Bathmophobia

Richard Thaler had a term for people with an irrational fear of slippery slopes: bathmophobes. He counted Glen Whitman among their ranks for warning that Thaler's "nudge" architecture could would up proving rather illiberal in practice. I worried, in my Mont Pelerin address, that by reducing the costs of paternalism, Nudge seemed more likely to expand the range of paternalism rather than transform existing paternalisms into softer alternatives. Paternalism gets cheaper so we get more of it. I suppose I'd have been a bathmophobe as well.

Anyway, here's Thaler on the bathmophobes:

For example, you may not be familiar with bathmophobia, which is an abnormal and persistent fear of stairs or steep slopes, or a fear of falling. Less well known is “nudgephobia,” also known as the Whitman-Rizzo syndrome, which is the fear of being gently nudged down a slope while standing on a completely flat surface. This phobia is sometimes associated with other disorders such as the fear of being given helpful directions when lost; the fear of obtaining reliable medical advice when sick; and, in rare cases, some have even suffered from a fear of having someone recommend a book or movie that you will really like.

...Another basic point that Whitman does not recognize is that paternalism of some sort is inevitable. Consider the following common problem. Most firms have an open enrollment period in November when employees can elect their benefit package for the following year. At my employer, the University of Chicago, you have a few weeks to log on to the appropriate web site and make your selections. The question is, what should the employer do for those employees who forget to log on? (Professors’ reputations for absent-mindedness are well deserved.) For each of the choices the employee has, the employer needs to select a default option for those who do not log on, and normally the default is either “same choice as last year” or “back to zero” (meaning, decline this option). At Chicago the default option for the health insurance plan is the same as last year.

...Presumably, if libertarian paternalism creates a slope risk then real paternalism must generate a “cliff” risk. But have we seen this in history? In America we started as Puritans but moved away from it. When Prohibition was passed into law it did not lead to a slew of other paternalistic interventions. On the contrary, once society got to see prohibition in action, the law was eventually repealed. Is there any evidence of a paternalistic slide? The only example Whitman gives is smoking, where there certainly has been a progression of increasingly intrusive laws passed. But there are several problems with this example. First, most of the anti-smoking laws are based on externalities, not paternalism. People do not want to fly, eat, or work in smoke-filled environments. Indeed, many smokers favor such laws. Note that while smoking bans are not nudges, they are shoves, even these shoves do not seem to have led to a batch of similar crackdowns in other domains. I have not seen any municipality institute a ban on loud talking in restaurants, for example, though come to think of it… .

In short, the risk of the slippery slope appears to be a figment of Professor Whitman’s imagination, and clear evidence of his bathmophobia. 

Remember that old Simpsons episode where Lisa convinces an amnesiac Burns about the merits of recycling? And he goes on to recycle the ocean into Little Lisa Slurry? And Lisa recoils in horror at the evil she helped enable?

I wonder if that's how Richard Thaler's feeling now. Perhaps he should be. Why? This.

I suppose it's all fine. After all, there has to be some default position on whether you wish to have a censored internet package. The choice of default "porn and dangerous thoughts allowed" will have consequences, as will the alternative of "porn and dangerous thoughts not allowed, unless you tell your ISP that you like porn and dangerous thoughts and maybe get put on some list because of it". The government cannot help but to influence outcomes by its choice of the default position. So why not ban dangerous thoughts by default. It's still Libertarian Paternalistic, because you can still opt out. And really, why would anybody need to have access to websites including "violent material", "extremist and terrorist related content", "anorexia and eating disorder websites", "suicide related websites", or websites mentioning alcohol and smoking. We know those are all bad things; the government tells us so. Switching the default is a perfect Thaler-inspired nudge.

And it's not just me calling this a nudge policy.

The Independent notes the filters implemented by the four main private internet providers will be "default-on," meaning users must explicitly choose to turn them off. Users can decide to keep certain filters while turning others off.

Making the filters default means most people will keep them, according to Open Rights Group Executive Director Jim Killock. "We know that people stick with defaults: this is part of the idea behind 'nudge theory' and 'choice architecture' that is popular with Cameron."

According to Cameron, the new parental control settings will be turned on for all new broadband subscribers "by the end of the year."

If anything, I've been inadequately bathmophobic. Here's what I wrote about this exact policy back in 2010 when it first came up:

I'm going to bet that this doesn't wind up being implemented. Here's Hansard of the debate. The Minister seemed pretty lukewarm on pushing through regulatory changes; I'll guess that the latest reports are bargaining position for either getting ISPs to do more to push subsidized Net Nanny variants to folks who want them, or for concessions on other issues altogether. Dick Puddlecote is livid (rightly so) but I'd be shorting the iPredict contract at prices higher than $0.35. It's pretty disgusting that a coalition that includes the Lib Dems would be even making noises in this direction.

I was wrong.

Since we're into the range of policies-I'd-previously-thought-implausible, let's turn back to my review of Nudge in the Christchurch Press a few years ago, in which I wondered whether Sunstein and Thaler would be happy with choice architecture at the ballot box.

While Sunstein worries about our decisions over investment plans or our weakness of will at the buffet table, I worry about our decisions at the voting booth. We vote infrequently, there’s no feedback from our personal voting decision to any policy outcome (unless you happen to hit Lotto by breaking a tie), the voting decision is complex and we may have little grasp of the issues at stake let alone our own positions on those issues. In my own research, I’ve found that only about half of voters in 2005 could place National, United Future, and Labour correctly on a left-right spectrum, for example, and that individuals’ political knowledge independently affects their policy and party preferences even after controlling for income, education, race, employment, gender, and other demographic characteristics. And so I think we (by which I mean you) need a nudge. Under my libertarian paternalistic voting system, your electoral enrolment would be linked to your census details. You’d then answer a brief questionnaire when entering a computerized voting booth, and I’d tell you, through the computer’s algorithms, for whom you should vote. Trust me: I’d be choosing the option that really would be best for you, if you only understood all of the policies supported by each of the parties and had a PhD economist’s understanding of the likely effects of these policies. You’d still be free to pick some other candidate or party, but you’d have to first reject the default choice I’d pick for you. The remaining options would then be presented in an order designed to maximize the chances of your choosing the next best option.

I trust that you find this kind of scheme repugnant. I’d find it great, so long as I got to be the choice architect.

I'd given this as reductio; I wonder whether Cameron mightn't be thinking about implementing it.

Ideas have consequences.

Update: James, in comments, notes that part of this is already up for mobile broadband:

This filter is already in effect in the UK for all "mobile broadband". It's called "content lock" - and about e.g half Lindsay Mitchell's blogroll is classified as adult content by the UK's current filter (Offsetting Behaviour is currently OK).
How do you unlock it - easy. Go to a website and enter your details. All you need is a credit card. A UK credit card. With a UK Postcode. Which, of course, I don't have.

I'm glad that Offsetting isn't on Cameron's banned list as yet.

Previously:

• UK Nudges
• Libertarian Paternalism Is An Oxymoron
• From Nudge to Shove
• Nudge Nudge
• Nudge thyself
• Wink Wink, nudge nudge, say no more (in which this porn nudge was first discussed)

Chasing the Xenophobic Vote?

One piece of evidence perhaps consistent with that that Labour's "dey terk yer house" xenophobic housing policy was in pursuit of votes that otherwise go to NZ First: shortly after Shearer announced it, traders at iPredict downgraded Winston's chances of returning to Parliament.

It's hardly conclusive: it's a pretty thin market. But traders reckoned that Peter's chances of returning to Parliament dropped from about 85% to about 62% on Sunday, 28 July.

