Land costs and labour costs

The New York Times has a great piece on what happens in high cost cities. Land use regulation has made San Francisco incredibly expensive. Consequently, there are some tasks there that are on the way out: the value of the task is not high enough to meet the cost of getting a worker to perform the task.

San Francisco's $15 minimum wage certainly isn't helping, but wages would be being pushed up anyway because you have to meet a participation constraint: it would be difficult to find somebody willing to perform any task in San Francisco at a low hourly rate because the cost of living is too high, and there aren't easy commute-in options from less expensive bedroom communities. In that environment, the least-valuable tasks are priced-out first, and it ratchets up from there.

And so even up-market restaurants are shifting from having table service to counter service.

Restaurateurs here have taken a model familiar to taquerias and fast-casual, cafeteria-style places like Sweetgreen and Chipotle Mexican Grill, and pushed it further up the fine-dining food chain. Call it fast-fine, they suggest, or fine-casual. Or counter service “in a full service environment” that includes $11 cocktails and $22 pan-roasted salmon.

...

Enrico Moretti, an economist at the University of California, Berkeley, estimates that when housing prices rise by 10 percent, the price of local services, including restaurants, rises by about 6 percent. (The median home price in San Francisco has doubled since 2012.)

So burgers get more expensive as houses do. But even wealthy tech workers will pay only so much to eat one. “If we were to pay what we need to pay people to make a living in San Francisco, a $10 hamburger would be a $20 hamburger, and it wouldn’t make sense anymore,” said Anjan Mitra, who owns two high-end Indian restaurants in the city, both named Dosa. “Something has to give.”

...

Innovations in farming machinery or microwave meals, for instance, freed up people to be more productive, and better paid. But that is not entirely what is happening here. Restaurants haven’t developed a way to serve meals with less labor. They’ve gotten customers to do the labor they had been paying employees to do.

There is something innovative in reprogramming diners to decouple fine food from full service. But the fact that restaurants have to do this speaks to deep fears here of what the Bay Area will look like if certain classes of workers can’t afford to live here.

It'll be interesting to see what happens with New Zealand's coming higher minimum wages, and what happens if Auckland's housing affordability issues aren't sorted. 

Getting to 5

The NZ government might be targeting housing affordability, with a median house price to income multiple measure of 5. From Hickey's Newsroom Pro newsletter:

Acting Prime Minister Winston Peters effectively committed the Government to targeting a house price to income multiple for first home buyers of five times income, which is well below current levels in the biggest cities.

However, he stopped short of calling for lower house prices or suggesting it would happen within the next six years. He said the Government aimed to significantly increase wages.

Peters told his post-cabinet news conference he looked forward to the day when a young couple can “prospect no higher than five times their annual income.”

"This is the Government’s “long-term objective,” he said, adding he did not expect it in the Government's first or second terms.

It's not a bad target. I talk about some of the infrastructure financing lessons on how to get there in my column at Interest.co.nz:

Think about a council like Auckland or Hamilton, where debt-to-revenue limits of 250% are close to binding. Under those limits, a Council wanting to fund a new infrastructure project cannot borrow more than 2.5 times the annual revenue expected from the project. But Infrastructure lasts for decades.

Revenue bonds and special tax districts enable borrowing that is not guaranteed by the general ratings base and can then fall outside of the Council’s debt limit. American revenue bonds enable borrowing of five or six times the annual revenue associated with an infrastructure project.

When a developer wants to build a new subdivision or co-fund a mass transit project to service a new brownfield terraced housing development, the trunk infrastructure can be funded through levies on the future residents of the development to repay the revenue bond.

But if we really want to get to 5, here's a way of committing to it:

• Set annual median multiple targets providing a path to 5
• Set automatic policy levers that trigger for being too far from the path. These triggers can include:
• Overriding some or all of the city's plan, providing for increased density and abolition of rural-urban boundaries until the city is back onto the path. National Default Urban Plans that could apply during the emergency period could do things like:
• Abolish minimum apartment sizes;
• Abolish apartment balcony requirements;
• Abolish viewshed restrictions;
• Impose a land tax on property owned by local government, rated as though it were in appropriately dense residential use. So Auckland's peppercorn-rental golf courses would start costing Council a lot of money every year directly, rather than just as opportunity cost;
• Automatic upzonings of everything to next next higher allowed density;
• Abolishing heritage overlays, or capping the proportion of potential dwellings covered under heritage overlays. So if a neighbourhood, absent the heritage overlay, would be likely to have a hundred dwellings and currently has 10 heritage-listed houses, that would count as a hundred houses towards a new  Council quota;
• Abolishing any mandatory parking provision;
• Central government overriding Council viewshafts and heritage restrictions to allow increased density;
• Abolishing any rural-urban boundary
• Switch Council's rating base from land plus capital value to land value only, to encourage more efficient land use. 
• Provide Councils with positive incentives to pursue growth. That includes enabling innovative infrastructure financing options to remove a disincentive to allow growth. But why not also allow Council to share in some of the benefits of enabled growth?

Update - we'd covered some of these kinds of ideas when we'd punted the idea of trialing urban-friendly policy reform in Auckland. See section 4.5 here. 

Alcohol healthwatch - again

Newshub reports on the latest from Alcohol Healthwatch:

"One-third of NZ's hazardous drinkers are now aged 35-54," says Alcohol Healthwatch executive director Dr Nicki Jackson.

"For the older groups, hazardous drinking is now higher than it was back in 2006/07. It feels like we have a new 'peak booze' among parts of our population."

The Ministry of Health estimates that over 780,000 adults are hazardous drinkers. Statistics NZ figures show the drinking habits for more than a third of people aged 18-24 could be potentially hazardous - regularly consuming six more drinks in a single session.

Dr Jackson warns there's been an increase in hazardous drinking every year since 2011, and says it's increased by more than 50 percent among those aged 45 to 64 years.

As well as this, hazardous drinking in the 66-74-year age group more than doubled from 2011/12 to 2015/16.

"Our older drinkers are some of the heaviest drinkers in the world," she says.

Let's go back to the stats.

The 2015/16 New Zealand Health Survey does have an increased prevalence of harmful drinking (AUDIT score 8 or higher) for total population in each year from 2011/12 through 2015/16. But that came after a substantial drop from 2006/07. So the 2015/16 figure is now a bit higher than it was in 06/07. The rise from 11/12 to 15/16 is statistically significant, but there is no significant difference between 05/06 and 11/12.

While 32.6% of those aged 18-24 were considered hazardous drinkers by that standard in 2015/16, 43.2% were considered hazardous drinkers in 2006/07. It's been flat on "about a third" since 2011/12. The drop from 06/07 to present is significant; there's been no significant change though since 2011/12.

There were statistically and real-world significant drops in the prevalence of hazardous drinking from 06/07 to 15/16 for cohorts under the age of 24. Prevalence among 15-17 year olds roughly halved (19.5% to 11.5%); among those aged 18-24, it dropped by about a quarter (43.2% to 32.6%).

There was no statistically significant change over the period for those aged 25-34 (though higher now than before, with a large rise from 14/15 to 15/16), or for the 75+ cohort (which dropped from 3.6% to 2.9%).

There were statistically significant increases in prevalence from 06/07 through 15/16 for 35-44 year olds (16.6% to 22.3%), for 45-54 year olds (12.2% to 18.5%), and for 65-74 year olds (7.3% to 10%).

So if you want to tell a story about big increases in rates, you can pull out the 06/07 data and start from 11/12, which seems the bottom of a trough, or ignore what's been happening for younger cohorts, or both. The Ministry of Health data only goes back to 06/07, but overall per capita consumption data has a massive drop from 1987 to 1997, a mild rise through 2010, then a fall through present. If overall hazardous drinking is up 2011/12 through 2014/15 despite a drop in per capita consumption, then maybe whatever the government's doing on alcohol policy is doing more to deter moderate drinkers than it is doing to affect heavier drinkers.

It's also worth looking at the other measures in that survey.

MoH tallies the proportion of people consuming 6+ drinks on one occasion at least monthly. That figure is statistically significantly down overall from 06/07 through 15/16 (22.5% to 19.3%), massively down among 15-17 year olds (25% to 9.4%), and also down for 25-34 year olds (30.7% to 26.3%).

