The Planning Imperative

Urban designer Garth Falconer identifies a lot of the problems in post-quake Christchurch. But he misses, I think, the bigger point.

First, the good stuff. Falconer rightly notes that downtown Christchurch remains similar to a bomb-site. We were there during some actual bombing a few weeks ago, when they blew up the former police station. He rightly worries whether there could be enough business demand for downtown high-end offices with everyone having moved out to the burbs. And he's very right that CERA has failed.

But he's wrong on one small issue and one big one.

On the small side, he says that residential housing in Christchurch is limited to the East by the sea. This is true, but only in the trivial sense. There is plenty of land available for housing in the east, but the infrastructure is a disaster.

Until August of last year, we lived firmly in the East - in South New Brighton. Imagine an arm where you've put on a tourniquet tight enough that it'll go gangrenous and die, but it can still move around a bit for now. The fingers don't quite know the whole score but they know they don't like what's going on. That's the east side of Christchurch. The gangrene has set in. It's not all like that, but enough of it is that the area as a whole feels pretty doomed.

The city's economic centre of gravity has shifted substantially westward, and lengthier commutes along wrecked and depressing streets appeal to few. Every time Council prioritises downtown cycleways over fixing east side bridges, they tighten that tourniquet just a little bit more. It's pretty easy to then get into self-reinforcing downward spirals: economically active people move out West to where the jobs are, and those who are left make it harder to attract either economically active people or new businesses to the area. Maybe there's still a chance to anchor something good around the Brighton Mall, but it's grim. Our house, fresh from a really rather good opt-out earthquake repair, still took months to sell and finally sold for a bit under rateable value - in the midst of a Christchurch housing crisis. Plenty of demand on the east side for lower tier housing, but not so much for places a few notches up the scale.

But that's the minor point.

Bigger picture, Falconer blames poor design - that Council and central government didn't have the right plan. He recommends (as one option) five-level residential buildings with downstairs retail. But that sort of thing was already in one of the many downtown plans - I think it had a seven-story limit. The problem rather was that for want of the perfect plan, Council, CERA and the CCDU held everything up downtown until everybody realised they needed to move the heck out of the zone of central control. They made the best the enemy of the good enough, and Falconer reckons the problem was that the plan just wasn't best-enough. Further, he complains about how the retail development is going to be too expensive for most businesses without noting that this is a direct result of the planners' efforts: they deliberately sought to restrict downtown land availability to push up prices and set design requirements to prevent lower-rent developments.

The lesson of Christchurch isn't the importance of getting the plan right; it's rather that, sometimes, you do far better with a very light planning touch. Quickly announce where key facilities will be placed so that private developers can decide where to move; facilitate lots of public information about who has decided to rebuild where so that the next folks down the line can plan around it (if you're putting up a hotel, maybe I want to put a bar nearby); make it easy for developers to make contact with land owners to facilitate site accumulation for larger projects; and, commit to what infrastructure's going to be provided really early on so that you don't have nonsense like tearing down newly rebuilt buildings because government's just decided to make Manchester Street 9 meters wider. And for the love of all that's holy light a fire under your consenting office that approvals be granted quickly and there be no regime uncertainty.

The problem wasn't that they chose the wrong plan for Sim City; it's rather that the planners figured they were playing Sim City.

Housing supply curves don't have to be vertical

I like Bernard Hickey's concluding paragraph in this weekend's column. After explaining how changes in Chinese controls on outbound overseas investment could spark greater interest in Auckland property, he writes:

A look across the Tasman suggests the flood of money coming from China could be put to good use if it is funnelled into new housing developments, in particular apartments off the plan. Australian developer Lend Lease sold 581 apartments off the plan for its latest Darling Harbour project in five hours on one weekend last month, including more than a third to overseas buyers. It sold A$600 million of property at a rate of A$2 million a minute.

If Auckland and the Government could only convince Aucklanders to allow the building of more overseas-funded apartments near the CBD then it might have a smidgen of a hope of filling that shortage of 60,000 homes. They would cost NZ$30 billion to build so that NZ$16 billion of overseas investment could come in very handy indeed, if it was directed into new homes rather than existing homes. 

The problem isn't a lack of capital - there's plenty around. Or a lack of capacity to put up buildings - that's determined by longer term expectations about whether you can make a go of starting up a construction company, expanding an existing one, or getting into trades. There can be current constraints, but those are an equilibrium that could shift if we again allowed new construction.

The barrier is instead where and whether Council allows new construction to take place. And that's a function of whether Council has strong enough incentive to overrule the NIMBYs under the current RMA processes and local government financing regimes.

Every time a NIMBY cries, an angel gets stuck in an overcrowded house.

Don't you try overturning my anecdotes with data.

Few things are more depressing than a Stuff.co.nz comment thread, even on a good day. But this one was a doozy.

Michael Daly reported on the Treasury paper showing, if anything, declines in income inequality in NZ since the early 2000s and, for expenditure-based measures of inequality, a decline substantial enough to have matched the increase that came in the late 1980s. We put out a press release on the topic along with explanatory video.



The Stuff comment thread though - folks seem to think there's some grand Treasury - NZ Initiative conspiracy to juke the data. The data that Treasury's using here's showing the same basic trend that MSD showed last year, and it would be difficult for anybody who's met Brian Perry to call him a raving right-winger.

A fair few worry about wealth inequality. Well, expenditure-based measures implicitly have both wealth and income in there as the rich will draw down from savings or have better access to credit during any income downturn. Further, what data we do have suggests New Zealand ain't too bad on that front either.

Yes, things can be bad for those on low incomes. Double-plus-emphatic-yes that the housing shortage has had horrible effects on the poor. But does believing that have to commit you to believing that Treasury AND MSD are making up the data on inequality? Give your heads a shake.

Ultra Vires?