And here's the strange part. Q&A, the TVNZ Sunday newsmagazine programme on which Shearer made his announcement, airs at 8:50 a.m. I'm not sure at what time after 8:50 Shearer made his announcement, but the trading on NZ First started at 7:19 Sunday morning, when what looks like a single trader pushed Peters to a 30% chance of returning to Parliament. That returned to 68% later in the day, and since eroded to 54%. So either:

• iPredict's time stamps are a couple hours out;
• Somebody knew what Shearer was going to announce and predicted that it would hurt NZ First - that somebody would most likely be in Labour as the announcement only came on Q&A;
• Something else served as shock to NZ First prices early Sunday morning and that move then stuck, perhaps because of the Shearer announcement, perhaps because of something else.

I don't think iPredict's time stamps are out. I shorted one "NZ First not to be in Parliament after next election" share at 10:35 to check it, and it's reporting that that's the last trade time. So pick one of the other two. 

If somebody in the Labour camp put a few bucks against Peters in anticipation of Shearer's Q&A appearance, that would be interesting.

Thanks to @JohnnySharland for the pointer.

Labour on Housing, RBNZ on LVR

There appears little plausible economic justification for Labour's proposed ban on foreigners' buying houses.

Let's take Seamus's logic from yesterday one step further. Recall Seamus's simple model:

Consider a very simple model of the New Zealand housing market in which there is a fixed supply of identical houses that will not change over time, and an unchanging demand. Let there be no on-going maintenance or other costs to owning a house, just the one-off capital costs. Finally, let there be a risk-free interest rate of 5%, let demanders be risk-neutral and indifferent between renting and owning for a given cost, and let rental income to a landlord be exempt from tax so that there is no tax advantage to owner-occupied housing. In this world, there would be an unchanging equilibrium rental price for housing over time, and an unchanging price of houses that would be equal to this rental price times 20.

Following on from Seamus's later tweaks to the base model, let us also change the model a bit. Imagine that demand in one year's time will double and then stay constant from then on, and that everyone knows that as of tomorrow. The process is identical to the one Seamus lays out for the case where only foreigners know that equilibrium demand doubles in a year's time given that the stock of foreign capital is large relative to the domestic market:

In this version of the model, the rental rate would continue to remain constant for a year before doubling, but foreigners would bid up the price of houses now to the point where the capital gain between now and in one-year’s time was sufficient to exactly offset the fact that current rentals are insufficient to cover the capital cost of the house.

We can get a disconnect between current rental prices and current house prices where the market expects a future increase in demand relative to supply. That rental rates have not gone up lock-step with Auckland housing prices simply isn't automatically evidence of a bubble or anything irrational. Rational, forward-looking investors could easily be looking at the current Auckland market, the current plans for expanding housing supply in Auckland, and concluding that there's no way that supply will increase quickly enough to keep up with increases in demand. We can't guarantee that this is what's happening, but we cannot simply look at the purported disconnect between rental costs and property prices and conclude BUBBLE.

Now, consider the RBNZ's proposed LVR policy. The policy restricts banks against allowing more than some percentage of new home mortgage loans to have "small" deposits. I am not sure if RBNZ has yet indicated what the thresholds for the different speed limits will be, but it's sounded like it's designed to be binding most of the time. Under what scenarios does this rule make sense?

Start with a world like Seamus's: perfectly inelastic supply, prices 20 times rental rates under his conditions. Further, there is zero chance of bank bailouts in case of property market collapse; everything would be handled under OBR where depositors might take a small(ish) haircut. Individual investors form expectations about future demand; banks form estimates of the future price paths of housing. They're both identical in this simple case. Now, suppose that a cohort of buyers knows that demand will double next year and so start bidding up the price of housing today. The banks from whom they're borrowing money check to make sure that the buyers will be able to cover the mortgage costs and that the buyers' expectations around future rental earnings aren't crazy.

In this world, LVR restrictions only make sense where bank exposure to highly leveraged property loans impose systemic unpriced risk. Even if RBNZ knows no better than do individual banks, they might want to set speed limits where loans risk pushing into leverage levels consistent with prior cascading bank failures. I'd expect that RBNZ has run plenty of stress tests and has some idea of what level of leverage could yield cascading failures for varying levels of property leverage and plausible ranges of housing market drops.

But, in this world, you only set the speed limit to bind in exceptional cases, not in normal cases. To get a rule that binds more strictly, I think you have to assume that RBNZ knows more about the future path of relative demand (either shifts in demand, or potential moves in the supply curve) than do either the banks or investors.

I wonder whether Labour's "dey turk er houses" ban-the-foreigners housing policy shares some common assumptions with RBNZ's LVR regs. Tweak Seamus's model a little bit such that these foreign investors are all just systematically wrong about the future demand path and that there are enough of them that they can manage to affect prices at the margin. Then banning them from bidding up housing where we know that they are causing a bubble by definition avoids a bubble. I do think this requires some pretty heroic assumptions about knowledge asymmetries. But they might not be all that far from the knowledge assumptions required to make sensible an LVR policy that binds in the normal rather than only in the exceptional case.

Labour's Housing Policy

I am baffled by the Labour Party proposal to ban foreign speculators from owning houses in New Zealand. O.K. that is not strictly true; as Matt over at TVHE notes, the policy is easy to understand as a cynical appeal to xenophobic New Zealand First voters. But David Shearer is a better person than that, and so I would prefer to remain baffled and try to think through the logic of the proposal.

Consider a very simple model of the New Zealand housing market in which there is a fixed supply of identical houses that will not change over time, and an unchanging demand. Let there be no on-going maintenance or other costs to owning a house, just the one-off capital costs. Finally, let there be a risk-free interest rate of 5%, let demanders be risk-neutral and indifferent between renting and owning for a given cost, and let rental income to a landlord be exempt from tax so that there is no tax advantage to owner-occupied housing. In this world, there would be an unchanging equilibrium rental price for housing over time, and an unchanging price of houses that would be equal to this rental price times 20.

Now change the model a bit. Imagine that demand in one year’s time will double and then stay constant from then on, but that will not be known in the one year before the change. In this world, the equilibrium rental price and the equilibrium house price will both double in one year’s time and current owners of houses (both owner occupiers and landlords) will receive a one-off capital gain at that time.

Now make one more change. Imagine that the future increase in demand becomes known now, but for some reason only known only to people who are not citizens or permanent residents of New Zealand or Australia. In this version of the model, the rental rate would continue to remain constant for a year before doubling, but foreigners would bid up the price of houses now to the point where the capital gain between now and in one-year’s time was sufficient to exactly offset the fact that current rentals are insufficient to cover the capital cost of the house.

Now compare this model to the one where the demand increase was a surprise to everyone. Renters pay exactly the same amount of rent in each period, owner occupiers receive exactly the same capital gain, but can realise it's present value straight away. Foreign speculators receive only the market rate of return on their investments, just like any other inflow of capital that allows New Zealand to fund investment in excess of its saving. The only distributional effect would be a shift in the capital gain from those who would have bought houses during the year before the demand increase to those who would have sold, but there seems no particular reason for policy to favour one of these groups over the other.

In this world, it is hard to see what possible benefit there would be to a policy of banning overseas speculators from owning houses, which is what Labour are proposing. Of course, the assumptions in these three models are extremely unrealistic. So what changes to the model or what welfare function can make sense of this policy? We could relax all the assumptions about indifference between renting and owning, risk neutrality, homogeneity of the housing stock, no tax advantage to owner-occupancy, and no other changes over time, but it wouldn’t change the basic intuition. We could assume that supply is not perfectly elastic, but that would imply that the earlier rise in price from speculation would generate an earlier supply response and hence more housing affordability. And we could assume that, maybe, New Zealanders and Australians know at least as much about the New Zealand housing market as non-Australasians and so can bid up the price of housing without overseas help, in which case banning foreign speculators would have no effect at all.

