Planning externalities

The Finance Minister's speech to the Victoria University Business and Investment Club last week was excellent. I was not in attendance, but the text is now available online.

After running through a litany of areas where the application of market signals through policy reform improved outcomes - from agriculture to energy, he turns to housing. He walks through how urban planning regulations have jacked up housing costs, delayed new construction, worsened housing price cycles, hurt economic growth, driven inequality and cost the government plenty in state housing and accommodation supplements.

So these are the reasons why the Government pays attention to the housing market and issues stemming from poor planning.

For those among you who are economists, I would go so far as to say that while the justification for planning is to deal with externalities, what has actually happened is that planning in New Zealand has become the externality.

It has become a welfare-reducing activity.

And as with other externalities, such as pollution, the Government has a role to intervene, working with councils to manage the externality.

We're starting to get analysis that shows planning’s costs.

Too often the discussion about how our cities are planned is couched in vague terms of general good. "A world-class city." "Quality urban design." "A liveable, walkable city."

Those are all desirable, achievable objectives. But we need to understand the costs of achieving them so that we can make the trade-offs transparent.

I love it when people rediscover Tullock's 1998 argument that policy itself generates external costs that are underappreciated - which was of course simply an extension of his 1962 work with Buchanan on external costs and decision-making costs in The Calculus of Consent.

And it gets better:

As we get more information about what actually happens, often we find planning doesn’t achieve what people think it is achieving.

Planners and councils have a very difficult job in planning our urban areas.

Cities are incredibly complex systems. They are the product of millions of individual choices.

The idea that a small group of people could understand what choices we're making is asking too much of them.

Not because they are in any way incapable. But because the task is overwhelming.

The Auckland Unitary Plan is 3,000 pages long.

It's trying to regulate everything from the size of bedrooms to biodiversity in the Waitakere Ranges. No one person could possibly understand all the trade-offs in that plan.

Which means many of its effects will be certainly be unintended.

Planners can’t know everything – so of course they can’t be perfect in making trade-offs on our behalf.

Successful planning requires an understanding of its own limitations.

And then we come to the meat:

The funding base for councils is increasingly people on low fixed incomes. That is a product of an ageing population.

So you can understand why councils are under pressure not to expand if they think an expanding city is going to push up rates for existing ratepayers.

Councils need clear funding models so that development worth having can occur and future homeowners and current renters who might want to buy are taken into account.

So that's a brief overview of how important it is that housing is regulated in a way that enables flexible supply, and I hope some indication of the progress we're making.

That progress is necessarily slow, because these issues are complex.

If we better understand the economics of what is happening we can make better choices about housing regulation.

And that depends on one of the most important parts of public policy, which is the institutional arrangements by which those decisions are made.

That means looking at the incentives confronting an individual sitting in a council when making a decision about whether to allow a new subdivision.

We need to understand the incentives councils are reacting to.

Next month the Productivity Commission will produce a further report on the regulation of land supply. It will be another input into further, ongoing improvements in this area.

And we are seeing new thinking on a range of issues affecting housing, including from councils.

Often politicians are accused of being focused on the short term. That’s one of the reasons this issue has never been dealt with properly in the past.

The Government is taking a long term view.

All of the things I've talked about today will take 10 to 15 years to sort out.

So it’s important that a broad group of people understand our single-biggest asset class – the most-important asset most of us will own – how is valued, how it is regulated, and how it can contribute to our general welfare.

The New Zealand Initiative's report on policy trial zones, coupled with improved council financial arrangements to strengthen incentives, will be coming out 19 October.

I hope to see you at the report launch.

The Canadian Leaders' Debate - that could have been

Here's Chris Selly summing things up:

All three leaders are now trying to establish their free trade bona fides while simultaneously trying to defend supply management the most.

— Chris Selley (@cselley) September 29, 2015

Here's what I'd have loved to have heard instead, from any party leader:

“Right now, Canadian dairy prices are much higher than they need to be. Mothers pay too much for infant formula; families pay too much for cheese. And the system as a whole doesn’t even benefit dairy farmers any longer: getting into the industry is expensive because buying quota eats up whatever benefits the system provides to farmers. But there is a better way."

"We are committed to protecting the quality of dairy products on store shelves – as we are with every food product sold in Canada. But we don’t protect food quality with 300% tariffs for vegetables, fruit, or thousands of other products that cross our borders each and every day. For that, we use food inspections. The dairy quota system isn’t necessary for protecting food quality.”

“Today, we are buying back all of the dairy quota and opening the borders. Farmers should not see their retirement savings wiped out by a policy decision from Ottawa. We are able to afford to do this because dairy prices, in a competitive world market, are low enough that we can fund the buyback with a levy on all dairy products sold in Canada while still keeping prices lower than they are now. And those levies will disappear when the bill is paid in full. Canadians will have better access to the world’s products, and Canadian agricultural producers will have better access to world markets.”

It's simple. It would work. But Canada gets the government it deserves, and it gets it good and hard.

Depressing trade talk

Canada, you make me sad.

Late last week, the Liberals said they won't support any TPP deal that makes concessions on supply management in dairy. This is no longer the party of Martha Hall Findlay, who was about the lone voice of sanity on Canadian dairy. Here's how the Liberals' ag critic is now pitching it:

“If they (the Conservatives) have opened the borders to the United States milk in here, we are not going to be supporting this deal,” Eyking said in a interview. “Our position (is) that it [supply management] should not be on the table. Period.”
“Any agreements that we worked on before as Liberals, supply management was never on the table,” Eyking added. “So, our position is, if the Americans are even pitching this, they must be talking. So who else is pitching it? New Zealand has a a glut of milk … the world has a glut of milk.
“They’re all over-producing. We’re not overproducing. They’re all over-producing and they want to dump it here.”

There are nasty Canadian dairy political realities.

Several protests have already happened in Quebec, including one in Montreal this week attended by some 1,500 farmers from Quebec, Ontario and the Maritimes.
In August, 1,000 farmers protested outside Conservative cabinet minister Maxime Bernier’s office in la Beauce. Bernier is the Minister of State for small business, tourism and agriculture. Beauce is also home to one of the highest concentration of dairy farms in Canada.
Bernier, Fast and Agriculture Minister Gerry Ritz have stated that the federal government, and TPP negotiators, will protect the ‘three pillars’ of supply management — price, import control and production management — at the negotiating table.

Why do Canadian dairy farmers fight it?

“It makes me hot,” dairy farmer Ron Churchill said Friday during a farm visit. Churchill is the manager for Rocky Mountain Holsteins, which specializes in dairy genomics. “I hope it [TPP] doesn’t go through.”
If supply management is dismantled, or concessions are made, he said, it will be a “free for all” in Canada’s dairy sector.
While Churchill said his farm’s revenue come primarily from exports and sales of dairy genetics, he still milks 30 cows. His quota, he said, is worth $1 million, while his cows are some of the most expensive in the country. He recently sold a cow to a B.C. buyer for $197,000.

Emphasis added. If a trade deal threatened to wipe out a million dollar regulatory asset you owned, you'd fight it too. Just like the mafia didn't want the end of prohibition.

Canada could have avoided this. Set TPP as a reason for buying out the farmers' quota at a price matching what quota was running a couple months' prior to the deal. Put a tax on dairy product a bit shy of the quota rents embodied in current Canadian dairy products, and have it apply across the board for imported and domestic goods. Retire the tax when the bonds used to cover the dairy buy-out are paid off. Not wiping out the retirement savings of a bunch of politically attractive dairy farmers could make things a bit easier.