Michael Reddell, ex-RBNZ economist, has wondered whether the RBNZ's LVR rules really fit within its financial stability mandate. I had a piece in the NBR last month wondering the same thing.

Seems we're not alone.

In a briefing for Secretary to the Treasury Gabriel Makhlouf, officials said they agreed with the Reserve Bank that a pick-up on the Auckland housing market "could potentially pose a threat to financial stability" in the coming years.

"However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ's mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices."

The comments appear to suggest the Reserve Bank is being warned that it may be overstepping its role over financial stability, a claim made in recent months by Michael Reddell, a senior adviser to the bank who was made redundant earlier this year.

Reddell said the Reserve Bank's own stress tests released in late 2014 showed the major trading banks could withstand a 50 per cent house price fall in Auckland and 13 per cent unemployment without breaching capital requirements. Some could even continue to pay dividends in that scenario. Nevertheless the Reserve Bank had imposed lending restrictions requiring larger deposits on the ground that rising prices were a risk to financial stability, something Reddell claims the bank had not laid out an argument for.

"What they haven't done is make a compelling case that there's a threat to financial stability of the New Zealand financial system," Reddell said.

Reddell hit the topic again at last night's LEANZ meeting. He blogs on it here - his full talk is worth reading. Jenny Ruth at The NBR (gated) has more.

Meanwhile, the Finance Minister reminds the Reserve Bank that they're meant to keep inflation between 1 and 3 percent; they've been running a bit low.

Mr English’s criticism of Reserve Bank governor Graeme Wheeler’s conduct of monetary policy is a major departure from the government’s customary respect for the central bank’s independence.

“He’s been out of the zone for years now, below the midpoint for quite some time,” Mr English told the Bloomberg news service late last week.

“He’s meant to be following the Policy Targets Agreement,” Mr English said.
The PTA, an agreement between the finance minister and the central bank’s governor, requires the governor to keep inflation between 1% and 3% and to aim for 2% over the medium term.

“That’s the bit I look at and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not,” Mr English said.

That's pretty blunt.

Central Bank independence means independence to choose the appropriate methods, among those they're legislatively empowered to use, to achieve the inflation outcomes they're contracted to produce and to maintain financial stability.

It does not hurt central bank independence to remind them that there are targets they have to achieve. I don't like it when Finance Ministers and Prime Ministers speculate about the appropriate path for interest rates. But they have to hold the Governor to the targets. I think that failed in 2005/6 when Cullen let Bollard run too hot for too long. But I am a bit surprised that English's comments came after Wheeler started cutting interest rates, rather than a few months ago.

Matching markets in everything: Sugar-daddy edition

Oh, but how the internet reduces transactions costs and facilitates trade.

Today's edition: what happens when somebody needs income support through university and is willing to supply friendly companionship, and somebody else seeks the opposite? From this week's Economist:

Students who post profiles on SeekingArrangement.com know what they want, so “it’s almost like a business partnership”, says Angela Bermudo, a spokesman for the company. The site hosts some 900,000 profiles of sugar babies enrolled in American universities, up from 458,000 two years ago. Their ranks swelled during the recession and are still growing fast, says Brandon Wade, the site’s founder. A year ago nearly 1,200 students with an e-mail account belonging to an American university posted a profile on the site every day; the daily average has risen to about 2,000. The site has even stopped advertising online. Its ads used to pop up with search results for terms such as “student loan”.

The boom is fuelled by increased acceptance of “sugaring” (dating for money), says Steven Pasternack, the owner of a Miami firm known as Sugardaddie. The company’s site gets more than 5,000 new profile uploads worldwide every day. A quarter are students. Astute marketing helps. Sugardaddie’s pitch notes that it does not “discriminate against people’s desires”. Sugar babies are increasingly advised to negotiate not an “allowance”, but rather a certain “lifestyle” in exchange for dates. These arrangements can remain discreet. New Yorker Keith and the younger woman he met online, seeking a sugar daddy to pay for college, both tell friends that they met in a bar. His weekly $500 deposits into her bank account will cease, he says, if she becomes unavailable.

The article says young men are generally out of luck, as few older women are in the market seeking such arrangements.

Inequality crisis?

Consumption inequality in New Zealand is down. Not just down on the mid-1990s post-reform peak, but also down relative to 1984.

That's the conclusion out of new work by Ball and Creedy at the Treasury. I cover it over at The Initiative's Sandpit blog. But here's the key figure.

The dashed “Market” line traces Gini inequality in market earnings over the period – that’s before taxes and transfers. That series rose from the late 1980s through about 1994, then levelled off before easing back to early 1990s levels.

The solid “Disposable” line tracks Gini inequality in disposable incomes – that’s after tax and transfer. This measure rose from 1988 through to about 1994 then was basically flat. Note that the spike at 2001, and again around 2010, coincide with tax changes that encouraged income shifting from one year to another, generating the hump.

The dashed “Consumption” line is the one that’s particularly interesting. It measures inequality in real consumption. That measure rose a bit from the late 80s, plateaued through the mid-90s, and has eased off since then. Current inequality in consumption is lower than it was before the 80s reforms.

I doubt that data will have much effect on media frenzies around inequality. But at least you and I know better.

The languages of Omecron Perseii 7 and Omecron Persii 9

Since none of us can really affect political outcomes, it's generally irrational to pay too much attention to politics. On that measure, men are far less rational than women - or at least by the studies of political knowledge I've come across (two examples), and my own work on New Zealand.

This general finding is supported by a very different kind of method. Schwatz et al trawled through 700,000,000 words, phrases and topics provided by 75,000 Facebook volunteers. The authors were interested in personality differences and language. But the gender difference in propensity to talk about politics was stark. Here are the word clouds, sorted by gender. I apologise for the curse words.

At least in this Facebook sample, women talk disproportionately about relationships and feelings; men disproportionately curse, talk about sports and video games, and talk politics.

