A defence of Treasury

It pains me when organisations in need of critique are hit for the things it is trying to get right. 

Thomas Coughlin's piece at Newsroom last week complained about Treasury's use of value of statistical life measures.

My column this week reminds us that those measures are hardly new, and highly necessary.

I then go on to some of the other stuff Treasury's trying to add to its CBA mix under the living standards / wellbeing agenda.

Imagine being the poor Treasury official tasked with telling the Minister that his preferred policy does not stack up under any reasonable cost-benefit assessment. You lay out all the facts and figures, showing that the policy is a colossal waste of limited funds, and that the money could be put to far better use elsewhere – only to have your analysis overturned when a Ministry official points out that the policy would improve social capital, or help neighbours make friends with each other, and that the value of those uncounted benefits should tip the scales.

It can then be understandable why Treasury would want to have standardised figures – and hope that there’s at least some rigour in estimating the effects of policy on such nebulous things as friend-making.

But we might also worry that, where Government is not always all that committed to rigour in cost-benefit assessment, even having these sorts of numbers invites creative accounting.

It is not hard to imagine the Provincial Growth Unit explaining to Minister Jones that he could justify giving $100,000 to his favourite small-town lawn bowls club if it encouraged even as few as two hundred new friendships. Increasing club membership from 35 to 41 could be enough to do it, under certain assumptions. It could then far too easily encourage a sham version of the living standards framework, rationalising political decisions rather than ensuring that every dollar of fiscal or regulatory cost does as much good as possible.

And that is where the opposition really must hold government to account. The problem is less whether having an additional friend is worth one seventeenth as much as having additional contact with your neighbours in Treasury’s CBAx assessment. The problem rather is whether the government bothers putting its bigger ticket items through the framework at all.

It would be interesting to know just how the Government manages to justify the Provincial Growth Fund, tax breaks for pretty race horses, or the Taranaki oil ban within any kind of rigorous assessment in the wellbeing framework.

Running those numbers might cost Treasury some friends – but I bet the CBAx tool would show it’s worth that cost.

Morning roundup

The worthies on the closing of the broswer tabs:

• Michael Reddell on the problems in the Tax Working Group's report. I've also been worried about exempting the NZ Superannuation Fund from tax - it introduces a distortion in favour of the Fund owning things better owned by others. I also worry about what happens to the government's incentive to fix housing supply if doing so creates tax losses. 
• Robin Oliver's interview on RNZ on the impracticabilities of the TWG capital gains tax proposal is very good. Ignore the partisan fights. This is the stuff the government has to figure out how it would deal with if it wants to go ahead with this mess.
• Blanchflower and Clark find that children do not raise happiness for singles, the divorced, separated or widowed, and that financial pressure makes having children less pleasurable. I imagine only the convenient policy implications for the government's wellbeing agenda will be noticed. There are also inconvenient policy implications. Those will receive less attention. 
• Arthur Grimes on the correlates of happiness and wellbeing
• Hopefully NZ doesn't follow America into the nuttiness of the culture wars. It's not a safe place. 
• What one guy in his spare time can do with NZES data. Despair by contrast at what StatsNZ has failed to achieve with its GSS data - and has prevented anyone else from achieving by keeping the CURFs locked down. 
• It is best when dumb ideas are critiqued by those on the same ideological side. Paul Krugman goes through the problems with MMT: No more Calvinball, please. 
• Former Chief Science Advisor Sir Peter Gluckman makes the case for letting NZ farmers use the GE ryegrass that absorbs nitrates and reduces methane emissions. It's stupid that we even have to make the argument given that the current government seems to care about global warming and nitrate pollution, but here we are. 
• Netflix is killing piracy. 
• Robert Caro on power

1973 is the new black

Richard Harman's Politik newsletter is one of my few daily NZ must-reads. 

He's unlocked today's headline piece.

You should read it and subscribe.

New Zealand's top trade official is flying to Britain to be there when Britain proposes to leave the EU on March 29 to deal with any threats to New Zealand’s lamb exports.

In recent weeks British farmers and a key Cabinet Minister have called for massive tariffs to be placed on New Zealand lamb.

POLITIK understands that the Ministry of Foreign Affairs and Trade is so concerned about the threats that it wants its Deputy Secretary, Trade and Economic, Vangelis Vitalis, on the ground in London as Britain quits the EU.

Two years ago we were imagining opportunities for a UK-NZ free trade deal. Michael Gove pretended to be somebody who liked free trade, and that the EU was holding a free-trading Britain back.

NZ lamb currently enters the EU under a tariff-free quota: imports up to the quota are without tariff. The EU and UK are looking at ways of splitting up their shares of that quota. But:

But Gove, speaking six days ago at the British National Farmers’ Union conference said:” One thing I can reassure you is that it will not be the case that we will have zero rate tariffs on food products. There will be protections for sensitive sections of agriculture and food production.