Meanwhile, here's how one Canadian source is characterising the negotiations:

Frictions over agriculture have been overshadowed by autos since Maui, but still bubbling below the surface.
Battered and bruised Kiwi Trade Minister Tim Groser is not at all optimistic about the prospects for success. Could we see New Zealand walk because there are no net benefits? I would normally say no – New Zealand too understands the importance of being inside the tent. But this is a no net benefits deal for New Zealand which is being asked to take on very unpopular obligations.New Zealand is between a rock and a hard place – capacity was built to benefit from Kiwi free trade with China – and it worked for a while, but even China says enough is enough from their largest dairy supplier.
New Zealand is all about dairy. It has done well by its specialization – but it is in a position much like a company which has relied on a single customer – or product. Minister Groser will dig in his heels in Atlanta – he has no choice. Groser is facing the realities of negotiating for a small market. He needs to be bought off. At the end of the day, New Zealand is in a position similar to Canada. It cannot stay outside the tent. It is not going to get what it wants, so it must hope that it wants what it gets. Disappointment seems inevitable.

I'm really pretty sure that New Zealand would be pushing for free trade in agriculture regardless of current market conditions. New Zealand supports free trade.

The piece does note a few other ag problems - American dairy is far from free, as are Japanese rice markets.

And remember how I figured that TPP access to North American markets could prove illusory?

Fonterra, an effective monopsony – enjoying a degree of buying power which could not exist under competition rules in the US, EU or Canada – has cut its payments to Kiwi dairy farmers from $8.40/kg milk solids in 2014 to a current $3.75. Fonterra is practicing its own form of supply management, holding back supply to try to increase prices. [EC note: this has increased to $4.60]
Fonterra is being criticized by its farmer members for mismanagement. NZ dairy farmers call it a failed experiment. The TPP is seen as a way to keep NZ dairy farmers from going out of business.

Fonterra is a big part of the New Zealand market, but there are alternatives and no particular regulatory barriers to anybody who thinks they can do a better job. Farmers can switch over to Synlait, or Tatua, or Westland, or small local plants like Miraka or Oceania. It's amazing that folks in a country where it is illegal to milk a cow and sell the product without a quota permit and where they get mad if you call it a cartel can claim with straight face that Fonterra's a monopsonist.

Expect more of such talk to set a public case for using antitrust action as trade barrier against New Zealand dairy product if we get a trade deal.

Quirky EQC self-insurance

Hoisted from the comments, here's some sensible comments from one of my former students, Tom Quirk, on the National Disaster Fund:

Hi Eric,

Part 1 – on the NDF and sovereign risk management
I wonder whether you’ve framed your analysis on sovereign catastrophe risk management in the wrong light. Let's start with a bastardized-but-useful adaption of your summary:

"Suppose that your wife tells you that you could save a lot on house insurance if you just paid her the premiums every month and she'd pay you if the house burned down. Seems like a good idea - keep the money in the family. She invests the premiums you pay her in getting the kitchen redone.....

[insert my bit]....

But before you tell her to put away new the kitchen plans and to think carefully about her risk-management shortcomings, you realize that it’s you who have forgotten something important: your wife is extremely wealthy - she owns 100 houses! Each house has its own, reasonably independent, risk (most of the houses are in different neighborhoods).
Now you could put the premiums towards offsetting the specific risk on your current house, which may now seem expensive (do you really need insurance given your enlarged portfolio)? Or you could put the premiums into an account to cover losses and risks across your wife's (and your) whole portfolio, which may sensible and efficient. Or, if the kitchen is going to save you a bunch of money in the long run, and your wife's housing portfolio has been performing well, maybe you should just spend it. [finish my bit]"

My point is that we need to take a “helicopter perspective” when thinking about government risk. The government’s comprehensive balance sheet is exposed to a plethora of risks and possible shocks: potential government losses from biohazard shocks (foot and mouth), bailouts of non-bank deposit taking instructions (South Canterbury Finance), bailouts of banking institutions (hopefully not!), leaky buildings, solid energy - and the list goes on. We should factor in all of these risks when managing and financing any individual specific risk.

It would be silly to have a large build-up of assets in a bio-hazard risk fund while at the same time the government has to finance costs from bailing out South Canterbury Finance. It would be equally silly to have the NDF busting at the seams while at the same time that the government is heading to international markets to finance huge costs stemming from a serious foot and mouth epidemic. The idea is that an NDF-type fund invested in real, non-NZ government assets will ignore diversification across the government's portfolio, unnecessarily ring-fencing risks.

What you really want is a pool of assets on hand to cover the potential losses from all shocks/risks across the government’s entire portfolio. And luckily, the government has one of these - its call the fiscal anchor (net debt, or whatever you want). Would you care if the government did not have NDF if, when it came to funding the EQC’s earthquake liabilities, net debt was at 10% of GDP? (maybe you’d want some liquid cash to finance immediate expenditures and avoid f/x crisis. But taking the Canterbury earthquakes as one data point, the exchange rate and Govt debt YTM dynamics weren’t that bad post February 2011).

So when we talk about sovereign risk management we need to keep in mind that the level of net debt is probably what matters most at the end of the day. The NDF and other asset accumulating instruments are, at best, a good political instrument that encourage people to compensate government for the risk it assumes (think of the NDF as a vehicle used by the government to convince people that the EQC levy it collects doesn’t go directly to the government coffers and government expenditure). At worst, NDF type instruments constrain governments’ ability to efficiently manage risk.

We should be asking government to explain and justify whether its net debt target builds in an adequate and appropriate buffer for the risks to which it is exposed, and not whether the NDF’s asset allocation is appropriate. My personal view is that the NDF actually matters diddly-squat, even if it holds tons of real assets. This is because the government can always increase its debt in line with NDF asset growth, nullifying it the net impact of the asset accumulation, while still at the same time still achieving the net debt targets it actually cares about. The NDF holding non-tradable NZ government assets is a cleaner and more efficient way to achieve this global optimal debt level.

Now there could be a good political economy justification for the existence of a real–asset NDF. If the MoF is worried that she/he is not going to be able to constrain her/his colleagues’ expenditures in the future, then the NDF – actually quite like the NZSF - could be a good way to put the money into a safety deposit box, politically and maybe even legally out of reach of prying hands. But let’s be clear, this is not the usual financial risk management argument for having a real asset NDF.

So in summary, what’s my point? It is this: you can have an NDF, and you might actually want one for political economy purposes. But don’t kid yourself that you should have one based on vanilla principles of efficient risk management.
There are a few caveats and alternative strategies that would justly refute what I’ve said so - asset-liability matching is a good example. But I’m lazy ad will leave these for another day.
Part 2 – on the EQC

I wonder whether our views of Govt earthquake risk management may also stem from differences in our views of the EQC.

The EQC is not a private entity where the residential risk it assumes through its Act is ring-fenced, insulating the government from losses. In other countries EQC equivalents do follow a more private model. In such countries your arguments re holding appropriate real assets would have some fair bite.

But the EQC act clearly places the Minister of Finance (or maybe now the EQC Minister? - can't remember) with ultimate power concerning the EQC's finances. From purchasing reinsurance and deciding on the strategic asset allocation of the NDF to pricing the EQC's levy premium, the MoF “wears the pants” relative to the EQC's board and CEO. And because the government is guaranteeing the whole thing at the end of the day, this is exactly the way you'd want it.

