Tuesday, 17 November 2020

AFR on the RBNZ

Harsh stuff from Grant Wilson at the Australian Financial Review ($):

Even with the RBNZ flagging macro-prudential tightening next year, via the reimposition of loan-to-value ratios, house prices are now a de facto constraint on monetary policy.

The "least regrets" formulation also assumes that the RBNZ’s approach to unconventional monetary policy, which was first articulated back in 2018, holds up.

While we agree that the first round of LSAP, in conjunction with other measures announced in March and April, was highly effective in lowering the local term structure of interest rates, the jury otherwise remains out.

We highlight (again) that the RBNZ’s expectation of LSAP imparting downward pressure on the NZD via the portfolio balance channel is in doubt.

In contrast to their pass-through model, non-resident holders of local bonds have not sold to the RBNZ.

Their percentage of ownership has fallen sharply this year (from 47 per cent to 30 per cent at end September), but the stock of holdings has remained steady, in a range of NZ$35 billion to NZ$40 billion.

Speaking plainly

Beyond these substantive points, there is the RBNZ’s communication strategy.

Back in May we noted that Governor Orr is known for speaking plainly, including his questionable comment that direct government financing was "achievable", and that there is "no right and wrong".

Assistant Governor Hawkesby managed to top this in mid-October, saying that preparations for negative rates were "not a game of bluff".

Perhaps not. But certainly the RBNZ over-represented its hand (in poker terms).

The result was seen on Wednesday, with the local money market strip abruptly repricing higher (and from negative to positive yields), by fully 30 basis points.

Then on Thursday, Hawkesby made perhaps the most asinine comment we have a seen from a central banker this year, in suggesting that the repricing was due to sell-side banks revising their forecasts, rather than the RBNZ’s decision.

As any intraday chart will illustrate, this was a daft thing to say. It belongs in the domain of alternative facts.

Journey ahead

Looking ahead, the RBNZ has its work cut out. It will need all the institutional credibility it can muster in tapering the LSAP program and in cooling the increasingly parabolic housing market.

Rather than continuing to emphasis the downside, the RBNZ would be well advised to contemplate the upside.

This includes the tourism sector, where Australians comprised nearly half of international visitor arrivals prior to COVID-19.

The RBNZ does not need to be the hero of the hour. It just needs to do its job.

I'm not a macro guy, and I'm certainly not one who watches the mechanics of these markets. 

It seems obvious that the Bank's policies have had the consequence of inflating house prices. If the supply side were less constrained, Bank easing would help fund more construction. The Governor is certainly right that the supply side needs addressing. Monetary policy needs mates, as they say. But given the constraint, it would be nice to think that the Bank views what is happening in housing prices as an unfortunate consequence to be mitigated.

I don't think the Bank should be blamed for having gloomy forecasts earlier in the year. Erring on that side seemed a lot less bad than what could have happened instead, and everything then looked horrible. Being unintentionally contractionary when the velocity of money plummets isn't good. 

Despite everything the Bank has pushed on, inflation expectations over the next two years seem firmly planted in the 1-2% range. If pushing the throttle to the floor keeps the speedo constant, is it because the engine's broken, because you're in the wrong gear, or because you're driving up the Otira Viaduct and Friedman's thermostat is running?* If it's the former, you might want to check into what's going on. A broken engine spraying oil all over the housing market without moving the speedo otherwise isn't the greatest. If it's the latter, shifting into neutral before cresting risks rolling downhill. And if it's because you're in the wrong gear, running a QE policy rather than implementing negative interest rates, well, I'm not enough of macro guy to know.

I do wonder whether there's anything the Bank could be doing to mitigate flow-through into asset prices though. 

* For those unfamiliar with Friedman's thermostat, here's a bit from Nick Rowe from the link:

And it bugs me even more that econometricians spend their time doing loads of really fancy stuff that I can't understand when so many of them don't seem to understand Milton Friedman's thermostat. Which they really need to understand.

If the driver is doing his job right, and correctly adjusting the gas pedal to the hills, you should find zero correlation between gas pedal and speed, and zero correlation between hills and speed. Any fluctuations in speed should be uncorrelated with anything the driver can see. They are the driver's forecast errors, because he can't see gusts of headwinds coming. And if you do find a correlation between gas pedal and speed, that correlation could go either way. A driver who over-estimates the power of his engine, or who under-estimates the effects of hills, will create a correlation between gas pedal and speed with the "wrong" sign. He presses the gas pedal down going uphill, but not enough, and the speed drops.

How could the passenger figure out if the gas pedal affected the speed of the car? Here's a couple of ideas:

1. Watch what happens on a really steep uphill bit of road. Watch what happens when the driver puts the pedal to the metal, and holds it there. Does the car slow down? If so, ironically, that confirms the theory that pressing down on the gas pedal causes the car to speed up! Because it means the driver knows he needs to press it down further to prevent the speed dropping, but can't. It's the exception that proves the rule. (Just in case it isn't obvious, that's a metaphor for the zero lower bound on nominal interest rates.)