The only statistically significant change for any other subgroups were an increase among Maori women from 2011/12 through 2015/16 (23.4 to 27.8% but as the 2006/07 proportion was 28.0%, there was no change over the longer period), and smallish drops among European men and Europeans overall.

If you flip to the "Consumption of 6+ drinks on one occasion at least weekly" figure, you get a significant drop overall, a significant drop among men, and significant drops in the under-24 age cohorts.

It's also worth checking the most recent figures.

Again, the new ones aren't commensurable with the older ones, so we only have the change from 15/16 to 16/17. The proportion of hazardous drinkers dropped from 20.8% to 19.5% in the total population, and from 26.2% to 24.7% among past year drinkers. Heavy episodic drinking at least monthly is up by fractions of a percent, but heavy episodic drinking at least weekly is down fractions of a percent. None of those changes are worth noticing, but the drop in the most recent year contrasts with Alcohol Healthwatch's "there's been an increase in hazardous drinking every year since 2011".

Anyway, your regular health warning about relying on Alcohol Healthwatch's stats applies. It's usually worth going back and checking the original data yourself to see what's been left out.

Morning roundup

The survivors in the browser tabs, each of which likely deserves its own post.

• The mess at Tolaga Bay seems one where you should get the right solution by applying liability. It's impossible for you or I to tell how much value the forestry companies get from leaving slash on hillsides - it can be important for soil regeneration. And it's impossible for you or I to tell how much it would cost them to avoid landslips and mess during storms. But if companies are liable for damages caused, then they'll have incentive to weigh that all up properly. 


• Drunk people are better at creative problem solving. Well, tipsy people (just under .08). Harvard Business Review only just wrote this up, but it looks like the underlying research by Jarosz, Colflesh and Wiley is from 2012. Or at least I think that's the underlying research. HBR doesn't link it and doesn't mention either the name, year, or journal of the study. Usual skepticism about small-n psych experiments should apply, but it does accord with fairly common experience (drink while writing, edit sober), and with a later similar study. 


• Colby Cosh on the history and robustness of the Dow Jones Industrial Average.


• The Taxpayers Union' finds a continued, and growing, public sector wage premium. The correct first response to this kind of finding is that the public sector will be more likely to draw a different skill mix than the private sector. What you really then want isn't the difference between average pay in the private sector and average pay in the public sector, but rather whether workers of similar characteristics enjoy different earnings in the private or public sector. On that one, the most recent New Zealand work I know about is John Gibson's 2009 piece showing a rising public sector pay premium from 2003-2007, adjusting for everything then observable about workers.
  
  From Gibson's abstract:

  This note reports propensity score matching estimates of the public sector pay premium in New Zealand for each year from 2003 until 2007. Comparing with observably similar private sector workers shows that public sector workers have received a pay premium that has grown in each year, from almost zero in 2003 to 22% in 2007. Unless there have been unmeasured changes in worker qualities or in the attributes of public sector jobs that give rise to compensating pay differentials, this rising public sector pay premium is most plausibly attributed to an increase in non-competitive rents. 

  Remember too that an employee's total compensation bundle isn't just pay - it's also conditions and job security. If public sector employment is, on average, viewed as having more security and less onerous conditions than private sector employment, we should not expect a positive wage gap. Perhaps there are other conditions in public sector employment that require paying a premium to draw in suitable staff.


• The government's to be subsidising firms who take current beneficiaries as new apprentices. I expect wage subsidies are an appropriate solution here. I note that countries like Switzerland that have robust employer-provided training schemes don't constrain firms with a minimum wage - young trainees start on very low wages and quickly move up to wages closer to those of skilled workers as they develop those skills. If you ban firms from starting apprentices on wages that reflect productivity, you'll have to subsidise firms taking on apprentices. In this case, I expect that the subsidy would also help ensure meeting a participation constraint on the employee side. UPDATE: I've been corrected! Wages for Swiss trainees remain low during the training phase, though it varies by sector. In a lot of cases, they remain between 10% and 25% of skilled workers' wages. But it enables a sector that can train skilled workers. 


• Katherine Rich is awesome. I don't know how many times I've seen the public health brigade shout about how industry should be denied a place at the table and should never be consulted about anything, and that the loudness of industry screams is a proxy for the benefits of a policy. Well, know what happens when you shut out industry? You wind up making stupid mistakes that you could have found out about earlier if you'd only bothered asking people who know more than you do. So instead of a referee report allowing you to fix errors before publication, you get an embarrassing letter in the journal your article was published in from Katherine Rich pointing out important problems.

  Madam
  The paper by Chepulis et al.(1) published online by this journal contains errors, inconsistencies, unsubstantiated statements and a lack of evidence to support its conclusions. The following comments refer to the different sections of the paper as published.
  
  Abstract
  There is an error in the abstract and on p.4 of the paper, which reports that New Zealand had the highest percentage of beverages with added sugar while the UK had the lowest with 9%. The UK figure should have been 39%. The erroneous figure was seized upon by the New Zealand media to demonstrate how far behind New Zealand was from the UK and to highlight the potential impact of a sugar tax. ...

  It goes on from there. Katherine talks more about it here, and notes that the journal now has an updated corrected version up - which will be covered in zero of the newspapers that pointed to the original work. All of this is consistent with a model of public health research that cares far more about getting a couple days of screaming headlines with incorrect figures than about truth-seeking. 


• Brendan Harre pulls together several of his suggestions around housing affordability. I agree with the broad thrust - we have an incentive-alignment problem where central government reaps the bulk of the benefit of growth but local councils have to find ways of funding the infrastructure to enable it. Interesting suggestions throughout.

The foreign buyer ban - revisited

Labour's foreign buyer ban is back from select committee.

Recall that I had a few issues with the prior draft:

• It catches people living in New Zealand on work visas who are not yet resident, but who may intend on becoming resident. For example, a doctor coming in to work in Greymouth on a skilled migrant work visa would be banned from buying a house there until she has achieved residence. An international student graduating from Invercargill's Southern Institute of Technology and moving onto a work visa and into a job there couldn't buy a house. 
• Permanent residents who split time overseas, or who have to spend some time abroad, can be hit by it. 
• It would mess up financing of projects like apartment towers where funding can come from foreigners who buy off-the-plans and then rent to locals.
• It will mess up building larger developments where the developer is considered foreign-owned because more than 25% of their shareholding is foreign. 
• It sets hurdles before infrastructure companies needing to buy bits of residential land for cell towers, power lines, telecom cables, or water pipes. 
• It creates confusion where a business includes residential premises for workers and the business is purchased by a foreign outfit. Would they have to tear down the houses?

And, on top of all that, it's hard even to show that there's any kind of problem. The proportion of transactions involving foreign-affiliated buyers is low, and highly variable across the country. 

NZIER had several additional concerns, including (my paraphrase):

• Can the Overseas Investment Office really handle 3000% more applications? Really?
• Why apply it across the whole country if you're just mad about Auckland?
• If New Zealand really wants to attract skilled migrants, treating them badly isn't a great way of doing that. 
• We look like dolts in international trade negotiations.
• Regulatory uncertainty for investment in residential development is a stupid thing to add in when we already have big problems in getting housing developed. Don't we want the big foreign companies that can build to scale? 
• What kind of precedent are we setting when we run policy in this shonky a process? And what should we think about a Treasury that figures it's ok to put up an RIS where the problem definition is just "Labour wants to do this; this bill solves that problem." What kind of tinpot policy process are we running here?

Ok. So, what's in the Bill back from committee? 

First up, I Am Not A Lawyer. There's bound to be stuff I'm missing and that lawyers for those directly affected will catch. I am not checking stuff like "In section 62(a), replace "section 17(2)(f)" with "section 16E(4)(f) or 17(2)(f)"." is consequential. In a better world, legislation that needs this much fixing after first reading because it had such poor pre-implementation process would have a sunset clause on it requiring fairly stringent post-implementation review for any renewal. 