The heuristic I use to think about the EQC is that it is really just an acknowledgement that in the wake of a disaster the government would not be able to turn down a bailout of badly damaged and uninsured residential property (and that without the EQC buffer, for a number of commercial and behavioral reasons, levels of domestic catastrophe insurance penetration would likely be much lower). Instead of simply dealing with this problem after the fact – and its likely to be a much bigger problem after the fact - the EQC lets the government collect some money and compensate itself in advance.

Part 3 - some thoughts on the government’s procurement of reinsurance

If you assume the government is the final funder of the EQC, all but the most tail-risk target reinsurance will be relatively expensive. From a value-for-money perspective NZ citizens should be wary of huge reinsurance premiums.
Reinsurance layers/tranches are generally priced based on the expected value of losses (with adjustment for risk preferences and tail risk, operating costs, market conditions, returns/costs of capital, etc). As a result, lower layers with low excesses will be highly priced, and higher layers with large excesses will be priced relatively lower. (The price metric used is the “rate-on-line”, the premium costs as a per cent of the total risk transferred).

Should the government pay high rates-on-line for relatively to get coverage at a low excess level? I think this would be silly: the government has a deep and diversified portfolio; it has buffers and financing flexibility. Paying NZD 100million+ per year to cover the EQC risk (or other earthquake risks) at a low excesses (less than a good few NZD billion) is crazy.

The government can also likely finance losses at low excesses at a far lower rates than reinsurers, especially over the long run. Self-insurance would seem to me to be the first option government should examine in its risk management, especially given its risk profile, likely risk preferences, funding costs, revenue stream variability, etc. Governments can take a long-term time horizon that reinsurance business models simply cannot match; I imagine that Government financing costs across the entire yield curve will be lower than even the gargantuan reinsurers.

If the government can buy reinsurance attaching at a level high up the EQC loss distribution, it might make sense as a “tail-risk” management strategy. But, eeeekkk, I’d need to see some pretty good CBA to justify it. You’d need a strong argument as to why we’re not better putting the financing into building a bigger buffer in the net debt anchor.

It’s hard to be scientific around what appropriate reinsurance purchases might look like without doing the modelling or analysis. But I’d say - very unscientifically, and given NZ’s current debt levels - a reinsurance program attaching at over NZD 6-7 billion and going up from there might be worth considering. At least in a huge earthquake this might make a difference to our financial position. But how many years of forgone accumulated premiums, and consistent and building self-insurance, is this risk transfer worth? We’d need some modelling that I’m not sure has been done.

I do accept, however, that reinsurers may have some cost advantage compared to government; for one example, they can achieve cross-country diversification that governments cannot achieve. But I’m just not sure that these advantages outweigh the government’s self-insurance capacity and inherent diversification. It’s an empirical question for someone smarter than me to answer.

I agree with much of this as far as it goes, but think of the incentives then created.

Every homeowner taking out house insurance is forced to take on EQC insurance as well. In small events, all's well - the government's self insurance for the excess prior to reinsurance kicking in covers things without imposing noticeable burden on public finances. And the same holds if it is reinsurance all the way up.

Large events like the Canterbury quake, or a future Wellington one, strain government finances appreciably. There is no actual NDF on which to draw, as it all comes out of government borrowing. Under Tom's proposal, there might not be reinsurance on which to draw either; in the Canterbury quake, the government was on the hook for anything above the reinsurance draw.

EQC behaved, after the February earthquake, as though its purpose were to minimise costs to the Crown rather than to make good on its contracted commitments to policy holders. It is difficult otherwise to make sense of the numerous claims where EQC believed the house was well under-cap but the private insurers called it a complete rebuild.

And as good as the proposal from the Crown has been to increase the EQC cap to reduce the coordination failures between private insurers and EQC, that also makes it less likely that you'll be able to trigger assessment from your private insurer where you might get a fair shake.

Flag election data: Electoral Commission bleg

I wonder whether the Electoral Commission will keep and publish the data on vote preference orderings in the preferential flag ballot. There are 120 potential permutations on the 5 orderings, but ...rather more where there's ballot drop-off. Still, it shouldn't be unmanageable.

It would be really interesting to check whether there were major or minor cycles that went unrevealed, whether there was a Condorcet winner, whether the Condorcet winner was picked by the preference elimination routine, and whether different run-off options would have yielded different winners. Recall that a Condorcet winner would be the flag that beats each and every other flag in a head-to-head vote. If one exists (and it isn't necessary that one does exist), it is desirable that a selection mechanism select it. If there isn't one, all choices are kinda arbitrary anyway so no particular reason to prefer STV and top-of-order elimination over voting by veto or other mechanisms, but no particular reason to prefer the others either.

I've sent a note in to the Electoral Commission via their website asking that they keep the data and publish it. We'll see.

While we're at it, though, it does seem ... ridiculous ... that we'd be collecting all the preference data and then running an elimination routine without first checking for a Condorcet winner. STV doesn't necessarily pick the Condorcet winner, if there is one. It took me all of five minutes to come up with a preference ordering that failed to reveal one. Shouldn't that be the first stage check before running the preference ballot? The preference data needed for running STV is all you need to check for a Condorcet winner. The algorithm for checking wouldn't be all that hard.

Since we seem to be running all kinds of process changes under extreme urgency anyway, why not have one more process change and ask the Electoral Commission to start by looking for a Condorcet winner?

Manipulating an STV vote

Ok, so the Internets are all a-twitter about how strategic voters should behave in the coming flag vote, and whether it's possible to vote strategically.

Recall that there are now 5 options: 3 with ferns, monkey-butt, and the red peak thing. Let's denote these A, B, and C for the ferns; M and R for Monkey-butt and Red-peak, respectively.

Suppose there are five different basic types of voters. This is just a constructed example; I have no clue what the actual preference distributions are. But suppose that red-peak is the second choice of a lot of fern-lovers who have strong preference for their most-preferred fern as compared to the others. And that one of the ferns - nobody much likes that fern. You all know which one.

And so:

10 voters	7 voters	5 voters	3 voters	4 voters
A	B	M	R	M
R	R	R	B	R
B	A	B	C	C
M	M	C	M	A
C	C	A	A	B

Everyone votes for most preferred candidate.  If no majority, the one with the fewest first-choice votes is dropped and the second choice moves up for those voters. And so on until there is a majority.

• C has no first-place votes and is dropped in the first round. 
• Then, R is dropped because it has only 3 first-place votes.
• Then, M is dropped because it has only 9 first-place votes (to 10/10 for A&B)
• Then, B wins 15 to 14 in the final round.

Suppose that the four monkey-butt supporters in the last column don't like this. Their least preferred option wins. What happens if they lie and say that they prefer red-peak to monkey-butt?

10 voters	7 voters	5 voters	3 voters	4 voters
A	B	M	R	M R
R	R	R	B	R M
B	A	B	C	C
M	M	C	M	A
C	C	A	A	B

And the sequence:

• C is dropped in the first round.
• M is dropped in the second round, having only 5 first-place votes.
• B is dropped in the third round, with only 7 votes.
• R wins in the fourth round, 19 to 10 against A.

By lying about their preference ordering, 4 of 29 voters flipped the outcome from their last choice to their second choice. If you think this isn't fair or somehow bad, they've also made sure that the Condorcet Winner actually won:

• R>A 19:10
• R>B 22:7
• R>C (unanimous)
• R>M 20:9

If they hadn't lied, B would have won: an outcome that 22/29 people would not have liked. So are they so bad?

