdue University. "We know that weight gain is common after marriage and that marriage is highly valued in most religious groups. Thus, one wonders if the results could be partially due to religious people being more likely to get married earlier and then gaining weight."
Roissy would have asked questions about gender interaction terms; I won't. And as I haven't the study and can't find it on 15 seconds' looking, neither will I speculate as to causes of the effect; I know not what controls were included. I'd also worry about whether underlying variables might be associated with both churchgoing and obesity.

But none of that would stop me from strongly recommending that atheists be given an exemption from any future fat taxes.

Friday, March 25, 2011

Wagers, we have wagers

Matt Nolan and Andrew Coleman set a bet over at TVHE. Here it is.
If the CPI grows by more than 15% between its December 2010 level and its December 2015 level (excluding any changes to the GST rate), Matt pays Andrew $100 (in Dec 2010 prices)

If CPI grows by less than 15% during this period, Andrew pays Matt $100 (in Dec 2010 prices).
I added another $100 to Andrew's, so Matt's on the hook for $200 if RBNZ lets inflation get a bit out of hand.

The December 2010 CPI index was 1137. So if the CPI December 2015 is less than 1307, Matt wins his two bets.

Why did I make this bet? Because I bear psychic costs if the inflation target isn't met. It grieves me when quasi-constitutional things are batted aside. And so in the state of the world where I'm depressed, I get paid $100. In the state of the world where I'm happy that RBNZ has followed its mandate, I pay $100. Equalizing utility across potential world states is where it's at, man.

Thursday, March 24, 2011

What should we do?

I'm on tonight for the Kim Hill moderated debate over at Lincoln University

Caroline Saunders opens for the "we have to have government reorganize our economy to deal with peak stuff" side. I'm after her. Then we move to general debate. With Caroline are Bob Frame from Landcare Research and Graeme Coles. With me are Ruth Richardson and Sharon Buckland (Chevron/Caltex).

Here's what I intend on delivering as opening for my side - I'm allowed 5-10 minutes. Comments and suggestions welcome. And even more welcome would be a few attendees at tonight's event. I'm very much expecting this to be an "away" game; it would be nice to have a few from my home team there in attendance. I expect subsequent debate to hit onto peak oil (futures prices on NYMEX show no evidence of it) and post-oil (Thorium and hydrogen, says me, but that's all a half century away). I've the Hotelling model in my back pocket as well. Here's the draft text.


Wealth, resilience and the environment
Address to the Kim Hill "Hot Energy Debate"; check against delivery.

Some days, it really looks like the world is ready to collapse. Caroline Saunders just gave a reasonable description of a lot of the problems we’re facing. Increased carbon output seems likely to increase global temperatures by a degree or two by the end of the century; sea levels may rise perhaps up to half a metre as consequence. Food price increases have hurt the world’s poorest. And oil supplies may run low sometime in the next fifty years.

And now we have to decide what to do about it all.

And there’s an awful lot we do have to do. But what we have to do depends on who the “we” is.

As individuals, “we” have all already started responding to the challenge. Oil prices have risen substantially over the last fifteen years. I remember when I was a grad student back in the Washington DC suburbs. Oil was a bit under $30 per barrel and petrol cost about $0.90 per gallon. That’s about $0.33 per litre. I drove a ’69 Buick Skylark with a V-8 and a 4-barrel carburetor that got about 12 miles to the US gallon – about eighteen litres per hundred kilometers. Since then, oil prices have risen to about a hundred dollars per barrel and petrol prices here are more than $2.00 per litre. As one of the “we”, I switched to driving a 2000 Honda Stream that uses less than half as much fuel – about 8.5 litres per hundred kilometers. And it isn’t just me – the broad trends are toward more fuel efficient vehicles and away from gas guzzlers. Nobody has had to tell us to do it – it just makes sense for our pocket books and so we have. And nobody’s had to tell Japanese car dealers to send us more of their smaller cars than of their bigger trucks – importers could tell what customers wanted and sorted things out as part of the distributed “we”.

As energy prices rise, “we” have moved to actually start insulating houses in New Zealand. It’s something Kiwis have been reluctant to do – best I can figure, you folks think there’s some kind of moral sanctity in wearing the itchiest woolen sweaters close to the skin; having a cold house gives you an excuse to do that. Well, with an insulated house, you can enjoy the itchy woolen sweaters with fewer space heaters. “We” have been switching to more energy efficient appliances. And “we”, as producers, have started building those more energy efficient appliances.

So the “we” as consumers have been responding to what prices are telling us about the world. Energy has become scarcer, as we can see by the price rises, and so “we” have responded by using less of it. And “we” as producers and entrepreneurs have responded by meeting that demand: coming up with new and better designs for vehicles. The new Boeing 787 Dreamliner uses 20% less fuel than the similarly-sized Boeing 767. And recent designs of double-D framed aircraft – nowhere near production as yet, but we could be there in twenty years – suggest fuel savings of around seventy percent. “We” as entrepreneurial designers and as corporations looking to reduce costs will make these designs a reality as fuel prices rise further.

All of these are things that “we” will do entirely of our own initiative and without any need for grand “master plans”. They’re the kinds of things “we” are doing already and will continue doing, simply by watching price signals.

Let’s think of the next bigger “we” – we as communities, towns, and cities that have to make some collective decisions. Much development from the mid twentieth century onwards was predicated on the idea that people wanted big suburban sections of land with low density use. And so “we” as communities put in place land use regulations preventing densification. Because land use couldn’t become more dense, cities built out. And as city planners got upset about seeing urban sprawl, they started putting in place green belts and metropolitan urban limits.

The combination of density restrictions and urban limits worked to massively inflate land prices and really kill a lot of poorer folks’ dreams of owning their own home. But it did well for suburban middle class folks who could afford a home and who wanted to keep the poor folks out of their neighbourhoods. If petrol prices are likely to rise substantially, “we” as communities are probably going to have to rethink our zoning density regulations.

I know a lot of people are really really keen on public transport solutions ranging from buses to light rail. But while “we” as voters and pontificators seem to like those ideas, “we” as commuters don’t. Except for really high population centres like New York, Boston and Washington DC, light rail and subways are overwhelmingly money sinks – people won’t use them unless they’re heavily subsidized. Why? Because they’re really inconvenient. They’re great for the single guy commuting from his house to his office. But for families who are making multi-point commutes – dropping the kids off at school, going to work, grabbing some groceries, getting the kids then going home – they’re impossible. And so they’re underutilized.