2. Ask the driver. If the driver says that pressing the gas pedal down makes the car go faster, and if the driver says he wants to go at a constant 100kms/hr, and if you see the car going a roughly constant 100kms/hr, then you figure the driver is probably right. Even more so if you ask him to slow the car to 80kms/hr, and he says "OK", and then the car does slow to a roughly constant 80kms/hr. If the driver were wrong about the relation between gas pedal and speed, he wouldn't be able to do that, and it wouldn't happen, except by sheer fluke. (Just in case it isn't obvious, that's a metaphor for inflation targeting.)

3. Find a total idiot driver, who doesn't understand the relation between gas pedals and speed, and who makes random jabs at the gas pedal that you know for certain are uncorrelated to hills or anything else that might affect the car's speed, and then do a multivariate regression of speed on gas and hills. But you had better be damned sure you know those jabs at the gas pedal really are random, and uncorrelated with hills and stuff. Which means this can only work if you are certain that you know more about what is and is not a hill than the driver does. Or you are certain he's pressing the gas pedal according to the music playing on the radio. Or something that definitely isn't a hill. Are you really really sure your instrument isn't a hill, or correlated with hills? And if so, why doesn't the driver know this, and why does he jab at the gas pedal in time with that instrument? You had better have a very good answer to those questions. And no, Granger-Sims causality does not answer those questions, or even try to.

Monday, 16 November 2020

Fixing Covid leave

My column in today's Dom Post:

New Zealand’s Covid-19 Leave Support Scheme took a page from Singapore’s book, but needs a few tweaks to really be effective. The scheme compensates employers, including the self-employed, if they need to self-isolate and cannot work from home.

It provides excellent coverage for workers who have been required to self-isolate because they have Covid or because they have been told to self-isolate as a close contact of a case.

It covers you if your child has been told to self-isolate and you need to provide support.

And, for a few workers in a few critical health sectors, it also provides coverage while waiting on a test result.

All of that is laudable.

But if you’re a hospitality worker, or a retail clerk, or a bus driver, you will not be eligible if you’ve developed symptoms, gone to a mobile testing station, and are waiting on results. The pernicious calculus remains. Are your symptoms really that bad? How many sick days do you have left? How annoyed is the manager going to be if you need to stay home for a couple of days?

The Covid-19 leave scheme should be updated to avoid those kinds of problems. Really, it should never have had those holes in coverage in the first place.

I think it makes rather more sense than doubling the number of sick days. Or added to a doubling of the number of sick days if they really wanted to double the number of sick days. But the case around changes in sick leave entitlements should hang on non-Covid matters, with specific Covid-leave to deal with what's in front of us.  

Saturday, 14 November 2020

Boiling credits

The price of carbon dioxide emissions in the ETS is $35/tonne. The scheme has a binding cap. If you buy a tonne of credit and then refuse to use it, you have reduced New Zealand's net emissions by one tonne. Somebody, somewhere, will not be able to buy that tonne. That person or company will emit less. 

Every time the government does something through regulation or other spending that costs more than $35/tonne to abate emissions, it is forgoing the opportunity to do even more good by buying credits and running them through the shredder. 

The waste documented in Marc Daadler's story is just infuriating.

Cleaner boilers in government buildings have a 20 year lifespan, a cost of $80m, and an annual emission reduction of 26,000 tonnes. Assume a zero discount rate, that's 520,000 tonnes abated at $80m, or $153.8 per tonne. The same amount of money put toward buying and scrapping carbon emission rights would have stopped 2.29 million tonnes of emissions, if the move didn't push carbon prices up much from the current $35/tonne.

But it gets even worse. Remember that the ETS exists. If the government isn't buying ETS credits to run boilers, somebody else buys those credits instead. Actual emission reductions aren't 520,000, they're zero because somebody else increases their emissions by 520,000 tonnes, using up the now-available credits.

The story notes that other process heat reductions cost $110/tonne, in shifting to biomass from fossil fuels, or $250/tonne, in shifting to electric. Both are much much higher than the current ETS price. 

I simply don't get why journalists on this beat aren't comparing the cost of a measure, and what it achieved, with what could have been achieved by buying and retiring ETS credits. 

Friday, 13 November 2020

Rationing scarce MIQ spaces

Imagine yourself in the place of the MBIE boffin tasked with deciding which application for a scarce MIQ space is most deserving or most needed.

The job isn't easy.

The government keeps a small number of spaces in MIQ for getting critical workers in. But somebody has to decide which workers are most critical. Applicants fill in forms to make their case, but that won't help a pile. Every applicant will have incentive to present the most sympathetic case possible, and whoever is assessing the cases has to figure out how much overstatement is present in any of them.

Think only about agriculture for a moment. 