First, the good stuff:

• Anybody on residence-class visas now counts as domestic. When I moved here, it was on a skilled migrant resident visa; I became permanent resident a couple years later. Others coming in on talent visas that aren't resident will still be blocked. So we might expect people to try harder for the residence-class visas. But at least they're counting a broader class of residents as domestic. 
• There is now a waiver available for those normally resident to buy a house if they're out of country for 183 days in the prior year - the Minister must be satisfied that the person intends to continue to reside in New Zealand. That still seems burdensome, but it's better than it was. 
• People building apartment towers can some of the apartments off the plans to foreign investors so long as they're then not occupied by those investors. I have no clue what monitoring burden that will involve, or whether any of the appeal of funding an apartment here to be rented out was the option to live in it occasionally. They've also put in a fix for investors in hotel units. [Update: this also applies to buying off-the-plans in larger new housing developments]
• There are exemptions for network utility operators in telecom, electricity and gas. 
• Relationship property exemptions would let the surviving non-resident spouse or partner take on the deceased partner's house without having to seek OIA consent.
• Conveyancing gets easier where the buyer has to attest to meeting the criteria rather than the conveyancer being liable. 
• Foreign investors in large developments won't be required to on-sell immediately on construction if they intend on renting it out.
• Residences on a property that are ancillary to the business purpose also have exemption: the buyer of a vineyard that comes with housing for some of the workers won't be hit as a foreign home-buyer.

And the stuff that's still a problem:

• There remains no adequate explanation of the problem that the ban seeks to solve, nor any reason to expect the policy will improve housing affordability.
• During the election campaign, Labour wanted to go after foreign speculators, and suggested foreigners would have to build a house here to be able to own it. The increased housing test at Clause 11 still requires eventual on-sale, or non-occupation. Someone coming in on a work visa cannot buy a piece of land and build a house on it to live in.
• OIO's capacity for taking this on hasn't been addressed, though if the 'benefit to New Zealand' test is now simpler, that could help.
• There were problems in there for estates where a foreign-based family member takes on the house to be passed on to minor children; I'm not sure what now happens in that case. 
• I can see political reasons for carving out profits à prendre exemptions for forestry and not for other sectors, but I can't see good reasons for it. The government has made tree-planting a priority, and perhaps sees the exemption as a way of helping them achieve their tree-planting goals. But what of other land-based industries with their own goals?
• The Opposition statement on the bill points out that retirement villages haven't been given exemptions allowing financing by unit sales to foreign buyers. 
• Because the legislation was drafted quickly, and amended in response to the first round of criticisms, it seems rather likely that we will find other branches to bash our heads on as we go. 
• NZIER's critiques remain. 

Update: John Ballingall points me to a bit that isn't in the Bill as reported back from committee, but is in Minister Parker's press release: Australian and Singapore citizens and residents are treated as New Zealand citizens and permanent residents for purposes of the ban. I had known that Australians were exempt from the ban, and had known that they were going to have to do something about Singapore because of the trade deal there. 

I have not seen any additional detail, so do not know whether Singaporean citizens and residents would face the same encumbrances as New Zealand permanent residents, or whether Singaporean citizens would be treated as New Zealand citizens and Singaporean residents would be treated as New Zealand residents. 

But if Singaporean citizens would be treated as New Zealand citizens, then long-standing New Zealand permanent residents would face more encumbrance than Singaporean citizens because of the rules around presence in the prior year. 

Storing resources for the future

In this week's NBR, I made the case for storing materials until it proves economical to recycle them. I think that is consistent with Auckland Council's declared zero-waste mission.

Think about bauxite deposits. Some of those deposits are economical to mine now for aluminium production; some may become worth mining in the future. It would be a mistake to try and pull all of the bauxite out of the ground today just because somebody doesn't like that it's sitting down there in the ground, waiting to be pulled out later when it's profitable to pull it out. Prices do a great job in helping people figure out which deposits should be saved for later.

Some waste materials are eminently profitable to recycle now. Copper is so profitable to recycle that some folks try pulling it from live power lines. But other materials are not currently profitable to recycle.

I suggest that we should store those materials safely, in a clay-lined hole, covered up so they cannot blow away and cause issues elsewhere. That the fee for storing the materials should cover the costs of building and maintaining the storage facility. And that doing things that way minimises overall waste - just as we waste resources mining difficult bauxite deposits before their time, so too do we waste resources when trying to recycle difficult materials before technology has made that recycling profitable.

Those with a subscription can read it here.

One reader emailed me to note that if tip resource storage facility fees are too high, it can encourage illegal dumping. He's right. I like how Christchurch handled that problem when I first moved there: each household gets 26 rubbish resource storage bags free for the year, but has to pay for any extras.

The problem shouldn't be too big though where tip resource storage facility fees aren't that high. But it could be more substantial if tip resource storage facility fees were set to punish evil rather than to just recoup the costs of running a tip resource storage facility.

Sunday Star-Times on sugar

Eventually, you hit a tipping point with underresourced newsrooms where you kinda wonder whether they should just shut the thing down rather than continue.

Here's John Anthony's piece in the Sunday Star-Times on sugar.

A recruitment drive by Coca-Cola to combat the threat of sugar taxes has been slammed as "appalling" by the New Zealand Dental Association.

A Coca-Cola South Pacific advertisement on LinkedIn for a public affairs and communications manager role promises "an opportunity to make a difference in the world" working for the global drinks giant.

The successful applicant, who will work from Auckland, will manage government relationships in the Pacific Islands to ensure sugar taxes don't negatively impact the business, the job ad says.

A Coca-Cola spokesman says it does not support sugary drink taxes as they are "ineffective as a means of combating obesity".

However, that's contrary to findings reached by an international cohort of experts who have published a new paper in peer-reviewed medical journal The Lancet, highlighting "compelling evidence" that sugar taxes help improve health outcomes.

Ok, so public health people are mad that Coca-Cola doesn't like sugar taxes. The rest of the article is Valiant Saintly Public Health People against Evil Companies.

I guess that's an easy story to file.

Here's what the Ministry of Health had to say about sugar taxes:

...our current position [is] that there is insufficient evidence that a sugar tax would be effective in reducing obesity.

And the report the Ministry of Health commissioned from NZIER found the same thing.

If we go to the Lancet piece Anthony cites, we find that it is a two-page "Comment" piece. The Lancet notes that most of its Comment pieces are commissioned. I don't know whether they then go through any peer review, but this was most likely just Lancet editor Richard Horton asking Casswell's group for an oped on how great it is to tax alcohol, tobacco and sugar.

Much of the rest of the article is Casswell and Beaglehole opining on sugar, and how it's terrible that a company might have a corporate affairs rep that might ever oppose them.

Shouldn't we have expected the story to mention, somewhere, that the Ministry of Health, and the report it commissioned, found against sugar taxes? And that the Lancet piece was in their opeds section?

Australia really sucked in the 70s

Frances Woolley points to Barbara Spencer's Address to the Canadian Women Economist's Network lunch at the 2002 Canadian Economic Association meetings. I hadn't read it before.

Some less-than-fun features of Oz through the early 1970s to which Spencer points:

• Until 1966, any woman in the public service who married had to resign, unless she were a secretary and could join the typing pool;
• Women in the public service, until 1969, were required to be on lower pay;
• It took until 1972 for regulations restricting women's advancement in the public service to be removed;
• Scholarships for teachers at ANU were very generous, but bonded: graduates had to go and teach in remote places for five years after graduation, unless they got married. Unsurprisingly, almost all of them got married just after completing their degrees. 
• CSIRO, the Commonwealth Scientific Research Organisation, blocked female appointments because their scientists had to go out on field expeditions, and they didn't have toileting facilities in the field that CSIRO considered adequate for women. So while they didn't ban female appointments, all appointees had to be able to go out on field expeditions, and women were not allowed on field expeditions. This was apparently endemic through the mid-70s in sciences. 

  "A friend, who is currently a professor at the ANU in Social Welfare, was told in about 1974 by the career guidance councillor at her high school in Canberra not to do science because of the lack of appropriate bathroom facilities."

But there are also some excellent fun observations about Winnipeg and the University of Manitoba.

I knew very little about Canada except that it was rumoured to be cold and that it produced lots of logs and beavers. Arriving at Winnipeg just before Christmas in 1969 was a shock. It was so cold and desolate looking that I thought I had arrived on the moon by mistake. I had no boots, only sandals, and my feet nearly got frostbite as I got off the plane at 30 below zero on the open tarmac.

However, it may surprise you that over my years in Winnipeg, I gradually grew to appreciate the stark beauty in flatness and endless white. I remember going out into the country side and realizing that the white snowy ground stretches, basically unchanged, for hundreds of miles. I never grew to appreciate the cold.

I was an undergraduate at Manitoba, doing a double-honours in Economics and Politics, 1994-1998. The economics faculty baffled me. But there's a long history there - and one that a farm kid going to the local university would never know.