It is easier to make sense of other parts of Labour’s housing policy. Building 100,000 houses would obviously reduce prices if it added to rather than displaced construction that would otherwise occur, although the policy is silent on how it would find the land on which to build the houses given council zoning restrictions. Similarly, a capital gains tax that excluded the family home, while doing nothing to change supply and demand, would be a way to reduce prices to owner occupiers while increasing prices to renters. Such a policy proposal wouldn’t make much sense from a party representing lower-income households (who are more likely to be renters), but it is perfectly consistent with a party that proposed exempting fresh fruit and vegetables from the GST.

But Labour’s Press release focuses mostly on speculation. The point needs emphasising: speculation that pushes up prices is only profitable if those prices were going to increase anyway for non-speculative reasons. Preventing speculation (if it were possible to do so) only delays the eventual price rise. Doing something about the future price increases by addressing supply constraints would not only be a long-term solution, it would remove the incentive for speculation at the same time. In other words, any politicians whose housing policy consists mainly of an attack on speculation is essentially conceding that they have no long-term solutions at all. 

Sometimes, prices are blunt

Where the social harms from alcohol consumption are nonlinear and excise is constrained to be linear, any excise tax will wind up being a pretty blunt way of trying to internalise harms. An excise tax that raises revenue sufficient to cover the total social cost imposed will necessarily overtax light and moderate drinkers while undertaxing those imposing larger social harms, if we expect that it's the heavy drinkers who impose large social costs on others rather than just large health costs on themselves.

Reasonable policy tries instead to focus on the relevant margins. An alcohol excise tax sufficient to internalise the external harms imposed by heavy drinkers will impose very strong penalty on moderate drinkers. Instead, policy should combine a rather lower excise component with penalties attached directly to the actions that impose external harms: penalties for being drunk and disorderly; penalties for driving while intoxicated; making alcohol use an aggravating factor in sentencing for other crimes.

A new bit of evidence that prices are a blunt instrument in dealing with harms imposed by heavy drinkers. I've typically cited Wagenaar's metastudy showing that heavy drinkers are roughly 60% as price responsive as moderate drinkers: a 10% price increase has drinkers in total reduce consumption by 4.4% but has heavy drinkers reduce consumption only by 2.8%. The University of Maryland's Jon Nelson has a new study out focusing on a smaller proportion of the population of estimates, but the ones with the finer-grained individual data that allows for demographic breakdowns. The abstract summarises things:

Gender differences in drinking patterns are potentially important for public policies, especially policies that rely extensively on higher alcohol taxes and prices. This paper presents a systematic review of alcohol prices and gender differences in drinking and heavy drinking by adults and young adults. Starting with a database of 578 studies of alcohol demand and other outcomes, 15 studies are reviewed of adult drinking including discussion of samples, measurement issues, econometric models, special variables, and key empirical results. A similar discussion is presented for eight studies of drinking by young adults, ages 18–26 years. Four conclusions are obtained from the review. First, adult men have less elastic demands compared with women. Second, there is little or no price response by heavy-drinking adults, regardless of gender. Third, although the sample is small, price might be important for drinking participation by young adults. Fourth, the results strongly suggest that heavy drinking by young adults, regardless of gender, is not easily dissuaded by higher prices. Policy implications, primary study limitations, and suggestions for future research are discussed.

Nelson here provides more of a literature review than a metastudy that would provide a new summary elasticity measure. A couple other interesting findings:

• Bans on alcohol on university campuses do rather more to deter moderate drinking than to stop heavy drinking;
• The number of licenced outlets near campus has little effect on drinking or on heavy drinking among young adults.

Glaeser on Christchurch

Ed Glaeser's Condliffe Memorial Lecture is now up at the University's "What If?" site. I've embedded it below.

 

I tell my students of the Pantheon of the Econ-Gods. Ed Glaeser is one of our Elder Gods - fueled not by the apples of the Hesperides but rather by Diet Coke.

Ed had a ridiculously busy day prior to his talk at Canterbury. He started with a tour of downtown with CERA, chipped in for a documentary somebody was making, lunched with a bunch of architects, provided a seminar for the Department, gave an interview for a freelancer for The Listener at the Staff Club, then the Condliffe. Then off for breakfast with Roger Sutton in the morning.

There are a lot of fans of Glaeser's approach to urbanism around the country. Let's hope it's done some good!

Can consequences this foreseeable really be unintended?

Imagine this as an intermediate microeconomics exam question. Suppose the government were to bar firms taking government contracts from paying their highest-paid employee more than three times what they pay to their lowest-paid employee. What consequences might you expect ensue?

Here are a few, for starters:

• There would be a rapid shift towards outsourcing of tasks performed by lower-paid workers. An economic consultancy company would hire a temp service to provide secretarial services and would contract with a janitorial services provider rather than have secretaries and janitors on staff. A construction company would have a rather tougher time - they'd be more likely to split into several component parts all selling services to a central agent who contracts with the government. So there could be a shoveling services company, a truck driving company, and a project management and procurement company. You'd have fairly flat payscales within companies, but large differences in salaries across companies. This would be inefficient, but it would likely be the best they could do given the rule.
• Universities running consultancy arms for contract research by academics would have to run those as more explicit external shells. The government throws millions of dollars at the University of Otago for ban-everything studies under HRC grants. If they can't disguise the hourly rates in the contracts to make it look like the researchers are just putting in tons of hours, they'd have to put the contracted lecturers and profs onto part-time contracts with the University, where salary scales would range from the guys who mow the lawns to the people who teach brain surgeons how to be brain surgeons, and have a separate consultancy company where everybody earns a lot. 
• If we think that Universities are under contract for government already in the whole teaching-students business, then they'd just have to run the same outsourcing arrangement suggested above. Or, think of it this way: would YOU want to have your brain surgery conducted by somebody trained by somebody earning three times what you can make mowing lawns? 
• Now suppose that the policy were more comprehensive than I've suggested: they also work hard to look through these kinds of contractual setups and bar firms from putting in tenders for government contracts where it looks like they've done this.
• It would be almost impossible to police. Some companies already find it optimal to contract with a professional maintenance services company rather than do things in-house; others like doing things in-house. Who's to say which organisational decisions were motivated by the rule and which derived from other considerations?
• If they could do it, then you'd effectively have the end of government contracting-out for services except on very minor scale. The whole thing seems designed to kill private-public partnerships like:
• Having specialist companies tender to construct roads rather than having some Ministry of Public Works do all the construction for the government (and losing the efficiencies of competition and private tendering);
• Contracting in external experts for assistance rather than keeping a bunch on government staff. This sucks in a small country where you might need particular kinds of experts only infrequently.

That's just a start; other very foreseeable rather bad consequences are left as an exercise for the reader. For starters, think about incentives to acquire human capital.

Nobody would be daft enough to suggest such a thing though, right? Nope.

The Government should stop giving contracts - and knighthoods - to companies that pay their bosses more than three times their lowest-paid workers, an economist has suggested.

Who? Maybe some crank consultant? Nope. The University of Victoria at Wellington's Geoff Bertram. 

I caught this over the weekend but hadn't gotten around to blogging it; glad to see David Farrar and Matt Nolan caught it too. Matt only thinks Bertram's being "reasonably disingenuous"; I'm less charitable. 

To advocate policies like this, as an economist, and to pretend that a great big bucket of awful wouldn't ensue pretty directly, is worse than disingenuous. Bertram gets to grandstand about what a caring guy he is, let his followers believe that horrors wouldn't ensue, and just trust in that no government would be batty enough to implement the policy. This kind of policy advocacy smells more of charlatanry than of economics. I really really hope that the Herald has quoted him incorrectly as I can't believe that any economist could seriously think this a desirable policy. Care about inequality all you want, but the appropriate levers are tax and redistribution policy, not wage mandates.

