A small bit of sanity

Imagine that at some random American university, a student sent an over-the-top ridiculous letter to the student magazine culminating in a threat to shoot up the library. Would you expect:

1. Nobody to much notice
2. The police to have a chat with the letter writer
3. The University to expel the letter writer
4. The campus to go into lock-down with heightened security. Quadrocopters with cameras watching everybody. 

Here's what happened at Canterbury. 

A police plea for the name of the writer of a letter threatening to unload an automatic assault rifle in Canterbury University's library has been turned down by the institution's students association.

The letter, written anonymously and published in the students association's magazine Canta on March 20, lists a series of gripes the author has about university life, including people who ride bikes on the footpath and students who wear camouflage.

It then reads: "The above things are slowly transforming me from a Gandhi-like character to the kind of guy who is going to walk into James Hight [the library] one day with a fully loaded automatic assault rifle and unload my anger into you."

The letter has also featured on the magazine's website since March 20, but only came to the university's attention when a student's mother complained about it on Friday.

It's not exactly easy to get an automatic assault rifle in New Zealand. Semi-automatic hunting rifles, sure. That plus the basis of complaint being students riding bikes on footpaths... seems pretty unlikely that there's any serious threat.

University Vice-Chancellor Rod Carr said he only became aware of it yesterday and referred the matter to police. "This is a person who needs help," he said. Police university liaison officer Senior Constable Ken Carter said it did not appear any criminal offence had been committed and there was no indication of an immediate or direct threat. But he said such comments were a concern and he could understand how people were anxious about the letter, especially since incidents like the Boston bombings.

The Vice-Chancelleor would have to refer it to the police; it's the police's job to sort out if there's any there there.

Despite police asking for the individual's name, Carter said, the University of Canterbury Students Association (UCSA) had declined to release it on privacy grounds. Since no offence had been committed, police were unable to seek a warrant to force the release of the name.

"We are looking at other options for getting in touch with this person," Carter said. "We would like to speak with them, and hopefully satisfy ourselves that there is no need for concern. If they would like to come forward and contact us, we would welcome the opportunity to discuss the letter and the concerns it raises."

I love that freedom of the press extends to student magazines. And that the Police can't compel production of the writer's name absent there having been an offence.

[UCSA president Erin] Jackson did not respond to questions about why UCSA would not release the name to police. But she did say the last paragraph contained content that "could be interpreted to look like a non-specific threat", but the "tone of the letter was largely hyperbolic".

She said given the tenor of the letter, and UCSA's previous dealings with and knowledge of the author, it was assessed there was no serious threat.

"We are a student magazine that presents the views of all students. Sometimes these views are unpalatable or even offensive to the majority."

...

Carr said Canta was an independent campus publication and was not censored by the university.

He did not intend to increase security across the campus.

All of this seems sane to me. If you prefer living in a place where the default response would instead be a campus lock-down with SWAT teams all over the darned place, feel free to not emigrate to New Zealand.

Update: The UCSA asked the student to tell the police he's no threat; the student told the police; the UCSA reminded everybody that it was just a silly student letter written 5 weeks ago and that the fooferah is from ONE students' mother who complained to the media. And that's about it.

Coming to the nuisance

John Walley has a point. He worries that commercial encroachment on industrial zones is not being treated as a coming to the nuisance but rather could push out the prior industrial firms.

The mobile Nimbys are motivated to perceive these residual problems as significant, using every opportunity to whip up opinion against any previously acceptable use as unacceptable.

In normal times this creates problems, in a disaster recovery situation it becomes a more serious issue. Industry and manufacturing has been a lifeline for our city through our disaster, the sector kept going and, through the efforts of many, maintained activity.

Our disaster has forced our city to become more diverse, more mixed. Different sensitivities have been pushed together and sadly, we have not seen an expansion in the tolerance of established use.

Minor problems become significant when more sensitive people are present to witness them. We all know that dealing with problems becomes all the more challenging when earthquake damage insurance difficulties and weather extremes are in the mix.

The reverse sensitivities in Woolston are not new; noise and smell have always been potential issues, however these existing uses need to be tolerated as many jobs are threatened, being replaced by a handful of hospitality and retail jobs. Does that make any sense? How would you feel if your job was threatened in this way?

The Woolston gelatine plant has generated a gawdawful stench for at least the decade I've lived here.* Rolling up the windows while driving past is pretty standard drill. And it's been worse since the earthquakes.

A few short months after the earthquakes, Cassels & Sons opened their excellent brewpub close to the Woolston plant. It is a glorious place to spend the afternoon when the sun is out and the wind is coming from the right direction; we were there on Sunday. But when the wind isn't right... well, they have a phone number displayed prominently for patrons to call Environment Canterbury with complaints. Cassels are expanding with a large section of retail shops soon to open beside the brewpub.

The gelatine plant clearly pre-dated the retail development. It's also very likely that the gelatine stench predated most of the current owners of the houses just up the road from the plant; they would have bought their properties at a substantial discount reflecting the disamenity. Anyone who bought a house there after the plant was established came to the nuisance as much as did Cassels.

So, it's almost a classic coming-to-the-nuisance case. And, it's also one where there's a strong residual claimant on most of the abatement benefits: the Cassels family. Their brewpub and assorted retail holdings will do rather better when the foul winds cease to blow. In this kind of case, we expect bargaining to efficiency: if it's cheaper for the gelatine plant to change their operations or to move than it is for Cassels to bear the stench, then they can pay the plant to do it. It might have been too hard for the dispersed homeowners to pay the gelatine plant for abatement, but Cassels could pretty easily coordinate things if they wanted a Coasean solution.

But it's a bit more complicated. The gelatin plant may have been breaching some of its emissions consents:

As one of the three air monitoring stations set up in Christchurch by Environment Canterbury (ECan) is directly across the river from Cassels, ECan is well aware of the problem too. As ECan monitoring officer Chris Elsmore explains, there is the odour from gelatine production and there have also been breaches from sulphuric acid production - that would account for the sulphur smell.

"It's at a difficult stage at the moment," Elsmore says.

"Gelita certainly comprehend the problem and are taking significant steps."

But Gelita is working at a different speed to Cassels and others in Woolston, Elsmore says.

But if Cassels aims to have his Tannery complex open in six months, which is his ambition, will the smell have been minimised by then?

"Most likely," Elsmore says. "We're pushing them all the time."

That said, Woolston has long been an industrial area and is where such businesses have traditionally been. Besides Gelita, there is Independent Fisheries, a tannery and, until recently, rubber curing.

"If it was smelling, it was in that area," Elsmore says. "Alasdair's right in that things needed to improve."

So if Gelita is emitting more noxious fumes than they have the right to emit, and if it is more expensive for them to abate down to Code than for Cassels to bear the stench, they could pay Cassels to stop complaining. Cassels is pushing their customers to notify ECan whenever things are too smelly; some of this will be a push for enforcement of existing code while some of it would be to build pressure for reducing the permissible amount of emission.