Here's how Spencer found it in the 70s.

I arrived at Manitoba with a job as a part time lecturer in the Economics Department, starting January 1970. For my first course, I took over Principles of Economics from Cy Gonick, a well known Marxist or New Left economist, as he called himself, who had recently been elected to the Legislature as part of the NDP sweep into power. Taking over from Cy Gonick was a memorable experience. His version of microeconomic theory had mostly been a diatribe against the role of U.S. multinational corporations in suppressing Canadian independence. Most of the students were taking the course solely because Cy Gonick was teaching it, including a group of about 10 Maoists, who were there to heckle him. Cy neglected to tell the students that he would not be teaching in the second term and, in addition, he promised that there would be no final examination, something that was contrary to the rules of the University. Not surprisingly, the students were quite upset and angry when they learned that I would be teaching the macroeconomics part of the course and that I would make heavy use of algebra, which would be tested on the exam. Despite being given a half eaten apple as a present by a student and no doubt receiving dreadful teaching evaluations, somehow I survived and was actually rehired by the then Chair, Clarence Barber, to teach Mathematical Economics and Intermediate Microeconomics the next year.

I remember a John Loxley seminar on the Multilateral Agreement on Investment that was very much in the Gonick tradition. 

I returned to Manitoba in January 1979 to find it in turmoil, with Cy Gonick, the leader of the left wing faction, newly appointed as Head and many of the faculty attempting to move the location of their offices to Colleges on campus, as far from the main department as possible. I did manage to get promoted to Associate Professor that year, but it was obvious that I had to leave. 

Departments that get themselves into this kind of mess do such a terrible disservice to their students. Maybe you can do that at a small teaching university somewhere, where everyone applying to the place is applying to go there because they want to see Maoists fighting Marxists and want to be right at the heart of debates within a fringe part of the discipline. But pulling this crap in the economics department at the province's flagship university - it isn't right.

Gotta adjust for population

I know it's tempting if you want to run a scare story on how bad something is to just run totals over time and to ignore population growth.

But it's pretty poor practice.

Here's a piece over in Stuff. It's got the headline "New Zealand: Where alcohol is normalised - and that means more drinking". It doesn't have a by-line, presumably because the author is too ashamed to admit to writing it.

If you want to say more drinking, you either need to compare it to other places, or over time.

The piece has this chart on alcohol availability from Figure NZ. It gives total alcohol consumption, by quarter, from 2012 Q4 through 2017Q4.

It looks like this.

Now I don't know why they didn't go through March quarter 2018. That data's now up. Maybe Figure had an easy-to-find one that had that time range. Who knows. But that's the more minor problem. The more major one is that we've had substantial population growth since 2012.

So you'd find an upward track in total consumption of most stuff in New Zealand. More people means more consumption. Except this total track is pretty flat. I bet that means decreasing per capita consumption. Well, it's a sucker-bet because I know the data. 

Here's what the per capita data looks like, out of Infoshare, using population aged 18+ as denominator. 

Whatever hypothesis they're trying to run about normalisation leading to more drinking has to contend with the substantial decline in per capita alcohol availability since liberalisation with the 1989 Sale of Liquor Act. There was a mild rise through 2010, then it came back down again. I suppose you could base predictions of another increase on mean reversion or something 

And we're low to middling in the international per-cap consumption stats too. 9-ish litres per capita is around the middle of the OECD tables. If you want to look at overall global tables, maybe don't rank us against countries in the mid-east that will cut your head off for drinking. 

And I don't think this is just the web-person at Stuff chucking in some pretty(ish) charts. From the article: 

And alcohol sales continue to rise. In the 12 months to March, they reached $1.6 billion - a $200 million increase from last year, Statistics New Zealand figures showed.

Sales, in dollar terms, can go up for all kinds of reasons. You can spend more while drinking less by shifting up-market. You can have an increasing total dollar spend just with more people being here - and more tourists rolling through and drinking as they go. Or you could have actual increases in per capita alcohol consumption accompanied by increasing expenditure. You need to check the volume per capita stats, not the total expenditure stats. 

The article takes the latest SHORE work by Huckle as hook.

Boozing has become normalised in New Zealand, and that means it's likely we'll drink more - and at higher risk levels, new research says.

One of the study's authors, Massey University's Docter Taisia Huckle, said: "What does normalisation look like? It looks like New Zealand.

"We have a situation where alcohol is completely normalised in society, through advertising, marketing and availability, alcohol is reasonably priced."

School children could walk past three liquor outlets on the way to school or see advertising on social media, she said.

We're a high-income country - and that means our drinking frequency is higher than middle-income nations, according to the researchers, who studied drinking patterns across 10 nations in a report published on Thursday in the journal Drug and Alcohol Review.

Ok. SHORE and Huckle have a couple pieces in Drug & Alcohol Review.

The first one is survey work asking drinkers where they purchase their alcohol, at what time they purchase it, how long it would take them to obtain alcohol and, if under-aged, how often they're asked for ID and get served. It doesn't say anything about normalisation. It does show that New Zealand kids are the most likely to report being asked for ID out of the set of places surveyed, and are third least-likely to report being served alcohol. 

I don't get the link to normalisation in any of this. The article's Table 1 reports the "percentages of drinkers purchasing alcohol at an on-premise or take-away outlets across countries at least once in the last 6 months", but we have no clue about baseline proportion of drinkers - the table just says that Kiwi drinkers are a bit less likely than Oz drinkers to buy at pubs, more likely to buy at duty-free shops and at the cinema, and more likely to buy at clubs and restaurants. For a normalisation argument, wouldn't you need to show increasing proportions of people at different venues who consume alcohol there, rather than the venue choices among current drinkers?

The second one is more survey work comparing Oz, England, Scotland, Thailand, Peru, Vietnam and NZ. 

Table 1 shows that NZ has the smallest proportion of heavier drinkers, the second-highest proportion of low-risk drinkers (Peru has 74% low risk, NZ has 62% low risk) and the second-lowest proportion of higher-risk drinkers (Peru has 2% higher risk, NZ has 15%). I also don't see anything in there about normalisation. 

Upshot:

• Always run a population correction for this kind of thing. It's absurd to point to total spending on something or total consumption of something as being a bad thing, unless that thing is bad in a total way. Total carbon dioxide emissions can go up despite drops in per capita emissions (say) and that would be bad because the harm comes from the total. Alcohol isn't like that.
• The research forming the hook doesn't really say anything about normalisation, and instead shows NZ to have less high risk drinking and more low risk drinking than Australia, England, Scotland, Thailand, and Vietnam - but not Peru. 
• I expect the journalist didn't sign the article out of embarrassment, and is right to feel shame. 

Blowing a gaping hole in the Asylum Wall

America's civil asset forfeiture regime has led to evil. Because police there get to keep a good chunk of what they seize, some local governments have allowed their police to fund themselves by stealing from people. I am not exaggerating. 

New Zealand brought in civil asset forfeiture in 2009. It is not good. But it is not as bad as America's.

I wrote in last year's Outside of the Asylum essay:

Incentives in New Zealand are not nearly as perverse as in America. Police here do not directly profit from asset seizures. But they can apply to the pool of funds established by seizures. In 2016, Prime Minister John Key gave millions to anti-meth efforts from seized assets.

If the seized proceeds of crime are not used to compensate victims, those proceeds should be part of general government revenues. If police drug enforcement activities become self-financing because of asset forfeiture, police attention may plausibly shift towards drug crime – at the expense of less profitable lines of policing.

But it's worse than I'd thought then. I did not know that National had set police a KPI for gang asset seizures of $400m by 2021. And Stuart Nash has just increased that target to $500m.

A Cabinet paper seen by Stuff shows Police Minister Stuart Nash and Police Commissioner Mike Bush have set four new "high-level outcome targets", while also retaining most of the previous government's nine performance targets at an operational level.

The targets include $500m in cash and assets seized from gangs and criminals by 2021.

Nash said a small number of key targets would help focus police on priority areas, and since taking on the job, he has been clear about his plan to focus on gang-related crime.

KPIs on seizures can provide similar bad incentives for police, depending on what the rewards and penalties are for hitting those KPIs.

Here's the snapshot of the Cabinet paper from Stuff.

Asset seizures should never ever ever be a KPI target. At best they could be an intermediate target towards some actual KPI of, say, reducing overall criminal activity. But targeting it directly seems an exceptionally bad idea.