Again, this is just a trivial constructed example. It is not easy in the real world to tell what actual preference orderings are. And knowing what they are is important for figuring out strategy. At the same time, since no one vote will ever change the outcome of an election, neither will any one strategic vote.

But, in general, if you think that fern-supporters are divided across ferns, and that a non-fern option might be a strong second choice, you might want to list that second choice as your first choice if you fear winding up with a fern you don't like. Similarly, if you're a big fern-supporter and you're scared that splitting your first choice options across the field will let somebody else sneak up the middle, well, maybe go with the fern you think most others like best.

This isn't something unique to STV - all systems are manipulable (other than dictatorship). That's the Gibbard-Satterthwaithe theorem. It may take more information to run properly than is feasible in a lot of cases, but it's possible. 

Perhaps a better bottom line: voting is irrational if you think you're going to change the outcome; it's even more irrational to put a ton of thought into strategy where you're not likely to change the outcome. Do you run complicated strategies when picking lotto numbers?

Volkswagon

Oliver Hartwich sums things up nicely over at Business Spectator.

In a way, Volkswagen’s crime was a very Germanic response to a business problem: It rendered regulatory standards useless by sophisticated engineering. Or, to say it with the famous Audi slogan, it tried to gain Vorsprung durch Technik (‘Advancement through technology’).
...

This is a corporate PR catastrophe of the first order, easily dwarfing previous disasters like the Deepwater Horizon explosion, the sinking of the Exxon Valdez or Merck’s recalls of its Vioxx drug. It calls into question not just one company, but a whole industry in one of the world’s leading business nations.

It is a common misconception to believe Germany is a place for ‘whiter than white’ business practices. That is, of course, how Germany likes to see itself and how it likes to advertise itself to the world. Self-righteousness is a virtue invented in Germany. Just look at the ways the Germans have tried to teach other nations lessons on fiscal policy, energy policy and now refugee policy.

The problem is that there is a gulf between this self-image and the reality of German life. The Germans are probably not worse than everybody else. But they certainly aren’t better, either.

...

Volkswagen itself has had its own experiences with, well, suboptimal business practices. The German system of co-determination in which employees play a role in a company’s management had led the Volkswagen leadership to bribing its own employees’ representatives. They received cash, were taken on luxurious locations and invited to lavish sex parties. The scandal resulted in high-profile convictions, including a prison sentence for the head of the employees’ council.

If this had happened with Great Wall or another Chinese car company, imagine the demagoguery and the calls for bans on Chinese car imports.

I note as well that not all organisations headed by Germans reward staff with lavish sex parties.

Underliving the locals

New Zealand First's Ron Mark comments on recent high migration figures:

“At the same time, the Finance Minister Bill English admits immigration has kept wages down.

“That was the government’s intention, it is an age-old trick. It is exploiting foreign workers, particularly those from lower-waged economies, and unfair to Kiwis.

“Migrants will accept inferior working terms and conditions, and unscrupulous employers, both Kiwi and new employers from overseas, know this.

It's unfair to Kiwis that foreigners might come in and accept lower wages?

Here's Tim Leonard on the secret history of American labour market regulation:

Influential progressives already had in place theories of wage determination that were grounded in biology, arguing that certain “low-wage” races were biologically predisposed to low wages, or “under-living.” Economist-turned-sociologist Edward A. Ross volunteered that “the Coolie cannot outdo the American, but he can underlive him” (1936: 70). “Native” workers have higher productivity, claimed Ross, but because Chinese immigrants are racially disposed to work for lower wages, they displace the native workers. (Ross does not say why ostensibly more productive workers cannot command relatively higher wages.) In Races and Immigrants, John R. Commons volunteered that “the Jewish sweat-shop is the tragic penalty paid by that ambitious race” (1907: 148). Like Ross’s coolie, Commons’s Jew is industrious but less productive than native workers.

The tragedy Commons referred to is the process by which the Jewish predisposition to underlive led to destructive wage competition. Wage competition not only lowers wages, it also, for Commons, selects for the unfit races. “The competition has no respect for the superior races,” said Commons, “the race with lowest necessities displaces others” (1907: 151). Labor leader (and Socialist Party presidential candidate) Eugene Debs said of Italian immigrant workers: “The Dago . . . lives more like a savage or a wild beast than the Chinese,” and therefore can “underbid the American working man” (1891, quoted in Glickman 1997: 89). Wharton School reformer Scott Nearing volunteered that if “an employer has a Scotchman working for him at $3 a day [and] an equally efficient Lithuanian offers to the same work for $2 . . . the work is given to the low bidder” (1915: 22). For these progressives, race determined the standard of living, and the standard of living determined the wage, with adverse consequences for the superior, “high-wage races” (see Leonard 2003a).

There are very legitimate worries about exploitation of foreign workers whose visas are tied to their employer's happiness with their work. But, thankfully, contemporary discourse has flipped away from arguing there's any innate racial propensities for 'underliving'.

It's plausible that reservation wages of those moving here are lower than reservation wages of those who are here. Such worries motivated much of the push for minimum wages in the US during the progressive era: they were designed to make unemployable those who would underlive Americans or women, who were presumed to have lower productivity than men and so would be disemployed by the minimum wage and sent back to the kitchen. New Zealand's minimum wage is already $14.75/hr; if migrants are undercutting Kiwis for wages in low-skilled work, they haven't a lot of margin on which to do it.

In related news, Oliver Hartwich, Executive Director here at The New Zealand Initiative, today received his New Zealand permanent residence. Jason Krupp is soon to be made a citizen. I've been a permanent resident since about 2004; I arrived here in 2003. Martine Udahemuka arrived here as a refugee.

We turk er jurbs?

A Dirigiste Turning Point

The NBR's Nevil Gibson agrees with us on the ridiculous Lochinver Farm decision.

At some time in the life of a government a single decision can be seen in retrospect as a turning point that may seal its historic reputation.

One of those occurred yesterday when the cabinet endorsed the decision of two government ministers to overturn fundamental property rights and signal the political interests of the state were supreme.

The blocking of the Lochinver Station sale to a Chinese-owned company, Pure 100 Farm, will cast a long shadow over future foreign investment proposals.

The government has protested that it wasn't a political decision.

I'm not sure how else one interprets a ministerial decision to overturn the OIO's approval of the sale.

Flaws in Overseas Investment Act

The New Zealand Initiative's 2014 publication, Open for Business: Removing the barriers to foreign investment, identifies a number of flaws in the Overseas Investment Act (OIA).

Its author, Bryce Wilkinson, says it has too many guidelines for decision-makers; in fact, there are some 19 factors in the original legislation before further condition were added by regulation.

“The OIA requires the Overseas Investment Office (OIO) to consider a multitude of potentially conflicting considerations and weight them arbitrarily,” he says.

“Ministers overturned the OIO's approval recommendation because they put different weights on the relevant considerations.”

Instead, Dr Wilkinson says there should be a presumption in favour of the vendor's property rights and the burden of proof put on the government to establish a good public interest reason for stopping a sale.

Unfavourable decisions should also raise the question of compensation.

Australians looking across the ditch for inspiration might be a bit cautious.

For a new localism

If you're in Wellington, please join us on the 19th of October for an event launching our coming report on Special Economic Zones.

Khyaati and I have had a lot of fun writing this one. 