If we look at the topic clusters, women's focused on family and feelings (emotions, cute things, happiness, friendship, family/friendship); men's were politics, sport, war, video games, economics-politics, and cursing. Or at least that's my summary of each of the topic clouds. Within the central core, government shows up on the men's side; nothing policy-related shows up on the women's side. Or, at least, these are the words that are most *distinctively* associated with each gender. If somebody on Facebook is talking about the economy, tax, budget, the government, freedom, democracy, rights, or liberty, it's likely to be a guy - at least in this sample.

HT: Max Roser

Pollution taxes?

The Environmental Defence Society wants a shift to taxing pollution. It sounds fine in principle, but there may be a few problems in practice.

For some things, like GHG emissions, where the negative effect is global rather than localised, it's both simpler and harder. Taxation is simpler because you don't have to worry about local circumstances: a tonne of CO2 emitted anywhere has the same cost. So the price per tonne should be the same everywhere. But it's harder because, if only a couple of countries impose carbon pricing, you can wind up with perverse outcomes like production shifting from relatively clean countries imposing a tax to relatively dirty ones that don't. Optimal policy is then harder to figure out. New Zealand should be a part of any comprehensive international taxation or trading regime. But absent one, we may do better with tech investments into pastoral emission abatement.

For others, like water drawing rights, the right policy is pretty obvious, but it could be a bit complicated to set up in practice. John Raffensperger, formerly of the University of Canterbury's operations research group, wrote a series of papers (here, here, and here) showing how to do it. You need to know a fair bit about the underlying hydrology. But if you know that, you can set up a smart market in which farmers bid for drawing rights at different drawing nodes, and the system weighs up the effects of drawing at different points. Unfortunately, Canterbury's Management department killed the operations research group as part of budget cuts and the usual depressing university politics, so there isn't really anybody around pushing this kind of solution any more. Raffensperger's now at the RAND Corporation.

Going beyond that, into things like nutrient runoff, nitrates and the like - that gets a bit harder again. Like water drawing, the effects will be highly location specific and will depend critically not only on what other neighbours are up to but also on what downstream water uses are. But it's easy to meter how much water is drawn from a river or aquifer. Metering nutrient runoff is harder. Agreeing on downstream usages is much harder - and especially around option value. And, because there is no single effect across the country, you could never run it as a straight pollution tax and expect decent outcomes. Finally, from a public choice perspective, we have to worry about those who'd set tax rates to maintain every river as a potential drinking water source rather than recognising that they can vary in value.

The EDS proposal was summarised by Jamie Morton at the Herald, drawing from discussion at Pure Advantage.

How the Environmental Defence Society's proposal would work

• The tax would be based on land area and the intensity of its use as identified from high-resolution satellite imagery and land title information.
• It would put a price on all the major environmental impacts of intensive land uses, including biodiversity loss, greenhouse gas production, accelerated runoff and pollution from nutrients, sediment, fecal coliforms and toxins.
• Low intensity land uses that supply largely natural ecosystem services would earn a rebate at a per-hectare rate commensurate with opportunity and management costs borne by the landowner and the value of those services to society.
• Different parts of a single property would therefore be subject to different per-hectare tax rates based on the cover on, and use of, each part.
• A landowner could minimise tax liability by confining the most environmentally intensive uses to small areas and improving the state and legal protection of natural areas.
• Revenue raised could fund increased conservation and environmental management, climate change mitigation or other general government expenditure. Similarly rebates could be spent at the landowners discretion on conservation or other priorities.

EDS suggests that the tax could both improve environmental outcomes and reduce reliance on more damaging taxes.

While I like the idea of subsidising land uses that provide national benefit rather than compelling such use, the tax scheme here seems to be trying to serve too many purposes at once. You'd first have to set a baseline level of environmental intensity against which other uses would be compared for tax or subsidy. That baseline plus sharpness of tax/subsidy gradient would determine whether the scheme were revenue neutral, revenue-raising, or impose net cost on the budget. Ideally, you'd set the gradient to internalise the externalities, not to achieve any particular revenue-raising target. And any subsidy should be far more based on the value of those services than on costs of production. Whatever money comes out of it should be a side-effect.

I'm also really not sure how you could judge this based on high resolution satellite imagery. Again, any tax or subsidy would have to depend not only on your own use but also the neighbourhood. Imagery could capture much that's correlated with the variables of interest, but wouldn't directly measure it. If I've run a better water treatment plant on my milking shed and you've not, could the satellite pictures tell the difference? If we're both then taxed on an average, what does that do to your willingness to invest in better kit?

It's all the kind of thing that I wish could work, but has a lot of technical difficulties even if we assume that the system would be run sensibly. Once we think about the very likely politicisation of the scheme - it gets more worrying.

Morton quoted me as follows:

Dr Eric Crampton, head of research at the New Zealand Institute, said that in principle, taxes on pollution were far better than taxes on income so long as they were set properly - but this was very hard to do.
A land use-based tax could be unfair if a farmer who used better practices to reduce nutrient runoff and faecal coliform - which were invisible to satellites - was made to pay the same rates as a neighbour who had not.
"Second, the environmental cost of activity on any one piece of land depends a lot on what else is going on in the area - setting a tax and subsidy scheme to account for that does not seem simple."
Environment Minister Dr Nick Smith has not reviewed or received any advice on the concept, but he also said the approach could be flawed.

Playing in the SandPit

I've been blogging a bit over at The Sandpit - the NZ Initiative's blog. A few recent highlights there:

• Eminent domain is not nearly as awesome as the latest Productivity Commission report makes out.
• Notes from my chat with Bryan Crump at Nights on Radio NZ on Social Impact Bonds.
• Know your times tables - me at the ChCh Press on our recent Numeracy report.
• Correcting Mathew Elliot on Social Impact Bonds.
• Would that we had a regulatory budget to complement our fiscal budget.