What can “we” do then, as communities, that meshes well with what “we” as individuals want to do? Change zoning to allow greater density and more mixed use. You don’t have to force anybody to do anything. Allow the development, and as people want it as prices move, entrepreneurs will provide it. The more commercial activity is allowed near residences, the more able people are to live near work. Denser housing provides an incentive for grocery stores to come in close to where people live, making for shorter trips to the store. And, this kind of dense, mixed use environment is precisely the kind of community that Jane Jacobs lauded as the most vibrant and liveable kind of place to be. More recently, economist Ed Glaeser has written a lot about how dense urban environments are not only some of the world’s most creative and innovative places – our engines of economic growth – but are also some of our most environmentally friendly places. Residents of downtown New York use far less energy than folks in the suburbs; it costs a lot less to heat an apartment than a suburban house, and folks in dense urban environments don’t need to drive as much.

Our zoning regulations have prevented it, and “we” as activists have worked to kill it by lobbying against rezoning of land in places like the New Brighton pier where densification could have shortened commutes, built communities, and provided additional hubs outside of the CBD that would have given us greater resilience in the face of natural catastrophes like the recent earthquake. The more of these hubs we allow to emerge by easing up on zoning, the more resilient we will be to a wide variety of challenges that might come.

The next bigger “we” is New Zealand as a country. What can “we” do there? The best we can do is to avoid screwing everything up. The further decisions are away from folks on the ground, the more likely everything is to turn pear shaped.

And boy are “we” good at making those kinds of disasters when “we” start acting through national policy. Through the 1990s in the States, folks really worried about the environment, peak oil, and global warming pushed really hard for policies mandating ethanol use in blended gasolines and big subsidies to ethanol production. The result has been the big spike in food prices that Caroline just showed us. Even Al Gore, the Senator who pushed hardest for those policies, has admitted they were a colossal mistake. “We” really need to guard against the damage that “we” can do when we all act together towards something that sounds good.

Caroline put up a slide showing the big increase in atmospheric CO2 concentrations over the last while. Imagine for a moment that a massive earthquake hit tomorrow that submerged New Zealand a mile below the sea, never to return. Now imagine the graph showing CO2 emissions for the next century. Would that graph be any different with the complete elimination of New Zealand as a country. No. The best you could hope for is that global CO2 concentrations might take a day or two longer to reach a given level a century hence. When you think about it that way, it helps to put into perspective what “we” as a country can do to slow global warming.

Now I know somebody’s going to come back at me and say we all have to do our part and that we can be a shining example unto others and the rest of the world will follow our lead. But that’s magical thinking. It’s just not going to happen. Instead, I argue that what “we” should be doing is looking at ways that we can help the rest of the world to reduce total emissions through technological change in areas where New Zealand already has a research advantage. We’re not likely to come up with the next innovative design for fuel saving aircraft. China is miles ahead of us in coming up with the next best source of power generation – Thorium fueled nuclear generators that produce next to no waste and cannot melt down because their reaction is fuelled by a photon beam that, if turned off, stops the reaction. Once China has built those, “we” might do well to allow a few reactors if they’re commercially viable and safe.

But what can “we” do that would have global benefit? Fund agricultural research into crops and livestock that produce less methane. We’ve already made a great start. The most we can hope for with our emission trading scheme is that our emissions reduce to zero – and that won’t make any difference in the grand scheme of things. But if we could take the resources that we’ve devoted to the emissions trading scheme and instead use them to fuel development of new agricultural technologies, and then give those technologies for free to anybody in the world who could use them – that could make a difference on a global scale. That’s where we should be looking if we want to make a real difference rather than just feel good about ourselves for making minor reductions in GHG emissions with a trading scheme. When a Canterbury guy tells you that the best we can do is give more money to Lincoln, you probably should listen.

Finally, “we” as a country can work hard to pursue policies that allow us to become wealthy. Global warming and “peak” whatever are not the only problems that can emerge. We’ve figured that out pretty well in the last six months or so. Whatever challenges emerge, the richer we are and the stronger economic base we have, the better placed we are to deal with whatever might come. If sea levels rise by more than we expect, we can build seawalls and move people to higher ground if we’re richer; we can’t if we decide that growth is a bad thing. We don’t know what challenges might come. But we’ll do better facing them if “we” don’t decide to hobble economic growth.

Wednesday, March 23, 2011

Gossip profits

Next time lobbyist Carrick Graham sends out cryptic tweets, expect iPredict to move a bit faster.

3 PM Monday afternoon, he tweeted "Senior Labour MP in trouble..."

WhaleOil picked up on it shortly thereafter: "@CarrickGraham Looks like Judith T will be an MP again".

iPredict has a contract paying $1 if Judith Tizard enters Parliament this term. That happens if any Labour MP drops out as she's next on the list. The contract had been trading around $0.14. No movement on the contract until Tuesday evening when it jumped first to $0.20, then to $0.40, then as high as $0.70 late Tuesday night through early Wednesday morning. The price jump made @BKDrinkwater say "Whoa". In the iPredict forums, @Peteremcc pretended to inside knowledge but revealed nothing.

The price has since dropped again.


Mid-Wednesday morning it was revealed that Labour MP Darren Hughes is under police investigation for an incident involving a young complainant; Labour leader Phil Goff is backing him pending the outcome of the investigation. If Hughes leaves Parliament, Tizard enters.

I'm a bit surprised on this one. Labour knew about the complaint a couple weeks ago, but nobody from Labour came in to trade in anticipation of the complaint's being made public. Sure, they may all well have expected the complaint was without foundation, but I would have expected some there to expect that the story's release would have led to a price jump.

Carrick's going to have to get an iPredict account for the next time he gets advance word of a story like this. Buy on the rumour, sell on the news....

In further defense of price gouging

Michael Giberson at Knowledge Problem points to his Regulation piece against anti-gouging legislation.

It's a nice piece and lists many of the absurdities of anti-gouging legislation. But I worry that anti-gouging legislation isn't the substantial binding constraint. As best I'm aware, there's no anti-gouging legislation here. But it still doesn't happen. The binding constraint isn't the legislation - it's the underlying public sentiment that gives rise to the legislation. Even absent the legislation most retailers won't hike prices because the long term reputation costs are too high. Giberson writes:
Instead, price gouging laws appear more akin to laws banning the sale of horse meat for human consumption, “Blue laws” that prevent the sale of certain items on Sunday, or laws that once prohibited interracial marriage. The laws put the force of government behind efforts to prevent people from entering into agreements or transactions that lawmakers find objectionable. One more puzzle: unlike Blue laws and interracial marriage bans, laws against price gouging are not fading away as society becomes more accepting of personal differences. Instead, price gouging laws emerged relatively recently, are spreading geographically, have become more expansive in scope, and are becoming more frequently invoked.
Michael cites a few cases where retailers did hike prices. But those were all petrol retailers who bought product at spot prices in international markets. There, the constraint will be binding. I have a hard time thinking of other major retailers who choose to increase prices rather than run out of specific products during short emergencies. Snow shovels don't jump in price at Home Depot in advance of blizzards. What the legislation mostly prevents is small one-off guys from engaging in useful and profitable geographic arbitrage.