John Walley has a point where changed neighbouring uses lead to lobbying for changed rules in cases where it would be really simple for the aggrieved neighbours to buy abatement if abatement could efficiently be provided. But where they're instead lobbying for the enforcement of existing standards, and where you can make a pretty reasonable case that any de facto easement existed only because of strong coordination problems among the residential neighbours, perhaps Gelita should be the ones purchasing abatement from Cassels.

* If you're from Winnipeg, think about the Saint Boniface yards from two decades ago.

Liquor traps

Gordon Tullock warned us that once substantial rents accrue to some regulatory provision, it gets hard to change the regulation even if it is spectacularly inefficient. He illustrated the case with New York's taxicab medallion system: the restriction on the supply of cabs doesn't help the drivers but instead drives up the price of the asset in fixed supply, the medallion itself. Abolishing the medallions would bring prices down for dispersed consumers but would impose substantial capital losses on the medallion-holders.

There is a way out of transitional gains traps: tax the winners to pay off the losers. But it's awfully hard to implement. Opaque transfers are opaque for a reason: voters do not understand them and regularly oppose things that would make them better off. Tullock's biggest lesson then is that we should never ever get into transitional gains traps in the first place as they are just so very hard to escape.

Today's edition: liquor permits. Cities like restricting the number of liquor outlets, reckoning that they can thereby reduce the number of problems caused by drunks. If the restriction is binding, then the licence to sell alcohol becomes an asset for the owner. If the restriction is really binding, it can be a really valuable asset. Witness Flemington, New Jersey [ht @MarketUrbanism]:

Local officials who want a more lively town center and a development team seeking to restore a landmark hotel were hoping to put a new watering hole on Main Street. Then they ran smack into New Jersey's strict, Prohibition-era alcohol laws, which restrict the number of liquor licenses per town. Flemington had just three—two belonging to establishments in strip malls and one for a Veterans of Foreign Wars hall.

Having a decent bar, it turns out, is helpful to reviving small downtowns, development experts say. So, in February, the developers came up with a novel but expensive solution, buying the Italian restaurant that owned a license and eventually transferring it to the downtown hotel. The price: about $1 million for the permit alone.
...
The Union Hotel owners' arduous journey to opening a bar is emblematic of a conundrum facing small downtowns across New Jersey. In a state making efforts to reverse decades of sprawling suburban development, a shortage of liquor licenses has emerged as a hurdle to rejuvenating Main Streets, according to development consultants and planning groups.
...
The ramifications have been felt across the state. Local officials in Glassboro, N.J., a South Jersey borough of about 18,000 people, said their $300 million public-private downtown development plan has been set back because it only has seven liquor licenses, with one changing hands recently for $700,000, said Joe Brigandi, the borough administrator. It has made it difficult to attract a new downtown restaurant, he said.

Meanwhile, Manitoba's emergence from the liquor dark ages is hindered by the existing rent-holders. The Winnipeg Free Press's Bartley Kives* documents the insanity of the prior liquor regulations, with 12 different highly prescribed liquor licences that often require venues provide services of negative value to their customers. Live music requirements ban the use of DJs for some licencees, for example.  But Kives also sees the transitional gains trap:

And more politically, the province isn't prepared to undermine entrepreneurs who've invested heavily in restaurant-lounge concepts such as Earls, Moxies and the Keg, which have proven extremely successful in recent years.

"We're not going to step all over people who've invested in infrastructure," said Chomiak, referring to independently owned restaurants as well as the chains.

In Manitoba, Earls-style venues have stolen the club-going clientele away from hotel beverage rooms, suggested Jim Baker, president and CEO of the Manitoba Hotel Association.

Decades ago, hoteliers opposed liquor-regulation reform in fear of losing market share to stand-alone venues. Today, hoteliers are more concerned about the prospect of legalizing alcohol-delivery services -- which would harm beer vendors -- than they are with the idea of more small clubs serving alcohol in downtown Winnipeg.

Baker said he would also like to see the province ease up on regulations governing minors in beverage rooms, especially in rural areas where banquets and fundraisers would present a business opportunity if people under 18 were allowed on-site.

"There's a need to see how these people can use the larger rooms for other purposes," said Baker, who cautiously supports the idea of regulatory reform. "We want to be part of this discussion."

Hotel, restaurant and club owners are also united in their desire to see liquor inspectors ease up on the enforcement of minor infractions such as improper paperwork. That sort of cultural change is coming as part of the creation of a new regulatory agency, Chomiak said.

There's a great Masters thesis to be written applying the Peltzman model of regulation and deregulation to liquor law in Manitoba.

New Zealand has been a minor oasis of sanity relative to these kinds of cases. Australia, as I understand things, has sufficiently restrictive liquor permitting laws in some parts of the country that people buy hotels just to be able to run the permitted liquor outlet attached to the hotel. I worry that NZ's move to greater local control of licensing options will wind up letting local activists restrict the supply of new licences, to the hoozahs of existing permittees, and move us into the trap. Read New Jersey and Manitoba as cautionary tales.


* When I was in Manitoba, I remember Kives having had the entertainment beat (though I could have that wrong; it was a long time ago). Now, every time there's a great piece in the Winnipeg Free Press, it's from Kives (and here and here). I wonder how long it'll be 'till he's scooped up by one of the national papers.

Heald on copyright

Paul Heald discusses his work on copyright and the public domain with Mercatus's Jerry Brito. I really enjoyed his talk at Canterbury last year on the same topic; his headline chart made the rounds a bit afterwards.

Heald showed that as works fall outside of copyright, their use greatly increases; copyright on older works then seems to stifle those works' use rather than encourage creative uses.

What If Lecture on Cricket

Last year, Eric presented a talk on alcohol in the University's What If Wednesday series. This coming Wednesday it will be my turn, talking about economics and cricket. The title is "What if...Economics could help cricket teams win matches?" I have blogged a bit about my work with students on various aspects of cricket in the past (click on the tag "cricket" to see all those posts).

On Wednesday, I am going to focus on how an economics-derived approach to the analysis of cricket can yield interesting analyses of on-field strategy. Specifically, I will be talking about an aspect of the work from Scott Brooker's doctoral thesis that I haven't blogged on previously--how we can estimate batter "production possibility frontiers" showing the tradeoff between risk and return for specific batsmen, and from that to suggest one explanation for why New Zealand has traditionally punched above its weight in ODI cricket.

The announcement and link to register for the lecture are here. I understand that the registration process can be a bit cumbersome as it seems like you are registering for a course, but it is free to attend and registering enables the University to ascertain likely numbers. (And to be honest, I haven't registered for the ones that I have attended.)

I hope to see as many loyal readers of Offsetting there as possible, conditional, of course, on your caring about cricket.

Affordable City

Like Canada, New Zealand doesn't really have political parties at the local level. There are city-by-city loose affiliations that can be viewed as Labour-linked or National-linked, but they're not all that obvious.