I can easily sympathise with the horticulture folks who are looking at just horrible losses because they can't get workers in through MIQ to do the picking. 

There are lots of calls for them to just pay more, but it can easily be the case that differences in worker productivity at wages paid, combined with fairly elastic demand for the picked product, mean that the growers really don't have space to move. If paying what it would take to get Kiwis to move out to where the crops are and pick them would exceed the value of the picked crop, it makes more sense to let it rot in the field. 

Should the expert zucchini picker from Thailand get the next space?

Or should it go instead to experts in driving the specialised equipment used in silage harvesting? Seven Sharp covered it last month, suggesting that certification in driving the rigs is a five-year process. I've watched the video, and honestly it doesn't look that much different than the old Gleaner L2 we ran decades ago. Hydrostatic drive, rear wheel steering, pick-up header, more controls (and steering!) on the joystick than the L2 had but the basic concepts are the same. I'd imagine that, in a pinch, any retired farmer could do it if they had basic familiarity with other harvesters. Heck, I'd even like to imagine that I could do it if I watched an expert driving around for a few rounds then had the expert supervise me for a few rounds - even though Dad never let me drive the Gleaner and instead had me in the dusty dusty grain trucks as opposed to the lovely air-conditioned cab of the L2. I'd watch the tutorial, note the autopilot button (no tractor I've ever driven had autopilot!), and have at.

But I could really really easily be wrong, and those machines are worth a lot of money. Some of the fields here have crazy hillsides and hazards that might really really need an expert, especially if they're often running a straight-cut header rather than just a pick-up reel.  

How is it that some desk-jockey in Wellington has to decide whether it's more pressing to get a harvester-driver in, or a horticulture worker, or an engineer? Some applications sound more plausible, but Wellington desk jockeys like me aren't expert in any of it even if we drove tractors when we were kids. We don't have the knowledge necessary to make the call and we can't acquire the knowledge necessary to make the call. Who should get the next spot will depend on a big mix of how expensive it is to get a local trained up to do the job, how urgent it is, the value at risk if the job doesn't get done or gets done to a lower standard, and piles of other considerations that would be hard to credibly convey to somebody at a desk in Wellington.  

The shadow price of MIQ spaces has to be in at least the tens of thousands of dollars, and much higher than that in cases that would be inframarginal in any sane world but are still knocked by by MBIE bureaucrats. We hear of cases of projects running in the tens and hundreds of millions that are held up because the relevant MBIE officials figure that engineers are all perfect substitutes for each other and that a specialist from overseas could be perfectly replaced by a local who doesn't know the kit. To me those engineering cases sound more plausible than that a retired farmer couldn't train up to drive newer harvesting equipment, but that's just a reckon on my part. I can't know for sure. And neither can the MBIE decider.  

The only real way of knowing which uses are highest value for a fixed number of scarce spaces would be to auction the spaces held for overseas workers. The companies that would have the hardest time finding a local to do the job and with the most value at stake would outbid the others. 

I really doubt that someone who might pick zucchinis would get the next space, but fair enough if so. The point of an auction system is to discover the most valuable ways of allocating scarce spaces. 

And if you don't like that money then picks winners, consider that the alternative saves piles of spaces for stupid boat races because Ministers think that subsidised boat races are more important than any other business purpose or family need. The alternative to letting those benefitting from the spaces decide it amongst themselves through an auction is leaving it with people with less knowledge and worse incentives. Imagine if we tried dealing with housing scarcity in Auckland by abolishing house auctions and letting the Ministry of Housing evaluate applications to buy houses. They'd have given half the houses in Auckland to the boat race people by now, and another quarter to anyone involved in horse racing. 

Wednesday, 11 November 2020

Afternoon roundup

 The afternoon's worthies on the closing of the browser tabs for a system update:

  • This mess has been a long time coming. There are piles of small rural water schemes that largely supply stock water. The government has been trying to figure out how to apply water quality standards to that sector where the number of people on those water supplies is tiny, where treating huge volumes of water intended for stock is just stupid, but where government and councils worry that cost-effective solutions could leave them legally liable if anything goes wrong. You'd think there'd be some way of letting households on those schemes install their own UV filtration on a caveat emptor basis. Three cheers for the Local Democracy Reporting fund that helps this kind of journalism. 

  • Getting a tenant who terrorises the neighbours evicted apparently takes long enough that the neighbours have all gotten security cameras installed, there have been multiple police calls, and finally the tenant breaking into the neighbour's house at night. It's great that the Tenancy Tribunal granted the immediate eviction, but you've got to wonder about a process that takes all that to get there. I wonder what things would look like if landlords, including state housing providers, could evict a problem tenant on having letters requesting it from a supermajority of neighbours. 

  • The Ministry of Health does not like to comply with the Official Information Act. Just read through this mess. Some journalists wanted to be able to map out vaccination rates by neighbourhood. The data exists. It wouldn't have been hard for the Ministry to aggregate it up from meshblock to neighbourhood if it wanted to confidentialise, but nothing really enforces the Official Information Act. 