“You (farmers) have argued that we need tariffs on sheep meat, beef, poultry, dairy, both milk and cheese; and pig meat in order to safeguard domestic production,” he said.

“Your concerns have been heard, and an announcement on new UK tariffs in a no-deal scenario - with specific and robust protections for farming - will be made shortly.”

Hopefully Gove's misspoken here and there won't be an end to tariff-free access to the UK.

Good thing New Zealand has pursued a very broad free trading agenda, including the Trans-Pacific Trade Agreement and the China-NZ FTA. Just in case NZ winds up getting the shaft - again - instead of a NZ-UK FTA.

Here's Gove's full speech of 19 February. It does not include the line saying there will be no zero-rate imports. But the BBC's coverage included it:

Many supporters of Brexit argue that tariffs on food and other items should be scrapped in order to lower prices for consumers. But farmers fear that cheap imports and lower standards would destroy many parts of British agriculture.

"Your concerns have absolutely been heard," Mr Gove told a conference of the National Farmers' Union (NFU). "It will not be the case that we will have zero-rate tariffs on food products.

"There will be protections for sensitive sections of agriculture and food production."

He added that an announcement on a no-deal tariff schedule "should be made later this week".

1973 was a betrayal. I hope Gove was misquoted or misspoke here. Pulling this stunt, after NZ sent negotiators to help the UK, and after May provided NZ with assurances about trade continuity...

Let's all wish Vangelis the best of luck. In a better world, he'd be heading there to negotiate the expansion of the NZ-Australia free trade and free migration area to include the UK and Canada. Not to beg that NZ be able to continue lamb exports.

The Midwives have a history

The College of Midwives really doesn't like research suggesting the shift to midwife-led maternity care caused problems.

A decade ago, while I was at Canterbury, Andrea Menclova did some work showing worsened maternity outcomes with the change. The College sent a nasty letter to Seamus, our then Head of Department. Seamus entirely backed Andrea of course - as did we all. But that project then went into the file drawer; Andrea was a fairly new hire in a new country and wasn't then up for that fight.

Now Andrea's been here longer, is Associate Prof, and is reminded of that incident by an excellent piece by Michelle Duff going through another similar case.

Andrea writes, in an email distributed more broadly and which she is happy for me to share:

My name is Andrea Menclova and I’m an Associate Professor of Economics at the University of Canterbury. I was very pleased when Diana Sarfati and Ellie Wernham published their paper on the NZ lead maternity carer system. I find it appalling how they have subsequently been treated and this bullying behaviour from the College of Midwives needs to stop.

I myself wrote a paper reaching similar conclusions as Sarfati & Wernham in 2008. I presented it at a few conferences/in academic seminars. After a presentation at the Centre for Health Economics Research and Evaluation in Sydney, my Head of Department received a letter from the College of Midwives ‘warning him’ that I do research of poor quality (with many of their points completely uninformed) and asserting that: “there is a clear agenda and conflict of interest which is not stated”. At that point, I had only been in New Zealand for less than two years and had no connections in the LMC system or the NZ healthcare system more generally, had received no funding to conduct the study and had no a-priory views on maternity care. The College of Midwives have never contacted me directly. Like Peter Crampton at Otago, my then Head of Department (Seamus Hogan) fully supported me and defended academic freedom. Still, I can very much relate to Peter Crampton’s assessment that researchers attacked so aggressively by the College of Midwives then feel “beaten up and traumatised by the experience”. That’s not okay.  

I have refrained from saying much on this one, as Andrea hadn't previously wished to be identified in this.

But her work was one of the reasons that we felt it exceptional value to pay for shared care with an obstetrician for the birth of our two children. Her work wasn't more broadly distributed because of the bullying by the midwives association. 

Looking-glass productivity

Over at the NBR (ungated), I get annoyed at the persistent Wellington tendency to get productivity backwards. Government's role isn't to run studies figuring out which firms are productive, which ones aren't, and to then try to arrange for the one to teach the other. Government's role should be figuring out and removing the barriers to entry and the barriers to competition that keep business away from the productivity frontier. 

A (lengthy) snippet:

Some folks take the wrong lesson from intermediate microeconomics – or never took the course in the first place. I worry that too many of them staff Wellington’s bureaus.
Every decent second-year university paper in microeconomics teaches students there are two equivalent ways of getting to efficient outcomes but one of them is much easier to implement.

Imagine an omniscient and benevolent central planner existed who knew our abilities, the productive capabilities of every firm in the market and exactly what each of us values. That benevolent planner could ensure efficient outcomes where no one could be made better off without making someone else worse off in the process. It is hard to do things that way because the knowledge the planner would need to make those decisions is impossible for the planner to obtain.