Enjoy!

Is 400 the new 300 in ODIs?

The current ODI series between England and NZ has been quite extraordinary. England has scored more than 300 in every game, but has lost twice. Yesterday morning, New Zealand’s total of 349 was not only chased down by England, it was chased down with ease, with England losing only three wickets and having 6 overs to spare. 

My sense from my Twitter feed is that the conventional wisdom is as follows:

1. The rule changes dating from October 2012 (that saw two new balls in each innings and a reduction in the number of fielders allowed outside the circle in non-powerplays) allowed for larger scores, as the outfield gaps and still-hard balls allow batsmen to score at will in the final overs.
2. These rule changes coincided with new batting skills honed in 20-20 competitions like the IPL.
3.  New Zealand has been leading the way in showcasing an aggressive approach to cricket; England  prior to now has continued to play with an outdated conservative style, but has now belatedly accepted the new approach, in which “400 is the new 300”.

There is probably much right with this version of events, but I’m not fully convinced. Here are some raw numbers. Since the October 2012 rule changes prior to the current series between England and New Zealand, there were 177 ODI games played involving two teams from the top 8 (defined as the test-playing nations excluding Zimbabwe and Bangladesh), excluding games with a Duckworth-Lewis-Stern reduction in overs. Of those, 56 (or 31%) saw the team batting first score 300 or more. This is certainly a higher rate than we would have seen in past eras, but not as high as conventional wisdom seems to be suggesting. Moreover, getting to 300 still made the team batting first the overwhelming favourite. Of those 56 games with a first-innings score in excess of 300, the team batting first won 48 (86%). More pertinently, of the 18 games where the first innings score only just got to 300 (defined as a score between 300 and 310), the team batting first won 14, which is still a %77 success rate. If 400 is the new 300, it really should be easier to chase down 300 than these data suggest.

I wrote last year about how, once you adjust for mismatches between teams and where the game has been played, there wasn’t much evidence in the data for a general trend towards increasing first-innings scores. Taking all games from the start of the English 2002 season through to the end of the World Cup, controlling for team ability, home-field advantage, and the ground being used, first innings scores since Oct 2012 are only 12 runs higher on average than in the 10 years before Oct 2012. (For data geeks, I describe the exact model at the bottom.)

The following graph illustrates the lack of a trend. The small red dots are the difference between the first-innings score and a prediction based on the team batting, the team bowling, which team (if any) was playing at home, the ground at which the game was played, and allowing for a 12-run premium for the current rules. The solid red dots are a 25-game smoothed moving average, to take out some of the random variation and make any trends clearer. Although there appears to be a bit of an upward trend over the period since October 2012, scores by the end of this period were still only 28 runs higher than in the 2002-2012 period, suggesting that 328 is the new 300!

But now look at the four blue dots. These are the out-of-sample prediction errors for the first four ODIs between England and NZ in the current series. These predictions take into account England’s and New Zealand’s recent (since Oct 2012) batting and bowling form, England’s home-field advantage, and how high scores typically are at those four grounds. The prediction, actual score, and prediction error are as follows:

Ground	Predicted Score	Actual Score	Prediction Error
Edgbaston	235	408	173
The Oval	256	398	142
The Rose Bowl	269	302	33
Trent Bridge	232	349	117
Chester-le-Street	225 (Eng) 228 (NZ)	?	?

The point here is that rather than there having been a world-wide trend in the past few years that England have only now come to grips with; the current series has been extraordinary in every respect even in comparison to recent history. So what is going on? I can think of four hypotheses:

1. I have made a massive coding error in my database.
2. There has been a structural break in conditions: The four English groundsmen have produced very different pitches than in the past, ones much more favourable to high scores.
3. There has been a structural break in team quality: Both NZ and England have better batting and/or worse bowling in this series than they had in the recent past.
4. These four games have been black-swan events; and things will return to normal soon.
5. There has been a strategic mindset shift in both New Zealand and England.

When things look extraordinary, coding errors are always a good bet, and I wouldn’t rule this out, but the raw predictions don’t look too far out from my own intuition, so I  don’t think this is the problem here.

I can’t comment on whether conditions were very different from usual in the four games so far, but I haven’t seen any commentary from England suggesting that the groundsmen have been producing untypical pitches, so I suspect hypothesis 2 is not the right one.

There is probably some truth to hypothesis 3. I don’t think the batting is too much different, but the bowling is quite possibly weaker. New Zealand have lost Vettori, Anderson and Milne from their World Cup bowling line-up, and have had Southee and Boult together for only one of the four matches. England have rested Anderson and Broad. Even so, I would put my money on the final two hypotheses explaining most of the data. 

The idea that teams are not aggressive enough when batting is something Scott Brooker and I have been saying for a long time. Back when he was writing his thesis, Scott experimented with what an average team would be able to achieve if they applied the optimal level of aggression. Based on the strike rates and dismissal rates that we can observe batsmen having in different game situations (e.g. conservative batting in the middle overs versus aggression in the death overs), he constructed a set of frontiers describing the trade-off between risk and return for typical batsmen in positions #1-#11, and then simulated optimal behaviour. He found that scores could be roughly 30 runs higher if batting teams were more aggressive, but that there would be more variance in scores and a higher probability of not batting out the overs. This was based on data from before 2007. It is likely that under the new rules, the value of extra aggression is even higher. 

What I think we are seeing in the current series is two teams who keep pushing the boundaries of this approach, forcing the other team to react in kind, and so all kinds of previously unrealised potential that has existed for a while is now being revealed. Contrary to the conventional wisdom, I don’t think this has been New Zealand’s approach before now. Rather, I think they have emphasised retaining wickets during the middle overs in preparation for an all-out assault in the final 10. New Zealand’s famous aggression in the World Cup was mostly seen in its approach to bowling, putting an emphasis on wicket taking rather than containment.