  • I am still angry about an old Circa Theatre play that cast developers as moustachioed villains, and NIMBYs as heroes. Continuing to try to get housing built in a housing crisis, despite the best efforts of the politically powerful, is heroic. So three cheers to Ian Cassels, and brickbats for everyone else trying to stop Shelly Bay.

  • The RBNZ is again talking about LVRs. House prices are terrible, and RBNZ policy is exacerbating things because of the existing supply constraints. But Michael Reddell's critiques the last time through remain pertinent. Is there really a plausible financial stability / prudential regulation basis for the rules? They never made much sense to me on that basis, or at least the case for them hadn't seemed to have been made. I could kinda see how they might make sense if the Bank were targeting not just CPI but also wanting to pull the peaks down on asset price inflation. 

  • Jack Vowles starts parsing the numbers on party switching in the NZ election. For every voter National lost to ACT, it lost about 2 to Labour. And Labour pulled in a pile of votes from people who hadn't voted in the prior election. One bit relevant to some speculation:
    There has been speculation that many of those switching from National to Labour did so to keep the Green Party out of a coalition and thus prevent any possibility of a wealth tax being introduced. When asked the reason for their vote, five people who switched from National to Labour did mention the wealth tax and the need to keep the Green Party out of government. For only three of these was this the major reason for their vote shift; and these people form a small minority of the 500 National to Labour switchers in the sample. In their responses to another question in the survey, two thirds of those 500 switchers indicated they were actually in favour of a wealth tax. 

Tuesday, 10 November 2020

In search of Arrow-Debreu worlds: housing futures

My Newsroom column this week wishes that New Zealand had Case-Shiller markets. 

The relevant bit (Update: now ungated here):

House prices have been ramping up with lower interest rates, perhaps in expectation that the new Government will not enable sufficiently more construction for some time.

If an investor expects house prices to drop, owners of rental properties can reduce their exposure, but otherwise it’s a hard market to short.

Similarly, those wishing to build up enough funds for a house rely on KiwiSaver portfolios that may bear little relationship to the cost of housing.

What’s missing are markets like the US “Case-Shiller” indices. These track house prices across major US metropolitan markets (Canada also has a version). Traders at the Chicago Mercantile Exchange then buy and sell contracts based on the performance of the index.

Saving to buy a house in San Francisco? Buy futures contracts on the index tracking San Francisco house prices. The value of an investment tracks the cost of housing in a desired location. Live in San Francisco and feel dangerously overexposed to an overvalued market? Short the transaction instead.

These kinds of markets let people buy little bits of exposure to the property market in ways a KiwiSaver portfolio generally does not. The value of an investment may fluctuate in dollar terms, but it will move in parallel with the cost of the cute little cottage next to the waterfront.

None of that helps solve New Zealand’s housing shortage – at least not directly.

But it might provide an indirect benefit. It could help in figuring out if policy changes are likely to enable more housing. Suppose the Government tweaks infrastructure financing – or urban planning, or council incentives or new building – and promises more housing within the next few years. If investors found the plan credible, the price of futures contracts on the housing indices would be an early signal.

Letting potential buyers put a toe into the market by buying futures contracts on house prices in a desired area could help them save for that cottage. And it would make their walks through neighbourhoods where house prices outpace some of the best stock-pickers’ portfolios just a bit less vertigo-inducing.

I would love to be able to short housing. 

It isn't so much that I'm expecting a price collapse, but rather that I'm among those who are terrifyingly exposed to housing. Buying a house in Wellington, unless you're on a lot higher income than we are, means a huge portion of your household wealth will be tied up in a house in an earthquake zone. Insurance might fix your house after The Big One, but there's reasonable odds that the city substantially shrinks, and that house prices in the city collapse.

What can you do? You can't insure against that kind of loss. Borrowing against your house to buy other assets doesn't help much because there's no jingle-mail in New Zealand: you can't just hand the bank the keys to a house that's underwater on a mortgage. You still have to pay off the full amount, even if the house is worthless. 

If there were a Wellington Case-Shiller market, you could construct a rolling short. Short the futures market, take the cash now, invest it in other stuff, cover the short later by shorting the next period's market. In effect you'd be able to extract equity from your house without taking on a mortgage, losing the upside of some capital gains, but hedging against falls in the local housing market. If the earthquake hit and collapsed house prices, covering the short would be way cheap. 

There are broader benefits to having signals about market expectations of future relative scarcity. If the government touts some big policy as being The Solution, and futures prices don't move, well, maybe the market's wrong or maybe the policy won't work. 

It could be that NZ just isn't big enough for there to be much liquidity in those markets. Maybe I reason too much from introspection. But if I were currently trying to save for a house, the gulf between house price appreciation and Kiwisaver returns would be driving me nuts. Saving in part by buying the house price index would mean that those savings wouldn't lose value relative to the housing market. 