Tuesday, March 22, 2011

Disaster currency

Matt at TVHE asks what's going on with the NZ dollar relative to the Yen; the Yen appreciated substantially post earthquake.

I'm no macro money guy, but here's my first cut.

Japanese insurers had to sell off foreign investments and buy yen to pay out on claims. The subsequent rise in the yen reflected demand, and the subsequent fall in the yen was due to intervention by the other majors. The Bank of Japan couldn't cut interest rates to offset the effects of the surge in demand.

You might think this would be a good reason for the NZ Earthquake Commission to continue holding NZ rather than foreign assets, or at least a mitigating reason against my suggestion that they hold a heavily foreign-weighted portfolio.

Do recall though that Japan has for some time been close to zero bound on interest rates. Sure, monetary expansion remains possible by printing money. I'm definitely not a macro guy, and there's no way I'm wading into the fights about liquidity traps: not my comparative advantage and not worth my investment. But it's harder for the Bank of Japan to sterilize the currency effects of insurers' portfolio adjustments than it would be for RBNZ.

Monday, March 21, 2011

Reader mailbag

Letters... we get letters. Here's one from a reader in the States from Wanganui (that'll teach me to read too much into a .com email address):
Dear Mr Crampton,

I was having a debate with my Uncle this evening about the merits of price gouging. I am a strong supporter of gouging, and was somewhat reinforced in these sentiments by your writings after the earthquake.

My uncle, on the other hand, is not such a supporter. He argues that the role of the state in implementing rationing systems is far more effective. After responding with arguments about how a govt can never judge who needs petrol, for example, the most he used the example of rationing saving millions across the world during and after World War 2.

I am only 16 so I had no knowledge of what actually happened during this period of rationing. I said I would assume that it didn't work as well as a price based system because of theoretical reasons stated above. He said I would be on my own in that view. I immediately thought of your blog.

Would you be able to share with me any knowledge you have of problems of rationing during WW2 and/or reasons a price based system would work better?

Thanks and regards,

James P---
I normally don't blog these things, but it's a fun problem. And, copying from the outbox is cheap content generation when I'm under time pressure. Here's the answer I gave him. Perhaps Seamus can weigh in if I've led him astray.
Your uncle isn't all wrong. If you have ration cards BUT you allow people to trade their cards with each other, then things wind up being efficient so long as the secondary markets in ration cards are thick enough AND retailers can observe the prices in those markets to help guide supply decisions.

Imagine that eBay existed during WW2 and folks traded ration cards. Bang! We'd be back to market clearing prices. The net effect then would be equivalent to giving a lump sum transfer to each person equal to the market value of the set of ration cards; folks then would trade efficiently to the optimal bundles. But there are three problems.

First, in thin markets, transaction costs start eating away at the efficiencies. Simple example. Suppose everybody in Kansas loves bacon while everybody in New York hates bacon (yeah, who could hate bacon, but bear with me). The same bundle of ration coupons is given to everybody. And folks mostly trade with their neighbours and coworkers. The price of a bacon ration card would be low in New York but high in Kansas. That's inefficient. Somebody could make money by driving ration cards from New York to Kansas. But that same arbitrageur could also be labeled a war profiteer and subject to at least strong disapprobation.

Second, signals telling suppliers that they need to get bacon as well as ration cards from New York to Kansas are attenuated; they might not find out until stocks run out in Kansas and stockpiles accumulate in New York. This wouldn't be a huge problem if retailers continued with their normal supply chain relationships, in which case the New York retailers wouldn't have ordered as much bacon as the coupon allotment would have suggested New York needed. But it's still a tough call - retailers couldn't know for a while whether New Yorkers would start eating bacon just because they had the ration coupons and they'd run out of other coupon options. If retailers could see trading volumes and prices for the ration cards in different markets, they should be able to back out from that what demand would look like and stock the right collection of goods. But it's all a bit convoluted compared to just using prices.

Third, the system can't adjust to changes in demand. Or at least not easily. If everybody started preferring chicken to bacon for health reasons, they'd use up their chicken allocation in the ration book, then use up their bacon allocation last. How could suppliers tell that people really wanted more chicken? How could the ration board? Even if the ration board set the optimal bundle correctly at the start, the longer rationing goes on, the farther the bundle can drift from what consumers want.

I'm really not much up on whether WW2 ration cards traded in any kind of secondary market or whether there were legal prohibitions on such sales. The alternative would have been to watch the prices of the bundle of goods that would have been rationed and give a wad of cash equal to the market price of that bundle to each person who would otherwise have been given ration cards. We get to the efficient outcome that way. But compared to the rationing alternative (in which the government effectively expropriated a pile of producer surplus), the government incurs a whole pile of on-budget costs.
I'm far more ambivalent about the benefits of price gouging over rationing during a prolonged war than I am during a temporary emergency. By the time an adequate rationing response would be developed in an earthquake or other sharp crisis situation, it would be too late. No bureaucracy can gear up that quickly. But prices can adjust almost immediately. Just look at Potassium Iodide tablets subsequent to the Japanese earthquake and nuclear emergency.

Sunday, March 20, 2011

Sue them... sue them all....

Buyer's remorse? Worry not! If celebrity product endorsement led you astray, the government's here to help! At least in the finance industry.
Among measures likely to find their way into law by the end of the year are moves to tackle celebrity endorsements of financial products.

In Cabinet papers released yesterday, Mr Power said collapses in recent years had highlighted the issue.

"In at least one case, a celebrity specifically endorsed the strength of a finance company," Mr Power said in what appears to be a thinly veiled reference to All Black legend Sir Colin Meads' endorsement of Provincial Finance as "solid as". Provincial failed in 2006, owing investors $300 million.

...

Mr Power said that "advertisements of this nature can have a strong influence on the decision-making process of investors when they are assessing investment options".

He had asked officials for options to tackle celebrity endorsements including "the possibility of celebrities being liable to investors for untrue statements" in the same way investment "experts" already are.

The law relating to untrue statements already allows for financial penalties, as well as compensation for anyone who loses money on an investment made on the strength of an expert's advice.
This has things precisely backwards. The problem isn't celebrity endorsement of investment product. Rather, it's folks willing to accept ex-rugby stars and former TV news announcers as providing expert investment opinion. Does Simon Power really think that but for the celebrity endorsement, the folks who put their life savings into dodgy finance companies paying a point or two above a Rabobank term deposit would suddenly become enlightened investors putting their money into passive diversified index funds?

Why not be consistent: let any buyer sue any celebrity whose endorsement led to buyer's remorse. And the actors on the ads too. I want to sue all the people in the Mentos ads. I've no problem with the mints, but they never make me quite as happy as the folks in the ads promise. And the woman in that irritating cleaning product commercial who implies you can clean up your whole kitchen in about a minute if only you have the product she's selling. That's never worked out for me. And I want compensation.