Fortunately, the welfare theorems in every intermediate microeconomics course show us that, if competitive markets are working well, we get there automatically. Prices coordinate individuals’ plans, so we wind up at the same kind of solution that the benevolent planner would have chosen. There is no need for a bureaucracy to figure out which firms are the most efficient at teaching the others how to work better as the discipline of markets takes care of it.

All of that left me rather irritated during the Productivity Commission’s “Productivity Hub” seminar last week on productivity in construction.

Housing New Zealand and BRANZ had commissioned work to review the literature on the productivity of housing construction before scoping future work on estimating the productivity of New Zealand’s housing construction sector.

It’s a big topic that matters. There have been conflicting studies on whether construction productivity has been stagnant or improving, and whether there is a long tail of low-productivity firms in the sector. Housing New Zealand is set to embark on a substantial bit of house building and will want to build the most houses possible on its budget.

Economic modelling

The work proposed using New Zealand’s administrative data to find the construction industry’s productivity frontier. Firms producing the greatest output value for their combined sets of inputs define the frontier in this kind of stochastic frontier analysis work; firms using the same amount of inputs to produce less overall value are inside the frontier and are considered less productive.

The seminar focused on important technical issues like the merits of Cobb-Douglas as compared to translog functional forms and the merits of stochastic frontier analysis over conventional linear regression techniques in figuring out which firms are most productive.

But I was getting itchier and itchier over the course of the seminar – as were a few others. It was not the researcher’s fault at all – she proposed taking the right approach to the question as defined. The problem rather was the framing of the question and its policy consequence.

Trabant efficiency

Imagine going back in time to 1982. You’ve been hired by the East German government to examine the productivity of the country’s automobile construction sector. You’ve been asked to use the latest statistical techniques to figure out which of Trabant’s suppliers are working efficiently and which are not. The government wishes to do this so it can send experts into the efficient plants to figure out what they are doing, so they can help the less efficient suppliers to get up to speed.

Stochastic frontier analysis was not really available then but that was hardly the main problem. Even if they got every one of the Trabant plants, and their suppliers and their suppliers’ suppliers running as efficiently as the most efficient East German plant, they would have mis-specified the problem. They would still have a Trabant at the end of the production line, and the value of a Trabant was less than the value of all of the bits of plastic and metal and rubber and labour that went into producing those things – and it certainly ran less well than the Volkswagens produced across the border in West Germany.

Instead of commissioning a study that might figure out which plants are efficient, tearing down the Berlin Wall and allowing free trade would let markets figure it out. Efficient plants might survive; inefficient ones would put their machines and workers to better use elsewhere.

New Zealand reached a similar conclusion about its local automotive industry during the reforms of the 1980s and 1990s. Economist Steve Landsburg talks about the Iowa car crop. Growing corn, selling it to Japan, and getting cars back, is a more efficient way of building cars than a lot of ways America has tried. New Zealand’s paddocks, forests and office towers provide our car crop more efficiently than did the Petone plant.

The construction productivity work specified the problem back to front but was hardly the first to do so. An academic study might point out which firms seem more productive than other firms but it can be easy to get those things wrong – especially when New Zealand’s construction firms have operated within a system designed to stymie construction productivity.

Regulations nest

Zoning has never allowed building to any reasonable scale, so the industry developed for smaller scale developments and bespoke projects. A broken land use planning system has given us a construction industry that may be relatively efficient within that system but it is not the one needed for the scale of the task at hand.

A nest of regulations and perverse incentives in council consenting makes it difficult to use far less costly but higher-quality construction materials from trustworthy places like Vancouver or Seattle or Tokyo. Costs here are consequently much higher; productivity is the ratio of the value of the outputs to the value of the inputs. Building houses costs (very roughly) twice as much here as it does in Texas, leaving land costs aside.

And competition from foreign suppliers is hampered not only by the Overseas Investment Act but also by the morass of local regulation that local firms have learned to navigate but foreign firms have not.

Seeing the productivity problem as one of finding the most efficient firms and cajoling the others to behave more like those Stakhanovites  (Soviet Union workers who took pride in their ability to produce more than was required, by working harder and more efficiently)gets the problem back to front. It is trying to work the welfare theorem from intermediate microeconomics the wrong way around.

I think the NBR's editors added the definition of Stakhanovite. I didn't know that was no longer a term I could assume commonly known. Alas. 

Tax Working Group

The Spinoff asked for a few words on today's Tax Working Group report. They're here, and copied below.

The Tax Working Group’s proposed capital gains tax would exclude the family home, making for a more politically saleable tax but one which makes far less economic sense.