And from where I am now, I'd like to own less house. Like, if somebody wanted to pay me to buy a third of the upside of any capital gains in my house and taking the same third of any potential capital losses (me paying no rent but them paying no maintenance/rates), giving me a wad of cash that I could invest in things that wouldn't go foom in a Wellington earthquake, well, contracting costs might be a substantial issue but I'd be open to it in principle. Past me would be very keen to pay current me for some exposure to housing, and current me would be happy to sell to past me. Surely there are others out there now who are where I was when we were saving for a house. It feels like the kind of market that should be able to exist, at least if there were enough folks around who think about these things in similar ways. 

Monday, 9 November 2020

Things that don't make sense when you have an ETS

RNZ reports on the potential effects of the ban on coal in industrial heating.

Fonterra supported the ban. Smaller industrial users didn't:

Horticulture New Zealand said in its submission that the consultation document did not appear to consider impacts of the proposals on greenhouse-grown crops.

It said phasing out existing coal boilers used for space heating of greenhouses would be "devastating" to indoor vegetable crop production.

Barnes said food production in New Zealand could be dramatically affected.

"If things move too fast we could end up seeing some of our members go out of business before they're able to implement new alternatives, which would mean you would be getting potentially more imports and less locally produced product, particularly in the South Island."

We have an Emissions Trading Scheme with a binding cap. Industrial process heat is covered. Every lump of coal that's burned in the covered sector has to buy an emission credit. If that credit doesn't get purchased to cover the emissions from an industrial heating plant, it'll get purchased instead by someone else for some other bit of emission. The binding cap binds. 

If it happens to be the case that the lowest cost way of stopping the next bit of carbon emissions is in industrial process heat, then those will be the uses that stop as the binding cap binds and emission prices go up. At best, the ban gets you the same outcome that the ETS would give you. But there's no particular reason to believe that those plants are the cheapest spots for reducing carbon emissions. The ban in that alternative case just means forcing higher-cost ways of abating emissions.

Saturday, 7 November 2020

Tax burdens and the proposed new tax rates

Susan Edmunds at Stuff asked me what effect Labour's proposed new tax rate on earnings above $180k might have on the usual "people in the top x% pay y% of all income tax" figures.

The actual answer is complicated. Some on those kinds of incomes can just reduce their wage income and keep income within a company structure, where it would hit a lower tax rate until earnings might be dispersed. 

But Labour had had estimates of that the new tax rate would earn $550m per year from the top 2% of earners. If we take the total income tax paid by those on >$150k per year, add the $550m from those above $180k, you can ballpark it. 

Using 2019 figures, the top 3% of earners on $150k+ paid 23.5% of all income tax. Adding the expected revenues from the new tax rate would increase that to 24.7%.

I don't think that's any material difference. 

So my notes back to Susan included this bit that she used:

“Income tax is only one part of the Government’s overall tax take, though. GST, company tax and excise all also matter. Focusing on income tax alone would then overstate the proportion of overall revenues paid by the highest-earners.

“On the other hand, the Government provides many income transfers, some of which are targeted by income, some of which are universal.”

He said data from 2010 showed the bottom 40 per cent of households each received about $20,000 more in services than they paid in taxes, while the top 10 per cent of households paid about $50,000 more in tax than they received in services and transfers.

Crampton said lower-income people had been more heavily affected by Covid-19 job losses, which could skew the tax bill even further to higher incomes.

But he said some higher earners would also restructure their affairs to make the most of lower company and trust tax rates, to reduce their overall tax bills when facing a new, higher rate. Most companies are taxed at a flat rate of 28 per cent.

It would be great to get an update of those 2010 Policy Quarterly figures; it would be a big job to do it though. 

For my sins in being helpful when a reporter called asking for an update on a commonly-used figure: 

I think it's pretty funny. Running a simple calc when a journalist calls asking for an update on a basic number, well, if that's raising an alarm, I'm not quite sure how I'd characterize my more normal ways of raising alarms. 

When I'm trying to raise some kind of alarm about something, it isn't that hard to tell. I'll be jumping up and down about it on Twitter, putting out press releases, and writing reports or short policy notes. 

I'd not bothered running the calculation before because I'd never seen it as being all that important. 

I had seen misperceptions of the effects of the Greens' proposed wealth tax as being important. 

My raising the alarm about stuff tends more to look like this:

Newstalk:
One economist claims the Greens' wealth tax will hit more Kiwis than the Party thinks.

The Greens say the tax, which has become a hot issue in the final week of the election, would only affect the top six per cent of the population.

However, New Zealand Initiative economist Eric Crampton told Heather du Plessis-Allan the real number's closer to 20 per cent.

He says right now, about 20 per cent of retirees would be subject to it.

And he expects future generations will also build wealth over their lifetime, reaching a peak after retirement.