The basic idea: national-level policy change has gotten too hard for the same reason that it's often a bad idea. One size doesn't fit all. If we tweak local government financing so that they share in increases in tax revenue their districts send on to central government, they'll have a stronger and direct stake in encouraging growth. They'll also be best placed to identify the regulatory or policy changes that could let them best pursue growth. At the same time, if pressure for policy changes comes from the local governments whose residents stand to benefit, that makes it easier for central government to give it a go. Smaller trials allow for a bit more boldness in policy change. If something works well, it can be rolled out more broadly; if it doesn't, the failure's been confined and can be rolled back more easily than if it applied to the whole country.

I hope to see you on the 19th. You might want to sign up sooner rather than later. We put up the invitation on Friday afternoon and fifty seats were gone by the end of the day.

And, when the report's available, it'll be up here too. 

Doing the most good we can

I really rather like my piece in this week's National Business Review ($). I there discuss Peter Singer, effective altruism, Wellington's hordes of bucket-wielding sidewalk charity collectors, and outcome-based funding of NGO service delivery.

A snippet:

It is hard to resist Professor Singer’s call for more effective altruism. Whatever your charitable preferences and wherever you most want to help, doing the most good you can toward your chosen ends requires being careful about where you give. It also poses a challenge for the charitable sectors. The government has been increasingly insistent on outcome-based performance measures in its contracting for services and some charities seem uncomfortable with the rigorous evaluation that such measures require.

It is not easy to measure the good that you can do. But organisations chafing at performance-based contracting with the public sector should not sit back and hope the fad passes by.

As more private donors start watching the kinds of evaluation being provided by places such as Give Well and demand better measures of the good their dollars do, charities wanting to keep those donors will have to keep up. It might get harder to rely on the bucket brigades.

A pre-pub is here. But you should subscribe. There's great stuff in this week's issue from Matthew Hooton on Seymour and ACT and Hosking on international tax issues. And they've provided the country's best coverage of the ongoing saga of earthquake building standards.

Queenstown - I still don't get it

Convention Centre economics are about as wonky as stadium economics. Field of Dreams stuff mostly.

So when a private outfit says that it wants to build a convention centre using its own money, you'd expect a city council to be pretty accommodating, right? They get the hallowed thing and don't have to pay.

Not if you're in Queenstown.

Loyal readers will remember this one from last year. I'd then written:

Chris Hutching over at NBR (gated) has the story.*

Alastair Porter wants to open a convention centre near the Queenstown airport, called "Remarkables Park". He wants to target smaller Australasian conventions, noting the pretty saturated market for the big international ones. He's lodged the consents to get started. Queenstown Council wishes instead to have a bigger venue downtown to anchor a retail, hotel and entertainment district.

Queenstown accountant Duncan Fea is quoted in support of the Council proposal, saying simultaneously that it will hurt the central business district because of the airport location and that, because it's at the airport, there will be logistical difficulties in getting attendees to and from downtown hotels. I'd have thought that conventioneers staying downtown and catching a shuttle would have given downtown Queenstown the best of both worlds: a centre they don't have to pay for, evening traffic from conventioneers, and no big deadspot downtown when there isn't a convention on.

I'd also have thought that Queenstown would have been a tough venue for big international conventions anyway because anybody going there needs to connect from Brisbane, Sydney, Melbourne, Christchurch, Wellington or Auckland. It's a beautiful spot, but it's a hop away only from places that already have, or are planning to have, ridiculously big convention facilities for international conferences.

I can't get how anybody's calculations would lead them to conclude you get higher net benefits for a downtown convention centre that you have to pay for than from one near the airport, whose visitors stay downtown anyway,** and that, critically, you don't have to pay for.

Does Queenstown really want to *punch* a gift-horse in the mouth?

Well, the saga continues. The NBR's Chris Hutching remains on the case.

A council meeting last week heard how the total anticipated direct cost to deliver the facility is $58.1 million including $55 million in construction cost, $1.7 million working capital, and $1.4 million in infrastructure upgrades. Rates would glean $31.4 million along with debt funding.
The balance of $26.7 million is being sought from the government and other sources including local community trusts, Otago Regional Council, and commercial sponsorship.
A central government funding proposal was provided to the Ministry of Business for consideration by the Treasury in January.
...
The developer of the Remarkables Park shopping centre has offered to build a convention centre near the airport at no cost to ratepayers. But the council wants the convention centre built near the centre of town.

So for the sake of a couple miles' distance, Council wants to spend tens of millions - presumably because a downtown centre will have greater flow-on benefits for downtown businesses. But, if I'm not wrong, it's Queenstown Council that complains, loudly, about all the costs that tourists impose on local services that the City isn't able to recoup in rates.

And is it really plausible that a conventioneer flown in to Queenstown wouldn't spend some time downtown as well?

There may be good reason for the general and widespread view that local councils suffer from severe competence issues.

Marital optimisation

If the experimentalists stuck me in a lab playing standard dictator and trust games with Susan, here's the play:

• Dictator Game: I am strictly indifferent as to how much I send her or she sends me.
• Trust Game: I send her everything and am strictly indifferent as to how much she sends back; I expect she'd send me everything in the sender role and expect she'd prefer a split as a signal of caring but otherwise wouldn't much worry about it as it all winds up in the same place.

I do not understand the drawing of strong conclusions about couples from how much they send in the dictator game. Either I, or Sue, might choose amounts just based on amusement. And similarly in the recipient role in the trust game. Even if the stakes are very large relative to income, we jointly decide how things get spent afterwards. If the stakes are small, money in her pocket is money that isn't spent out of the joint account later, and vice-versa.

Carolina Castilla has a paper out in the May AER running trust and dictator games with spouses in India, with stakes of up to 80% of daily household income. Receivers send back a bit over half of what they receive; when playing as dictator, they send back half. Senders send over a bit over half. There's lots of proposed explanations for the less-than-optimal sending, none of which are the obvious "Maybe they don't trust the experimenter to actually triple the money or not to pocket some of what's in the envelope." 

The main interesting finding (in the ungated and more extensive working paper) is that in households where the man spends a lot on tobacco, the wife sends over less money - potentially indicating problems in household bargaining. And, in households where the wife handles the kids' education expenses, the husband sends over more - presumably saving him the trouble of handing her a bigger share after the experiment to pay the school bills. None of that makes it into the the AER version, presumably because there are rather a few just-so stories floating around. 

The World Bank's Development Blog discusses the paper, lauding the generally higher trust exhibited by married partners as compared to stranger partnerings. Where we don't know how well the subjects trust the experimenters in countries with no small issues with corruption, trust in the experimenter might limit the extent to which within-couple trust can be exhibited in the experiment. 

What's the Key Government ever done for us?

Mike Reddell provides a short list, after the latest Australian leadership spill cited Key as example Australia might follow:

I grabbed a piece of paper from my bedside table and starting trying to jot down on the back of the envelope the “very significant economic reforms” in New Zealand over the last seven years.

It was a short list.  I couldn’t think of any.

Perhaps Turnbull had in mind the tax package of 2010?  Some of it might have been useful, but (a) it was pretty small in the scheme of things and (b), as the Treasury pointed out at the time, the net effect of that package was to raise the average tax rate on business income, not lower it.