Not only would it provide incentives to invest in the family home instead of other assets, it also has the potential to encourage couples to ‘divorce’ for tax purposes to be able to exempt two houses rather than just one. If you’re laughing, note that family friends back in the United States would divorce and remarry semi-regularly for tax purposes. They’d have a small party each time they did. Good luck to IRD in policing that.

It would also provide a strong tax incentive to pass the family farm along to the kids rather than sell it, even if the kids aren’t all that interested in farming. Because passing it on rather than selling it allows any capital gains tax to be deferred. We can expect complicated tax arrangements to make selling to the kids to fund the retirement look a lot more like inheritance.

And it hardly applies only to homes. KiwiSaver and other investment portfolios will feel the pinch. While Sir Michael Cullen’s group is certainly right that those assets are disproportionately owned by those on higher incomes, the effect of the tax is far more complicated.

Because the tax would be assessed on nominal investment gains rather than inflation-adjusted gains, the real effective tax rate on investment portfolios could be very high indeed. And the effect of that on business access to capital for investment will have flow-on effects throughout the economy.

Since the group proposed exempting the New Zealand Superannuation Fund from capital gains taxes, the fund would be at a strong advantage over private investors when bidding for assets. One might wonder how long it would be until the Super Fund winds up owning much of the economy.

But I’m sure that others will write many more column inches on the real-world difficulties of trying to bolt a capital gains regime onto a tax system that has, for the past 30 years, evolved around the absence of one. There’s a reason prior tax working groups concluded that it is, on balance, too messy to be worth the effort and that there were strong dissenters within this latest group.

Let’s look instead at some of the less-expected features in the report.

The Tax Working Group recommends shifting towards environmental taxation. In principle, this has a lot of merit. Taxes that correct underlying distortions provide a double dividend. Not only do they raise revenue, but they also improve overall economic efficiency if they’re done well.

The group recommended strengthening the Emissions Trading Scheme and having it shift, in effect, to being more like a tax by having the government sell more of the permits over the longer term. That recommendation should be supported if implemented well.

So too should its recommendation to use congestion charging to help fund the roads – it makes a lot more sense, and is far more equitable, than measures like the Auckland petrol levy that fall very heavily on poorer families with less fuel-efficient cars.

The group also recommended using taxes to improve water quality if the government isn’t able to find better ways of dealing with the problem soon. It suggested water taxes and taxes on fertiliser as potential measures.

Making sure that water users face the cost of that use is important, but tax is a blunt instrument. A tonne of nitrogen fertiliser has very different effects depending on where it’s used. And water taxes have a hard time recognising regional differences in water scarcity. Water should surely be more expensive in Canterbury than on the West Coast, but the government would have a hard time finding the right prices. A cap-and-trade system like the Emissions Trading Scheme is more appropriate.

Other suggestions, like hunting for reasons to justify increasing existing waste levies, or giving tax preference to buildings constructed to tighter environmental standards, might give the appearance of doing good for the environment but seem destined to be a boondoggle if pursued.

Breaking the pharmacy cartel

I wish that government spent even half as much time looking at how its existing regulatory structures create cartels as it did in the rest of its antitrust enforcement.

The Herald reports that a new entrant has finally started shaking things up in pharmacy, reducing costs to consumers. They get the framing entirely backwards, focusing on reduced earnings among the Chemist Warehouse's nearby competitors.

I wish they'd open an outlet in Wellington so I could have a look. Here's a dumb small example of what things are like here. I occasionally have minor heartburn. In North America, I'd buy a big bottle of Tums antacid. It'd take me a year to go through the big bottle. Now they sell them there in even bigger bottles: 330 tablets for $13.44 - $0.04 per tablet. Add on exchange rates and GST and you're still under $0.07 per tablet. The things are also great as placebo when a child is malingering. 

Here's what you can buy in New Zealand. The cheapest per-unit is a tiny little pack of Quick-Eze. They taste rubbish. And they're $0.15 per tablet. 

Every single thing in NZ pharmacies feels like a giant rip-off. My wife and son are lactose intolerant. Here's what lactase should cost: 9 cents US per tablet (9000 lactase units per tablet) - about 15 cents NZD with GST. Here's what it does cost: 76.5 cents per tablet - five times what it should cost. If you need a couple of these things to eat an ice-cream cone, New Zealand adds about 40% to the cost of an ice cream cone for the lactose intolerant - at least for those who haven't worked out ways of getting them imported. 

It would have been nice if the reporter at the Herald had compared prices at the new discount pharmacy warehouse; I'm curious. 