I was going to embed a video of Weird Al's song, "I'll Sue You". But Sony's geographic restrictions mean I can't even watch it in NZ. I want to sue them too. And any actor who's ever appeared in their commercials. Only their punishment can make me whole. [Update: I also want to sue Weird Al. I had tickets for his Christchurch show. He bailed when the venue fell down due to the earthquake. But I still want to sue.]

If we're going to sue anybody over Mom and Pop investors making idiotic investment decisions, we ought to start with the government. The government's refusal to make credible commitments that they'd never ever bail out the folks who voluntarily chose to invest with risky finance companies probably led more investors astray than did any rugby star. Or maybe we ought to sue those investors who knew that the government couldn't help but bail them out if things went wrong.

HT: DimPost

Saturday, March 19, 2011

Markets in Everything - TSA goggles edition

Ever wonder what your Facebook friends look like naked? Well, now there's an app for that.

FalseFlesh, which bills itself as "adult image editing software," claims to be "like X-ray vision" and to allow you to "see what your friends look like naked." More accurately, it helps you to paste someone's head onto someone else's nude body. It also offers the modern equivalent of the mirror on the shoe, declaring that it lets you see under fabric "by filtering out gamma/infrared rays of light and allows for the visual enhancement of breasts and nipples creating a see through effect." FalseFlesh is hardly the first program to allow you to do this -- there's this thing called Photoshop? -- but it's certainly one of the only ones to market itself for that express purpose. And the promotional angle is the really interesting thing here (yes, aside from the nudity, pervs).
So says Salon, via Slate. The links seem worksafe. But Googling the software's name probably isn't.

At the margin, this neither increases nor decreases my likelihood of joining Facebook (very low).

Have the software buyers no imagination?

One of the clients quoted on Salon said he used the software to manipulate the syllabus picture of one of his psychology professors. I doubt this software will ever be used to manipulate the pictures of economics professors.

Friday, March 18, 2011

Manichean ponderings

There are two types of people in Christchurch.

Those who agree with Vicki Anderson that the last thing we need so soon after the earthquake-enforced closure of schools, shops, and businesses is a provincial holiday forcing already struggling local businesses to close or pay punitive holiday rates.

And those who want everybody to go and hug each other while listening to Dave Dobbyn in Hagley Park and basking in the presence of local and international politicians, celebrities and royalty come to tell us how resilient and wonderful we all are.

You might guess which tribe I'm with.

I wouldn't resent folks the memorial service if it weren't a provincial holiday. We're all wired differently; no shame in being in the likes-to-hug tribe. I can't tell which side of the schism is light and which is dark. I'm probably on the dark side. But it's another day where everything, including daycare, is going to be closed. Why not run it on the weekend?

We just finished more than three weeks of entertaining the kids / keeping them too distracted to notice aftershocks. We're now just back to work. And know what? There's not a lot left in Christchurch for the under-five set.

Anybody piping up in the comments that I could always just take the kids to the big to-do at Hagley Park ... know that I may be trying to blow up your head using only my mind....

Thursday, March 17, 2011

If the quake won't do it, Council will

A roundup of stories from this morning's Christchurch Press.

  • A restaurant owner, prohibited from recovering items from his restaurant, for his own good, finds out the soldiers guarding the cordon had been inside to grab a few chairs to sit on. The restaurant was then demolished without his being notified after assurances it wouldn't be.
  • A sound building was demolished because it was the same colour as the neighbouring building. Again the owner wasn't notified.
    He said his demolished building, which housed the Vivace Espresso Bar and Fortuna Books, was destroyed because it was the same colour as its badly damaged neighbouring building. "They were different buildings but, unfortunately, I painted them the same colour, and it was a cream day that day. Every building that was cream in Hereford St was demolished."
    ...
    He said it was criminal to allow politicians and the Prime Minister to walk through the cordon area but deny access to property owners. "There are buildings that desperately need propping and there is an overzealousness to keep us out of there to supposedly protect the public, but there is no public in there ... so what exactly are they protecting?"

    Gough, who owns Oxford Tce buildings, said many were damaged and needed to be secured. He fears they will be unsalvageable by the time he gains access.

    "My rights have been taken away from me. They are saying we can't go in there, but I am sorry, I say that is b........"

    Gough believed Christchurch was living under a dictatorship.
  • Responsible owners left notes on the windows of their locked buildings saying the building was clear of any people. Search teams then smashed doors open without contacting owners.
  • The "Good Living" section, not online, includes a dispatch from Vera Larsen on living in the "Red Zone" - the cordoned area downtown:
    Overnight, fences had been erected around the red zone, one of which blocked my access to an aretsian well that had become my primary source of water since the quake. Returning from the well that morning, I was stopped by a policeman who informed me I now needed a red pass if I was to be allowed back to my home and I would have to go to the Arts Centre to get that pass... a day-long trip past countless destroyed buildings, army checkpoints and police cordons....

    I decided it was all just too hard and have so far relied on the common sense of the army and police personnel to determine that I am a local resident just trying to survive.... But each time I leave home to get water, have a shower and wash my clothes at friends' houses, or do some grocery shopping, I can't guarantee I'll be allowed back home. And without fail, every time I'm on the streets near my house I am stopped at least once, the record so far being three times in one block, and have to provide ID, explain what I am up to, where I am going and where I have been.

    Ending up in the red zone has also meant friends living in the green zone cannot visit. My power was restored relatively quickly. A friend in the green zone was one of the last to get power. Pre-Sunday, March 6, she was using my fridge to store her food and to boil water. Post March 6, we had to meet at the checkpoint. She would hand me goods from the outside world while I handed her boiled water and perishable items, all under the amused eyes of the army and police.
This isn't the New Zealand to which I immigrated. The advertised New Zealand was a place where folks could muck in, sort out their own problems, and assume their own risks. Folks could do ridiculous things in kayaks and on mountains, but would sometimes be called on to front the bill for their rescue if they wound up doing something too stupid. It's a country where when a woman died of hypothermia going through Cave Stream in the middle of winter with insufficient polypro, the only response was to put up a slightly bigger sign warning people to wear warm clothes in winter: "We can't fence off all the mountains" was the very sensible reply.

Gerry Brownlee and Bob Parker are doing their best to wreck what I'd always found best about New Zealand - that folks were free to pursue their vision of the good life* and to bear their own risks so long as they weren't burdening anybody else. Yes, business owners going into downtown may be assuming some risks and might wind up needing rescuing if there's a bad aftershock. But even where they've hired professionals to come in and ensure everything's done safely, they're still prohibited. This is nonsense and has to end.

*So long as that didn't include taking drugs or doing anything that requires a speedy resource consent.