From almost seven years of a Key-led government, I managed a few other small useful items for the list of reforms:

• Some modest welfare reforms  (but 10.3 per cent of the working age population – and one in three Maori – is still on working age welfare benefits)
• Partial privatisations (of minority stakes only) in several state-owned companies
• The wind-back of Kiwisaver subsidies (but, on the other hand, policy is now to make Kiwisaver compulsory)
• The establishment of the Productivity Commission
• Some very modest reforms to the Resource Management Act
• Some modest labour market reforms (probationary periods)
• Minor planned changes to the anti-dumping regime.

No doubt there are others, but if anyone can point me to a “very significant economic reform” undertaken in New Zealand since November 2008 I’d be grateful. 

Anything Mike's left out? National's done a bit to reduce the negative effects of the minimum wage on youths. Plus, having inherited a large structural deficit from Labour thanks to Working for Families and zero percent loans, they managed to clear most of that while cutting taxes. Reddell notes that corporate tax rates are high, but the gap between corporate tax rates and the top marginal income tax rate isn't too bad. On other margins, we can credit the government for things it didn't mess up. Uber has entered the NZ market without being legislated or regulated out of existence. The Financial Markets Authority has allowed neat innovative moves in larger scale crowdfunding and in alternative indices like Unlisted. Nobody has yet banned parallel importation of digital product like geounblocking Netflix, and nobody has yet killed parallel importation of physical product through hamfisted application of GST at the border. The government would have been under strong pressure to do harm on most of those margins, and resisted it.

Otherwise, they've done the more typical conservative thing of making things worse more slowly than the other team might have. Civil asset forfeiture has gotten worse. Treasury has gotten worse and seems mostly to care about being politically palatable. The Ministries have gotten worse for generally not having Ministers who insist on robust analysis. RBNZ's taken its eye off targeting the centre of the band.

Here's Reddell's other list:

And the problem with even the list above is the list of measures that could appear on a  “steps backward” list:

• Higher effective corporate tax rates
• The debacle of the earthquake-strengthening legislation
• The continuing debasement of our skills-based immigration system, both in the way it is administered and in formal announced policy.
• New overlays of financial market regulation
• The re-establishment of direct government controls over who banks can and cannot lend to
• The continuation of a regime of “corporate welfare”, including for example the Sky and Tiwai Point deals, and the smell that the Saudi sheep deal gives off
• The degree of central government control of the Christchurch repair project, involving both wasteful projects (some of which may not finally go ahead), and the way central government has artificially boosted land prices and impeded the prompt redevelopment of the central city.
• The continuing apparent decline in the rigour of public sector policy advice, and the use of robust cost-benefit analyses in underpinning policy decisions.
• Increased first home buyer subsidies.
• Undermining housing affordability with mandatory insulation etc requirements for rental properties
• Continuing increases in minimum wages, from very high levels (relative to median wages) at a time when unemployment is quite high, and policy was supposedly oriented to getting people off welfare.
• Heavy investment in the newly state-repurchased loss-making Kiwirail

But, mostly, the story is just about the failure to do anything much. 

It feels like National has convinced itself, and many of its supporters, that it has done the most it can do given the political constraints it faces: that this is the best of all possible worlds.

Perhaps that's the ambition Turnbull has as well. Lowering supporters' expectations does make the job a bit easier.

Correlated risks re-re-revisited: worse than I'd thought

Glenn Boyle draws my attention to the National Disaster Fund.

Loyal readers will recall that a substantial proportion of EQC's investments have to be in government securities. They need to be in assets that can be liquidated quickly in the event of an event. But the odd bit is that they needed to be in New Zealand Government Securities. As I'd summarised back in 2010:

Suppose that your wife tells you that you could save a lot on house insurance if you just paid her the premiums every month and she'd pay you if the house burned down. Seems like a good idea - keep the money in the family. She invests the premiums you pay her in getting the kitchen redone. Yup, the insurer's asset base looks good now. But come the fire...

Hopefully it's not as bad as all that. If they're clever, the reinsurance picks up everything beyond some minimal amount, so the Earthquake Commission's asset base only needs to cover what would effectively be a deductible. In that case, heavy domestic investment in government assets is silly rather than reckless.

I worried too that the value of any NZ government securities being sold-off post-event would be lower: if government is selling debt at the same time to rebuild, and there's a higher risk premium on the country as a whole, these things will sell at a discount post-event.

And then I found EQC is forbidden from having a properly diversified portfolio.

But it's worse than that:

Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993. 
i. This direction comes into effect on 1 November 2001 and as of that date the direction dated 2 June 1998 is hereby revoked.
ii. The Earthquake Commission (the Commission) shall invest the Natural Disaster Fund (the Fund) in:
     a. NZ Government securities comprising Treasury bills and/or Government stock and/or Inflation-Indexed Bonds tradeable only through the NZ Debt Management Office [emphasis added];
     b. global equities; and
     c. New Zealand bank bills. 

It later notes that the NDF can have up to 35% in global equities and up to $250m in New Zealand bank bills. The rest is non-tradeable government securities.

It's one thing to be heavily invested in NZ government bonds that could trade at a discount post-event. It's another to be invested in ones that can only be sold back to the government. Isn't that basically equivalent to the government not having a disaster fund at all (for the 70% in nontradeable government securities) and just having to go to the debt markets to cover the costs of the quake?

If you wonder why EQC took such a hard-nosed approach to costs, and prided itself on keeping the rebuild costs to the government down, well, this might be part of it. If I'm reading this correctly, both the NDF and any overruns above NDF that weren't covered by reinsurance would come out of the government's pocket.

I get the point of having something like EQC. The reinsurance scheme seems worthwhile. Is the NDF that different from self-insuring though?

Head Transplant

If I ever suffer massive brain trauma effectively killing me but not affecting the meat that carries me, I totally consent to being a donor for this kind of transplant.* I hope you'd do the same for me.

An Italian-Chinese medical team plan to perform the world's first head transplant in China, one of the surgeons said Friday, amid concerns over medical ethics in the country.

Ren Xiaoping, who along with Italian surgeon Sergio Canavero, hope to attempt the procedure within two years, but only if the preparatory research and tests go according to plan, Ren said.

"A lot of media have been saying we will definitely attempt the surgery by 2017, but that's only if every step before that proceeds smoothly," Ren told AFP.

Canavero, who leads the Turin Advanced Neuromodulation Group, first announced his project in 2013, saying at the time that such a procedure could be possible as soon as 2016.

I know nothing about the relevant biology. But if head transplants wind up working, are cyborgs closer than I'd thought? The rest of the meat is just a way of delivering oxygenated, cleansed, nutrient-rich blood to the brain, right? If we can couple heads to new-meat, is it that much harder to couple it to a machine able to provide that? Wouldn't it be simpler, as robot-body wouldn't reject the head? And there's always this inferior option:

In related news, I've a short op-ed in the Herald on compensating live organ donors.


* I specifically decline consent to anyone who caused the head injury resulting in the meat's becoming available.

Take it outside?

The Dom's editorial today rails against the existence of outdoor smoking areas at bars.

Now the ministry is proposing new rules requiring an outdoor smoking area to be 35 per cent open. Anything that can be closed, including doors, plastic sheets and even an umbrella, would not count as open space. If it can be closed, it's fair to suppose that it will be. That, after all, will provide the noxious fug that the bars and their smoking clients want.

But perhaps there is a better way to deal with this. Rather than engaging in a byzantine debate about what is an open space, perhaps the law should just ban smoking in all outdoor areas in and around bars and restaurants. This is what the local and regional councils suggested to the government in July, and a good case can be made. Partial bans, after all, always lead to invidious arguments. Even this newspaper has wondered about the wisdom of banning outdoor smoking areas on the windswept Wellington waterfront.