While it's nice to avoid party politicking, it does make it harder for voters trying to figure out which candidates they should support for particular policy bundles. To the extent that local politics is mostly about constituency work rather than policy, this can make sense. But local government policy issues are getting to be rather pressing; failures in local politics seem to be driving housing price inflation and are starting to have macroeconomic consequence. 

And so it's great to see the launch of a new local-politics political party: Affordable City. Their policy objectives:

The national Affordable City umbrella has five policies which all local Affordable parties will have in common.

• Lower rates
• Balanced budgets
• Making housing affordable
• Spending only on the basics
• Restoring private property rights

The individual local Affordable parties may also have other policies which are specific to the issues in their region.

If any readers are sufficiently masochistic to wish to stand for local government, they might wish to get in touch with the folks at Affordable City. Getting local government right is rather important. I worry that it will be a tough slog: homeowners vote far more regularly than do renters, and policies that make cities affordable aren't in the short-term interest of current homeowners.

Bollywood zombies revisited

Pride and Prejudice and Zombies had me wondering what else could be improved with judicious zombie additions.

The Bollywood dance numbers saved Bride and Prejudice from Austin tedium. But imagine how much better Bride and Prejudice and Zombies could be! Thriller-style dance numbers, modified to Bollywood. And if the movie were released in format allowing for continuously variable zombies* for the home audience....

Then I wondered why there were no Indian zombie movies. I had a few candidate hypotheses, but none were terribly satisfying; I think this was my best one:

Horror films as a genre seem very thin market in India. A Bollywood-style zombie movie would then be very thin market indeed. If it's tough to do a low budget Bollywood film - Baumol's cost disease on the troupes of singers and dancers - then those films will target mainstream Indian cinema, not niche products. And a Bollywood zombie movie would be a niche of a niche: you kinda need the mainstreamish version of zombie movies before you can do the Shawn of the Dead treatment. My ideal Bollywood zombie movie would be genuinely terrifying, with dance intervals to relieve tension rather than as comic relief, but the Shawn of the Dead version would be much easier to pull off.

So it's again the curse of high fixed costs mixed with idiosyncratic preferences. If there were a few million Erics around, we could have Bollywood zombie film festivals on Seasteads. But there would be other problems.

Susmita Das today points me to a new Indian zombie movie: Rise of the Zombie (IMDB).

Here's one review:

There can't be a more fresh start in Bollywood and Luke Kenny takes full advantage of it by promoting his film as a blood spewing gore horror fest. However, what he doesn't put in the promos is the endless romantic saga that keeps running in flashbacks every five minutes. The romance track overshadows even the main plot after a point what with all the flashbacks and love songs. How Neil turning into a zombie has anything to do with his heart being broken has no justification whatsoever.

So, our very first zombie appears more a heartbroken rockstar (courtesy all the rock music playing in the background and a love gone sour track running in parallel) than a scary and spooky monster. He starts off by preying on ants and lizards, not quite the goriness you expect. But as the film graduates from being boring to sleep inducing, even the tastes of the zombie rises from insects to people. But by then you are already bored of the monsters incessant hunger pangs.

On the up sides, the film is a mere 90 minutes so sitting through it does seem possible. Luke also tries making up for his bad script sense by raising the technical aspects. Full marks on the make-up department for the transformation of Luke's character into a zombie gets brilliantly handled. Even the sound work in the spooky portions deserves a mention. The cinematography too is impressive.

Here's the trailer: The review gave the film 2/5 stars. There's Bollywood singing, but not the big dance numbers that would have pushed up costs. Sadly, if the film is rather poor, it's less likely to build the kind of demand that could yield the Bollywood zombie film for which I've yearned lo these many years. Alack, alas...

* In the original post, I wondered whether e-book formats could incorporate continuously variable zombies. Set it to zero, for Pride and Prejudice and Zombies, and you're left with lousy Jane Austin. Set it to Maximum, and there isn't a page without some kind of zombie event. Do read the original post...

No fish for you

If you're a fisherman on Manitoba's lakes, you can only sell your fish to the government's monopsonist Freshwater Fish Marketing Corporation. I've heard different stories about its establishment: some stories had it that the FFMC was set up to protect small fishermen against big corporations who'd otherwise exploit them; others had it that the system was meant to encourage efficiency through centralised processing. Or maybe it was both of them.

It really isn't working out very well for fishers based far from the processing plant. And it isn't working out for fishers who have put in the yards to identify markets for fish that the FFMC has deemed to be of very low value. Fishers cannot sell some species of fish to the FFMC at any kind of profit, but they're also forbidden from selling those fish to other willing buyers. And so the fish are left for the birds to eat.

Bartley Kives of the Winnipeg Free Press investigates.

Up on Lake Manitoba, Kenyon believes he has the answer — or had it, before he wound up in a legal dispute with Freshwater Fish, the source of most of his income.

In 2009, Kenyon and his daughter, Amanda Stevenson, pooled the resources of 300 west Interlake fishers, many of them Métis or residents of First Nations, to form the WMM Co-Op, with an eye to shipping rough fish to the United States.

Although Freshwater Fish has the exclusive right to buy Manitoba fish bound for the export market, it provided the WMM Co-Op with an export licence with the provision none of the fish wind up in any market already served by the Crown corporation. In December 2010, Kenyon’s group struck a deal to sell mullet and carp to Schafer Industries, a Thomson, Ill., operation that’s successfully found buyers for U.S. rough fish.

Some fishers living far from Winnipeg claim they don’t sell mullet to Freshwater Fish because it isn’t worth the shipping cost to the Plessis Road plant. In 2011, Schafer Fisheries sent its own trucks to Manitoba to pick up approximately 450 kilograms of rough fish — until Freshwater Fish pulled WMM Co-Op’s export licence.

Freshwater Fish says Schafer was reselling some of that fish to A&B Famous Gefilte Fish, a New Jersey processor that has bought product from Freshwater Fish.

"It was going into customers in the New York area," Wood says. "They were not operating under the terms of the licence that required them to sell to a new market.Under the law, we had no option but to remove their licence."

The licence was pulled in May 2011. Incensed WMM Co-Op fishers, who were receiving a better price from Schafer, continued to fish.  

In July 2011, Manitoba Conservation officials seized 17,000 pounds of carp and mullet sitting in a shed in Duck Bay, which sits north of Pine Creek First Nation on Lake Winnipegosis. The co-op’s directors, including Kenyon and Stevenson, were charged under the Freshwater Fish Marketing Act.

The seizure incensed Schafer Fisheries, which hoped to buy a total of 1,350 kilograms of mullet and carp from WMM.

"I don’t know where Freshwater gets off saying those were their customers," says Mike Schafer, the second-generation operator of the company started by his father in 1955. "I didn’t go after any business I didn’t already have. I sell those fish every week. I don’t understand why they’re a problem."

Canada's politicians spend a lot of time talking about the importance of "value-added" in exports. I guess processing by-catch rather than leaving it to rot doesn't count as adding value.