If I am right, that there has been a mind-set change for both teams in the current series, I am mindful that Scott’s conclusion was that the additional 30 runs on average would come alongside a big increase in variance. This brings me back to the black-swan hypothesis. We have seen scores more than 100 runs in excess of what recent form would have predicted on average. It is likely that in each game, there was a degree of luck. Batsmen got away with taking risks on these occasions, but we could just as easily have seen scores that were quite low. Even allowing for the fact that dropped catches are more likely when batsmen are hitting the ball hard, the catching in the current series does seem to have been below par. Realistically, 370 might be the new 300, but equally 180 the new 200.

Method:

My prediction model was based on a database of all non-rain-affected ODIs involving the top-8 countries since May 2002, using only games played on grounds where there were at least 10 matches played (but also including Chester le Street, as that is the venue for the final ODI between England and NZ).

The model was an OLS regression of first innings score on a dummy variables for the batting-team country, dummy variables for the bowling-team country, a dummy variable for each of the 53 grounds, a dummy variable for when the batting team was playing at home, and for when the bowling team was playing at home. Finally, I added a dummy variable for matches played since Oct 2012, and more dummy variables for this recent-era interacted with the batting and bowling team dummies. 

These interaction teams mean that only post-Oct-2012 data is used to determine the effect of team ability on scores; the only reason for pooling the data with the pre-Oct-2012 era is to provide enough data to estimate ground effects. Essentially, the model is assuming that the relative impact on scores of being at a particular ground and the relative impact of home-field advantage has not changed from before the Oct 2012 to after.

In the 25-game  moving average shown in the chart above, the data is broken around the structural break of Oct 2012, so that the smoothed line before the break is not influenced by games played after the break and vice versa. 

Minimums and medians

It's a bit predictable. Whenever there's a hike in the NZ minimum wage, the unions point to Doucouliagos's metastudy that minimum wages in the US have had small (if any) employment effects and to Dube's work also showing little effect in the US. I point to that American minimum wages are less than 40% of the median wage and that New Zealand's minimum wage is around 65% of the median. When the minimum wage is more binding, you should expect bigger employment effects.

And so I was interested to read this:

The University of Massachusetts economist Arindrijat Dube, a strong proponent of minimum wage policies, suggests that states and cities should use a threshold of about half of the median wage when setting wage floors. By Bernstein’s estimate, the L.A. minimum wage in 2020 will be about 60-65 percent of the city’s median wage—a full 10 to 15 percentage points above Dube’s recommended threshold. This is uncharted territory, which may be one of the reasons that some L.A. unions asked for an exemption to the $15 minimum. In a city like St. Louis, where both the median wage and the cost of living are lower by comparison, the $15 minimum is even riskier.

I've typically said that I get nervous about the employment effects where minimum wages are 45-50% of the median. And here we have Dube suggesting half the median.

I'll have to remember to pull this out the next time the unions here cite Dube at me when I caution against minimum wages that are 65% of the median.

As reminder:


Note that that's as fraction of the mean; the mean is higher than the median.

Racial bias in mortgages?

Simon Collins at the Herald asked me for comment on a paper alleging racial bias in mortgage lending; his story's now up.

The paper is available here. It shows, using ordered logit regression, that people who self-identify as being more easily identified as Maori are less likely to own their own home, correcting for income and a few other variables. The paper's empirics say absolutely nothing about mortgages or banks. But the study nevertheless concludes:

"To sum it up in one sentence: results from a large national probability sample of Māori indicate that the more Māori you look, the less 'mortgage worthy' you are."

Here are a few alternative hypotheses:

• The empirics correct for current employment and current income but not past employment and past income. If Māori employment histories are more varied than non-Māori, and if this also follows the "is identified as Māori " indicator, Māori will have less accumulated wealth at any given level of income, and this is not controlled in the study.
• If those who look more Māori are given preference in state housing, then home ownership would also be attenuated.
• If parental resources are negatively correlated with looking more Māori , then that also affects ability to put together a deposit on a house. Note too the potential influence of holding household wealth under Māori land tenure.

I also think they've an error in how they described the magnitude of the effect. Remember that this is an ordered logit regression. So you can't just take the point estimate and multiply it by the number of interval steps to get an accumulated effect; you have to ask your stats package to give you a predicted value at the different values of the category. At page 11, it really looks like they linearised from the point estimate:

Some readers may be wondering how large this effect is in practical terms. One way to think about it is like this: when statistically adjusting for numerous other demographics, such as differences in income, region of residence, and education, a Māori person with a score of 5.55 on our Perceived Appearance measure of Māori identity would be twice as likely to not own their home relative to someone with a score of 1 in Perceived Appearance. This is a statistically significant association, which in our view represents a large and extremely important difference in the rate of home ownership based solely on merely appearing more Māori.

They have an odds ratio of 0.82, which ought to mean that a step change increase in perceived appearance score from the mean score reduces likelihood of owning a home by 18%. I don't think that means that if you go 5.55 steps in the other direction (1/0.18) from the mean score doubles your likelihood of home ownership, except under some pretty strong assumptions. But it's been a little while since I've played around in ordered logit.

Here's the bit where Collins quoted me - entirely fairly:

However Dr Eric Crampton of the NZ Initiative think-tank said there could be many other explanations for this besides racial bias. For example, people who looked more Maori might have parents who did not have freehold properties to use as collateral for loans, a factor that was not surveyed.

"Banks would be throwing money away if they decided to not lend to somebody simply based on looks," he said.

Mortgage brokers Bruce Patten in Auckland and Karen Essex-Mooney in Blenheim both said they had never seen a mortgage application turned down because the borrowers were Maori. They said many borrowers now applied online and never actually met the lenders.

New Zealand Bankers' Association chief executive Kirk Hope said racial stereotyping was not in the banks' or their customers interests especially within such a competitive part of the banking sector.