In case it is less than obvious why it is an exceptionally bad idea, here are some examples.

• If gangs own less than $500m in total assets, the police have strong incentive to deem more people as being gang-affiliated so that they can steal more stuff from them. The same holds true regardless of how much gang-affiliated people own. What matters is how easy it is to seize assets from different people, and how easy it is to claim that those people are gang-affiliated. 
• It encourages seizing the easiest-to-seize stuff, which may not be the assets that are either most directly tied to actual criminal activity or the assets most critical to continued criminal activity;
• Police always have choices about how to spend their time. Those choices depend on the KPIs. Should police be prioritising work leading to potential seizures over other work? Shouldn't they be instead trying to minimise the overall burden of crime, and figuring out what measures work best toward those ends?

As a general rule, whenever NoRightTurn and I agree that a policy is terrible, we should have a joint veto on it. 

Krueger!

Anne Krueger will be providing this year's Condliffe Memorial Lecture at Canterbury University. 

I don't know if I can make it down for the talk, but if you're able to get to Christchurch, go!!

Here's the blurb. The talk is Wednesday, 18 July, 5.30 - 6.30.

Many policy makers and academics claim that changes in the global economy make the obstacles to rapid growth of poor countries even more challenging than it was a half century ago. They cite technological change, with emphasis on automation and IT replacements of both unskilled and middle income jobs, and on the emergence of China as a formidable competitor as major reasons.

In this lecture, I shall argue that while the future is never entirely foreseeable, there are a number of considerations that point to greater ease of development now than in the past. These include: the diminishing rate of increase in populations in most low income countries; the fact that much more is understood now (albeit still imperfectly) about development (and especially how not to achieve it); that global markets are much larger; and obtaining information of all kinds is much easier.

There are also some technological advances that make development easier: mobile phones; continuing discoveries of improved technology in agriculture; advances in materials sciences; and so on.

This does not mean that development is easy. Mistakes can still be made.  There is no avoiding the need to improve health and education and bring rural residents into more productive jobs outside farming. Competitive conditions in the world economy make the adoption of an appropriate set of economic policies even more critical than it was in earlier years. Temptations to resort to excessively expansionary fiscal and monetary policies are still attractive to politicians.

Nonetheless, as the lessons from past experience are learned, those policy makers sufficiently committed to sustainable and rapid growth will be able to achieve results on a par, or better than, those that took place in the past.

Unfortunately, the Canterbury promo page says nothing about Krueger. Sure, she's self-recommending - but unless you follow econ, you wouldn't know it.

In a better world, Krueger would have received a Nobel for rent-seeking along with Gordon Tullock sometime in the 90s or early 2000s. They independently discovered the phenomenon. Tullock was first, but wasn't able to get his article on it in any journal higher than the Western (1967). Krueger gave it the catchy name, and had some data from India, and published it in the AER in '74.

She's also done great work on trade.

But her positions at the World Bank and at the IMF (in some views) were seen as a hindrance: a Nobel might then be taken as endorsement for whatever either of those organisations were then up to. Plus, awarding her a prize for rent-seeking without Tullock would have been impossible while Tullock was alive - the 1986 award to Buchanan without Tullock was bad enough. And the Swedish Academy (at least back then) demanded appropriate obeisances be paid by prospective nominees - and Tullock don't play that.

Anyway, it would be a great year for a Krueger prize - and especially as corporate America turns to lobbying Trump for special favours. Rent-seeking's back again!

Telling the truth about supply management

Maxime Bernier, who narrowly lost the Canadian Conservative Party leadership, has released the supply management chapter of his eventually forthcoming book on Canadian politics. 

It is excellent.

The laying out of the problems in supply management is, or should be, old hat to anybody who's been paying attention. But you almost never hear it from a Canadian politician.

But the politics - oh my. Bernier explains how the dairy cartel bought the Conservative leadership through its rotten-member structure. In short, anybody can sign up as a Conservative member the day before the leadership ballot and cast a vote. And so a cartel can run a whip-round, sign up ten thousand paper members, and tip the race.

During the final months of the campaign, as polls indicated that I had a real chance of becoming the next leader, opposition from the supply management lobby gathered speed. Radio-Canada reported on dairy farmers who were busy selling Conservative Party memberships across Quebec.33 A Facebook page called Les amis de la gestion de l’offre et des régions (Friends of supply management and regions) was set up and had gathered more than 10,500 members by early May. As members started receiving their ballots by mail from the party, its creator, Jacques Roy, asked them to vote for Andrew Scheer.34

Andrew, along with several other candidates, was then busy touring Quebec’s agricultural belt, including my own riding of Beauce, to pick up support from these fake Conservatives, only interested in blocking my candidacy and protecting their privileges. Interestingly, one year later, most of them have not renewed their memberships and are not members of the party anymore. During these last
months of the campaign, the number of members in Quebec had increased considerably, from about 6,000 to more than 16,000. In April 2018, according to my estimates, we are down to about 6,000 again.

A few days after the vote, Éric Grenier, a political analyst at the CBC, calculated that if only 66 voters in a few key ridings had voted differently, I could have won.35 The points system, by which every riding in the country represented 100 points regardless of the number of members they had, gave outsized importance in the vote to a handful of ridings with few members. Of course, a lot more than 66 supply management farmers voted, likely thousands of them in Quebec, Ontario, and the other provinces. I even lost my riding of Beauce by 51% to 49%, the same proportion as the national vote.

At the annual press gallery dinner in Ottawa a few days after the vote, a gala where personalities make fun of political events of the past year, Andrew was said to have gotten the most laughs when he declared: “I certainly don’t owe my leadership victory to anybody…”, stopping in mid-sentence to take a swig of 2% milk from the carton. “It’s a high quality drink and it’s affordable too.”36 Of course, it was so funny because everybody in the room knew that was precisely why he got elected. He did what he thought he had to do to get the most votes, and that is fair game in a democratic system. But this also helps explain why so many people are so cynical about politics, and with good reason. 

Bernier lost his shadow cabinet position for releasing the chapter. You should read it if you want a feel for Canada's politics.

If Canadian citizens resident abroad are allowed to take up a Tory membership in the next leadership campaign, and if Bernier is running again....

Alcohol harms and the NZ reforms

Man, I shouldn't have gotten my hopes up.

The Science Media Centre pointed me to reporting on some new work look at what's happened consequent to National's Sale & Supply of Alcohol Act 2012.

It always felt like a spot where some really good work could be done. Different locales implemented different district licensing plans at different times, so you could run a panel study looking at how different measures worked in different places.

But that isn't what this is. And what it is... well, let's go through it.

So the Science Media Centre points to this Newshub Newsroom (dammit) piece by Farah Hancock. It doesn't start well.

Alcohol industry appeals have “muted” potential benefits of legislation aimed at reducing the estimated $14.5 million a day cost of alcohol harm, a new study finds.

Massey University research shows the only effect of the Sale and Supply of Alcohol Act 2012 (SSAA) is a reduction in alcohol availability after 4am in cities.

The alcohol industry appealed 30 of 32 alcohol policies proposed by councils to reduce harmful drinking.

Lead researcher Stephen Randerson said alcohol related harm was estimated to cost New Zealand $5.3 billion per year.

“That was in 2005, so it’s probably going to have risen since then. The things that feed in to this are the cost of emergency services including police work where alcohol is involved in at least one in three call-outs, the emergency department and the health cost of chronic disease caused by alcohol.”

Recall that the $5.3 billion figure cited was from BERL's decade-old work and was their headline figure for the cost of alcohol and joint alcohol-and-other-drug use. The alcohol-alone figure was $4.8 billion. And that figure was very very wrong. Matt, Brad and I explained the problems in it in this NZMJ piece. A few of those problems:

• Counting as a social cost every dime spent on alcohol by anyone consuming more than about 2 pints of beer per day, including all alcohol excise paid by that cohort;
• Double-counting productivity costs of lost wages and VSL measures of statistical lives lost that encompass productivity costs;
• Counting as social cost every cost incurred by a heavier drinker, but not netting from those costs any benefits experienced by those drinkers.

A bad stat is hard to kill. And folks citing those kinds of stats who should know better, well, it tells me to be careful when reading what they've done.

And that brings us to the piece out in Friday's NZ Medical Journal by Randerson, Casswell and Huckle that's the basis for all this [Why oh Why can't news outlets just link to the study?!]