Organ rights

@MoataRamira tweeted
I don't think anyone incl govt has the right to tell an individual what they can do with their reproductive organs. End of story.
@Meteria, leader of the New Zealand Green Party, retweeted it.

I think we have to parse @Meteria's retweeting as defining "tell an individual what they can do" to include commercial transactions other than prostitution: payment and monetary incentives == coercion. I'm pretty sure they opposed those folks who suggested paying beneficiaries to use long-term birth control measures. What's the Green Party stance on paid surrogacy? Or payment for gamete donation? Prohibitions on either mean that government's coming in pretty hard telling folks what they can do with their reproductive organs.

But it isn't just the commercialisation that they oppose. Let's stop privileging reproductive organs for the moment. Recall that Sue Kedgley, another Green Party MP, was not particularly opposed to that extended families have veto rights over expressed individual organ donation wishes. The Green Party there didn't oppose that others could tell an individual what he could do with his organs. And that isn't even commercial transactions.

How about the right to do what I like with my lungs and liver? If alcohol and tobacco somehow were consumed via the reproductive organs, would the Greens be more in favour of individual freedom?

Perhaps the simplest is that a retweet doesn't always imply agreement. But I still have a hard time reconciling the Greens' pro-choice stance on reproductive freedoms with their anti-choice stance when it comes to other organs, and especially where there's suggestion of commercial interest.

Wednesday, March 16, 2011

People are strange

Suppose this were the lead item in tomorrow's local news roundup:
A local man was driving along a narrow road on the side of a cliff when he drove over a spike strip left there inadvertently by police. The car, a Volvo, went off the side of the cliff, rolling several times and bouncing off the cliff wall repeatedly before coming to rest some two hundred metres below. The driver reported a mild concussion and a broken arm; the car is a write-off. Volvo engineers reported that the car wasn't designed to withstand falls of several hundred metres, has leaked some engine oil, and the radiator may yet spill coolant.
If I read the story, I'd be more inclined to buy a Volvo. But these guys would likely start protesting in front of Volvo headquarters for building unsafe cars.

What's going on in Japan is awful. But, relative to expectations about nuclear accidents - it could be worse. There remains strong chance of meltdown. But so long as the containment unit doesn't blow (yes, that's a huge so-long-as), this isn't a nuclear apocalypse.

The reactor had been tested through a 7.9. Nobody had reckoned on a 9.0 earthquake - recall that this is a logarithmic scale so the increment from eight to nine isn't an eighth on top of design spec. And even with that massive quake, followed by a tsunami that wiped out a whole pile of backup systems, we've had thus far only relatively minor releases of radioactive gases. This is about the worst beyond-spec thing you could throw at those reactors. And, three days later, they've still only released worrying rather than apocalyptic levels of radiation.

Yes, this is a terrible tragedy. And I'd be damned scared if I lived anywhere near these plants now too. I'm on the paranoid side about such things - we bought the Iodine pills post 9-11 living outside DC. But think about how far beyond design spec these reactors have been pushed. As far as updating estimates about the safety of nuclear power, we ought be revising upwards, not downwards. You have to beat on them massively hard - well beyond design specs - before bad things happen.

Germany's pretty geologically stable. I don't see what new information is revealed by the Japanese earthquake --> tsunami --> nuclear accident that ought convince any rational German to revise downwards his estimate of the desirability of nuclear power. It's only increased the salience of downside risk, not the estimate of its probability.

And we oughtn't forget that people die in coal mining accidents, that fine particulate matter from coal-fired generation kills people, and that burning coal also releases radiation. If coal's the most likely substitute for reactors in Europe, that's almost certainly a net negative for the environment.

MIT's Nuclear Information Hub is the best source I've found on the ongoing crisis. Two days ago folks there didn't seem too worried, though that may yet change. Here's more on the importance of preparation and strict emergency drills for this kind of thing.

Sunday, March 13, 2011

Heritage preservation

Saturday's Christchurch Press includes an excellent Mainlander feature on Alan Slade's efforts to save the Octogon Restaurant in Christchurch, despite the best efforts of the Heritage board. The Slades are passionate about restoring old churches and fell in love with the old Trinity Congregational Church in Christchurch.
"The building's H1 historical registration meant that everything we did needed consent, which took forever. The roof had a lot of water damage: repairing that with matching timbers was a long job. We even restored the dilapidated 1871 London organ to superb recording condition. Finance held us up, as things always cost more than you'd expect, but it was worth it."

The restaurant opened in 2006 and, after a quiet first year, business grew rapidly, with a strong following built on the restaurant's food and live music.

...

Behind this success was an ongoing tension over heritage issues with the city council and the Historic Places Trust.

"When you take on a building like this, you do it with your heart, not your head. You are as keen to protect it as anyone. You don't want to cut corners, and preserving the building's integrity is vital. But the Historical Places Trust suspects every owner of deviousness."

The September earthquake hit Octagon Live hard, with more than $600,000 required to rescue the building. "We were allowed to take emergency action to build a frame to hold up the tower, but the retrospective consent ended up costing $8000 - for something I'd done to save the building."

The restaurant was closed for only two months, with the local community pitching in. The Boxing Day earthquake caused yet more damage.

Even though it was the building industry's traditional holiday period, Slade had 11 workers and two cranes onsite repairing the damage the day after, and the restaurant was open a day later, with the public enjoying the mannequins that adorned the temporary braces holding up the exterior walls.

Trinity Congressional Church was significantly strengthened in 1975, explains Slade.

"The engineers at the time strongly suggested earthquake proofing the tower by temporarily removing the roof, which would have meant some damage to the wooden shutters. They were over-ruled by the Historic Places Trust.

"Just recently, the engineer from the 1975 assessment told me that the tower was severely compromised, and warned that it was unsafe. Now it has come down as predicted. We were incredibly lucky no-one was underneath it at 12.51pm, but it was the conservative attitude of the conservation movement and the Historic Places Trust that caused the danger in the first place."


Slade believes this attitude in the heritage preservation industry amplified the consequences of the Christchurch earthquake.

"Maintaining our old buildings is incredibly important, but the heritage framework in this country has worked against keeping buildings in good condition. Spirit-sapping bureaucracy stands in the way of routine jobs like replacing weak stones. Even repairing roof tiles requires consent, and the damage that three weeks' rain can do while that is processed can be enormous. Many of Christchurch's treasured buildings are now in a pile, and the narrow-mindedness of the conservationists in the council and the Historic Places Trust played a substantial part in that. Sadly they will probably never be held accountable."

With thoughts turning to rebuilding the city, Slade is confident that Octagon Live will be a key part of the new city. The structure is considered saveable by engineers and the organ should be fine.