Pacific Trade Options

With the US putting the Trans-Pacific Partnership talks on the backburner, what are our options? 

Here's NZ Trade Minister Tim Groser:

Well, given the pessimism you're expressing there, this could be it. It could be sunk, couldn't it?

Groser: Well, according to the negative view, it's not going to happen in the next two years. Whether it happens beyond that time, that's more speculative. The basic point is this: the United States, unfortunately, is in a position where the lack of support for a pro-trade agenda could see them watching as bystanders. I mean, it's an unbelievable situation. And there is a parallel we've just seen on this new Chinese-led Asian infrastructure investment bank where, again, the Chinese, growing in power, come along to the United States and say, 'We want more say in the World Bank and the IMF,' and then to cut it to simple terms, the Congress stops the quota expansion that would be necessary to do this. So what do the Chinese do? They set up their own institution, so the United States... And then first New Zealand, it was the first OECD country to say, 'We will go with this new bank,' and then later the Brits, the Germans, the other big Euros join, leaving the United States high and dry on the beach. So, I mean, this is not a theoretical issue here, and it's a very strange situation for the world's number-one economy, but that's the sort of calculation... By the way, what I'm saying is understood by a lot of people in the US Congress, cos I know cos I've talked to them, but not enough of them.

I read this as Groser saying that there will be a China-led Pacific Free Trade area unless the US pulls its head in, and that NZ will be in it.

As New Zealand already has a strong FTA with China, we have there less to gain than if we could get a strong FTA with the US. But it's less likely that a China-based free trade area would require us to lock-in a 1923 watershed for public domain works.

But I can share Groser's amazement that the less-than-serious people in Congress would prefer a China-led Pacific.

State Insurance

When AMI didn't have enough reinsurance to cover Christchurch earthquake claims, it was rolled into a new government entity: Southern Response. Southern Response took over the claims, got the assets, and had a backstop from the government to cover excesses of the former over the latter.

This was always a bit dodgy. AMI was a mutual: its insured parties were its nominal owners. If it didn't have enough reinsurance coverage, nobody else should have been on the hook for that - and I say this as someone who was insured by AMI.

The fair response would have been to assess total claims costs, total assets, and then provide each member/claimant with a haircut. If total assets amount to only 90% of claims, the homeowners would get an honest assessment of what it would take to fix your house, but the insurance would only pay out 90% of that. You could tweak it a bit, with some of it paid up front and some held in reserve until there were a better picture of real total costs. But it would have been honest, and it would have been fair.

Instead, Southern Response, at least according to the folks looking at a class action lawsuit, just lies about the repair cost. Everybody still takes a haircut, but whether you're dealt with fairly is pretty random-draw. If you managed to get assessed early, before total costs were really known, maybe you did ok. As the pressure to limit payouts to the amount available became a bit more pressing, though...

Here's Georgina Stilyanou:

Mr Cameron said the repair or rebuild figure the homeowner received was, in many cases, vastly different to the dollar figure on the insurer's files.

He said Southern Response customers had been under "immense stress" since the earthquakes and said people's lives were on hold until their claims were settled.

The meeting included videos from Southern Response policyholders talking about their dealings with their insurer.

Among them was a man who had been given a repair figure of $255,000.
An independent engineer then found the property's foundations would likely need replacing and subsequently, a quantity surveyor estimated the cost of reinstatement would be upwards of $1.25 million.

Mr Cameron believed by lowballing claim amounts, Southern Response could end up making about $2 billion in savings.

He said it would take nine years for Southern Response to settle all claims at its current progress rate.

Glad to be out.

Previously:

• Southern Response and Arrow Bleg
• Insurance Follies
• So far so good

IUDs and teen pregnancy

Better access to IUDs at subsidised family planning clinics reduces teen birth rates, says a new NBER working paper by Jason Lindo and Analisa Packham.

From their abstract:

Despite a near-continuous decline over the past 20 years, the teen birth rate in the United States continues to be higher than that of other developed countries. Given that over three-quarters of teen births are unintended at conception and that over a third of unplanned births are to women using contraception, many have advocated for promoting the use of long-acting reversible contraceptives (LARCs), which are more effective at preventing pregnancy than more commonly used contraceptives. In order to speak to the degree to which increasing access to LARCs can reduce teen birth rates, this paper analyzes the first large-scale policy intervention to promote and improve access to LARCs in the United States: Colorado's Family Planning Initiative. We estimate its effects using a difference-in-differences approach, comparing the changes in teen birth rates in Colorado counties with Title X clinics (which received funding) to the changes observed in other US counties with Title X clinics. The results of this analysis indicate that the $23 million program reduced the teen birth rate by approximately 5% in the four years following its implementation, providing support for the notion that increasing access to LARCs is a mechanism through which policy can reduce teenage childbearing.

I'd love to know whether the programme also had effects on STD rates. Where the price of unprotected sex goes down, you should get more of it - as Klick and Stratmann found. That's hardly a reason not to provide access, just something to consider as an offsetting cost potentially in the mix.

Times Tables

Me at The Press on the Initiative's numeracy report:

The Numeracy Project, as it was called, had some really great elements. Rather than simply rote learning facts, students would also build their understanding of why six by nine is 54 and alternative strategies for figuring it out. Those alternative strategies can really help when trying to multiply larger figures beyond the twelve-by-twelve that those my age had to memorise.

But something went wrong in the implementation – or at least in some schools. There is a lot of school-by-school variation in New Zealand – and this is a good thing. But some schools took the Numeracy Project a bit too literally. Rather than complementing the times tables with the additional strategies, they threw out the rote learning part.

Patterson's report suggests this too great a lean against rote learning lies behind some of New Zealand's recent poor maths scores. Kids who have to spend time working out six by nine use up mental capacity that then is not available to take the next steps. Those who memorised it can move quickly to the next step in applying their answer.