Canadian supply management policy remains firmly stuck on the stupid setting.

An Open Letter to David Shearer and David Parker

Dear David and David,

I have read with interest the policy document you released yesterday: New Zealand Power, Energising New Zealand. I wonder if you could clarify a few points for me.

1. In the document and the associated speeches, you quote the Wolak report's figure of $4.3b of, in your words, "super profits". Have either of your read the report, or any of the trenchant criticisms of that report? (A bit egotistically, I can suggest work that I was involved in, here, here, and here, but there are others.) 
2. You say that "prices are rising faster than in many of our major competitor countries", and show a graph comparing the price trend in a number of countries since 1986. Let's leave aside the question of what is meant by "competitor country". Is it your position that prices were correct in New Zealand in 1986? Elsewhere you say that your new agency, New Zealand Power, will set prices based on operating costs and a fair return on capital. Is it your position that prices were generating a fair return on capital in 1986?
3. You say that the faster rate of price growth in New Zealand "undermines the competitiveness of our economy". But one of your graphs shows that real industrial prices have remained about constant since 1986 and commercial prices have fallen. What exactly do you mean by "competitiveness"? 
4. Your graph shows that the faster increase of prices relative to other countries has been fairly steady since 1986 albeit with an acceleration around 2000. Since your explanation for this price trend is a lack of competition in the market and the use of marginal-cost rather than average-cost pricing, is it your position that these factors have been changing steadily over the past 25 years, accelerating during the period of the last Labour government? Is it possible that the trend might be attributable to steady increases in demand over time and regulatory obstacles to power companies building new capacity? 
5. You say that selling assets will "push up power prices even more as foreign and corporate investors look to maximise profits". Is it your position that the state-owned electricity companies are not currently looking to maximise profit, even though that is their fiduciary duty under the State-Owned Enterprises Act? 
6. You state that the Wolak report found that the four big generators made "super profits of $4.3b at the expense of consumers". You also state that hydro generators earn "super profits" by using free water to generate electricity that is sold at the same price as generators using more expensive methods. Do you think this is what Wolak meant when he calculated the excess profits earned? Have you read the Wolak report? 
7. As I noted earlier, you state that price will be set based on operating costs and a fair return to capital. But the Wolak report assumed that there was excess capacity in New Zealand so that a competitive market would have produced prices based only on operating costs. Are you stating that Wolak's $4.3b figure is overstated? Have you read the Wolak report? 
8.  Drawing on a report you have commissioned from BERL, you state that your policy will create 5,000 jobs and boost the economy by $450 million per annum. In their report, BERL state that they are assuming an economy with deficient demand so that unemployed resources are avaialbe to the industrial and commercial sector with no opportunity cost. In citing that figure as an on-going per annum benefit, are you stating that it is your view that the economy will remain in a state of deficient aggregate demand forever, and that your government would take no other action to increase demand? 
9. And if you have time, could you ask BERL whether it is not an oxymorn to have a computable general equilibrium model, and then state that "the model's calculation of the impacts on the government accounts exclude the direct loss of revenue from lower generator dividends and lower tax receipts from the generator's reduced profits". 
10. By the way, did you know that one of the implicit assumptions Wolak used in his report implied that there was no efficiency loss from the putative overcharging, just a transfer from users to taxpayers? If you accept this report, wouldn't it be easier just to use the tax and benefit system to transfer money back to poorer consumers? Have you read the Wolak report?

Kindest Regards....

Labour economics: golf caddying edition

Radio Sport yesterday was consumed with a debate about whether Steve Williams, the caddy for Masters winner, Adam Scott, is worth the money he is paid.

For those who don't follow golf, here is the background. Steve Williams is a New Zealander who was the professional caddy for Tiger Williams in his heyday (1999-2011). They had an acrimonious break-up two years ago, and since then Williams has been caddying for the Australian, Adam Scott. Williams' contract sees him earning 10% of Scott's prize earnings, which I gather is a typical contract for a professional caddy. Obviously, if you can caddy for one of the greats, that is a very lucrative contract indeed. (The prize for winning the Masters this year was $1.44m USD.)

Now the debate on Radio Sport concerned whether any caddy is worth that amount of money. And for an economist, "worth" would typically mean what a caddy can contribute relative to the next best alternative. Is it really the case that a top caddy can improve a golfer's winnings by more than 10%, relative to what he would earn with one of the throng of enthusiastic golf fans who would be prepared to do the job for a normal kind of salary? While there has been much commentary on the advice that Williams gave Scott on his winning shot at the Masters this week, it seems unlikely that the best caddy is really that much better than the alternative.

There is a second labour-economics question that I did not hear addressed on Radio Sport: Why are caddies paid on a commission basis (percentage of income) rather than a flat rate? The standard answers to these questions from the contract literature would be that either the golfer is more risk averse than the caddy, or that this is a hidden-information problem and that the caddy needs a financial incentive to exert the effort needed to do a good job. The former hardly seems likely given the relative incomes of the golfer and his caddy. The second is even less likely to pass the sniff test: Does it really take additional costly effort to give good advice on which club to use and how a putt is likely to break?

Instead, maybe we should be looking to the efficiency wage literature which contains a number of different theories for why above-market-clearing wages can persist in the face of unemployment. My favourite model to explain caddy wages would be Shapiro and Stiglitz's classic model of shirking. In their model, the high ("efficiency") wage persists as a preference for employment over unemployment is needed to induce a fear of being fired and hence an incentive not to shirk in the face of costly monitoring of effort. The model I have in mind for caddies is similar. The top golfers are big superstars whose flaws and foibles would be fodder for the tabloids. A caddy who works closely with a golfer is likely to have considerable information that tabloids would love to get hold of. So why might one pay above the market-clearing wage for a caddy? So that the cost to the caddy of losing his job would not be dwarfed by payments he might be offered by a tabloid. And why pay caddies on a commission basis? Because the greater is a golfer's earnings, the greater is his stardom, the more a tabloid would be prepared to pay for information, and hence the greater would be the needed efficiency wage.

What other explanations explain the twin puzzle of high remuneration and a percentage-of-earnings contract. If I were teaching labour economics, I would set this as an essay question.

Keep it simple. Keep it safe. NZ's GST edition.

Every now and again, some bright spark wants to introduce GST exemptions for their preferred little pet project. It's worth remembering just how awesome our GST is.

Josh Barro serves up a nice counterexample: sales taxes across the US states. He here notes one important problem with requiring internet vendors to remit sales taxes to the buyer's state: too many states have thoroughly insane sales tax codes. Dealing with one state's code is bad enough. Pile fifty of these on top of each other, and well....

The best argument that Amazon and other retailers raise against requiring them to collect and remit sales tax is that doing so is burdensome. Sales taxes are collected by 45 states and the District of Columbia, each with different rates and different rules about what is taxable.