Anyway, why has it been so hard to get decent prices on anything pharmacy in New Zealand? The government screwed up the whole industry, forcing everyone to pay too much for everything, by putting in a rule saying that every pharmacy must be 51% owned by a pharmacist. I don't know how Chemist Warehouse has solved this problem: it's not easy to find one person, who happens to be a chemist, who has the capital to put up to build something like that. Maybe there are interesting ways around it with a clever debt structure. 

The prior National government was looking to get rid of the rule in changes to the Therapeutic Products Regulatory Regime. The pharmacists didn't like it. 

The Bill as currently drafted, and currently under consultation, seems to leave the ownership question open. Or at least I can't find any requirement in it that pharmacies be owned by pharmacists, but I can find a requirement that the responsible persons for the licence have qualifications as determined by the rules - with the rules not specified. I think that's because Minister Clark has left it open. But he does provide some discussion in December's background paper:

The pharmacists' organisation raised a pile of concerns about market concentration in the absence of the rule, but remember that the point of competition law is to improve outcomes for consumers, not to prevent concentration per se. The current model delivers terrible prices for New Zealand consumers - and especially for those consumers least able to route around the current mess by importing the products they need.  

There is absolutely no good reason to require that the person owning a pharmacy be a pharmacist. There are good reasons to require that dispensing be done by a pharmacist. 

The government is taking submissions through 18 April. If you think submitting makes any difference, here's the link.

That the criminalisation provisions in current New Zealand competition policy do not apply to regulators who create cartels continues to frustrate me. New Zealand has a lot of small-market problems that make things a bit less competitive automatically. But everywhere people think they see cartels or anticompetitive activity - dig a little to find the regulatory apparatus blocking competitors' entry.

Reader mailbag - supermarket zoning edition

From today's reader mailbag:

Hi Eric,

Why not make supermarkets a permitted activity in any Rural zoned area?

Then another chain could be developed with a lower cost base as they wouldn't be paying retail zoned land prices. Large supermarkets could sit on the outskirts of most cities and towns in NZ with minimal effects. Huge dairy factories and timber mills are permitted activities - why not a supermarket?

There are Aussies chains avail - only Woolworths is here. Also Aldi and Lidl - though they only need quite small sites

One tiny change to the RMA and you could knock food prices down by 25% I reckon. Westfarmers would be here in a heartbeat - they own Bunnings.

Graeme Farr

I thought Aldi was starting to look at New Zealand. But in-town zoning does seem a substantial barrier to entry. In Christchurch, Raeward ran a very nice big supermarket just outside of town by the airport.

Are there currently barriers to putting up supermarkets on rural zoned land? I expect there would be transport infrastructure needed, but there's a lot of rural land on highways. 

Graeme notes the price difference between identical products in New Zealand and Australian supermarkets. A lot of that will be differences in warehousing and transport costs between the two countries, so I'd be surprised if prices came down by quite as much as advertised. But that's not a reason not to open things up. 

Let's make a polling deal

IRD has gotten in trouble for doing some polling about potential changes to the tax system.

Inland Revenue has admitted it was wrong to ask for New Zealanders' political persuasions in a survey they are carrying out for the Government on the eve of the release of a crucial tax reform report.

The taxman is researching the public's views on globalisation and fairness in the tax system. Questions had included where respondents sit on the political spectrum, prompting questions of whether taxpayers are funding sensitive political polling.

It would be bad if IRD were doing this kind of polling to help its political masters to sell whatever tax changes might be coming, but that's not the only possible interpretation.

We can also imagine scenarios where the political masters wanted changes that IRD knew to be a bad idea, that the politicians thought were popular, and that IRD wanted to be able to demonstrate were not only bad policy but also bad politics. "See? It isn't just rich pricks and right-wingers who hate this particular part of your tax package which we've also told you is a terrible implementation issue. Would you please now consider not doing this?"

I have zero inside line on this one, but it's not unimaginable.

Perhaps, as penance, IRD could just release the polling data for all of us to play with. It would be super awesome to have the full results. And then there'd be no worries about whether they were doing secret political polling for Labour - the results would be up for everyone to play with.

Around 1000 people are being asked questions about their views on Inland Revenue, whether they are generally trusting, believe what they read in the media, pay too much tax or whether public services should get more funding.

A question on where respondents sit on a left/right political spectrum threatens to skirt the department's legal obligation for political impartiality.

Polling experts said the results could give politicians valuable insight on how different demographics view the tax system

I for one would love... hmm. I'll try OIAing the full results.

Counting jobs

I really really hope that somebody in the bureaus is running proper probity over whatever Shane Jones is up to in the Provincial Growth Fund. Because every time we hear news on it, it's just a bit off. 

Here's Jason Walls in today's Herald:

Numbers published on the Ministry of Business, Innovation and Employment (MBIE)'s website show more than 10,000 jobs are expected to be created as a result of Provincial Growth Fund (PGF) announcements made last year.