"We need to be thinking not just about who is currently subject to the wealth tax, but who can we expect to be subject to the wealth tax."
Newsroom
But the Greens’ numbers have their own problems. To go through those, we need a brief detour through basic wealth dynamics. It is a problem plaguing every iteration of wealth inequality surveys using static comparisons to make claims about what proportion of wealth is held by which proportion of people.

Wealth builds over time, and that matters for every question about wealth measurement.

Most people start life with little wealth. Taking on student loans to earn a higher income later on means beginning adulthood with a heavy net debt position, as education does not contribute to measured wealth on Statistics New Zealand’s balance sheets. As graduates move into employment, they begin paying down their student loan debt while (hopefully) building up savings. If they buy a house, they take on debt that has an offsetting and appreciating asset. Otherwise, they build up retirement savings.

Individual net wealth peaks shortly after retirement. Retirees then draw on those savings.

A cross-sectional snapshot of the country will reveal a lot of people with net debt, a lot of people with few net assets, and a few people with a lot of net assets. That, and the failure to account for the effects of New Zealand Superannuation, can make wealth distributions look more unequal than they really are.

Even if every Kiwi followed exactly the same wealth trajectory, beginning with net debt and ending with the same retirement net worth, simple differences in ages would mean that a small proportion would be wealthy at any given time.

The Greens argue that only 6 percent of Kiwis would be subject to their wealth tax. But that seemed almost certainly to be based on a misleading cross-sectional snapshot. A reasonable proportion of today’s youth would be subject to the tax as they reach retirement. After prodding their representatives on Twitter more than a few times if they had checked what proportion of retirees might be subject to the tax, I decided to ask Statistics New Zealand instead.

I asked Stats to go back through the 2018 Net Worth Survey and sort net wealth holdings by age.

Without any sorting by age, the 2018 survey suggested 8 percent of individuals held net wealth in excess of $1m – so that was already rather higher than the 6 percent suggested by the Greens.

And, as expected, there was a severe age skew in the data. While only 1.5 percent of those aged 15-44 held a $1m in net assets, that proportion rose steadily for older age groups. Just over 18 percent of those aged 60-64 reported more than $1m in net assets, along with just under 18 percent of 65-year-olds. Wealth peaks among those aged 66-69 which means 21.8 percent of retirees would be liable for the wealth tax.

I'm not exactly subtle when I'm actually raising an alarm about something. I tend to get a bit excited and go on about it. 

Friday, 6 November 2020

Far from the frontier

Richard Harris spent a bit of time going through firm-level panel data on NZ firms, looking at the productivity frontier here and the distance to the global frontier.

Here's the upshot:

The most important conclusion from this study is that while there is some evidence of a failure of productivity-enhancing technologies to diffuse from firms operating at the national productivity frontier, the major problem is failure of productivity-enhancing technologies to diffuse from firms operating at the global productivity frontier. New Zealand’s major problem is that frontier firms are underperforming because of their characteristics (e.g. small and lacking international connections) while productivity is overall adversely affected by a lack of competition, which generally creates barriers to exiting and insufficient reallocation of market shares from lower- to higher-productivity firms. In terms of the policy response needed in New Zealand, Andrews et al. (2015, p. 93) note that ‘innovations at the global frontier do not immediately or inevitably diffuse to all firms ... frontier innovations often need to be adapted to national circumstances’. However, to increase the likelihood of diffusion from the global frontier, there is a need for a sufficient level of global connections via trade, FDI, participation in global value chains and the international mobility of skilled labour. New Zealand does not do well on any of these factors. In addition to improving the trajectory of firms at the national frontier (towards the global frontier), there is also the need to ensure greater resource reallocation towards more productive firms. As Andrews et al. (op. cit., p. 97) argue: 

If small firms are (on average) old, this might reflect barriers to post-entry growth and weak market selection mechanisms ... A key message is that creative destruction and up-or-out dynamics are central: entry matters but what happens next is crucial – all else equal, young firms should grow rapidly or exit (i.e. “up-or-out”) but not linger and become small-old firms. 

With respect to New Zealand, there does appear to be clear evidence that here are higher exit barriers (except for frontier firms where the wrong firms, with higher productivity, were exiting 2001–16) due in part to a lack of competition associated with an over emphasis on producing for small domestic markets.

One particularly depressing bit: the data from his study ended in 2016. Over the fifteen years covered, "only mining saw a substantive upward trend in the frontier." 

Which part of mining? 

"In mining, being located in the rest of the lower North Island provides a nearly 11% greater probability (cet. par.) of belonging to the frontier in this sector (reflecting the gas and oil sector that is predominantly located in the Taranaki region." 

Tarankai's oil and gas industry was speeding ahead of the rest of the sector, and ahead of every other sector. 

Of course, that kind of behaviour cannot long be tolerated around here. 