These rules can get incredibly picayune and complicated. See this 1,437-word memo [link added] from the Wisconsin Department of Revenue, providing ten examples of cases in which the sale of an ice cream cake (or a slice thereof) might or might not be taxable. One of the examples hinges on the ratio of ice cream layers to cake layers –in Wisconsin, having too much ice cream in your ice cream cake can lead to a tax liability.

And one state’s picayune rules don’t necessarily conform to other states’ equally picayune rules. Both New York and New Jersey apply sales tax to candy but not to most other food, yet they have different definitions of what “candy” is. A Twix bar is taxable candy in New York, but in New Jersey it’s a non-taxable baked good. An online retailer has to keep up with this morass not in just one state, but in all of them.

More dauntingly, there are over 8,000 local sales taxing jurisdictions in the country, again with their own rates. New tax jurisdictions are created frequently and their boundaries do not necessarily conform to Zip or even Zip +4 boundaries. A few states, such as New York, even allow local jurisdictions to determine their own tax bases. One particularly relevant example for online retailers is that New York State does not charge sales tax on clothing and footwear under $110, but most counties in New York do – and sometimes a city has different sales tax rules than the county it is in.

He gives one way forward for an internet sales tax: administer it among states willing to run a single less-crazy state sales tax code. I expect that inefficiencies caused in the US by the absence of an internet sales tax are pretty second or third or fourth order compared to the gains that could be had by abolishing the home mortgage interest deduction and getting rid of the special tax status of employer-provided healthcare. Heck, getting rid of the kinds of things that make it really hard to implement a national internet sales tax would probably do at least as much good as implementing the national internet sales tax. If it's distortionary that I can avoid taxes by ordering a book from Amazon rather than wandering over to a book-shop, how about the purely within-state distortions that have to be present when you need tax memos on ice cream?

New Zealand's GST is remarkably clean. It's easy to defend a very bright line on a clean tax code without any of this nonsense in it. Down the path some here wish to tread lies 1437-word memos on what counts as an ice cream cake. That's inside-the-asylum stuff. Let's stay outside of the asylum.

Previously:

• Seamus on GST basics
• Seamus on the illusory benefits of GST exclusions
• The GST is not regressive.
• Seamus on Canada's messed up GST
• More American sales tax insanity.
• Australia needs expert witnesses from Italy to decide whether a cracker is bread or not because it has a stupid tax code that treats the two things differently.

Sometimes, you can be a bit proud of Parliament

I tuned in to Parliament TV last night and caught some of the final debate on New Zealand's same-sex marriage legislation. Parliament helpfully uploads everything to YouTube; here are some highlights. But if you like, just skip to the waiata at the end.

First, here's Labour's Louisa Wall, whose private member's bill led to all this:

National's Maurice Williamson's speech was rather nice; he noted the big gay rainbow in the sky over his rain-sodden electorate that morning could have been a sign. John Banks, ACT's MP, made the case for marriage equality based on fundamental rights. Banks is personally pretty conservative but has come a long way. Nice job. National's Nikki Kaye did a great job too. Green MP Kevin Hague talked about the importance of the bill to his community. Maori Party MP Te Ururoa Flavell provided examples from Maori history of gays holding positions of prestige in their communities and argues that it was British colonial abolition of Maori customary marriage that broke that tradition; I really don't know enough about the history here.

After the vote, 77-44, Parliament broke into song, led by the Gallery. I'm told this is pretty rare. Here's the history of Pokarekare Ana, a New Zealand love song.

I'm not usually a fan of waiata. But this was very nice indeed.

Exempting the elderly

New Zealand and Christchurch having been a bit depressing lately, other than last night's rather nice 77-44 vote in favour of allowing same sex marriages in addition to civil unions, it is sanity-enhancing to look a bit at lunacy elsewhere.

While New Zealand funds education from general taxation revenues and ensures that schools in needier areas receive enhanced funding, Manitoba, and much of North America, mainly funds its schools out of local property taxes. There are potentially good Tiebout reasons for doing this as some people prefer paying more in taxes for better schools, it also makes it harder for schools in poor areas to provide decent services.

From 2015, Manitoba seniors will be exempt from the education portion of the property tax bill. Says Finance Minister Stan Struthers, "These seniors who paid a lot of taxes over their working careers as they raised families, I think they deserve a break."

Let's leave to one side for now the obvious equity problem here that letting the relatively wealthy elderly off the hook for a bundle of services that they don't currently consume might well invite relatively poorer young people to request exemptions from the portion of their taxes that go to pay for government services never consumed by young people: the Canada Pension Plan, Medicare coverage for Altzheimers', government-funded old folks' homes, the Royal Canadian Air Farce... I'd be pretty surprised if net government funding didn't already strongly favour the wrinklies.

The bigger problem is the long-term fiscal outlook when the political incentive is to pull back from taxing the wealthy elderly. Now there are reasons why property taxes on the elderly can be politically unpalatable. Suppose that you've owned your house for 60 years, its value is bid up by a bunch of families coming in because of the local school, and you suddenly can't cover the property tax bill. This will be a problem for any land tax system, any capital gains tax system that taxes unrealised gains on the family home,* or systems supporting local education out of local levies on property values.** There are plenty of ways that the elderly homeowner could re-optimise: reverse mortgages could tap the equity, or the homeowner could sell to someone who values the local amenity and move somewhere else in town.

But if policy should be moving towards a tax base that can withstand a large proportion of taxable-income poor but asset-rich individuals with strong demand for government services, Manitoba's move isn't encouraging.

New Zealand at least has been making some moves in the right direction. We've been shifting the tax base from income to consumption. We don't tax capital gains, and for good reason. But whenever retirees cash out some of their portfolios to fund current consumption, they pay the 15% GST. I'd also expect that we'll be scheduling increases to the age of superannuation eligibility after the next election.

* Systems taxing only realised gains have other problems. And systems exempting the family home entirely have still other problems. Seamus has a rather lengthy series of posts on the topic, some of which are here indexed.

** Note also that we can also get big problems in rural school districts: townies are income rich but have less land wealth; farmers are land rich but will have incomes that fluctuate a lot year to year. If the school levy is a fixed proportion of the land value, the farmers bear a very large share of the school district's costs. I have no particular view as to what's fair here other than a generalised view that a progressive consumption tax would be rather better than all of this mess.

Markets in Everything: ensuring outbreeding edition

Iceland is an amazing place. They now have an android app out that lets you quickly tell whether the person you're chatting up at the bar is too close a cousin for kissing purposes. When everybody's related, it's not easy.

Am I sleeping with or dating my cousin?

"Am I sleeping with or dating my cousin?" an Icelander might ask. The answer is: Of course you are, but how closely exactly are you related?

The answer to that can be found in the online database, but people might not always have the opportunity to look that up when they are for example out partying.

But now there is a solution.

"Bump the app before you bump in bed"

Three engineers made an app for the 'Íslendingabók' database. People can now easily, and on the go, look up how they are related to other Icelanders. And a precious feature, using the bump technology, allows people that meet to just bump their phones together, to instantly see if they are too related to take things any further. The engineers' slogan for this feature was: "Bump the app before you bump in bed".