Of that, 7000 – almost 70 per cent – are estimated to come from just one project: The East Bay of Plenty Regional Development Project Implementation.

This project was allocated just under $240,000 for "funding a position to manage and report on 65 key economic development projects".

That 7000 jobs estimate is based on a feasibility study provided to the Provincial Development Unit, which oversees the PGF, by the Ōpōtiki District Council.

It isn't nuts to run forecasts of expected employment from projects that haven't yet gotten started, but this kind of accounting doesn't seem right.

And this seems just a bit off as well, from the head of the Provincial Development Unit:

The day after Goldsmith said just 54 PGF jobs had been created, the Provincial Development Unit issued a press release which said "job creation does not happen overnight" and that more than 10,000 jobs may be created as a result of all the PGF investment approved to date.

Speaking to the Herald, the head of the Provincial Development Unit Robert Pigou said the statement was only released to provide "clarity" around how the PGF was structured.

He said he was not able to say how many jobs had been created because of the PGF last year, as he "did not have that detailed information yet" but said it would be higher than 54.

"We're working with the [PGF] applicants because many of them are just starting to get into that employment phase [of the projects]."

The 10,000 jobs expectation is based on the estimates of the PGF project applicants, a Provincial Development Unit spokesman said.

"When applicants outline their project, they include an estimate of the number of jobs to be created both directly through the project and indirectly, as a result of the investment."

For larger scale projects, such as the $40 million to expand the TranzAlpine service, financial modelling by an independent economic firm has been used.

I would expect Shane Jones to advertise numbers based on the job creation estimates provided by folks seeking grants from him; he is a retail politician.

I would expect a neutral and impartial public service to be a bit more sceptical about claims made in those applications and not use them to tally up big numbers to put on the Ministry's website. And that makes me a bit nervous about what the heck is going on over there more generally.

It’s always been a mistake to try and sell this stuff on short-term job creation numbers. The point of the fund, as I’d understood it, was to get infrastructure and other bits in place for longer term development in the regions. There are better and worse ways of trying to do that – a pile of loans to business that no commercial outfit would take a punt on isn’t a great idea, but getting better infrastructure in place so that regions that don’t have a strong enough economic base can have a fair go – that’s not crazy.

So I think it was silly to advertise this stuff as aiming at lots of jobs quickly.

That said, it is a bit odd to count as current benefits the estimated increase in jobs that might transpire if a bunch of other projects that haven’t yet been funded all panned out as well as expected by the folks pitching the projects. I haven’t seen the underlying studies, but if the Herald’s description is accurate – it’s an odd way to do things. It’s fine to base expected numbers on projections from studies, but we might have expected the basis to be a bit stronger than that.

I also really hope that there are sufficient checks in place in the bureaus vetting these projects and approving them, making sure that none of them would cause problems for any of our international agreements around subsidies, and making sure that there’s sufficient probity around the projects.

Procurement

Government should seek value for money in its procurement policies. Using procurement as a way of forcing or encouraging other ends is generally going to be a bad idea: You get a worse deal on what you're trying to purchase, and there are likely going to be more cost-effective ways of encouraging whatever goal you're after.

Or to put it another way, does it seem generally likely that the most cost-effective way of encouraging X is by paying more for goods and services produced by companies committing to X?

And so the cabinet paper on procurement is a bit of a worry. It's from October; I hadn't noticed it at the time. 

The paper starts off well, reminding us of the decent procurement framework we already have, and contrasting it with the messes elsewhere:

The government procurement policy framework in New Zealand consists of a combination of principles, rules and good practice guidance. It aims to support and encourage procurement practice that delivers good commercial outcomes. In contrast, some other international frameworks, such as in the European Union, have very prescriptive rules which result in procurement practices that are more compliance-driven.

...New Zealand is generally internationally perceived as having an exemplary government procurement framework and as being open, fair and transparent. In the World Bank’s Benchmarking Public Procurement 2017 report, New Zealand scored highly on the quality of its tender processes and is highlighted as having effective and efficient payment and complaints systems.

That approach is not universally loved - it's good to be hated for the right reasons:

Businesses can be, and often are, critical about government procurement. They have been most vocal about large contracts being awarded to offshore suppliers – such as the Christchurch Convention Centre contract, which was awarded to an Australian-based supplier that then engaged its own supply chain, rather than hiring local firms, to do the sub-contracting work. Some New Zealand businesses would like to see New Zealand take the Buy Australian, Hire Australian approach of some Australian states and territories.