The piece uses survey methods developed in Casswell's International Alcohol Control study to structure interviews with 36 informants (main sources, according to the article, being police, liquor licensing inspectors, and public health officials) in early 2014 and early 2016, with 26 of the informants interviewed in both rounds of interviews. Plus a few police who do alcohol breathaliser checkpoints. 

Those informants scored a pile of things, like their view of regulatory compliance and enforcement, alcohol availability, trading hours, compliance with hours, difficulty of obtaining new licences, purchase age enforcement, and several other indicators. 

So I guess I'll have to keep hoping somebody credible does the panel data work I've been hoping to see - this is just a survey of what police, public health, and liquor licensing inspectors think about things.

Ok, so where's the evidence on big bad industry thwarting local communities? Here's the relevant section - there's also a bit in the conclusion I'll quote later.

Local alcohol policies

Only five LAPs were in force by the end of 2015, although 32 of 67 territorial authorities had produced a draft or provisional policy by this time (pers. comm. Jackson, 2016). Appeals were the most commonly reported impediment to developing an LAP. Some local authorities halted or deferred developing a LAP until appeals in other districts had been decided. Other difficulties cited were finding a compromise between the commercial goals of businesses and alcohol-related harm in the community; opposition from business interests, including the hospitality industry and supermarket chains; and time and cost.

Now if you've been paying attention to the LAPs, you'd know that there's some truth here. When Nelson-Tasman went for their LAP, they decided to hold back until Wellington's had been decided. But it wasn't industry that was appealing Wellington's LAP, it was the police and medical people who didn't like that Wellington wanted a 5am closing time and were trying to litigate them down to 3am.

Disclosure - I was hired by the Hospitality Association to provide evidence on the international literature on bar closing times. Didn't wind up presenting in Nelson because all that was deferred to the Wellington decision, but I did have a lot of fun presenting in Wellington in 2014. Bottom line: it's a stretch to expect any major changes in harms with a couple hours' difference in closing times, but it's likely a good idea to have bottle shops close before the bars do.

Anyway, the police and medical lobbyists were going to have a tough time getting anything more restrictive than the national default hours in Wellington because, well, Wellington could always just choose not to have an LAP and stick with the default. But at least I got to have a bit of fun.

But all that Casswell's team has in this survey is respondents (police officers, licensing officials, and public health people) complaining that businesses selling alcohol will often object to the licencing plans that police and public health people want.

LAPs have significant potential to restrict trading hours, outlet density and location, but too few were in force in 2015 to affect the alcohol environment nationally. Appeals against LAPs deterred and delayed their implementation. Although medical officers of health and police mounted several appeals, appeals from off-licence alcohol suppliers were more widespread, and most commonly resulted in the relaxation or removal of restrictions from LAPs.29 In light of the substantial commercial conflict of interest which alcohol suppliers have with the SSAA’s aim of minimising harm from the excessive consumption of alcohol,30 steps to protect the LAP development process from their influence appear desirable. This could facilitate policies which are more likely to reduce alcohol-related harm, and reduce development time and cost.

So the problem they've identified with the Act is that tribunals and courts sometimes wind up siding with industry objections to local plans. Like, if industry were just raising objections that wasted time and were never upheld, then you could make an abuse of process case and hope that the courts might start awarding costs or something.

But the big SHORE-team complaint here is that sometimes LAPs are made more liberal after industry appeals. If the Police objected to some bit of criminal law procedure that made it harder for them to get convictions for people the courts wind up finding innocent, or that make it easier for people successfully to appeal convictions, I'd hope we'd want stronger basis for changes than just that observation from some surveyed police officers.

Immigrants and wages

Another for the growing list of articles showing that migrants do not hurt the wages of locals, in the latest American Economic Review, from Clemens, Lewis and Postel:

An important class of active labor market policy has received little impact evaluation: immigration barriers intended to raise wages and employment by shrinking labor supply. Theories of endogenous technical advance raise the possibility of limited or even perverse impact. We study a natural policy experiment: the exclusion of almost half a million Mexican bracero farm workers from the United States to improve farm labor market conditions. With novel labor market data we measure state-level exposure to exclusion and model the absent changes in technology or crop mix. We fail to reject zero labor market impact, inconsistent with this model.

In short, farms swapped out Mexican workers for capital investment, but neither wages nor employment of farm workers changed. Farm owners went from hiring Mexican workers to hiring machines instead, and shifted production a bit towards crops that could more easily be handled with machines instead of workers.

If for some reason you preferred that farm produce was picked by machines instead of by workers who had come in from Mexico, whether because you love machines or don't like people from Mexico, then I guess the policy was good at that. But it would be a mistake to view this as some productivity-enhancing capital-deepening. Output per worker would have gone up, but nothing happened to worker wages - employers were just paying machines instead.

Building materials costs

Phil Twyford's suggested that the Commerce Commission should use its coming market-studies powers to have a look at building materials costs.

When Twyford revealed the investigation he said the industry was rife with rorts and anti-competitive practices.

“That is because we effectively have a duopoly in New Zealand. Add to that rebates and junkets given to builders to use certain products. The industry is far too uncompetitive.”

The rorts are one of Edwards’ main complaints about building materials prices, which further hinders competition.

“There isn’t corruption in brown paper bags,” he says. “But there are rebates, which aren’t allowed in other parts of the world. If I am building a house or five houses in a year and I spend $50,000 on Gib, I get rebates from my supplier.”

This and the junkets add to the overall cost of the materials.

However, Tookey says even though it’s almost inevitable that other competitors are being kept out through the use of these types of rebates, it’s natural for companies to protect their interests.

“If you didn’t do it in that way, there would be substantially more competition,” he says.

Twyford says the enquiry can’t happen until the Commerce Amendment Bill currently

before Parliament gives the Commerce Commission stronger powers to conduct market studies and take action against anti-competitive behaviour.

The Bill would enable studies into market competition and give the Commerce Commission new enforcement tools.

“Once Energy Minister Megan Woods has conducted her market study into the fuel industry, I’d like to ask the commission to examine building costs,” says Twyford.

I have no special knowledge about what's going on in building material costs. They're stupidly expensive here compared to Canada, but a lot of stuff is stupidly expensive here because we're a small market at the far end of the world. Sorting out whether it's small-and-distant problem or anti-competitive practice isn't simple.

But I know one thing. When electronics seem stupidly expensive, anybody can go online and order direct from Singapore or Hong Kong. When that started being easy to do, there were a lot of potential savings there. Price dispersion on PriceSpy between the direct importers and the normal retailers was pretty wide. Since then, it's become a bit harder to find really big savings once you factor in shipping costs and tax and exchange. Hopefully, the government doesn't wreck the pro-competitive effects of direct-to-consumer imports with what it winds up doing on GST at the border.

Regardless of the merits of a market study by ComCom, mightn't it just make sense to instruct MBIE to fix building materials regulation to make it easier to import building materials? If there are problems in competitiveness, letting people route around them can solve. If there aren't, that would be revealed as well.

We'd just need two things.

First, we'd need to deem any building material approved for use in a comparable jurisdiction to also be approved for use in New Zealand. I would start with Seattle, Vancouver, and Tokyo. Seattle and Vancouver are wet and shaky. Vancouver's gone through its own leaky homes thing in the 90s and has updated since then. And it is ... basically insane ... to think that materials fit for use in Tokyo are not good enough for New Zealand. I'm sure there are other places that would be great to include as well.

Second, we'd likely need an NPS or something comparable to it instructing Councils on how to deal with consent applications involving materials with which they are not familiar - and likely a coupling of that with a removal of Council from joint-and-several liability for failures. Council liability as last-man-standing drives risk-averse, cost-inflating practice around building permits. Maintain joint-and-several among construction companies if you want, but limit Council's liability to its proportion of the overall problem. So if a court winds up finding that 10% of some future problem is Council's fault, it gets only 10% of the cost - not 100% as the only remaining entity.

If I were Twyford, I'd be telling MBIE that we'd be implementing this starting 1 July unless they could provide excellent and convincing reasons why not before then.

Oh - and get rid of any remaining anti-dumping tariffs on building materials. If people want to sell us building materials at very low cost, during a giant construction push, we should probably say thank you. If we care about construction costs and housing affordability.