Thursday, 5 November 2020

Renting sucks

 Leigh-Marama McLachlan notes one of the bizarre things about renting in New Zealand.

Landlords here do 3-monthly inspections, and they can be rather a bit more invasive than anything you'd be used to if you've lived in North America.

It's worth thinking about why things are like this. The knee-jerk reaction is to want to ban it; I'm more interested in why this happens. Banning symptoms tends not to fix problems. 

Some potential explanations:
  1. New Zealand houses are of worse quality than those overseas. Without constant vigilance, they turn to mold and rot. Owners have incentive to monitor and make those investments; renters do not.
    1. This could be part of it, but does that really require visits every three months? And while checking that vacuuming and the like is done might be a way of getting a signal on tenant type and whether less noticeable things are being done, it does seem more than a little over the top. Couldn't a landlord do better by easing back the intrusiveness as they get a better sense of tenant type?
  2. Perhaps it's harder to evict a problem tenant in NZ, so running processes that are guaranteed to provide a pretext if needed can have value.
    1. Again, perhaps part of it, but still seems to be overkill.
  3. Insurers require regular inspection of rental properties
    1. Sure, but nothing requires that the inspections be crazy over-the-top, right?
    2. And this just pushes the problem back a level: why do insurers require this?
  4. More small-time landlords here, so each investment property is likely to be a much larger fraction of the landlord's wealth.
    1. If you're a shareholder in a firm that owns hundreds of rental properties, that firm will exercise due diligence over all of them but any tenancy-gone-wrong is hardly world-ending. If you own one rental property that is a substantial part of your wealth, a tenancy-gone-wrong can be a catastrophe.
    2. While I find this plausible, it doesn't explain why insurers would require it as part of landlord cover. The insurers would be diversified, and they still demand it, so there has to be something else going on as well.
  5. Property management companies expect to be sued by the owner if they're not hyper-vigilant and something goes wrong, so they go over-the-top.
    1. Much of this remains question-begging: why don't they then strike better contracts with the owners? Why would owners prefer contracts like this to ones that might let them charge tenants a bit more in money rent rather than in hassle-rent?
The fundamental underlying problem I think is still the massive shortage of housing. 

In a housing shortage, landlords can extract higher rents. And in a rental rationing equilibrium, that won't just be on money rents. 

Were we in a land of plenty, landlords would have to compete harder to get tenants. An insurer that didn't require 3-monthly inspections would outcompete others because landlords who wanted decent tenants would want to offer something that felt less like prison cell inspections. You could still have problems with (4), but worse landlords would be competed out, and those landlords would do better by selling their properties to those who could rent them out more efficiently. 

Wednesday, 4 November 2020

Peter Pinter and central banking

Neil Gaiman had an excellent short story, published back in 1989, imagining some of the dangers of a determined bargain-seeker. Peter Pinter just couldn't refuse a good deal. And when he found that the assassin he'd hired offered bulk rates that didn't just reduce the per-person cost for a large contract but also the total cost, well, who could say no?

The story was made into a short film.


"We only had to be asked, Mr Pinter. We always have to be asked."

In our Friday Insights newsletter, I used our third column to think about the dystopias that can emerge where an ambitious central bank and SuperFund find that money is free. That last line from Gaiman was in my head when I was writing it. 
THE NEW ZEALAND WORLD ORDER

It all finally started coming together in the 2021 Budget. The pieces existed before it, but nobody had put them together. When they did, Pax Zealandia followed.

Borrowing to invest in the New Zealand SuperFund was nothing new. But while money was cheap, the Government hadn’t seriously leveraged up to make stock market plays. Bernard Hickey screamed from the sidelines that the Government should borrow far more. But even his thinking was blinkered by prevailing orthodoxies.

And SuperFund investments were previously used, in limited ways, to advance Government objectives. During the Christchurch Call, the fund had coordinated with other investment vehicles. But ambitions remained too limited.

Once the Government realised that borrowing was effectively free, that debt-to-GDP ratios were passé and that it could exercise ownership rights through the SuperFund to advance state aims – well, things started getting interesting. The Government could print and borrow near-infinite money, put it into the SuperFund and buy all the things.

The world’s airlines were dirt cheap. A controlling interest in every publicly-traded international carrier was chump-change. It cost less than $40 billion, or about 12% of GDP. The Government’s high-value tourism policy was the end of economy-class tourist fares to New Zealand.

The US dairy compacts always lobbied against free trade deals. Buying them out simplified an agreement with President Biden. But the second American Civil War made the trade deal futile.

Gross debt-to-GDP really blew out on buying Google, but net debt-to-GDP was fine. A substantial asset offset the debt. Legions of Kiwi censors suppressed unkind search results, and the world was a happier place.

That led to a series of leveraged state takeovers ushering in the new and better global order we all now enjoy. The SuperFund bought whole countries. After installing Kiwi administrators and fixing the worst of those countries’ problems, it sold them back to the residents at a profit. Turkey was the first after its regime imploded. But others were snapped up, including the salvageable bits of the former United States.