If Bertram weren't misquoted, I've a few questions for him.

1. Salary differences within government are often well in excess of the 3:1 ratio he recommends. The Prime Minister doesn't make a lot of money in the grand scheme of things, but he makes well over three times the lowest-paid government worker. Even if the lowest government salary paid anywhere in the system were $40,000, that would constrain the highest salary to $120,000. The Prime Minister earns $419,000. I expect a substantial part of the higher echelons of government earn well in excess of $120k. The base salary for a backbench Member of Parliament is $144k. Should we extend his preferred 3:1 rule to all of government, or just to contractors? 
2. If he only wants it to apply to contractors, on what basis does he make that distinction?
• Note that, if it applies only to contractors, the main large effect of the rule would be to end outsourcing of government work. We'd have a massive expansion of the civil service and an end to what benefits come from competitive tendering. I would put 20:1 on that Bertram's rule, in this interpretation and if enforced, would have this consequence. It is so obvious an effect that it kinda has to be something that the policy proponent wants to have happen. So, Geoff, if this is how you want it, why didn't you just call for a ban on outsourcing and an expansion of the civil service?
3. Private hospitals provide services under contract for government. This would end pretty quickly under Bertram's rule if it applied only to contractors. But suppose it's comprehensive and applied also to government hospitals. Geoff, do you prefer:
1. That the people who cut the grass, and the cashiers at the cafeteria, get salary increases so that nobody is earning less than a third of what the country's top brain surgeons earn? This may have consequences for the overall health budget and the overall quantity of services that the health system can provide. Or,
2. That the people who fix the brains get pay cuts so that none of them earn more than three times what the people who cut the grass earn? This may have consequences for the quality of brain surgery. 

I weep for the quality of thought on the left in New Zealand. Australia gets Andrew Leigh. We get, well, this.

Remembering Mel Smith

This is not the usual fare for Offsetting, but I cannot let the passing of Mel Smith go without paying homage to Not the Nine-O'Clock News' finest moment. (If the embedding doesn't work on, the link is here.)

Depraved economics

The University of Canterbury's truly excellent Economics & Finance Student Society has a semi-regular column in the University's student newspaper, Canta. For their themed issue on "depravity", Canta asked for a column on economics and depravity. EFSoc punted it to me; here's the column.

They edited out a couple of my favourite parts in the print edition, but the online version has the whole thing. A teaser:

In 1997’s “The Devil’s Advocate”, Al Pacino’s version of the Devil, John Milton, explained why economists really are best placed to understand depravity. Well, he didn’t exactly mean to. But when Pacino explained to Keanu Reeves just why Reeves ought to be taking the Devil’s side, a lot of economists would have been pretty sympathetic. At least I was cheering for Pacino when he explained:

“I cared about what he [mankind] wanted and I never judged him. Why? Because I never rejected him. In spite of all his imperfections, I’m a fan of man! I’m a humanist. Maybe the last humanist.”

Like Pacino’s Devil, economists take people as they are. We try to understand their decisions as they’re influenced by the costs and benefits they’d receive from various actions rather than trying to moralise about what they should or shouldn’t do. It’s part of the methodological foundation of our discipline: another Milton, this time Milton Friedman, insisted that we take individuals' preferences as given and explain changes in behaviour by looking to changes in prices and incomes. The standard guideline in welfare economics, the branch of economics that tries to explain whether we’re in a generally happy place, is the even-older Pareto criterion: something is good if it makes at least one person better off while hurting nobody else.

Because people differ in how they get their jollies, it’s tough for an economist, as an economist, to equate depraved with bad unless we define depraved in a very particular way: you’re doing something depraved and bad when you get joy from hurting others without their consent. Where the old Sunday School teachers talked about putting a thorn in Baby Jesus’s heart when you sin, I worry instead about putting thorns in Baby Pareto’s heart when you hurt someone else without their consent. And I’ll define hurt pretty broadly too: when you prevent two people from doing something that they enjoy and that doesn’t harm anyone else, because you disapprove of what they’re doing, that’s depraved. It has hurt them, without their consent, for your enjoyment. Getting joy from preventing the voluntary interactions of others is more properly considered depraved than whatever people get up to, consensually, behind closed doors.

So, if activities others consider depraved make you happy, and you’re not hurting anybody else at the same time, then the world’s a better place when you’re able to satisfy whatever freaky urges you have. Baby Pareto says so.

I then point to some of the empirics on sex, love, and economics. For my sins, I also owe Canta a follow-up column on the economics of self-control for the next issue.

Update: Enjoy! Slightly NSFW, Pacino's brilliant speech.

Innovation is unpredictable

Peter Jackson's showing the world that New Zealand is a great stand-in for Middle Earth didn't just boost the local film industry and tourism, it also gave us a new building material.

I'm several months late to this party: the Financial Times caught this one back in February. Peter Jackson needed a lightweight version of chainmail for his actors and extras. His art director, Kayne Horsham, came up with a new silver-coated plastic mesh. And now it's Kaynemaile, available commercially for myriad purposes.

Though fragile and time-consuming to make (by hand), it was lightweight and gave a realistic glint. Mr Jackson opted to use it, though actors had to carry glue and tape for repairs between shots.

After Lord of the Rings, Mr Horsham experimented with the mail as fashion apparel but he was unable to manufacture in bulk, and the weak joins on each ring were a problem. “I realised that if you could mould the mesh, making it stronger, then it would open it up to all sorts of applications,” Mr Horsham says.

Using free internet software he modelled a way of injection moulding the plastic directly into a strong, seamless mesh. “Each one of those links takes the weight of a single person,” says Mr Horsham, who realised that this strength, combined with its eye-catching reflections, made Kaynemaile better-suited for architectural design and security features.
In 2007, after investment from local angel investors Movac, Kaynemaile automated production at its Wellington factory and made its first sale in Shanghai. It now makes curtains, lightshades, security screens and balustrade panels with the patented mesh. Not forgetting his roots, however, Mr Horsham also supplied chain mail to The Hobbit. But New Zealand accounts for only 15 per cent of business. Customers include ANZ Bank, Hard Rock Cafe and Trump Towers.

When it's used on the outside of buildings as shades or screens, they call it "Building Armour".

And Wellington's now using it for outdoor chandeliers.

Of bus crashes and open bank resolution

Matt and I seem to disagree a bit on how successful the RBNZ's Open-Banking Resolution policy might be in encouraging banks to avoid taking risks that might, on the downside, require a bailout to avoid systemic effects. [Note: substantive update below at *]

Recall that, under OBR, the bank's owners are liquidated first, then their unsecured creditors, before there's ever any move to touch the depositors.* I would expect that if depositors had to take a haircut, there would be reasonable pressure for a bailout. And so there is potential for that some downside risk is foisted on the government.

But we always have to think about things at the margin. Here's a parallel. Right now, if I pay too little attention while driving and smash into the side of a bus, killing me and hurting the people on the bus, my estate does not have to compensate those passengers for the harm I have caused them. A portion of the downside costs of my risk-taking driving maneuvers has been socialised. Does that mean that I take far too many risks while driving? Not in this case: the incentive to avoid dying in a horrible fiery car wreck is sufficient to ensure that I take appropriate care. Requiring that my estate provide compensation would be an inframarginal transfer.

If there were a lot of potential types of car accidents where I'd only be slightly injured but where I'd be doing a lot of harm to others, then the liability regime will matter a lot more. But if I'm guaranteed to die horribly in the event of any car wreck at all, I will take a lot of care. If I have a spike on my steering wheel, it doesn't matter how liable you make my estate for the damage I cause. The spike induces a whole lot of risk-avoidance. Maybe even too much.