"I do think this is the time for us to radically change our approach to protecting our heritage," he says. [Emphasis added]
The preservationists would argue, perhaps rightly, that there are plenty of owners of registered buildings who'd like nothing more than to see them bowled over; guarding against those owners means folks like the Slades wind up as unavoidable collateral damage. But can't we imagine a system where preservation becomes incentive compatible?

I'm happy to grant that there are positive external benefits from having heritage buildings around. The great heritage downtown spots were a nice feature when we were deciding whether to move to Christchurch. A lot of these benefits can be appropriated by a private owner who builds a business around the building's unique character - like the Octogon Restaurant. But not all of them. So there is a potential role for local government in encouraging heritage preservation. How best to do it?

The current approach puts the costs of heritage preservation on the owners of a heritage building - they're an off-budget regulatory expenditure borne by private owners. Consequently local government doesn't spent much time or effort in ensuring the best bang for the heritage dollar.

An alternative approach would bring these expenditures onto the books: pay the owners of heritage buildings to maintain their heritage amenity value. But the mechanism design problem isn't trivial.

Specify that there are a continuum of heritage property owners. Some would be willing to pay lots to raze the building and put up something new - the location value in new use is very high. Some would have to be paid lots to ever be willing to see their heritage building razed - they love owning and maintaining heritage buildings and are willing to be out of pocket to do it. Some in the middle are roughly indifferent. The current regs impose some costs on the heritage-lovers (like the owners of the Octogon) and high costs on the owners who'd sooner raze the building.

An ideal system would see buildings razed where the heritage value is low relative to the opportunity cost and preserved where the heritage values are relatively high. And, payments should be targeted to where they make the greatest difference at the margin - folks who love heritage properties don't need to be paid to preserve them, they just need the City to get out of their way. It's the indifferent folks who need to be paid - the folks who'd be happy to keep their building as heritage if paid a bit every year but who otherwise don't get many personal benefits from having a heritage building.

If Council went to all property owners and made an offer of an annual subsidy for heritage maintenance based on the property's amenity value, we'd get the efficient outcome but with an awful lot of rents conferred on owners of heritage properties of high amenity value who would have been happy to preserve the property even absent subsidy.

If Council instead made such offers only conditional on the owner presenting the equivalent of an outside offer - putting in a building consent application for a changed use - there would be fairness worries about how only people who are willing to raze heritage properties get paid (which is the only way of maximizing the number of buildings preserved). We might get a bit of subsidy-seeking behaviour where folks at the margin who otherwise wouldn't have gone ahead with renovations put in applications in hopes of drawing a subsidy.

It's a problem worth working through though. The current system imposes heavy costs on owners of heritage buildings - even those who love their buildings and are doing their best to improve them. I doubt Council would consider moving in this direction though - bringing an off-budget cost imposed on private landowners instead onto the Council's books isn't something particularly popular with Councils.

Saturday, March 12, 2011

Correlated risks re-revisited

EQC is constrained against proper portfolio diversification unless it seeks specific Ministerial authorisation, note Duncan and BK Drinkwater.

Drinkwater notes that the fund has to be highly liquid and highly conservative. If EQC can use its cash holdings for the first wave of payouts, then liquidate foreign securities next, it could ride out the initial currency depreciation and the initial hits to the value of NZ government securities. But I don't know why that requires holding NZ government securities rather than a portfolio of other countries' similar offerings. Any earthquake big enough to require a serious chunk of EQC's portfolio will be big enough to hit the dollar and, potentially, the country's credit rating. All of those argue for holding foreign assets to guard against the worst case. What's the risk? Appreciation of the NZ dollar prior to a major event or the tanking of a broad set of foreign government securities. Both can happen. But we could similarly have a major event subsequent to a big recession in New Zealand. Is it really safest having most of the eggs in a basket that's subject to liquefaction? Did anybody at EQC seek the Minister's authorization to have a portfolio that's a little less NZ-centric?

Friday, March 11, 2011

Being an object of sympathy

If you're a city business set for failure because your servers are just behind the cordon, you're screwed. But it you need to breach the cordon to get a wedding dress, well that's something entirely different.

Stephen Franks takes on the folks standing between central city businessmen and their businesses' continued survival:
On the last day of February, during a trip to Christchurch, I raised with a Minister the plight of a friend who needed his computer server to get his business back on its feet. He was with a Christchurch business leader. The friend had new premises sorted. The 14 staff were ready. The government was saying it was going to subsidise wages, but they did not need that to forestall redundancy – they needed to know when they could restart work.

The server was in his car, shut behind a carpark gate within the cordon area.

Both men were utterly frustrated, having been bounced back and forth between Civil Defence and the Police. They'd offered to put together and pay a specialist team, including engineers and safety experts to go to premises where critical records could be retrieved. They would distract no rescue worker or other official.

No one could give them a decision or even tell them who would make such a decision.

The Minister undertook to enquire, and called back promptly, I was told I could reassure the business people that a plan would be announced that Monday evening that would cover organised access.

Yesterday the friend dropped in to our office in Wellington. He is still not operating. 10 days later his car is still where it was, ready to drive out from the carpark. He has not been allowed to take his own experts in to retrieve the material. You can read about his efforts here and here and here.

Ministers spend what will be hundreds of millions in grants to help employers keep their employees in Christchurch, yet do not have the courage or the drive to insist that ordinary people get access to their own property and capacity to operate. All are terrified of being held "accountable" should anyone permitted to do so make the wrong personal decision to take a risk in order to get their business going.
I can understand the government wanting to block folks from putting themselves in a situation where they might easily need to be rescued. But where they've arranged all the safety experts themselves?

If they just snuck through the cordon and grabbed the servers, they'd get off with a night in the cells and a warning, right? That's what happened to a woman who breached the cordon and went into a condemned building to get her wedding dress. Surely as much leniency would be given to keeping a business from bankruptcy as would be given to someone wanting to make sure her wedding day was just right.
"We got past the cordon. We managed to get all the important dresses down from the balcony, but once we were in the shop the cops [turned up]," said Mrs Phan, who is from Vietnam.

"We got arrested on Peterborough St. We got the whole thing. Handcuffs, the lot."

She and her husband spent a few hours in the police cells before being freed with a warning. Undeterred, Mrs Phan went in again about midday yesterday – this time escorted by a policeman sympathetic to her cause.
All the law firm needs is a policeman sympathetic to their cause.