Far from a call to abandon modern teaching practices in favour of rote learning, Patterson's report argued simply that the pendulum has swung too far. We need both rote learning and understanding. The report also recommended measures to help parents ensure that their kids' teachers are ready to really apply the more modern mathematics teaching methods which require greater teacher numeracy than teaching simple rote memorisation.

While the Initiative's Twitter stream filled with the usual attempts to pigeon-hole our recommendations into the Kiwi Twitteratti's ideological view of the world, our email inbox filled up with supportive messages from teachers, university lecturers, and maths tutors who agree that New Zealand kids really deserve better.

Read the whole thing...

More Westerosean Economics

Washington Post's WonkBlog draws some lessons from Westeros.

Their summary list:

1. People aren't good at stocking up for the future.
2. The economy still doesn't employ women to their full potential.
3. America could be the Iron Bank, but does it want to?
4. The Fed is the realm's quiet protector.

It's worth reading the whole post, not least of which because it quotes Ryan Decker quoting me.

I remain puzzled about the lack of savings for winter in Westeros. Sure, your food stores might make you more attractive to raiders, but I still can't see why there weren't better advances in food preservation technology - which also helps your own armies come winter.

WonkBlog concludes:

It's not winter per se that I think the U.S should worry about, but the White Walkers. In other words, regular business cycle recessions are not our greatest threat, but looming and ignored long-term threats. In our case, I think coming demographic challenges are our white walkers. The political parties battle over who sits in the Iron Throne, but the dangers of a quickly aging population and high dependency ratio march towards us.

Priority Organs

New Zealand's organ donor service doesn't seem to like Israel's priority system.

I was on with Paul Henry this morning talking about organ donation rates and pointed to the Israeli system as something that New Zealand should consider.

ODNZ put out a press release making much of single-year changes in deceased donor rates from 2013 to 2014 in Israel and NZ: Israeli rates dropped while New Zealand's rose.

They're right that New Zealand's organ donation rate in 2014 was higher than it was in 2013. The one-year jump from 2013 to 2014 to 10.2 brought New Zealand all the way back to the average deceased donors per million population rates that the country enjoyed on average in the decade 1995-2004. In the decade 2005-2014, it's been more like 8.4.

What ODNZ misses is the big jump in organ donor sign-ups under the priority scheme:

Increasing domestic donations is a special challenge in Israel, where religious factors have historically constrained the organ supply. Despite a 300-year-old rabbinical ruling that an autopsy—and by extension, any post-mortem surgery—can be performed to save a life, many observant Jews consider the body inviolate in death. Taboos against mutilation are less of an issue in other Western countries, where consent rates—the percentage of brain deaths that result in donation—frequently exceed 70 percent. For most of the 2000s, Israel’s hovered around 45 percent—among the lowest in the developed world.

Today, however, Israel’s consent rates have jumped, to 56 percent in 2013—still low, but a shift that demonstrates a real turnaround in public opinion surrounding organ donation. The change is largely due to the public debate surrounding brain death that followed the highly publicized decision by the family of the Israeli soccer star Avi Cohen to disregard his wishes to donate his organs after a 2010 motorcycle accident left him brain dead—and to Israel’s adoption of a unique allocation system for organs that rewards those willing to donate. At a time when waiting lists are growing everywhere, including in the United States, Israel’s success has implications for a global transplant landscape that is in dire need of innovation.

The priority law also encourages living donation by giving donors the security that they'd be at the front of the queue should their remaining kidney - or any other organ - go bung later on.

The whole article over at Tablet Mag is well worth reading if you're interested in the Israeli system. It's a bit more complicated than one-year changes.

I'm guessing that ODNZ is a bit tetchy because a binding organ donor registry is again in political play. I'm more ambivalent about how much good that could do - or at least on its own. Combined with stronger payment for living donors, defraying funeral costs for cadaveric donation, and a priority system like Israel's, well it could be pretty effective.

Update: Me on that last point in the Herald.

Two Sunday papers

This week's Herald on Sunday quoted me well in one piece on organ donation; I'm less sure what to make of the Sunday Star Times.

First the good. Amy Maas quotes me on New Zealand's organ donation shortfalls:

Organs from one child - like Leon - can save the lives of up to six others with the transplant of the heart, lungs, kidneys, liver and pancreas. It can also improve the lives of others with the transplant of eyes, skin and bone.

Dr Eric Crampton, an expert in the economics of organ donation and the head of research at the New Zealand Initiative, lauded Roberts' decision to donate her son's organs given the "horribly tragic" circumstances. "It is always uplifting when parents find the way to make the most of utter tragedy. And so we should celebrate their choice to help give life to others," he said.

Crampton said that New Zealand's rate of organ donation was a "national tragedy". "The Government has made some good moves to encourage donation by doing more to help live organ donors, but we still have one of the developed world's worst organ donation rates," he said.

Meanwhile, tributes to Leon continue from family and friends, who released dozens of colourful balloons at his June 3 funeral.

I'd also told Amy about Israel's priority system, but there wasn't room in the piece. I'm to have been on with Paul Henry on organ donation very early Monday morning (6:50!).

Meanwhile, over in the Sunday-Star Times, Adam Dudding didn't seem to like my take on coroner recommendations:

A young girl dies of an unpredictable complication of pneumonia. A coroner reports the usual, awful, clinical details – "oxygen saturation", "intro-axial haemorrhage", "brain stem death testing" – but something else as well: There are references to the "cold, damp" state house that Emma-Lita Bourne was living in when she fell ill late in the winter of 2014; to the buckets under the leak in the hallway ceiling of the South Auckland home; to the heater unused because of unaffordable electricity, to the older sibling with rheumatic fever.

And there is this line in the findings: "Whether the cold living conditions of the house became a contributing factor to the circumstances of Emma-Lita's death cannot be excluded."