The OBR is the spike on the steering wheel. The bondholders and the shareholders are killed in the case of a severe adverse event. That should be enough to induce due caution even if there are a lot of external parties who would suffer harm if the bank blew up. Some externalities are inframarginal.

Three conditions under which I'm wrong and Matt is right, though there could easily be more:

• A bank under such pressure might try a bit of scaremongering to try to whet public appetite for a bailout that would protect the shareholders rather than do anything to affect the deposit-holders. If the government cannot successfully avoid that, and if the bankers know that, then all this is wrong. That's why it's important, I think, to remind everybody, and loudly, that OBR kills the shareholders first and that it's very unlikely that depositors would take any kind of substantial haircut.
• Dysfunctional bank control structures. Suppose that the shareholders appoint a CEO whose compensation has a lot of upside variation with performance and a golden handshake in case of non-performance. And suppose further that the shareholders and bondholders aren't able to adequately monitor the riskiness of the bank's balance sheet. In that case, the one making the decisions isn't the one facing the boiling-in-oil contract and so offloads his downside risk onto both shareholders and bondholders and onto the public via the potential need for a bailout. But are shareholders really that stupid and bondholders that incapable of monitoring?
• Bank cleverness in moving all the unsecured creditors into a preferred secured creditor arrangement so they're ahead of depositors in the queue, and somehow insulating the shareholders from OBR. I'm trusting that RBNZ can prevent this. If not, then the analysis above is wrong. 

Update: More conditions under which I'm wrong:

• Brennan McDonald suggests (comments below) that some of the bigger shareholders might have sufficient political sway to get a shareholder bailout regardless of OBR. He could be right - it is very easy to imagine somebody like John Key looking at a statement from the NZ Superannuation Fund and reckoning that it's easier to bail out the bank than to prop up the Superfund afterwards and deal with the Kiwifund providers' lobbying. Brennan also worries that banks heading towards OCR might tunnel out all the good assets; I'd expect and hope that RBNZ would be keeping a sharp eye on such things. 

* Update 2: I'd outlined the RBNZ's OBR mechanism here. Depositors can take a small haircut fairly easily. Where I had thought that depositors had priority over other unsecured creditors, they are instead counted among the unsecured creditors. So the haircut would be larger than I had previously expected, and so too consequently would be the pressure for a bailout. While OBR attenuates bailout pressure overall by allowing banks to continue trading and by allowing depositors to maintain access to most of their deposits, the larger the expected haircut, the stronger the pressure. Now the OBR also includes provision for that small depositors could be exempted from the haircut, but it would take legislative action to give that effect. If it's done, small depositors pay less attention to their bank's security. If it isn't, bailout pressure come the crisis is stronger. Part of the difference between Matt and I could then be explained by my having mistakenly thought that unsecured bondholders were burned before rather than with the depositors. 

Council Debt for Dividends

My colleague Professor Glenn Boyle provided a few rather insightful comments on what's going on with Council-owned assets in Christchurch. I've hoisted them up from the comments section:

The first question to ask is: what are these increased dividends going to be used for? There are two possibilities - greater council spending or lower rates. It's hard to believe it couldn't be anything but the former.

That being the case, what really matters is the quality of the intended spending, i.e., is it covering its cost of capital? (which is more than just the cost of the borrowing used to finance the spending) Since we don't know what the increased spending is going to be on, it's impossible to say anything definite about this. But the quality of council spending over recent years, and the quality of the 'analysis' underpinning it (e.g., the $70m cycleway), means the most plausible assumption is to place 0% probability on these borrowed funds being spent wisely.

There are other interesting undercurrents in all this though. First, by getting CCHL to do the borrowing, the council is avoiding the need to reveal it on its own books, i.e., it's cunningly 'hiding' the extent of its indebtedness. Second, and more importantly, the council is effectively saying it can invest new capital more productively than CCHL. This is intriguing, given that we're repeatedly told what great investments the CCHL assets are, that they return 15% per annum, and how rates would be so much higher if we didn't have them. If all this were true, then the best strategy available to the council would be to reinvest the borrowed funds in the CCHL assets to provide for further growth. By implicitly saying it could do better than this, the council clearly doesn't believe its own spin.

This is hardly surprising. The arguments trotted out to justify the 'keep-the-CCHL-assets' line are so transparently flawed that the only plausible explanation for the council's behaviour is good old fashioned empire building (something that those of us who work at the University of Canterbury are familiar with).

But now the chickens are coming home to roost. As well as the disturbing announcement identified by Eric, this week we've also learnt that (i) Red Bus earned basically zero profit in the last financial year and will pay no dividend, and (ii) the council has sold one asset (Jet Engine Facility - what on earth was it doing owning it in the first place?) in order to prop up another loss-making subsidiary (VBase).

It's like living in an episode of Mad Men (without the fun parts).

Glenn is entirely right. Council drawing funds out of the Council-held firms is inconsistent with Council's repeated assertions that the rate of return on Council-held firms is very high.

Council should be in the business of providing decent roading infrastructure, working and reliable sewers and waterworks, and a few consumption amenities. They are not the best owners of things like ports. The temptation to tunnel assets out by deferring maintenance and loading the companies up with debt ... well, some perils are just too perilous.

Housing daily: LVR, NIMBYs, and congestion charging

The RBNZ will soon announce its Loan-to-Value rules. Matt Nolan makes a few reasonable points (all my paraphrasing):

• If the policy is targeted at financial stability, then it has to bite on high-leverage first home loans as those are the most likely to wind up in positions of default. 
• I'm still a bit sceptical here as the OBR rules mean that the banks have to burn their equity holders and unsecured creditors before touching depositors if they make a bunch of really risky loans: I'm just not convinced that the banks here are really imposing systematic risk by allowing highly leveraged loans. But maybe the RBNZ has insider information suggesting that the government is way more likely than anybody thinks to start stomping on Councils' NIMBY regs currently preventing new building and so property prices are set for an unexpected fall.
• Further, the choice of "speed limit" will matter. Suppose we've had a road with no speed limit and we're promised one will soon be implemented to stop speeding-related risks. If they then announce a highway speed limit of 100 or 110 kph, that's all fine. If they announce a highway speed limit of 25 kph, not so much. I don't know what fraction of normal-conditions first home loans would be blocked under the new rules, so I don't know whether we're setting a 100 or 25 kph speed limit.
• Politicians mucking about with what the RBNZ is proposing risks undermining the whole purpose of the thing.
• I expect here that Matt's alluding to some of John Key's comments suggesting that first-home buyers be exempted.
• Politicians seem to see LVR as a way of fixing housing affordability; it's not well-suited to that end. 

  At the moment political parties want to loosen financial conditions for home owners, and introduce all sorts of schemes that will get capitalised into house prices.  Instead, the politicians should be looking at it as a distributional issue – it isn’t about giving young households cheap large houses that only exist in fantasy, it is about being realistic about any intergenerational distribution issues that we believe exist due to the inherent “cause” of the current “bubble” or a broader “misalignment” – this has to be relative to what we think is “fair” around the distribution of lifetime resources.  We can’t just “pop” a bubble, but if we understand the causes we can deal with the distributional issues associated with it.  Looking at supply side constraints (which both parties are) makes sense – good to see that.

  But what about the near term?  Worst case scenario, one-off tax all property, given money to group who is “hard done by” – if you aren’t willing to do that, you are faking your belief in a distribution issue. 

  Indeed.
• Matt's sick of Gen X / Gen Y whinging about house prices and wanting transfers. 

I agree with Matt that most of the demand side schemes are horribly misguided. But current housing policy prevents substantial expansion of current supply, inducing large regulatory transfers to those who bought houses when supply was less constrained. In a world where supply could expand (both with increased density and expansion in the suburbs), we wouldn't get the kinds of price run-ups now being experienced in Auckland. Matt's right that more people, and especially young mobile people, should rent rather than buy.