Thursday, March 10, 2011

Assorted earthquake updates

  • The fuel crisis is long over. We should have had price gouging from Wednesday through perhaps the Saturday immediately after the quake. But there was no need for it after that. Cut price fuel currently in Christchurch consequently doesn't much bother me - prices elsewhere in the country are up about 15 cents per litre, but they've held constant here.
  • On the other hand, rents for business properties really should be going up with the rather large shock to supply. Folks complaining about fairness ought remember that which renters were in earthquake destroyed or earthquake safe properties had a bit of random luck to it. Maybe it's not fair for a landlord to increase the rent for an existing tenant (contingent on what the lease terms are), but it also isn't "fair" which businesses had their premises destroyed. Is the allocation {decided by the earthquake} more fair than the allocation {decided by which business now values the premise most}? In the former case, recall that the lessee may well be the one to take the rents if he can sublet; is that more or less fair than the landlord increasing the rent?
  • Our place in South Brighton has power and water. But nobody knows the state of the sewers. We'll find out probably by the weekend whether things are working, or whether 1) sewage is pooling at the low point east of the Bridge Street Bridge; 2) there's some earlier point where sewage is pooling; 3) our drains back up. We can live with chemical toilets. But we'll have to make some other arrangements if the drains start backing up. This was the only real bit of useful information for us coming out of the South Brighton community meeting yesterday afternoon in the park. The rest was a hug fest about how resilient we all are. Some folks go for that, and I'm sure it was useful for them. But the only useful bit of information - about the sewers - I got by asking the Civil Defence guy after the huggy bit was done. At least I could read Twitter during the boring bits.
  • The Reserve Bank cut rates by a half point. That doesn't bother me as much so long as Nolan's right that they strongly signalled its being temporary and that their tightening will also go half a point tighter than otherwise. But the RBNZ eroded an awful lot of credibility on the "will tighten when we're legally and quasi-constitutionally required to do so" front back in '05-06 when they were experimenting with notions of the natural rate of unemployment maybe being negative seven percent. There, they seemed in collusion with Michael Cullen in ignoring the Policy Targets Agreement and the Reserve Bank Act. This time, they were under pressure from Key to cut rates. Hopefully it'll be credible that they'll start raising rates when they're supposed to.
  • University daycare still down. They only got the engineers' inspection reports yesterday, and now are getting Ministry of Education approval. Why they only got the engineering report yesterday when half of Christchurch had their reports and approvals already... very frustrating.
  • Still no access to the Commerce Building to get my stuff. Contemplating donning ninja garb and breaking into the building in the wee hours. I broke into Alan Woodfield's house once using ninja skills, scrawniness, and a partially open second story window when he locked his keys in. But he wouldn't have freaked out if I'd set off the alarm since he sent me to do it; not sure Campus Security would be as friendly.
  • The University is set to start classes next week in marquee tents with whiteboards set up in the parking lots. Lots of buildings on campus are closed. It'll be interesting to see how it goes if they don't let staff back into their offices to collect their materials until after some gawd-knows-how-long safety assurance procedure that may or may not finish before lectures start. Glad I'm not teaching this semester.
  • Peter Cresswell has been the best consistent blogger on earthquake rebuilding issues. Helps that he's out of town. See here and here for example. We'd do well to have a bit more respect for property rights. After September's quake, all the cool kids were all "Hey, don't let them tear down any old buildings! They stood up this time, they'll stand up again! Force the owner to bear costs of putting them up to code, even if it's not possible to meet both the building code and the heritage requirements!" This time they're all "Nah, tear em all down, sometimes without even telling the owner 'till after it's done. If it saves only one life it's worth it." Both are asinine. There are heritage buildings that deserve protecting. I'd be fine with Council paying a lump sum to the owners of such properties to put covenants on them. As for the rest, why not let the owner decide? Or, if you're really boffo for heritage buildings, set up a charitable fund that pays building owners to strengthen and restore old buildings that they'd otherwise tear down? Here's one heritage building owner who's working hard to keep his building up. I plan on helping him by continuing to buy his beer.

    Too many folks have grand schemes of what the city should look like. I always prefer the mix of styles and uses that come from private owners making independent decisions about what their property should look like. It's one reason I don't live in a developer-designed subdivision. I like heterogeneity. I worry that delays on rebuilding while trying to get some consensus on a scheme might well kill our window for rebuilding. Driving around, I see a lot of folks who're clearly moving out of town. I hope they'll come back. But the longer they're gone, the weaker will be the ties that would bring them back.
  • The Christchurch Press reports that prostitutes in town are doing a booming trade. One street worker interviewed claimed a $1400 night, with clients at $100 or $120 each. Folks in the taxi industry often claim that taxi drivers go home after they've made "enough" for the night, even if business is booming. It would be interesting to know at what point labour supply curves start bending backwards in this industry as well, so to speak.
  • Paying for this whole mess. The part picked up by central government - that's what debt is for - another reason it's rather silly to have EQC heavily invested in government securities. How to pay off the debt? Hopefully mostly through spending cuts, but I'd reckoned the government was spending too much prior to the earthquake too. I'm worried about the talk of increasing abatement rates on Working for Families as a way of saving money - the implications for effective marginal tax rates are not good. But I haven't the time or capacity now to run the numbers. The elder one's nap is almost done. And daycare's still closed. And I need to find my ninja suit...just in case. Blogging will continue to be as and when can until the current emergency passes...

Enough already!

I was an early adopter at gmail and thought it would be a good idea to have my last name as my user name there - there may be other Cramptons, but I'm the one with the last name account.

Stupid stupid stupid move.

I'm now the recipient of emails intended for Cramptons around the world but sent by people who use a space instead of a dot or dash in firstname.lastname@gmail.com addresses.

Sitting in my Gmail inbox:
  • The Redbox rental receipts of some Crampton in Nebraska (who just returned The Social Network!) I've been getting these for months. There is no way to stop them. I've tried.
  • Multiple emails from the US military intended for a Crampton in the DoD who recently moved house with the army. First a bunch of notes confirming addresses and times for shipment, then a bunch of post-move notes asking whether everything had gone well with the move, and now a survey from the Deputy Chief of Staff at the Personal Property Directorate, Headquarters Military Surface Deployment and Distribution Command Scott AFB, IL, asking how satisfied I was with the move. I have sent at least three replies to various military emails telling them they're sending to the wrong guy. But they won't stop. Good thing I'm not into identity theft; on the other hand, stealing the identity of a recently returned veteran seems a remarkably bad idea. I've seen Rambo.
  • A note from someone in France who's looking forward to seeing us both in February and who is taking a sun break in Marrakesh currently, "My life galloping along but all gossip when we meet". I hope I didn't miss out on anything too juicy. No clue to whom this one was intended.
  • A note from the Dale Carnegie Training group for some Crampton (name here withheld) who was trying to register for one of their programmes - I wish him well with the training!
  • An email thanking me for participating in the Career-Mail program at Trinity Mother Frances and promising that I'll receive an email when jobs become available that match my selection criteria. Whoever participated - it's not worked out for him so far. I've not received anything. Hopefully he has.
  • Many many birthday greetings for many Cramptons from their elderly relations who don't know how to use email. Usually with lots of updates about their families. They all seem like very nice people.
  • Emails about a CIA RFP that some DoD contractor was thinking about bidding on. The attached RFP documents seemed interesting - policy analysis stuff. Was all unfortunately stamped unclassified though.
  • A while back I was getting employment offers meant for another Crampton who had screwed up his email address on his CV - he put the space instead of the dot. I eventually convinced him to fix his vita - this took more work than you'd expect.
Bottom line: if you get the chance to get the cool "lastname@xxx.com" email address, don't. Unless you're into reading other peoples' mail. Or identity theft. I usually give a skim to try to forward on to the right recipient, or at least reply saying they've got the wrong guy.