Previously:

• Construction payola? (2015): Why shouldn't Ngai Tahu be able to just start importing in bulk from abroad, and launching Treaty complaints if blocked from doing so? Ngai Tahu Construction should be able to build as they like on Ngai Tahu land. 
• Construction costs (2013): In which I note that one part of central government was all mad about construction costs (ProdComm), but other parts of government put tariffs on wire nails and plasterboard in the middle of the darned Christchurch earthquake rebuild.
• And, from this year, if we're going to make cartel activity criminal, then the regulators whose regulations create a cartel should be thrown in jail. Regulatory cartels are particularly bad because every player in a private cartel has incentive to chisel and defect; regulations can prevent defection and block entry. If the government's rules around material imports have acted as a cartel mechanism, then government should be investigating and prosecuting itself. 

Foreign buyers again

I was a bit surprised that Labour thinks that the latest Statistics New Zealand release on foreign home buyers is evidence in favour of their ban. 

Bernard Hickey writes:

Yesterday Statistics New Zealand reported that 8.0 percent of buyers across New Zealand were either not citizens or held only temporary visas, while 19 percent of buyers in the old Auckland City Council area (now known as the Waitemata local board) were not citizens. See chart above. Across Auckland, the percentage of foreign buyers was 7.3 percent, while it was 9.7 percent in the Queenstown Lakes District.

The figures are significantly higher than LINZ's figures, which focused on tax residency rather than whether buyers were citizens.

Economic Development Minister David Parker said the figures vindicated the Government's looming ban on foreign buyers of residential properties.

"I think it's clear that these statistics back up our decision to ban overseas buyers of existing New Zealand homes. We've no doubt that buyers are having an affect on New Zealand housing market," Clark told RNZ.

"How significant that price is no one really knows but in those suburbs where there's an 18 percent participation by foreign buyers buying that number of houses it must be having a significant effect I would have thought."

I'd had a look through these numbers when they were released yesterday.

First up, a trivial bit: I'm pretty sure that Bernard's transposed the wrong figure. Table 1 of the release has 8.0% of home transfers in which at least one NZ resident visa holder (but no citizens) are buyers, but 3.3% of buyers being neither citizens nor residents. So when Susan and I sold our place in Christchurch, and bought our place in Wellington, we'd have been in the "At least one NZ resident visa (but no citizens)" category* because we have permanent residence but have not yet applied for citizenship. I'm pretty sure that Hickey's 8% is an error that substantially overstates the extent of foreign buying - and that I hope doesn't get repeated elsewhere.

But here are the more substantial takeaways.

First up, I remember there being a big deal made about the "affiliation unknown" category last year and how that could be skewing things. In December quarter 2016, when they started collecting these stats, that category was very large: multiples of the figure for which they had citizenship data. Some folks suspected that the unknowns were disproportionately hiding foreigners.

The quarterly number of "affiliation unknown" buyers dropped from 36,237 in December 2016 to 4,287 in March 2017, to 450 in June 2017, and ratcheted down to 39 in the current March 2018 quarter. So the 'unknowns' problem was largely solved by September 2017.

Over that period, the proportion of "No NZ citizens or resident visas" among those buyers for whom affiliation is known went from 2%, to 2.1%, to 2.4%, to 2.3%, to 2.9%, and is now 3.3%. The biggest jump was from September 2017's 2.3% to the current quarter's 3.3%. But by September 2017, they'd basically identified all the buyers' affiliations.

So either there was never any substantial hidden foreign buyer contingent in the "affiliation unknown" category, or there was and many of them exited the market. The increase in the proportion of foreign buyers was really after they'd sorted out identifying foreign buyers.

Next up, the recent surge. I expect this is best explained by folks rushing to get ahead of the ban. Anybody who is here on a work visa and is trying to sort out residence, or who hopes to renew their visa, and has any ability to buy a house, will want to get that sorted absolutely immediately before they're banned from buying anything. The growth in sales by foreigners has not seen the same recent surge - although that might yet come if living here becomes sufficiently uncomfortable for foreigners.

It's also worth having a very good sense of proportion here. That 3.3% of buyers, across the country as a whole, in the March 2018 quarter, represented 1,083 house purchases. In the same quarter, non-citizen non-residents sold 501 houses. So, on net, in March 2018, "foreigners" (which will include people living here on non-resident visas, whose residence visas may be in progress) on net acquired five hundred and eighty-two houses in that quarter.

If we include all sales over the year to March 2018, we have 3,834 home purchases, across the whole country, by non-citizen, non-residents - and 1,899 home sales. So, on net, foreigners owned 1,935 more houses in New Zealand at the end of the year March 2018 than they did at the start of it.

Labour has implemented a ban on all house sales to foreigners on the basis of this. Just under two-thousand houses - some of which could have been new builds financed by foreign buyers in the first place.

Sales to foreigners are relatively concentrated in two places: Auckland and Queenstown.

In Auckland, in the year ended March 2018, 2,307 purchases (5.7% of purchases)** were by non-citizen non-resident buyers. That category also sold 1,050 homes (2.6% of sales). So net foreign ownership in Auckland, for the whole year, increased by 1,257 homes. In a city of 1.5 million people.

As a proportion, some of the figures can look bigger. If you look for the place with the biggest proportion of non-citizen, non-resident buyers in the year to March 2018, it's Auckland's Waitemata. 12.9% involved non-citizen, non-resident buyers. That's 573 houses. Non-citizen, non-residents there also sold 384 homes (8.7%).

Now if you think effects in Waitemata are particularly important, then maybe Labour could just have banned foreigners from buying houses and apartments in Waitemata. Now that would be silly because it would just encourage people to shift outside of that boundary line - but that also reveals the problem in asserting stuff like "Well, those horrible foreigners must have had a big effect in Waitemata! Look at their proportion there!" Auckland's market is bigger than that. An increase in demand in Waitemata will have some folks with weaker locational preferences pick spots outside of Waitemata. So any effect would be spread across the Auckland region.

In Queenstown-Lakes, foreigners made 7% of purchases (129 homes for the whole year) and 5.1% of sales (93 homes for the whole year).

Can foreigners on net acquiring thirty-six more houses in Queenstown and 1,257 more houses in Auckland in a single year really blow up the the housing market in those cities? If it does, shouldn't we be terrified of the financial stability risks inherent in Auckland? It should not be possible to break the housing market in a city of 1.5 million people by buying a couple thousand houses. If it is possible, then how many mortgages would rapidly be underwater if demand dropped by 3,000 houses in a year for some reason?

It all suggests to me that we don't need a ban on foreign buyers but rather reform to the supply side to unfreeze that blade of the supply-and-demand scissors so that quantity can start adjusting.

During the election campaign, Labour liked to note restrictions on sales to foreigners in other countries, and then Labour turned that into a justification for a ban. But foreign examples are almost never a ban. Denmark has something close to a ban on sales to non-EU citizens, and Austria will make you get permission from local government. But look at the US, the UK, Canada - heck Portugal will give you a residence visa if you buy a house there. Like, pick your favorite model country, and check whether a Kiwi could buy a house here. This site seems as good as any for checking that, though it might be missing some recent changes.

I guess I just have trouble seeing how it makes sense to ban sales to foreigners, across the whole country, to prevent 2,307 sales to foreigners in Auckland in a year whose figures will be somewhat inflated by folks rushing to get in ahead of the ban. And remember that the ban isn't costless to locals either.

Update: Hickey's Monday newsletter, at the very bottom, after his collection of interesting links, notes that the correct figure is not 8%. 

* Or we would have been had those stats then been collected.

** Note that I am here figures from Table 3. They differ from the Table 2 figures that Bernard Hickey is using. I am not sure why they differ, but I am using Table 3 because it provides the absolute figures rather than just the proportions, and because it includes the better regional breakdown - Table 2 does not have a separate breakdown for Queenstown-Lakes, for example. Since all of this is small number stuff, small changes in small numbers can make for bigger looking differences in proportions.

Afternoon roundup

Today's worthies:

• Cabinet has not yet produced a cabinet paper on the Taranaki oil ban, and Simon Bridges says that the government instructed officials not to provide advice on the ban. Even if you think that 'doing something about climate change' was part of a Labour/Green political mandate, wouldn't it make sense to make sure that whatever is done is the thing that can most cost-effectively abate emissions? If Bridges is right that the government instructed officials not to provide advice, can there be any good reason for that instruction? The most obvious explanations are not good. 