What we really need to figure out are policies that pay off the losers while expanding supply. We have something of a transitional gains trap in housing policy. Current homeowners do get some direct benefits from regulations preventing both them and their neighbours from developing: NIMBY is NIMBY for a reason. But another large effect is that the NIMBY regs keep up house prices as a whole. Sufficiently expansionary housing policy would impose capital losses on homeowners. And we tend not to have easy ways of implementing those kinds of policy changes without compensating those adversely affected so that we can move towards the more efficient equilibrium.

And so I was really disappointed to hear Gerry Brownlee on the radio this morning. One thing that could help Auckland move toward expanding on the fringes would be allowing the use of congestion charging to both internalise the consequent externalities and to help defray the costs of any new roading necessary to service the new communities. It's the kind of policy that compensates the losers (at the margin) while taxing the winners (at the margin). Gerry Brownlee on Radio New Zealand this morning suggested that Auckland wouldn't be allowed to implement congestion charging. Gerry should remember that it's socialists, not free-marketers, that usually recommend that scarce resources be allocated by queuing rather than by prices. If Auckland's willing to move toward sensible road pricing, and they're blocked by central government, we're in rather a bad spot.

Debt for Dividends

Christchurch City Council refuses to sell Council-owned assets to help pay for the earthquake rebuild. They should sell some of those assets, so long as it's to pay for roads and sewers rather than for stadiums. But, a lot of folks just hate the idea of selling off the assets, and so it isn't happening.

Instead, Council-owned companies look like they'll be taking on debt to pay a higher dividend to Council.

The Christchurch City Council's investment arm may have to borrow to meet higher dividend commitments of $140 million over three years to the council.

Christchurch City Holdings (CCHL), which oversees the council's trading companies such as Orion and Christchurch Airport, promised to step up dividends after the earthquakes.

Its new statement of intent for the next three years from July 1 this year to June 30, 2016, forecasts dividends of $46m, $46m and $48m to the council.

It is a significantly higher level of ordinary dividends than before the quakes, when dividends ranged from about $30m to $35m each year.

CCHL's profits for the three years are forecast to be $33.1 m, $37.6m and $43.1m. CCHL will need to borrow $26.2m to meet its commitment to the council, unless it receives more dividends from the council's seven trading companies, increasing its profits.

CCHL chairman Bruce Irvine confirmed CCHL would borrow to meet the gap between its forecast profits and the dividends if needed.

I'm not a corporate finance guy, but it seems a bit odd to be borrowing to pay dividends to current shareholders. It's not something I'd expect would typically be recommended. Borrowing money to finance projects that yield a longer term rate of return in excess of the borrowing costs - that tends to be recommended. If firm shareholders have short term financial issues that mean they've a strong preference for having cash now, sensible Boards, I'd have thought, would have reminded those shareholders that they could divest themselves of a few shares if they needed a short-term cash hit.

When companies instead are borrowing to make their big shareholder happy about the current dividend flows, I start worrying about a whole pile of other ugliness that could be going on. Like, whether the company is making adequate investments in the maintenance of its physical assets or whether it's deferring maintenance to make the dividend payments. But again, I'm not an accountant or a corporate finance guy, and I've certainly not cracked open the CCHL books. It just smells a bit off. When a company is taking the dividend as a constraint against which to optimise instead of as the residual of what's left over after they've paid the bills, I wonder whether they really ought to have different owners.

But maybe a finance type who reads the blog can set my mind at ease here. Or maybe this is just standard practice when the government owns NZ companies. I remember something about something involving Solid Energy doing something like this.

Update:

• Apple has borrowed to cover dividends and share buyback. Borrowing for a share buyback is different: the firm gets to own more of itself. And Apple had tax reasons to borrow rather than to bring its overseas cash back to the US.
• Weird stuff can happen such that companies can't make a scheduled dividend payment while all is fine, or where a profitable company hits a liquidity constraint and so has to borrow despite profits in excess of the dividend payment. But here CCHL deliberately lifted the dividend payment to transfer more money to Council post quake. If they're doing that, why not just sell some shares in it instead?

Stigmatise smokers

So we're spending half a million dollars playing on and fueling the stigmatisation of young smokers.

The sight of diseased livers, bloodshot eyeballs and rotting teeth on cigarette packets has almost no impact on young smokers, who view grotesque images as irrelevant, a new study suggests.

Instead, researchers from the University of Otago found warnings that play on young people's fear of social ostracism - and how unattractive they look and smell - are most effective.

Taglines like "Kissing a smoker is not a turn-on", "Everyone can smell a smoker", and "Smoking stuffs your lungs", had the biggest impact on a group of 18 to 30-year-olds.

Recall anti-smoking advocate Richard Edwards' plenary address from a couple of years ago.

We need to be very careful that interventions do not stigmatise smokers. Once again this involves keeping in close touch with how smokers are feeling through in-depth research. These quotes show how the experience of stigma among smokers and practice of stigmatising behaviours can be very real. This reduces support among smokes (and also among non-smokers) for tobacco control and the tobacco free vision, and may drive smokers together in a sort of Dunkirk spirit against the perceived assault from a marginalising society or harden the determination of smokers to smoke, as encapsulated in this last quote. We should be anti-smoking, but never anti-smoker.

I look forward to Otago's future recommendations to combat obesity by telling the obese that nobody likes them.

Internet sales taxes: NZ edition

Should consumers buying online goods from overseas pay GST on their purchases? The Press reports that IRD is examining options.

The status quo is that purchases from overseas do not attract GST where the cost of administering and collecting the tax exceeds the tax collected. So purchases of $400 or less are untaxed: the fixed cost of collecting the tax must then be about $60.

The New Zealand retailers hate that Kiwis like importing things from abroad, but it's hardly the GST-savings that are driving things. You can fairly easily save upwards of 50% by using UK bookseller BookDepository rather than Kiwi outlets; fixed costs here matter a lot more than the 15% GST difference.

Were there some costless technology for imposing GST on goods coming in at the border, then New Zealand should do it. The more we can rely on consumption taxes, the less we have to rely on income taxes. If collection technologies change, then the threshold too should change.

So there is nothing objectionable about IRD's continuing to keep an eye on the optimal GST collection threshold and on things that might reduce collection costs.

But I do hope that IRD is weighing the costs of collection falling on all parties, not just those falling on IRD. When a package is held at the border pending GST collection, it takes time and hassle to bill people, and packages get delayed. All of that is off-budget from IRD's perspective, but they're real costs too that should count in the calculus. And, they're particularly pernicious costs: the random-draw delays that can obtain if goods get held up waiting for GST collection can put people off online shopping from abroad entirely. That's likely what the Retailers Guild is hoping for.

I expect that having the credit card companies or foreign retailers act on IRD's behalf would prove rather intractable. I would also be a bit surprised if collection technologies have advanced sufficiently to make it worthwhile to collect at lower than a $400 threshold, but perhaps IRD will surprise me.

Saint Steven

If Steve Landsburg is right about the process for becoming a Saint, I think we ought to launch a campaign for Saint Steven. Here's Landsburg's summary:

So if I have this right, it is now the official position of the Catholic church that:

1. The late Pope John Paul II has the ongoing power to cure brain aneurysms.
2. As far as we know, he has chosen to employ this power exactly once. (He also once cured a case of Parkinson’s.)
3. While hundreds of thousands of others have suffered and/or died from brain aneurysms, John Paul has not been moved to intervene.
4. The one victim he troubled himself to save was selected not because she was particularly deserving or particularly valuable to society, but because she chose the right guy to pray to — sort of like having to suck up to the teacher to get a good grade.
5. All of this makes John Paul II particularly fit for veneration.