But a blanket ban would avoid all these micro-controversies. And although there might be an element of rough justice here, the greater good arguably trumps the particular case. Perhaps the best approach might be to ban smoking within, say,  three metres of any bar or restaurant, and leave it at that. We have had enough sophistry from the tobacco lobby.

After all, the fundamental principles behind all anti-smoking laws are clear and they should not be sabotaged by those with a commercial interest in backing Big Tobacco. The first principle is that smokers have the right to smoke. The second principle is that they do not have the right to inflict toxic fumes on others. The danger of second-hand smoke is abundantly clear. And so is the distress caused by blowing your smoke in someone else's face.

I'm afraid I don't get the underlying model.

If the outdoor smoking area is sufficiently closed in that there's a 'fug', why would any non-smoker head out there to suffer the fumes? No non-smoker would be there to suffer the distress caused by having smoke blown in the face. If they're sufficiently ventilated that doesn't happen, what's the problem that needs solving?

Seismic Assessment

Hugh Paveltich emails:

The “seismic assessment” fiasco is just more of the same … political and bureaucratic failure on a massive scale.

This writer is still going through this experience, that started back in early 2012, when a 20 years of age 5 unit standard retail development require a seismic assessment by a corporate tenant.

The initial high quality assessment rating was 56%. It was expected the full assessment would rate higher.

Regrettably the initial skilled assessor was so swamped with work, this writer allowed a corporate tenant to proceed with a follow-up full assessment by an Auckland based engineer, who came back with a result of 0 – 5%.

Following repeated requests by this writer, the local authority and other engineers, the full report with calculations has yet to be provided.

That’s when all hell broke loose.

The corporate tenants panicked (with many losing their jobs subsequently … a story that has yet to be told) … exiting the premises immediately … at substantial and unnecessary costs to themselves and others. The owner only learned of this the day they were exiting.

There was clearly a massive mess to sort out.

This was followed by desktop assessments of 28%; 32% and 67% by the 3^rd, 4^th and 5^th firms of engineers. Generally, older engineers did not perform well.

Remarkably, a 2 level structure nearby, developed at the same time and assessed  by the 6^th engineering firm, came out with an NBS rating of 99%.

The inconsistencies did not however stop at the ratings. The proposed solutions were all over the place as well.

I wonder how processes that yield such divergent assessments can produce a percent-of-NBS measure forming the basis for regulatory mandates. Update: See also Rodney Hide's column in this weekend's NBR ($).

Meanwhile, EQC troubles continue. Great that 3D is continuing to air this kind of stuff, despite apparent fatigue with it elsewhere in the country.

Let them help

Here's my piece in our Insights newsletter on refugees and that the government shouldn't stand in the way of those who would help.

It is really hard not to sympathise with calls for increasing the refugee quota. Seeing the pictures from the Mediterranean tugs at the heartstrings. But is increasing the refugee quota the best we can do?

I discussed the refugee situation with Peter Singer on Monday night at the Christchurch WORD festival. Allowing more immigration is one of the best humanitarian measures developed countries can implement: each migrant is far better off being able to move to places where they can live better lives, and their remittances home improve outcomes there too. But when countless numbers of Syrian refugees live in camps in Jordan, or in Lebanon, does New Zealand do better in spending money to bring a few hundred here and help them to settle in New Zealand, or in sending money to help improve conditions there? While New Zealand agonises over whether to allow a few hundred more refugees to come here, Lebanon has over two hundred refugees for every thousand Lebanese. They could use our help.

But many altruists are strongly motivated by wanting to help here. New Zealand’s churches have said they can support 1,200 refugees. Many others are similarly committed to helping here. How can we channel that altruism so it can be more effective? We could learn a bit, surprisingly enough, from Canada. There, community groups committing to sponsor a refugee who has passed the usual application guidelines are allowed to bring in an additional refugee. The sponsors cover the refugee’s housing costs, provide financial assistance through the first year (and potentially for up to five years), and help to ease the transition. Similarly, any group of five individuals making a similar commitment can apply to bring in an additional refugee.

The government should consider allowing such moves here. Rather than ignore communities that desperately want to help, the government could leverage that support to allow more refugees to come and to provide them with better settlement experiences. When comes the next refugee crisis, caring communities would then not have to waste time lobbying government to change the quota. They could instead rally their troops and see how much they could commit to helping more refugees to come here.

When people want to help, the government should not stand in their way.     

A coming engagement

I'll be speaking in Christchurch in about a month at the Cuningham Taylor Business Lunch. Here are the details.

Supporting the work of The Family Help Trust, the lunch on Thursday 8 October aims to entertain and inform high-profile Canterbury business professionals. It commonly raises $30,000 towards the successful prevention of child abuse and child death in vulnerable families through an intensive five-year programme of in-home support.

This year’s event will be MC’d by local business professional Leeann Watson, General Manager of Canterbury Employers Chamber of Commerce, and Director of The Champion Canterbury Awards. Leeann brings a wealth of public speaking and business experience to the lunch along with her own insight into the local business community and she says:

"The role of the Family Help Trust is aligned with the CECC's philosophy on the interdependency between a strong business sector and a healthy community and I am thrilled to be involved in this year's event"

Key-note speakers in 2015 include the Hon. Paula Bennett, MP for Upper Harbour, Minister of State Services and Associate Minister of Finance, who is also pleased to be involved this year. “From my time as Minister of Social Development, I saw first-hand what an incredible job non-government organisations like Family Help Trust and many others do with Government agencies to support our families.” She says.

...

The Hon.Paula Bennett will be joined onstage by economist and Head of Research at The New Zealand Initiative, Dr Eric Crampton. A think tank describing themselves as a ‘business group with a difference’’ the NZ Initiative are committed to developing innovative policy solutions that work for all New Zealanders, and believe that promoting such policies will benefit all members.

On the 8th October Dr. Eric Crampton will explain the basic model that the Ministry of Health is trialing for social impact bonds, how it could be made better for community-based charitable organisations in combination with crowdfunding, and how it links into the evidence-based approach recommended in the growing effective-altruism movement.

Get your tickets here.

Notched Bearers

My oh my would it be interesting if the courts decided that EQC's insistence that cutting holes in bearers as a floor-levelling strategy was not, in fact, repairing the building to an "as new" standard as required by those clients' insurance policies.

There's a class action suit seeking declaratory judgement:

In addition, they argue EQC’s liabilities are not met merely by compliance with MBIE guidance.
EQC has been arguing it only needs to repair in a reasonably sufficient manner rather than to as new.
An example is the way EQC uses MBIE guidelines on floor levels, which were created after the earthquakes.
This has allowed EQC to repair to a lesser standard by adopting the liberal foundation level tolerances in the guidelines.

...

He says the group action is seeking three sets of declarations from the High Court around EQC’s interpretation of the EQC Act.
“EQC’s interpretation has left many outstanding claims in dispute, and potentially many settled claims now in doubt,” Mr Woods says.
“This is not a class action for damages. These proceedings cover serious issues and will have far-reaching implications for all New Zealanders.
“Where the EQC Act states the definition of ‘replacement value’ being ‘when new’ and compliant with the building code, EQC has chosen to consider only the pre-earthquake condition of a building.”
“The MBIE guidance document does not set out the standard required by either private insurance or the EQC Act, though EQC insists it can meet its obligations merely by complying with these guidelines. 