Via Cameron McDonald.

You can find the app here. It has an average 4.7 star rating.

There are parts of Southern Manitoba where the app could also be useful.

Our manufactured drinking crisis

Boy, they keep looking for dark linings to silver clouds, don't they?

Here's Jennie Connor on the latest findings from the Ministry of Health hazardous drinking survey. She says,

"I was quite alarmed by the results. In particular, in the age 18 to 24, one in four women are drinking in a hazardous fashion. And for the men, it's even higher - it's over 40 percent. So I think we should be very concerned about that."

So, what's so alarming? Let's look at the survey.

First, note that hazardous drinking patterns are defined as a score of 8 points or more on the 10-question Alcohol Use Disorders Identification Test. Here is an online version of the test. I score a six for having a glass of wine or beer with dinner every night, having seven or more standard drinks less than once per month, and for having a feeling of guilt or remorse after drinking* less than once per month. It isn't hard to score an 8; that's why so many people score an 8.

Now, what do the time trends look like? Here are the charts from the document.

Figure 1 shows us that the number of non-drinkers has increased since 2006/2007. Among adults, the proportion who consumed alcohol in the past year dropped from 84% to 80%. They note that the drop was larger in youth cohorts: "The largest drop in past-year drinking was among youth aged 15-17, whose rate fell from 75% in 2006/07 to 59% in 2011/12."

Recall that I've previously argued that there is no evidence of any crisis in youth drinking, that Steve Stillman has found the same thing using more rigorous method than my ocular least squares, and that the monster-shouters have shouted a lot about how we need to up the alcohol purchase age to 20. 

Now on to hazardous drinking. In all the tables below, you'll note that the rates are defined as a proportion of those who drink, not as a proportion of everybody. This matters when the proportion of non-drinkers is rising. If you're comparing 2011/2012 rates to 2006/2007, and you want to normalise to total population rather than to the population of drinkers, you have to multiply by 0.8 for 2011/2012 and by 0.84 for 2006/2007. In other words, the drop in hazardous drinking is even larger when we measure it as a fraction of the total population rather than as a fraction of all drinkers.

The Ministry of Health also is very clear that the tables above understate the drop in hazardous drinking if we're interested in it as a proportion of the overall population. They write:

Since 2006/07 the level of hazardous drinking among male past-year drinkers has fallen from 30% to 26%. Among female past-year drinkers, the level of hazardous drinking has not changed significantly between 2006/07 (13%) and 2011/12 (12%).

Among all adults (not just past-year drinkers), the rate of hazardous drinking fell significantly since 2006/07 for men (from 26% to 22%) and for women (from 11% to 9%).

When we break things down by age and gender, the highest rates are among young men.

But when we look at the trend, it's dropped substantially among 18-24 year olds since 2006/2007. And, again, this understates the true drop because the proportion of past-year drinkers has dropped.

And recall that there had been no increase in hazardous drinking among 15-24 year olds from 1996/1997 through 2006/2007. Our youth drinking crisis? Flat from 1996/1997 through 2006/2007, then a substantial drop.

If we look at income patterning, richer people are more likely to have consumed alcohol in the last year but, conditional on consuming alcohol, poorer cohorts are more likely to report hazardous drinking. Netting the two effects, MoH reports, "As a proportion of all adults, about 18% of those living in the most deprived areas and 11% of those in the least deprived areas had hazardous drinking patterns."

The cross-sections tell us where potentially problem drinking is currently concentrated. But the big picture really shows declines in potentially harmful drinking. If the anti-alcohol brigade had managed to get a purchase age increase in 2009, they'd be claiming these results as strong evidence of their success, while insisting that much more is still needed.

Why isn't the anti-alcohol lobby celebrating these results instead of saying how alarming they are? Do they somehow need for there to be a crisis?


* Note, it's after drinking, not because of drinking. I have a glass of wine or beer with dinner just about every night. Do you go a month without regret?

Oh Christchurch

It didn't have to be like this.

784 days after the February 22, 2011 earthquake. There's a draft plan for downtown, but nothing's yet certain except for that the CCDU and CERA are pursuing compulsory acquisition for some land where they think they're likely to build a convention centre and stadium. We don't know when access to downtown's Cathedral Square will be restored, we don't know whether Town Hall (a performing arts venue) will be restored, rebuilt, or scrapped; what an Arts Precinct will look like will depend on what happens with Town Hall, and continued uncertainty about the Arts Precinct is messing things up for those wanting there to rebuild. We don't know when they'll finalise the city plans for downtown living zones. We don't know whether land acquired by compulsory acquisition will be used for public purpose or flipped at a profit by some later government. We do know that a reasonable burden is being borne by those having land taken by compulsory acquisition.

We have a great big mess of interconnected problems. The root of most of them is a fundamental lack of respect for individual property rights. Why do we have a housing crisis? People can't do innovative things to increase housing supply. Why do we have downtown property owners deciding to cut their losses and escape? Because the planners are giving us the worst of all worlds: a determination to pursue a central plan and cast aside the plans that individual property owners might have, but a seeming inability to just set the darned thing so that individual property owners can re-optimise and get building. There are good arguments to be had about whether it's better to have a fixed city plan with a designed vision for the city or whether we should let the city's vision emerge more organically from the decentralised projects each owner might seek to undertake. I prefer the latter. But surely either of those has to be better than putting town on hold for this long while deciding just what the perfect city plan might be.

It's tragic that most people don't understand the term "leave well enough alone". "Well enough" isn't a compound adverb describing how thoroughly one ought to leave something along, it's a compound noun saying that if things are good enough, we shouldn't screw with it. Read it as "Leave alone that which is 'well-enough'." It's the better English translation of laissez-faire. We've made the quest for the best city plan the enemy of getting anything done.

Let's recap a bit.

January 2011 it was pretty clear that there were already substantial zoning rents built into Christchurch property prices.

March 2011: Businessmen with critical records behind the red zone cordon were still barred access. But if your wedding dress was on the other side of the line, you could likely convince a policeman to let you through. All kinds of other nonsense around the cordon. .

We could see that heritage rules were working in opposition to earthquake preparedness and that we needed to fix things if we wanted to keep and strengthen our best heritage amenities. There's now a pretty good chance we'll lose the old Trinity Congregational Church entirely, and the intransigence of the heritage board after the September 2010 quakes is largely to blame. I do appreciate how Council is simply putting up $1m towards the restoration for anybody who is willing to do it - it's an amenity that seems worth it. I wish that we could have protected it three years ago by paying the providers of heritage amenities for their provision rather than making it really hard for them to do any earthquake strengthening.

April 2011: Central government and Hon Gerry Brownlee get more power over the earthquake rebuild. I'd hoped he'd use his powers for good and help us to get an IKEA. But it looked like a high variance play: an appointed Czar might sweep aside the regs that were holding things back, or might impose a central plan heavy on expropriation. Meanwhile, the Greens push for an earthquake levy; optimal tax policy dictates instead a mix of spending cuts and future tax increases.