For God’s sake (you should pardon the expression), if you’re looking to make the case that John Paul II was capable of performing (or at least catalyzing) genuine miracles, isn’t the defeat of Soviet Communism good enough? That right there makes him a saint in my book — though if I ever come to believe that he cancure aneurysms and has been holding out on us, I might have to retract my endorsement.

So, here's the campaign for Saint Steven.

1. Any of you who have any kind of illness at all pray to Steven Landsburg for intervention. 
2. If you do not receive divine Landsburgean intervention, don't tell me about it. 
3. If you do receive divine Landsburgean intervention, please leave a record of such in the comments. Preferably with a link to a doctor's note saying that your recovery was unexpected and pretty remarkable. This should happen in maybe 1% of cases. 
4. We submit the documented evidence of the successes, while ignoring the failures. Ta-dah! Saint Steven.

Economics has its Gods; why couldn't it also have Saints? 

Bland by design

I could grok changed building rules in Christchurch post-quake. Earthquake and liquifaction changed what we might want from foundations.

But the percentage of building frontage that must be in windows, no matter what? That car parking be hidden?

For example, the rules requiring buildings facing a road or public space to be between 60 and 90 per cent windows would not suit many businesses.

"Such blanket provisioning ignores that such a percentage of glazing may be inappropriate for the retailer, who may need more security, such as a jeweller or a bank; whose security requirements must take a higher priority than urban design,'' the submission said.

"Furthermore, it ignores the needs of department stores or larger stores who may need to place stock on shelving attached to solid walls around the perimeter of building."

The Property Council said that, because glazing was so expensive, the rule would boost the cost of new shops.

"We are strongly opposed to any provisions in the plan change that call for an increase in development costs without sufficient justification."

The submission criticised the requirement for car parking to be hidden from view, saying visible parking was a principle marketing attraction for retailers.

"This is completely impractical for many retail activities, which rely on visible parking to attract sufficient customers in order to remain viable,'' it said.

Prescriptive zoning rules are what deliver boring, expensive cities. Get a long enough list of "every building must", and you'll get a pretty short menu of options that can fit the bill.

I just don't get why we have to be so prescriptive about things that are orthogonal to "risk this building causes to others that are avoidable at reasonable cost." Minimum engineering standards that keep buildings from falling onto passers-by make sense. Council failed to do anything about this prior to the quakes, and even hindered owners who had wanted to tear down buildings that wound up falling down and killing people in February's quake. Even if we take a hard econ line on that individuals should be free to live or work in a dodgy building and trade safety for money, risk imposed on passers by seem sufficient to require either strictly enforced minimum standards or liability rules with compulsory insurance.

I wonder how much intersection there is between the kinds of people who think prescriptive town planning rules are great things and the kinds of people who don't like the tilt-slab construction that's been the consequence of trying to tick all the planning boxes on a budget.

Meanwhile, in America, Matt Yglesias has taken up Donald Schoup's banner on the high cost of free parking. Parking minimums are pretty common in the States: developers then have to put in more parking than they'd like to. Other places have parking maxima, preventing developers from providing as much parking as they think appropriate.

What happens when you stop being so prescriptive around parking?

Michael Manville of UCLA studied a liberalization of parking regulations in one section of Los Angeles and found that deregulation leads to the construction of more housing units and fewer parking spaces. Conversely, tighter regulation leads to a lack of affordable housing and a surplus of parking spaces. That might make sense if parking spaces were a public good, like clean air. But they’re closer to being a public bad. When Chicago mandates the creation of ahigh number of parking spaces per square foot of downtown office building, it reduces the price of parking, but it has a number of negative consequences. Cheaper parking means more traffic congestion on the streets. It also means lower ridership for Chicago mass transit. Perversely, cheaper parking offers a subsidy to commuters from outside the city limits at the expense of Chicago residents living within walking or biking distance of the central business district. And, of course, it leads to dirtier air, not cleaner.

Yglesias recommends abolishing requirements that buildings have parking spaces; I'll also recommend abolishing requirements that they have maximum numbers of parking spaces. If the highest valued use of a piece of land, as seen by the person with skin in the game, is a parking space, why need Council get involved?

Maybe, just maybe, if Christchurch Council focused really hard on a small number of rules around building safety, and dropped the other stuff, they'd be able to competently administer a set of useful rules instead of, well, what we have instead.

The Rent is Really Rather High: Christchurch edition

The median two-bedroom property available for rent in Christchurch today, listed on TradeMe, is going for $395 per week. There are 173 2-bedroom properties available. There are fifty properties listed at $340 per week or less; that's also the price at the 25th percentile. When I'd checked this back in March, the median Christchurch price was $365 and the 25th percentile price was $300 per week. So the median is up by 8.2% since March and the 25th percentile is up by 13.3%. 

The Christchurch Press continues to report on the rather substantial consequent problems.

Christchurch economist Robin Clements said it would ''take a long time to relieve the issue'' of the shortage.
''It's still going to take years to increase the supply, even if action is taken now."
Even the slowness of the cental city rebuild was affecting the housing market, Clements said.
There's a shortage of hotels, so visiting businesspeople have to stay in motels. Then people having their homes repaired can't get a motel, so they're taking up rental homes.
"Every section of housing has got some sort of pressure, and it's all linked to the pace of the rebuild.'' 

Every homeowner with temporary accommodation coverage in his home insurance policy is pretty price inelastic in demand for the duration of repairs. Inelastic and increased demand meets fairly inelastic supply and results are pretty predictable.

Everybody knew or had to have known this was going to happen. There was even talk about doing something about it. Here's Roger Sutton from June 2011:

Speaking to about 50 mostly red and orange-zone residents yesterday at a community meeting in New Brighton, Sutton said the region's land prices were a "real concern".

The authority's extraordinary powers could be used to reduce the cost of development land, he said.

A "common theme" from the meetings was that many properties in the red zone, where land cannot be rebuilt on, had a rateable value under $100,000.

"There's very little land on the market for those prices at the moment," Sutton said. "We have to move as quickly as possible to give an assurance that there is actually going to be land and house packages, or at least land packages, to begin with, at prices you feel you can afford."

Residents told yesterday's meeting that some developers had increased land prices after last week's Government announcement.

Sutton said supply-and-demand problems were expected, but cutting red-tape costs, such as planning and resource consents, was possible.

"I have quite extraordinary powers to actually bypass those planning laws, but my preference would be for the normal legal processes to work," he said.

For the next two years we instead stuck with Council's normal legal processes, which turned out to be so incompetently administered that we don't even know how many recently consented buildings actually meet Code. It's not as though Council weren't putting lots of hoop-jumping in the way of those trying to build: it seems rather that they were enforcing a random-draw set of rules often orthogonal to actual building safety. The resulting potential liability has had Council's credit rating downgraded. Council had planned on substantial borrowing to finance its share of the rebuild costs, and sensibly so. But this will now be more expensive.

Central government could be tempted to take over more of Council's functions; it would be hard to blame them, given Council's rather substantial demonstrated failure and the importance of getting this mess sorted out quickly. I don't know Douglas Martin, who has been appointed by central government to fix Council's consenting issues, but I don't share the engineers' worries about his not being an engineer. Council needs somebody who can sort out their processes and who can listen to engineers.