I have no clue about the merits of various bids, but I would lean heavily against Buy NZ approaches. It would risk the rather nice outcomes we've been able to achieve:

Overall, New Zealand’s government procurement policy framework is effective. It treats businesses fairly, is open and transparent, and encourages good procurement practice. It promotes the use of simplified processes and documentation, early engagement with the supply market, and early notice of opportunities. It supports New Zealand’s exporters as tender responses are assessed on the basis of merit rather than country of origin. This enables New Zealand businesses to compete for government contracts in our trade partner countries on the same basis. I note that the Ministry will continue to work with agencies to improve procurement practices.

The Cabinet Paper starts going a bit ... off ... after that. It's making the best fist it can of a conflicting mess of coalition and agency objectives around procurement, where the different parties want to use procurement policy to push a pile of other barrows. The paper suggests four outcome priorities be bundled into procurement:

1. "Increasing New Zealand businesses' access to government procurement" - basically, support helping non-traditional suppliers to navigate the GETS system.
2. "Increase the size and skill level of the domestic construction sector workforce". I read this one as prioritising construction bids by firms committing to take on apprentices and the like.
3. "Improve conditions for workers and future-proof the ability of New Zealand business to trade. Agencies would require suppliers in targeted industries to ensure their business, sub-contractors and domestic suppliers comply with employment standards and demonstrate good health and safety practice. This priority aims to protect workers from unfair and unsafe behaviour, and incentivise well-performing firms while ensuring they are not undercut by firms who have reduced costs through adopting poor labour practices." - I expect that unionised firms would wind up getting preferential treatment in contracting through this one. 
4. "Support the transition to a net zero emissions economy and assist the Government to meet its goal of significant reduction in waste by 2020." This one makes little sense for contracting in sectors covered by the Emissions Trading Scheme. There's also mention in here of prioritising timber: "This would include consideration of the life cycle environmental benefits of timber reflecting the Think Timber policy currently being developed by the Ministry for Primary Industries." 

The first priority seems a non-crazy way of dealing with New Zealand's First's insistence on prioritising New Zealand suppliers - which would risk breaking international trade agreements from which NZ suppliers benefit when hoping for fair treatment in bidding for government contracts abroad. 

The second one could prove costly where construction projects start trying to achieve employment goals rather than just building stuff. From the document:

This priority has been agreed to by Cabinet as part of the Construction Skills Action Plan 68(DEV-18-MIN-0187). Its intent is to use Government procurement as a lever to encourage suppliers to invest in workforce development and training. Agencies will be required to give consideration and a weighting to skills development and training in the tender process of construction projects valued over $10 million. Other initiatives of the Action Plan will also support employment opportunities for targeted groups (e.g. NEETs, women, Māori, Pacific people) within those government construction projects.

The third one risks being a de facto way of skewing contracts towards union shops.

And the fourth one is guaranteed to be a more expensive way of mitigating carbon dioxide emissions than by contracting with the most efficient provider and using the savings to buy back and retire ETS credits. Some of it seems a sop to NZ First's timber interests.

But it could have been rather worse had they listened to all the stakeholders.

98. A number of agencies noted that leveraging broader outcomes is likely to add cost to contracts and complexity to procurement processes and operationalising the approach would need to minimise those costs. This has been covered in the implications discussion.

99. Several agencies have asked for additional outcomes or targeted areas to be prioritised;

99.1 The Ministry for Primary Industries proposes alignment of this proposal’s priority outcomes with the Think Timber policy currently being developed by the Ministry for Primary Industries. In response, the Think Timber proposed policy has been added to the list of potential areas for priority four.

99.2 The Treasury proposes that government suppliers be encouraged to adopt diversity and inclusion workforce policies and for those firms with boards – policies that support diversity of board members. The Ministry for Women have proposed that a gendered expectation of a minimum percentage investment across-government be included in all contracts.

99.3 Te Puni Kōkiri proposes the paper explores the possibility of preferential purchasing to support Māori firms or other demand side options within free trade rules and explain how the Government’s progressive trade agenda may lead to changes to the way New Zealand considers how procurement is dealt with in free trade agreements in the future.

99.4 The Government Communications Security Bureau and New Zealand Security Intelligence Service propose that security must be a guiding principle for government procurement decisions. In response, it is already planned that the next iteration of the Rules will have a reference to protective security requirements and protocols.

It's always particularly disappointing when Treasury is among the agencies pushing to skew policy.

Household wealth and housing wealth: first quintile oddities edition

In my column over at Newsroom this week, I noted one strange feature of New Zealand's household wealth statistics:

Unfortunately, data on wealth is far worse than data on income – the Government gathers a lot less data on wealth. For example, Statistics New Zealand reports that people in the least wealthy 20 percent have $1.75 in property debt for every $1 in property assets – but no bank in the country would extend a loan on that basis. It is more likely that the survey data misses some houses owned through family trusts where, for example, a 25-year-old takes over the mortgage and effective ownership of their parents’ second home held in the family trust. The mortgage payments and mortgage debt are noted in Household Economic Survey data, but the ownership may be missed. This means their parents’ net wealth will be overstated, their own net wealth will be understated, and measured wealth inequality among younger cohorts would be somewhat understated but overall measured wealth inequality would be somewhat overstated. 