Tuesday, March 8, 2011

Kiwi earthquake humour

Courtesy of Twitter, best of #eqnzpickuplines . A couple are slightly dodgy; avert your glance if needed.

@kimpotter: can i interest u in 30 seconds of violent shuddering followed by the inability to go anywhere for weeks?

@twocolddogs: Do you want to come back to my neighbours place for a drink?

@zeborah: Your sign must be Orion cause you're turning me on [Orion is the power line company, working overtime trying to get us all connected. But still no power in South Brighton.]

@zeborah: Have you got water? Wanna take a shower together anyway?

@samjarman: I've inspected you and you're safe for entry

@vaughndavis: Are you sure you're from Christchurch? Because you don't have any faults.

@majicDave: Roses are red, violets are blue, the power is out, there's nothing better to do.

@fauxparse: I've been inspecting you from across the room, and baby, you got a green sticker.

@thunk244: I love the way your eyes rattle in the moonlight

@keith_ng: I can maintain continuous lateral slip-strike displacement for over two minutes.

@kimpotter: It's not the size, it's the location and the depth...

@kiwicomedy: "Safe? How can I promise it will be SAFE?"

@keith_ng: Oh yeah? It's a once-in-500-year event for me too.

@kiwi_chatter: Roses are red, violets are blue. When I dive under the desk, I hope you're there too.

@samjarman: Push me. And then just touch me. Till I can get my liquefaction.

@wendywings: You know Ken Ring predicted we would meet tonight give or take five days either side.

@robyngallagher: "Girl, I'll make u wetter than Bexley"

@bazfreq: I won't neglect your eastern suburbs.

@donkey: I've lost my address. Can I have yours?

@thunk244: You're a woman that hasn't showered for seven days, I'm a man...

@HouseSell: I have got my own private portaloo and soft paper

@GrowFromHereNZ: mm, you smell like babywipes and dettol

As best I can tell, it all started with @Tarquin_Death's Friday 8:50 PM post: Hey, baby, wanna shift my liquefaction? #eqnzpickuplines

Thanks Tarquin!

Monday, March 7, 2011

Correlated risks revisited

After the September quake, Peter Cresswell pointed to some worries about the New Zealand Earthquake Commission (EQC)'s balance sheet.* Specifically, it's heavily invested in New Zealand domestic assets, mostly government securities. I checked the 2008/2009 annual report - about two thirds of its asset base consisted of government securities. This seemed a pretty odd way of setting things up. A big earthquake hits, and folks are going to start demanding a risk premium on New Zealand government securities. That means their value drops at the same time as EQC has to offload a pile of them to pay out claims. I'm not a finance guy. Maybe there's some high tech fancy finance reason why this is a fantastically good idea. But it seemed then and still seems remarkably silly.

I've now checked the 2009/2010 annual report, which was signed off before the September quake but not published 'till after I'd posted in September. As of then, just over 69% of the asset base was in government securities.

The dollar dropped more than a cent right after the quake. If EQC had been heavily invested in foreign securities, that would have been a good time to ditch some of those assets and buy cheap New Zealand dollars. Instead, it's going to have to sell domestic assets in a buyer's market.

I hope that EQC adjusted its portfolio subsequent to the September quake.

Seamus had proposed a tidy solution: if politics means that EQC has to ignore financial sensibility and invest domestically, then at least it could invest in earthquake countercyclical assets. Construction companies would presumably fare well, relatively speaking, after a natural disaster. That recommendation probably needs some work - Fletcher Building is up overall, but not particularly in response to the February earthquake. Total market capitalization of the building sector is down since the September quake.

Maybe one of our future Finance honours students can mine through NZX data to build portfolios of earthquake countercyclical stocks. We now have two decent events.

First best remains having the whole thing invested overseas.

* For overseas readers, here's the two minute summary of the EQC. If you buy property insurance, as a homeowner, you pay a small levy on top of your normal premium for natural disaster insurance. The Earthquake Commission - a government agency - then takes on the first $100,000 of property and the first $20,000 of contents damage in the case of a natural disaster. The premium is not risk adjusted: $0.05 per $100 in value insured to a maximum premium of $67.50 for a maximum of $100K in property and $20K in contents insurance. We'll see what's left in the kitty after these two events.

Sunday, March 6, 2011

Rumour mongering [updated]

Current rumours about Canterbury post earthquake, none verified, some mutually contradictory. [note: updated below]
  • Registry building a complete write-off, even earthquake search professionals too scared to go in
  • Commerce building munted, to be demolished
  • Commerce building not that bad, but some obvious problems in stairwells that may point to worse elsewhere
  • We'll never be let back into Commerce
  • We may be let into Commerce next week in short timed shifts accompanied by earthquake search people to grab critical stuff for the coming semester
The daily (weekday) updates from SMT via email, and posted on the UC website, are helpful. But the Powers That Be seem determined to say nothing beyond that which they know with certainty. I'd like to think that Faculty could be trusted with some probabilistic assessments.

I'd love to see iPredict prices, especially if Senior Management Team insiders were trading, on a contract paying $1 if I were allowed to re-enter my office this week. $0.10? $0.90? How about for a contract paying $1 if I were ever allowed to re-enter my office? What would be highest bid and lowest ask for each of the following?
  • University daycare reopening this week
  • Daycare reopening within the fortnight
  • Registry being demolished
  • Registry being able to be reoccupied within two years? One year?
  • Access to the Commerce building (over various time horizons - weeks to months)
  • Reoccupation of the Commerce building (over various time horizons - weeks to months)
And the bit that has a fair number of folks up at night, or those of us that pay minor attention to the University's finances: whether the listing of natural disasters as a risk to investors in the University's philantropic bond offering means the University is not in trouble with the bond-holders should our international student numbers take a dive for the next couple of years.

Update: We're to be let back into our offices in short shifts. Timed twenty minute slots from the time we enter the building to the time we're back out. Each accompanied by a rescuer. Through the one stairwell that's safe. Tuesday and Wednesday.
"Please bear in mind that you will be limited to what you can safely carry and you will have a maximum of 10 minutes in your office to locate and retrieve your materials."
Fortunately, I still have my pack from backpacking Europe.

Daycare likely to open by 14 March.