• Kiwisaver provider Simplicity runs a very low fees model that is very attractive. But not one that's attractive to me, since they seem to have very strong non-return preferences baked into their model. If tobacco, gambling, oil or porn stocks started looking like attractive investment options, would they change their mind about the ban? 


• The government's looking to repeal the three-strikes legislation. Farrar points out that three-strikes policy is fairly popular, but I'd be surprised whether people remember come 2020 unless crime figures become salient. I rather liked New Zealand's legislation, and especially in comparison to American examples. The point of three-strikes, from an economic perspective, is to maintain marginal deterrence. In short, you need a stronger expected formal penalty for a second offence or third offence than you do for a first offence to achieve the same deterrent effect. Why? Because the first offence comes with a giant informal "Now you have a criminal record and a whole pile of things you thought you could do with your life are now going to be very very hard" penalty. That informal penalty's sunk after you've got the first conviction, so you need a stronger formal penalty for the later offences. And where California induced problems by having the same harsh penalty for second and third strikes across broad classes of offences, New Zealand maintained proportionality by linking everything to the sentence-specific maximum penalty. But, all that said, I doubt there'll be any particular effect on crime. There were just too many high profile cases where judges thought any application of the strike penalties was unjust, and so invoked their discretion (in my view) inappropriately. If folks don't expect the penalty will be applied because the judges won't apply it, the law's useless even if it's great in theory. 


• Is there any simpler explanation for the meth-mess than that Housing New Zealand had excess demand for houses and using an insanely sensitive hair-trigger for evictions let them free up some houses? Plus the usual stories around how agencies are more likely to be punished for not being sufficiently risk-averse than for being too risk-averse? 


• And, finally, some good news. Catherine Healy is now Dame Catherine Healy. She heads the New Zealand Prostitutes' Collective and helped see prostitution legalised in 2003. And how can you not love a union that, on seeing abuses of migrants on temporary visas illegally working in the sex industry, argues for legalising their work too instead of having more labour inspectors going around to deport competitors? America's ahead of us on marijuana reform, but we're miles ahead on this one. Too many Honours go to career public servants whose main merit was having diligently undertaken their day-job for 40 years. This one isn't like that. 


• David Friedman at Oxford Union on market failure. HT: Jim Rose.  

Teacher pay and living costs

Adele Redmond asked me last week for some of the numbers around CPI and the current pay disputes in nursing and teaching. Her story's up at Stuff now.

I'd pulled the LEED data on median earnings by industry [Table 4: LEED measures, by industry], noting that while the School Education one will be close to teacher salaries (but also includes all school-employed support staff), but that nurses will be spread across a few different sectors - and that each of those sectors will include a broader set of salaries than just nurses. So if doctor and administrator salaries had been surging and nursing salaries had been lagging, you could still see a rising green line for median earnings among those employed in hospitals.

There's never room in any story to include all the details I'll have sent through, so I'll often copy them here. Here's what I'd sent though (as well as a bit of preamble with warnings around interpreting the industry classifications as wages for any particular employee group). But on first cut it looks like wages in education overall have been keeping up with wages in other professional service industries. Unfortunately, the data only goes through 2017.

“Inflation has been very low since about December 2011. Since that quarter, the annual percentage change in household living costs has never been above 2%. That overall figure includes rent, but would not include the cost of buying a house. It is difficult to explain salary increases substantially above 2% as representing cost-of-living adjustments, unless salaries had been frozen for any substantial length of time.”
 
“In our 2014 report on declining student numeracy, we worried that declining relative teacher salaries, as compared to other professional salaries, might have been making it harder for the sector to attract quality teachers. But we found that, from 2000 through 2013, median salaries in teaching (primary and secondary schools) had generally kept pace with other professions like scientific research services; architectural, engineering, and technical services; legal and accounting services; and management and consulting services. Salaries differed across those areas, but increases in salaries from 2000 through 2013 had been roughly comparable across the industries. An updating of those figures through 2017 suggests that salaries in primary and secondary schools, and in hospitals, have been keeping pace with salaries in other professional service industries.”
 “In other areas, salaries are a matter for negotiation between relatively small employers and their employees. And, in most cases, they will be able to set pay and conditions to reflect local realities. If the cost of housing in Auckland means that it becomes harder to employ lawyers in Auckland, then law firms can either increase salaries in Auckland or relocate to places where the cost of living is lower. Schools and hospitals cannot relocate in response to local cost pressures, and it may be harder to set local pay in national level agreements to adequately reflect local conditions. But it can also be difficult to attract skilled staff to some places where the costs of living are very low, because they may not have the local amenities that professionals might demand.”
 
“If the employer, in this case the government, has a difficult time attracting and retaining quality staff in education or in health, then there can be a case for increasing salaries regardless of CPI or relative pay across industries within New Zealand; teachers and nurses can be internationally mobile. Similarly, if the government wishes to substantially change the characteristics of the employment pool by increasing salaries, then there could be a case for increases. But we might note that private sector firms finding it necessary to increase salaries across to attract and retain quality staff, or to improve the quality of incoming staff, may couple that with performance assessment.”

Political risk aversion

Few bureaucrats get fired for being too cautious about health and safety. Maybe this latest Housing New Zealand debacle will change that.

Recall our base theory here, going back to the kind of stuff Alex Tabarrok talks about. Consider a government agency trying to mitigate some kind of risk. It can screw up by being too cautious, or by not being cautious enough. We should all want it to minimise the expected cost of error, so to weigh the costs of getting things wrong in either direction. But the political incentives go the other way. If you err on the side of being too cautious, putting more weight on health and safety risks, for example, you'll typically impose costs across the whole sector that aren't all that visible - everybody pays $10k more than they should on a house repair because of really stupid scaffolding rules, for example. But nobody gets fired. If the bureau errs the other way, and somebody dies for lack of caution, then John Campbell's all over it and the Minister starts busting heads down the Ministry because the Minister's incurred political costs.

It's made worse by health and safety liabilities on directors, where they can take on pretty substantial cost if they're not sufficiently risk-averse.

And then we wind up in the meth-mess, where Housing New Zealand imposed stupidly risk-averse standards for determining meth contamination and so the whole sector wound up bearing a lot of cost - and a pile of people got needlessly kicked out of their houses.

Blaise Drinkwater's summary seems best here.

1) Twyford did what previous Ministers should have done: Gluckman was the only circuit-breaker in sight
2) Other than that, I'm not sure what Ministers *could* appropriately have done 3) HNZ procedure for houses with low meth residue is deep in the territory of the "operational"

— BK Drinkwater (@BKDrinkwater) June 1, 2018

4) That is, Ministers don't usually get to tell the Departments, Crown Agents, etc how to interpret statute, regulation, & guidelines
5) They *can,* but it's regarded as Ministers exercising authority: there is no presumption that they're informed or competent to make such calls

— BK Drinkwater (@BKDrinkwater) June 1, 2018

6) It's rare, & it's meant to be politically costly
7) The idea is that Ministers, being the government, can change state sector behavior by *changing the law*
8) Problem: govt lacks access to that lever in the case of so-called "tertiary legislation" like guidelines

— BK Drinkwater (@BKDrinkwater) June 1, 2018

9) Problem: what if both executive (eg HNZ) and (quasi-)judiciary (eg TT) get the *interpretation* of tertiary legislation wrong?
10) Let me be clear: English or Bennett, years ago, should have done what Twyford did. But other than that, I don't know what they could have done.

— BK Drinkwater (@BKDrinkwater) June 1, 2018

11) So I think people on high horses demanding that they should have done unspecified "something" aren't really bring reasonable.

— BK Drinkwater (@BKDrinkwater) June 1, 2018

12) Either MoH and Standards NZ failed to make clear their guidelines to Housing NZ or the Tenancy Tribunal, or the latter two were either willfully or idiotically dense. That's what left government, and tenants, wide open to dishonest industry.

— BK Drinkwater (@BKDrinkwater) June 1, 2018

I think we need to figure out ways of making the public sector, and regulation more generally, bring the real costs and political costs of the two kinds of error into line.

This episode might help in that - there are, in this case, political consequences for having been too risk averse around health and safety. The Ministries behave as though they expect massive penalties from the Minister for not being sufficiently risk averse, but no particular consequence for being too risk averse. Those expectations have to change or we'll keep getting excessively risk-averse Ministerial interpretations.