There's an ungated version of the column here.

The effect wouldn't be large because there aren't many households in that situation. But it's odd. So I asked Statistics New Zealand what's up with that, wondering whether the trusts explanation might be what's going on. I'd also asked whether Stats were able to ask follow-up questions of their HES respondents to see what's going on.

Stats' Statistical Analyst Michelle Griffin helps me out:

We’ve had a look at the distribution of owner-occupied property assets and owner-occupied mortgages for those in net worth quintile one. There are about 30 more households (unweighted) with mortgages than homes, and because of this difference, you need to go further along the mortgage distribution to get to the median, resulting in a larger mortgage median and hence a larger debt to asset ratio. So it’s looking like the high ratio is due to a mix of under-reporting and distribution differences.

We’ve had a look at only those with both a home and a mortgage to see what they look like (this is excluding those with a home in a business or trust), and this brings the ratio down to $1.44. This drops even further when you take the median of each household’s individual debt to asset ratio (to $1.26).

We’ve had a quick look at the households with only a mortgage to try and see what might be happening. They appear to be a mix of households with the home in a trust or business which is assigned to someone else (which could be a situation like you’ve described below), and households which say the home is in a trust or business but then don’t mention this trust/business later on (could be partly due to misreporting or respondent burden leading to households not answering fully). I think the fact that there are so few households in net worth quintile one with owner-occupied property is making this quintile more sensitive to these issues. Unfortunately, we can’t follow up with the respondents later on to confirm these situations – although it would certainly be interesting!

So restricting things to those households in the first quintile fixes some of the problem, but we're still at a debt-to-equity ratio on housing debt well out of step with sane banking practice, let alone existing LVR rules. And while there aren't many households with mortgages without homes, it's hard to tell whether debt to asset ratios for a broader set of respondents elsewhere mightn't be wrong too. 

Michelle suggests that keeners might apply for microdata access to really drill down into what's going on. It would be a great Honours thesis for somebody wanting to get microdata experience who has a qualified supervisor.

Many thanks to Michelle and to Statistics NZ for the helpful and detailed response.

Update: An informed reader writes:

A couple of thoughts about the data on wealth:

• There is a wider problem with data for people at the top and bottom of the distribution. Surverys include lots of trade offs between clarity, comprehensiveness and accuracy. For instance survey data on the benefit population substntially under-reports income from second and third tier payments (that is all loans, one off payments, disability allowance and accommodation supplement). Since this is a relatively small part of the population, SNZ makes the reasonable decision not to overcomplicate their survey to deal with the problem, but the consequence is continuous understatement of income for many people. The same applies at teh top where it is hard for surveys to capture the many different assets people with many assets have.


• More technically there is problem using a small number of  discrete categories like quintiles to describe a continuous variable. The general point is that if someone makes a mistake they have have to go somewhere in the discrete categories, so effectively there is a cut off at the top and bottom that will skew the results. It's easy to think of this through an intuition. If a person's income is roughly in the middle, say $50 000, and they miss a zero then they drop to the bottom of the distribution ($5000) while if they add a zero by accident ($500 000) they go to the top of the distribution. However a person whose income really was $5000 who makes a mistake either stays in the same place or goes up (ie income is $500 or $50 000); while a person with income at $500000 either goes down, or stay at the top. Even if we assume the liklihood of a person making an error and its direction are independent of income, the measured income will be pushed to the extreme quintiles. "On average" it may be right, but it will overstate the dispersion. My guess is this will be even more pronounced with wealth because it is so much harder to measure and thus more likely to generate error-prone answers.


• Finally, they are using snapshots for variables that change over time. I know this is a problem with flows like income and employment, but I sometimes wonder what it means for wealth. In particular, there is an issue with measuring transitions. The following example is made up, but gives a clue what might be happening. Say some % of people selling a house to buy another spent a couple of weeks where they had two mortgages while the paper work was settled. For the individuals the cost might be a few hundred dollars - which is not a lot when you get real estate agents involved! - but two weeks is approx 4% of the year so you would expect your snapshot survey to include some small % of people with double the mortgage debt relative to their asset. It is not many people, but it does not need to be because they will be a small percentage of the population but they will concentrated in decile/quintile. 

To me the deeper problem is that surveys tend to be designed to be "on average right", whereas the data is often used to make distributional statements. And Bryan Perry’s incomes report notes the problems with the extreme tails of the distribution.