May 2011: We start hearing suggestions that Council sell assets to pay for reconstruction. There's an economic case for it, especially where some of those assets weren't great candidates for public ownership to begin with.

July 2011 we start seeing problems where the insurer says a property can be repaired and so will pay out based only on the repair cost, but the government declares that you can't rebuild on that land. This is the kind of thing where either Council or central government should have funded a test case or sought a declaratory judgement. We still don't know what a high court appeal would say about it.

August 2011: the first cut City Plan comes out. It's vaporware.

September 2011: I get more worried about downtown. RBNZ starts pushing back its expectations of when things might start happening in Christchurch. They then expected rebuilding of severely damaged properties might start happening mid-2012. The downtown demolition job remains unfinished as of April 2013.

October 2011: Downtown developers (rightly) start getting stroppy about Council's planning approach. RBNZ reveals what it was up to during the quakes and their preparations in case things go badly in a Wellington quake.

November 2011: Bomber Bradbury says that the Libertarianz paid political ad highlighting bureaucratic and regulatory failure in Christchurch was "intellectually skanky". Clearly he doesn't live here.

February 2012: Council is still very slow in approving new subdivisions outside of town; too many veto points for getting things done. We also start seeing how the combination of lax building codes, heritage regs against building strengthening, and the abolition of liability under ACC caused substantial problems; I suggest liability insurance might be appropriate.

March 2012: Outside of downtown, away from the bureaucrats, Christchurch is coming back.

April 2012: Rental prices are soaring; demands for price controls. Central government throws out the Council city plan, promises a new and feasible one. I'd hoped that the new agency would take a light touch on eminent domain and that it might fund some declaratory judgments on insurance issues. Alas. At least the light rail scheme hasn't resurfaced. Bill Kaye-Blake reckons Christchurch is screwed. Too much focus on shiny stadium dreams, too little attention to helping folks wade through insurance messes. The housing shortage gets messy; bureaucratic failure abounds.

May 2012: CERA head Roger Sutton demonstrates a surprising lack of familiarity with zoning issues. I had hoped that CERA's job was to have been sorting out the tangled bureaucratic mess facing homeowners. Yeah, no. More pressure for Council to sell assets; I worry they might sell things like the Port to buy things like stadiums. Meanwhile, people who aren't owners of the downtown Anglican cathedral start protesting that it be rebuilt; its owners, the Anglican Church, seemed less than keen. I suggested they try Kickstarter to show us whether the notional demand was effective demand. None of that's yet sorted out as of April 2013.

June 2012: consents and planning are still stuck in pre-quake mode: the grey men had to make sure that the wheelchair ramps for a new temporary bar had a 1:12 slope rather than a 1:10 and that the handrails were just right. In the midst of a housing shortage, Christchurch is exporting houses from condemned sections; our zoning rules ensure that they can't really be used in-town. And Christchurch City only approved 1271 new dwelling units from April 2011 through April 2012.

Meanwhile, John Fountain figures out a ridiculously simple move to start easing Christchurch's housing shortage: allow people to build flats inside their existing homes. City Council zoning rules don't allow it if the flat has a kitchen, though they make provision for flats of this sort under rules ensuring that few people will really do it. The only explanation I have ever heard as to why Council wants to ban this simple way of easing the housing shortage is that they're scared that the area around the University will turn into student flats of the Dunedin type. If that's the case, they could have banned it in the area around the University, or they could have considered that it just might also be important that we get some cheap student flats if we want to keep having a University.

Gerry Brownlee claims there's no housing crisis in Christchurch. I suggested he's missing what's going on at the bottom end of the market. Ahem.

I suggested scrapping plans for a big expensive convention centre and instead have Council coordinate with the big hotels for a smaller facility linked directly to the hotels. Regime uncertainty gets worse with warnings about forced acquisition for the new city plan.

July 2012: We get the new city plan. I didn't know then, and I think that nobody knows now, just how any of the proposed anchor projects are to be funded. EQC makes it harder to avoid using their preferred project manager. Pressure for a broader national push to relax land use planning builds; I point out that it's also good earthquake-preparedness.

August 2012: Seamus notes that the anchor projects in the city plan might not pass a normal cost-benefit analysis but could help anchor expectations around a good rather than a bad new equilibrium in a multiple-equilibrium world. I wondered whether the expensive stadium plan was a poison pill. We started getting hints about what the anchor projects might cost. As of April 2013, CCDU is getting tenders for a convention centre but I'm not sure they've sorted out who will pay for it; they're saying construction on a stadium might start in 2015. We don't know what's going on with Town Hall.

December 2012: It's looking like insurers are deliberately dragging their feet so that policy holders take lowballed indemnity payments. We still haven't had reasonable test cases. EQC is pushing everybody to their preferred contractor. Gerry Brownlee scales back a proposed insurance advocacy service, reckoning that it isn't much needed. The service was supposed to help people figure out when their homes might possibly be repaired. Turns out Brownlee was right - we didn't need the advocacy service. We just needed EQC to leak the big spreadsheet containing all the details on most of the repair jobs and for somebody to stick it up on the internet so that folks could find out where their claims stood.

And remember how the convention centre was an anchor project in the big central plan of July 2012? December they're shortlisting developers for the convention centre while hiring somebody to make a business case for it. Also, you probably can't finance the big shiny stadium on bake-sales.

January 2013: Christchurch Council's record on building consents remains full of fail.

February 2013: Continued regime uncertainty. That shiny city plan from July 2012? Yeah, we don't really know what's going on with that. And it's starting to matter for those with properties zoned into one of the special precincts. The Insurance Council says that it's not their fault that 70% of major claims have yet to be dealt with; I'm not so sure. Insurance here feels more and more like a scam.

March 2013: Regime uncertainty continues.

It's mid-April 2013, 784 days after the earthquake. My builder is still squabbling with EQC about the quote to get the job done at our house. AMI/SR has yet to come to our house to assess our out-of-scope claims. SCIRT is just about done with what I think is the fourth tear-up-and-rebuild on our street; they all blur into a single two-year-long project interspersed with a few two-month stretches where the street is in one piece. The barricades around downtown block off less than they did two years ago, but they're still there.

The CCDU decided that some downtown areas had to have a minimum project size; property owners now are scrapping with each other trying to accumulate titles to get to the minimum size rather than building on the land they own. The planners' grand visions may be nice, but they're driving out the investors who should be rebuilding town.

Contrary to Gerry Brownlee's claims of there being no housing shortage in Christchurch, we see a 60% drop in affordable rentals relative to pre-quake baseline. Now some of this will just be an artifact of the baseline chosen for affordable rentals, and Auckland remains more expensive. But as of last month, the price of the median 2-bedroom rental in Christchurch was $365 per week and the price at the 25th percentile was $300. And Christchurch Council still effectively bans building self-contained flats in houses - removing that ban remains the single simplest and cheapest thing they could do to increase low-end supply.