If you insure your house to be repaired to an as-new standard, and EQC provides the first cover under that policy, and EQC agreed to that, and EQC then insists after the insured event that "as new" means something entirely different from any plausible reading of "as new", and EQC is basically the government and they lean on you hard saying that folks who make trouble get trouble, well, it starts making you a bit of a sceptic of the value of government insurance.

I really hope that the cohorts outside of Christchurch who all see this as just more Christchurch whinging never ever ever have to deal with EQC. The schadenfreude utility isn't big enough.

Seamus Hogan - NZAE Obituary

I have copied below the obituary for Seamus Hogan that I wrote for the current issue of Asymmetric Information, the NZAE's newsletter. It will eventually also be available here; look for the August 2015 edition.

Seamus Davie Hogan, newly elected President of the New Zealand Association of Economists, died of a brain aneurysm on 17 July, aged 53. He is survived by his wife, Sarah, and their children, Emma, Liam and Flynn.

Seamus was a Canterbury economist. Born and raised in Christchurch, Seamus completed his undergraduate and Honours training in economics at Canterbury in 1985 and there began his doctoral work under Richard Manning. When Manning left to Chair the Economics Department at the State University of New York in Buffalo, Seamus followed him and completed his doctorate in 1989. He then took up an Assistant Professorship at McGill University in Quebec where, with co-author Chris Ragan, he completed a series of papers modelling labour markets. More importantly, he there met Sarah.

Seamus advanced to Associate Professor at McGill before moving to Ottawa. There, Seamus served as Principal Researcher with the Bank of Canada and as a research unit Director with Health Canada, before moving to Canterbury where Seamus took up a Senior Lectureship in 2001.

The Economics Department was then building out of long slump. The Department, from the 1980s through the mid-1990s, had been unable to hire to fill standing vacancies. By 1995, the Department had dropped to seven economists plus two fixed-term appointments. Rebuilding began slowly in 1996. With the hiring of Seamus Hogan and Ken Carlaw in 2001, the Department had grown to twelve, though there had been much turnover. Frank Tay’s history of the Economics Department identifies the Department’s real turning point at 2001, with Les Oxley’s appointment and Headship.

Seamus provided support to Les Oxley’s Headship, and to John Gibson’s subsequent Headship from 2005. Oxley ran the department as a participatory democracy with strong roles for standing committees. Seamus’s long history with the Department, his willingness to provide departmental and university service, and his adept familiarity with the university’s regulatory arcana proved critical to the Department’s strong performance in the 2000s. Seamus spent much time as head of the Teaching Committee before his later term as Head of Department.

With the Department having been able to improve its staffing complement, more mass-market courses could be offered. Seamus helped to ensure the continuation of the rigorous calculus-based intermediate microeconomics offering as the intermediate course was split into honours-bound and majors-oriented streams, and during the subsequent semesterisation of both courses. He also greatly assisted the Department’s navigation through the Faculty’s creation of core requirements in the Commerce degree.

Seamus had been a student during the Department’s lean times in the early 1980s and had maintained connections with the Department during its worse times in the 1990s. He consequently understood the importance of building a strong, collegial environment. In his Headship, he continued the management tradition established by Oxley.

For all of his importance in ensuring a steady and foresighted hand on the Department’s administrative tiller, Seamus will be most remembered at Canterbury for his contributions to the teaching programme. Seamus taught the core calculus-based intermediate microeconomics course during all but two years of his appointment at Canterbury; while he was on sabbatical, his stand-ins, me and Andrea Menclova, knew better than to deviate from the programme that Seamus had established.

Nearly every one of the 50 to 100 students annually taking the calculus-based intermediate microeconomics course was taught by Seamus, and Seamus knew each of them by name. He was more than generous with his time, offering near-compulsory office hours and extensive course and programme advice in addition to lectures and tutorials. Nobody could better help a student best navigate the intricacies of double-degree or double major programmes. And he actively supported the Economic Students’ Association.

Seamus complemented his intermediate microeconomics offering with a graduate-level course in welfare economics which produced a disproportionate number of the junior economists later hired on at the Reserve Bank and Treasury. His graduate elective course was taken by almost every honours student during the years it was offered. Some especially perspicacious honours-bound students who anticipated Seamus’s sabbatical leave would take his graduate offering while in their third year to avoid missing out.

Seamus’s courses embodied what seemed to be at the core of Canterbury economics. It combined a rigorous technical approach with a focus on the economic intuitions underpinning the modelling decisions. That, together with a strong appreciation for the institutions within which markets operate and the moral presuppositions underpinning welfare analysis, built a cohort of students of which Canterbury can be exceedingly proud.

Seamus’s enthusiasm for the students was irrepressible, and was reflected in a College teaching award in 2011. It also played a role in his promotion to Associate Professor. But it is better reflected in the tributes paid him by his students at the memorial website established by his family.[1]

Seamus loved economics and loved teaching economics to others, whether students or colleagues. His interests were broad-ranging. Despite the department’s rather disparate research interests, we all could, and did, seek Seamus’s advice on our papers. Seamus’s lectures invited students to join in the fun inherent in economics. It was impossible to know him and not share in it. When Seamus provided us copies of his exams for proofreading, he was not really looking for error correction – his errors were few. He was inviting us to share in the fun he had created for the students. It was play.

When the external review committee established to re-assess the Department in light of post-earthquake budgetary pressures deemed, in 2014, that Seamus’s intermediate microeconomic offerings were surplus to requirements, it hit Seamus, me, our students, and many of our colleagues very hard. In prior eras, budget constraints were accommodated by restricting course offerings to the core theory fundamental to the training of new economists. This review instead cut core theory while maintaining the less rigorous intermediate path.

Seamus’s last year at Canterbury was not a happy one. I left the Department in July of 2014 to join the New Zealand Initiative, a Wellington-based think-tank. Seamus left the Department at the end of the year and joined me in Wellington, taking up a position as Senior Lecturer in the School of Government. The Economics side of the Department of Economics and Finance at Canterbury currently stands at nine, including two senior tutors. Before the earthquakes, we were twenty.

It is particularly tragic that Seamus’s death came so soon after his family moved to Wellington. Family was always especially important to Seamus, and that he had imposed such a cost on them did not sit well with him. But it is difficult to imagine Seamus existing far from the lecture whiteboard. Seamus’s death came just as the Hogans had re-established themselves after a particularly difficult year.

In policy circles, Seamus was best known for his work in electricity market regulation and for his blogging at Offsetting Behaviour, where he co-blogged with me.[2] Outside of academia, Seamus was best known for his work with his doctoral student Scott Brooker in creating the Winning and Score Predictor, the WASP now well familiar to cricket fans around the world. The WASP emerged from work Seamus and Scott undertook for New Zealand Cricket to improve batting performance.

Seamus was also well known in Christchurch music circles. While a student, Seamus played with the Christchurch Symphony, as both of his parents had. He played violin with the Resonance Ensemble under conductor Mark Hodgkinson. He also served on the board of the Christchurch School of Music to assist during the difficult post-earthquake period.

The economics community will miss Seamus’s commitment to service, to scholarship and to students. The Association has lost its President. And many of us have also lost someone whose quiet advice made us better economists.

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[1] http://www.heavenaddress.co.nz/Dr-Seamus-Davie-Hogan/1080833/

[2] A compendium of Seamus’s posts is available here http://offsettingbehaviour.blogspot.co.nz/2015/07/a-hogan-compendium.html