It's an understated phrase, but the reaction was anything but. Since the publication of Coroner Brandt Shortland's report there has been an explosion of news coverage, breast-beating and finger-pointing, and fresh recognition that poverty in New Zealand is a real thing that kills people. Once again a coroner has lit a fuse then quietly stood back.

Telling the public what went wrong and what can be done better is in a coroner's job description, yet they're not always thanked for it. In 2013, Eric Crampton, a researcher at business thinktank the New Zealand Initiative, blogged a list of recent coronial recommendations, presumably so his readers could sneer at their wackiness ("warning labels on Coke"; "national manhole safety guidelines"; "hard hats when climbing ladders"; "mandatory high-vis clothing for cyclists"), then suggested coroners get training in cost-benefit analysis before making silly, expensive suggestions.

First off, all credit for that post should go to the University of Canterbury rather than the NZ Initiative; I was on faculty there until July of 2014.

The "Coroner Recommends" list came entirely from Google. But I put the blame for wackiness where it belongs: with the Act. Coroners have to point out anything that might reduce the chances of the occurrence of other deaths in circumstances similar to those in which the death occurred, regardless of whether the recommendations make any darned sense. Sensible coroner recommendations might be given more weight if there were fewer recommendations like wanting every farm house to be fenced off from the yard.

Effective Altruism

I'll be chairing a discussion with Peter Singer in Christchurch in September. If you're anywhere in the neighbourhood, by which I mean within a 3-hour flight, you should attend.

I have never loved and hated and been changed by a book as much as Singer's Practical Ethics. I threw it across the room more often than any other. Actually, I think it's the only book I've ever hurled against the wall. But his arguments are almost impossible to resist.

The morning that I got the call from the Christchurch Festival inviting me to this, I'd walked in to work with Eleanor, then aged 4. On the way, that morning, I'd explained trolley problems to her - as you do with your four year old. She proved a very strict utilitarian. She then went on to propose ever differing bundles of who might be on which rail lines and whether you'd pull the switch - she was basically running hypothetical choice experiments to find out my marginal willingness to pay across options. Most of the options involved kitties of varying cuteness against family members, so it was all pretty easy for me. Then I got the call asking to come in to talk with Peter Singer. It was a great day.

I'll be discussing Singer's latest work on effective altruism. I'm really looking forward to it. Hit the link at the top to register and get tickets.

ON EFFECTIVE ALTRUISM


How can we do the most good? Peter Singer, often described as the world’s most influential living philosopher, presents a challenging new movement in the search for an ethical life. Effective altruism requires a rigorously unsentimental view of charitable giving, urging that a substantial proportion of our money or time should be donated to the organisations that will do the most good with those resources, rather than to those that tug the heartstrings. Chaired by Eric Crampton.
Peter Singer is the author of more than 20 books, including the groundbreaking work on ethics, Animal Liberation, The Ethics of What We Eat, The Life You Can Save, and his latest, The Most Good You Can Do. He teaches philosophy at Princeton and Melbourne Universities.
Eric Crampton is Head of Research with The New Zealand Initiative in Wellington and Adjunct Senior Fellow with the Department of Economics and Finance at the University of Canterbury. He blogs at Offsetting Behaviour.

Another fun bit: the Christchurch festival folks invited me, in part, because I'd blogged on the ridiculousness of charity races some time ago.

The STEM sucking sound

A potted history - or at least one that needs testing to see if it's right:

The government messes up teaching of maths at primary, making things harder at secondary. Then, pushes to increase NCEA Level 2 completion rates lead kids away from harder subjects and into more basket-weaving unit standards: basically, a form of stat-juking. So fewer numerate grads show up at university doors.

Next, Minister Joyce wants to push Sciences, Technology, Engineering and Maths. So Universities get way more money for degree completions in STEM subjects than for degree completions in other disciplines that require numeracy: economics, for example, but also education (for maths teachers). This has staffing and course offering consequences at the Universities, which kill off less lucrative lines.

And now we have this.

Both the survey and figures from teacher training organisations show a serious shortage of teachers in maths and science. The head of one teaching programme has written to the Secretary of Education with her concerns. "I think we are heading towards a shortage of teachers," Dr Ngaire Hoben, the director of Secondary Teacher Education at Auckland University, told the Herald yesterday.

"There is no financial inducement to go teaching, yet there are plenty of jobs. It is a very serious issue."

In her letter, Dr Hoben pointed out the very low numbers of applicants to teach maths and physics, and suggested scholarships to attract more of those students to teaching.
Auckland University graduated just four physics teachers in 2014, and 39 maths teachers. AUT had no maths or physics teachers, with other universities also reporting low numbers in comparison with physical education (PE) or social science graduates.

Teach First NZ, a programme that aims to recruit high-flyers to teaching, said universities often wanted to keep maths or science graduates to do research, rather than encourage them to teach. Numbers completing those degrees were low to begin with.

Principals who responded to the PPTA survey, which involved 172 schools, agreed.
"Maths is hopeless," said one, noting they had PE graduates teaching maths - a finding consistent with the survey which said more teachers were being asked to go outside their specialties to make up for shortages.

Rangitoto College principal David Hodge said he hired a physics teacher from overseas, and then had to have an argument with Immigration to secure entry for him.

"It's ridiculous," he said. "You get 80 applications for one job [in PE] and then for science almost none."

Not all that surprising, if my potted history is right.

Things that need testing:

• Has the proportion of numerate graduates actually declined? Testable out of NCEA data where you define a numeracy standard as having achieved well enough out of a set of maths courses.
• Has the mix of numerate students across disciplines shifted in line with the hypothesis above? Also testable in the IDI by linking NCEA data with University data on majors.
• Has the proportion of numerate graduating teachers dropped in the way we'd then expect? Also testable in the IDI.

My priors are the potted history above. I'll update when we get into the data lab.