The University has hemorrhaged students as housing is expensive and town is rather less attractive than it once was. It will not be easy for the University to recover until Christchurch is a place that students again want to live; costs of student housing have to come down into line with the amenities here provided, or the amenities have to improve. Neither of those are easy given the current Christchurch bureaucratic regime.

Winter is coming.

Open Banking Resolution and Deposit Insurance

New Zealand's Open Banking Resolution system in case of bank failure makes bank failure less likely, and so makes depositor bailouts less likely, but doesn't eliminate the risk that the government might bail out depositors.

Matt Nolan has made this point more than a few times and has urged that we reinstate deposit insurance and require banks to pay for this implicit insurance; I hope instead that the RBNZ and government will find ways of making more credible that the depositors may be burned. If depositors bear risk, then they have to pay a bit more attention to where they put their money and, in doing so, encourage the banks to be more sensible. Further, the simple existence of OBR with a set sequence in case of failure should reduce the panic that pressures governments into bailouts. But if we can't make it credible, then Nolan may be right. 

Toby Fiennes, RBNZ Head of Prudential Supervision, laid it out in a speech yesterday. 

So OBR is about keeping a bank open and providing the government with real alternatives to liquidation or full taxpayer bailout – both of which may be totally unpalatable. It facilitates a rapid and orderly resolution of a bank failure. It does so without changing our basic legal framework around ranking of creditors in a wind-up or insolvency. In particular:

– It does not change the fact that depositors’ and other creditors’ funds are at risk. It is a well-established legal principle that people stand to lose money if a business that owes them money cannot meet all its obligations. Banks are the same as any other business in this regard.

– It does not change the ranking of creditors. Shareholders will be the first to lose their investment. Once shareholder funds are exhausted, subordinated creditors bear losses, followed by all other unsecured creditors on a pari passu basis, meaning that those with an equal legal claim get equal treatment. This is the same as in a liquidation.

Two features of OBR make it particularly well-suited to the principles for crisis resolution I outlined earlier. They are:

– Its flexibility. OBR deals with the immediate crisis, including payments and liquidity issues around failing banks, without closing off long-term solutions.

– It reduces moral hazard. Bank shareholders, management and investors know that in the case of bank failure the authorities have a viable option that would put their stakes at risk. The mere presence of OBR in the toolkit will impact expectations of government support.

Fiennes continues:

It is important to emphasise that OBR and deposit insurance are not in any way alternatives. OBR is also applicable in a world where we have deposit insurance as in one where we don't. Deposit insurance usually involves the establishment of an insurance fund, to which banks contribute. There are many different variations on, and within, that basic framework, but OBR can cope with all of them. For example, if there’s an insurance fund, the fund itself could stand as a creditor in the OBR. This is how the FDIC (the US deposit insurer) is treated in failed US banks.

New Zealand does not currently have any form of deposit insurance or deposit guarantee. This position was confirmed by the Minister of Finance in 2011 (http://www.beehive.govt.nz/release/maintaining-confidence-financial-system). There are three reasons for this position:

– Deposit insurance is not always effective in preventing bank runs by retail depositors. UK-based Northern Rock suffered a classic retail run in 2007, despite a deposit insurance scheme being in place.

– Deposit insurance is hard to price accurately and fairly; and brings with it difficult boundary issues. Should it be just for banks – as is currently the case for OBR – or should it also include finance companies, building societies and credit unions? How would we ensure that the least risky banks do not end up subsidising the more risky?

– Deposit insurance will increase moral hazard, making the banks more susceptible to failure, which brings with it the need for more, costly regulation.He also notes that a large bank's failure could easily overwhelm a deposit insurance scheme and that the costs of deposit insurance in encouraging bad bank behaviour outweigh the benefits of avoiding depositor losses. So even in Nolan's world where the government cannot credibly commit not to bailout, the inefficiency caused by the certainty of a bailout (rather than the weighted expectation of one) can be large enough to make the scheme undesirable, even if the government does wind up bailing out the banks.

As I'm not a banking guy, here are a few things I particularly do not know much about and would materially affect the ability of OBR to reduce bailout risk:

• The proportion of secured versus unsecured bank liabilities. If there isn't much that can be burned through before hitting depositor assets, then the haircut landing on depositors would be greater and so too would be the political pressure for a bailout. 
• How easy it would be for banks to shift away from unsecured liabilities, knowing that risks put on depositors make bailouts more likely.
• Bank ownership structures. The NZ banks are owned by big Oz banks that have an implicit Oz government guarantee that's actually worked into their Fitch credit ratings (as best I understand things). Suppose something bad happens and one of the Oz banks and its NZ subsidiary both are going down. Do we know what assets are really with the NZ subsidiary and which are with the Oz parent? Will there be incentive to restructure the equity profile depending on which side of the ditch is looking stronger? Can they tunnel equity back to the Oz parent in the NZ subsidiary is looking dodgy and so leave less to burn through in OBR? RBNZ runs some strong prudential regulation; I'm sure they're on top of this stuff. I just don't know anything about it.

The greater the proportion of the burden borne by bank shareholders and unsecured creditors other than depositors, the lower I'd expect to be the pressure for bailouts. If deposit holders are to take a ten percent haircut if bad things happen, I doubt that they could muster nearly as much bailout sympathy as depositors facing a fifty percent haircut. 

Fiennes concludes:

But there’s always the remote possibility that a bank does get into trouble, at some point. If that happens there are no simple solutions. It will be messy, people will lose money and how it is dealt with will depend on circumstances at the time.

OBR is a tool that gives government an additional option to taxpayer bailout or liquidation. It is not the only option that will be available on the day. Its mere existence provides important incentives for bank shareholders and management to minimise the risk of failure.

New Zealand does not currently have deposit insurance, for reasons that are more to do with moral hazard and the sheer difficulties of defining boundaries and pricing than consumer protection. We believe it is better to keep the risk of failure very low, including through a strong regulatory framework, than to build structures that can distort incentives and behaviour.

If, however, deposit insurance were to be introduced, it could easily be accommodated within our toolkit of OBR and other crisis measures. It is not a case of choosing between one or the other – they have different objectives and can work alongside one another if need be.

We have to distinguish between best-case deposit insurance and achievable deposit insurance. How well you think the government can price the bank's underlying riskiness and how well the political system can ensure fair actuarial rates rather than implicit subsidisation of riskier banks will matter in your evaluation of deposit insurance's desirability. But note too that the world in which the government is really good at assessing bank's risks is also the world in which prudential regulation likely works well. I lean towards staying out of deposit insurance, but I'm not hugely confident in my point estimate here - as I noted earlier, I'm not a banking guy and really don't have enough information to be very confident.

Update: I failed in copying the second bit of Fiennes's speech the first go-round. My computer was trying very hard to crash while I was posting.