But perhaps we might instead pay some attention to what our very own Cassandra, Hugh Paveltich, recommended shortly after the earthquakes. Instead of abolishing local government, perhaps instead decentralise further. Instead of running everything out of Council's offices, and out of Earthquake Minister Brownlee's offices, devolve building consenting down to a far more local level. Paveltich then recommended:

1. COUNCIL REFORM REQUIRED: Dealing expeditiously with the systemic problems of the Christchurch City Council, in moving quickly to a “One City – Many Communities” approach. Thankfully there is a strong core majority of sound Councillors (as your article “A shaky future” explained). The current CEO needs to be replaced with someone having engineering training and a proven track record of project management. I am most impressed with the performance of Orion's CEO Roger Sutton – a person I hold in the highest regard.
   There need to be about 8 Community Service Centres – Akaroa, Lyttleton and about 6 in the city, which again need to be led by people at the staff level with engineering training and a proven track record of project management.
   After all, local government's primary responsibilities are infrastructure and buildings.
   These Community Service Centres need to be supported by building and environment regulators with enabling attitudes and the capacity to solve problems. It does not appear many within the current centralized structure have these skills. There would need to be constant monitoring of the performances of these building and environmental officers, so that those lacking the required skills are replaced quickly.
   The Central Office should be a small one, fulfilling a coordinating role where required (and importantly not, when it’s not required), responsible also for the central area within the four avenues.
   The highest polling elected representative should be the local chair and city councilor. The mayor should be elected on a city wide basis.

Spreading consenting across a lot of local units builds robustness. Failures get contained to that unit.

It would be interesting if Paveltich were to run for mayor. At least we'd get substantive discussion about urban planning and how it might facilitate rather than hinder recovery.

That of which we here are a part and complicit

From Snowden's interview with Jacob Appelbaum and Laura Poitras:

Interviewer: What are some of the big surveillance programs that are active today and how do international partners aid the NSA?

Snowden: In some cases, the so-called Five Eye Partners go beyond what NSA itself does. For instance, the UK's General Communications Headquarters (GCHQ) has a system called TEMPORA. TEMPORA is the signals intelligence community's first "full-take" Internet buffer that doesn't care about content type and pays only marginal attention to the Human Rights Act. It snarfs everything, in a rolling buffer to allow retroactive investigation without missing a single bit. Right now the buffer can hold three days of traffic, but that's being improved. Three days may not sound like much, but remember that that's not metadata. "Full-take" means it doesn't miss anything, and ingests the entirety of each circuit's capacity. If you send a single ICMP packet and it routes through the UK, we get it. If you download something and the CDN (Content Delivery Network) happens to serve from the UK, we get it. If your sick daughter's medical records get processed at a London call center … well, you get the idea.

Interviewer: Is there a way of circumventing that?

Snowden: As a general rule, so long as you have any choice at all, you should never route through or peer with the UK under any circumstances. Their fibers are radioactive, and even the Queen's selfies to the pool boy get logged.

Interviewer: Do the NSA and its partners across the globe do full dragnet data collection for telephone calls, text and data?

Snowden: Yes, but how much they get depends on the capabilities of the individual collection sites -- i.e., some circuits have fat pipes but tiny collection systems, so they have to be selective. This is more of a problem for overseas collection sites than domestic ones, which is what makes domestic collection so terrifying. NSA isn't limited by power, space and cooling PSC constraints.

Recall that Five Eyes is the US, UK, Canada, Australia and NZ.

Speculation: In the tent, eventually NSA kits up GCSB to be able to do what GCHQ can do. It'll be lower priority as we're a rump loop of the cable at the end of the world whereas Britain's pretty central. But we'll get there. Out of the tent, I'd expect NSA would stick a box at the Australian or US termination ends of our cables and start doing it faster.

Film imports

New Zealand is considering reducing the duration of the ban on the parallel import of DVDs. It should reduce it to zero. Why? The ban could have made sense in a world of physical film distribution; we are rapidly moving away from that world.

Background: films have traditionally taken a while to arrive in New Zealand. Film distributors used international release windows to ration a good in scarce supply: the physical copies of films that, after a first run in the US, made their long slow journey to New Zealand (complete with scratches and other assorted wear and tear). Movies could show up on planes before hitting theatres here. If everybody had been able to import VHS tapes or DVDs of films from the US when they hit the US market, film producers would have had to have printed more copies of films at the outset. This would have increased costs for everybody. One source says it costs the studios $1500 to produce and ship a film reel within the US. Maybe the benefits to consumers from earlier releases would have outweighed the increased ticket prices and the reduced producer surplus, but the movie industry's producer surplus is what lets new films be made too. Also, the US provided a testing ground letting film distributors get a handle on which films were likely to be able to make it on the international stage. If they had to produce enough copies of everything to satisfy a worldwide simultaneous release for all films that had a decent chance of making it internationally, costs could have been pretty substantial.

In general, New Zealand allows parallel imports. If some big brand wants to strike an exclusivity arrangement with some NZ retailer, the government rightly figures it's not the government's job to enforce that arrangement by banning wholesalers or retailers from other countries from shipping the same product to NZ retailers. But NZ has maintained a ban on parallel imports of DVDs until the theatres have had a kick at the can.

Now the marginal cost of another copy of a film is near zero with digital distribution. Theatres are flipping to digital projection. Worldwide simultaneous release is no more expensive to run than a staggered release, though you do forgo the benefits to local cinemas of being able to wait and see what works in the States so they can pick the winners, and you miss the chance to jet the stars around the world for the various premieres. The benefits to consumers of being able to see what's on in the States at the same time as it's there airing are also much higher now than they were two decades ago. If a pile of your Twitter and Facebook friends are all chattering about a movie you can't yet see, that really really sucks. You never say "Boy, am I glad that film didn't come here (or took 4 months to get here) because all my friends in the States saw it and said it stunk!" If you want movies to be pre-vetted that way, you do the same thing Americans do: wait for credible reviewers to see it and do what they tell you to do.

So, the benefits of staggered international windowing are much smaller than they used to be. Parallel importing of DVDs pushes distributors away from their ideal, but also circumvents the obvious alternative strategy of just downloading things, so the losses may be less than the naive model might suggest. If New Zealand abolishes the windowed ban on parallel DVD imports, it will have negligible effects on the film industry as a whole and will encourage that more films open here at the same time as the US. I'm not sure that it's in New Zealand's interest to help facilitate this particular international price discrimination scheme, or at least it would take reasonable evidence to convince me that it is.

CAFE kills?

American fuel economy standards have a bunch of offsetting effects. If you're going to be in an accident, you're safer in a bigger vehicle, but you're also increasing the risk for everyone else. Tightening the fuel economy regulations then have ambiguous effects: do they save more lives by reducing deaths caused by those in SUVs, or do they kill more people by ensuring that more who are involved in accidents are in smaller vehicles?

Mark Jacobsen runs the numbers.

I estimate the fleet-wide impact of historical CAFE rules to be 149 additional annual fatalities per mile-per-gallon (MPG) increment in stringency. In this case, the shift to smaller vehicles within the car and light truck categories prescribed under CAFE causes deterioration in safety that is only partially offset by reductions in poorly matched accidents. The safety effect translates to a welfare cost of approximately 33 cents per gallon of gasoline saved.⁵ In the context of related environmental externalities, damages of $25 per ton CO₂ amount to 22 cents per gallon of gasoline, and Parry and Small (2005) report costs from local air pollution of about 16 cents per gallon.

So tightening the regs by one mile-per-gallon costs $0.33 in lives lost for every gallon saved while providing $0.38 in reduced pollution for every gallon saved. Pretty close to a wash if we think that the regulations themselves are costly.

He estimates the effects of an alternative policy bringing all vehicles under a single unified standard and reckons that tightened fuel economy standards under that form of regulation come with approximately zero cost in terms of lives lost: drivers of light trucks substitute into safer cars.

Even better could be abolishing CAFE entirely in favour of a petrol tax. CAFE standards only make sense relative to a petrol tax where consumers are particularly myopic and ignore the future petrol costs when buying a thirsty car. They aren't.