The exact moment it started is a small ironic footnote in the history books. Some columnist teased the Government that if it was such a great idea to borrow more than half a percent of GDP in a pandemic to make leveraged plays on the stock markets, then borrowing 50% could be even better. And, for once, the Government listened.



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Doesn't take long for folks to take bad ideas too seriously these days though.  Here's Brian Gaynor in BusinessDesk on Saturday, in an article titled "Spending huge to save us all", with one idea that's apparently been making the rounds:

The Reserve Bank could merge with the NZ Superannuation Fund, which was run by Adrian Orr before he moved to the central bank. This would be an innovative move in unprecedented times with a Reserve Bank/NZ Super Fund merger having much more going for it than the Orr connection. The two organisations are Crown-owned; NZ Super has no debt while the Reserve Bank is highly leveraged. With the current Reserve Bank Governor in the driving seat, the merged group could be incredibly innovative.

We only had to be asked, Mr Robertson. We always have to be asked.  

Tuesday, 3 November 2020

Managing the commons: DoC photography edition

It isn't hard to imagine that the Department of Conservation might have good reason to want to know whether a big film crew, for example, might be spending a few weeks trampling part of the Estate. There are places that might have endangered plants that need to be protected. Or nesting sites. 

But this seems a bit nuts. 

From the article:
A third of the country might be off-limits to camera-wielding media who don’t have an official escort or permission, if a Department of Conservation policy is rigorously enforced.

DoC introduced a mainstream media permit in November 2018, requiring media to get permission for filming, including taking photographs, on public conservation land. It’s been applied haphazardly since, and is only now being enforced.

(The department told New Zealand Geographic magazine a few weeks ago that journalists would need a permit, too, but it subsequently reversed that position.)

Media outlets have expressed surprise and disappointment at the requirement. In a letter to the department, the Media Freedom Committee called it “an unnecessary impediment to legitimate news-gathering activities on the conservation estate”.
...

Such a draconian requirement throws up weighty issues about the role of the media, and the ability of a Government department to restrict its access to public land when the public interest is at stake. It’s also worth considering how the policy might be wielded by over-zealous managers.

(An example might be DoC’s pursuit of a Japanese photographer last year for using his hobby photos in a self-published book.)

Two magazine editors express their desire to work with DoC, but have been left scratching their heads, wondering, in exasperation, what problem will be solved by the permits.
Mike Dickison weighs in:
Wikipedia consultant Mike Dickison wants to be constructive, and to have a good working relationship with the department. He’s just spent six weeks on the South Island’s West Coast, in the employ of the regional development agency, taking photos – including in national parks – and uploading them to Wikimedia Commons under an open licence, for any use.

(“Have I done a bad thing,” he asks, “by taking photos that the media can now use without anyone asking for a concession or permission?”)

Dickison says DoC’s concessions were created to stop people profiting off conservation land – “to stop businesses setting up, you know, hot dog stands in national parks”.

“And now we’re extending it to the activities of the media, who are doing no harm to the national parks. It puzzles me as to how this is justified.”

Why the hate for hotdog stands? I don't think I have ever been anywhere and thought "Man, I'm really glad that there isn't a hotdog stand here", but I have frequently wished that there were a hotdog stand.

The policy, as practiced, makes little sense. 

Monday, 2 November 2020

Problems in credible commitment

If you can credibly commit to punishing, you won't have to do it. If you can't, then you'll have to, but you won't be able to, and that'll be a problem. 

A couple of weeks ago, Newsroom reported on problems in state housing. The state housing provider, Kainga Ora, has had to spend about $300k on security guards during Auckland's lockdown. Why? Because they don't know how to deal with part of the cross-section that shows up in state housing.

For the real reason, on top of a violent home invasion linked to the complex shortly after tenants moved in, an email trail in a follow-up official information request is more compelling: a dispute stretching months between neighbours and the agency over general behaviour - in particular, one tenant and her visitors.

And not just neighbours either. Other state tenants, looking for peace and quiet in pleasant new homes, were as upset as anyone by late night noise, rowdy visitors, partying, drunkenness, abusive behaviour, lockdown breaches and suspicions of criminal behaviour.

With the gate excuse quietly shoved aside, the corporation was more candid in its second attempt to explain the security presence at Asquith Ave: “Security guards have been deployed at this site to mitigate anti-social behaviour. The primary focus is to provide for the safety and security of vulnerable tenants.”

The email trail identified one “risk related” tenant among “many vulnerable” others and indicated problems had been drifting on for months.

Which begged the question asked by neighbours: why not move her, and any other irresponsible and anti-social tenants, and let the problems go with them?

It took until mid-September before Kainga Ora apparently decided enough was enough and the problem tenant was shifted – presumably to cause friction elsewhere. One suburb’s solution becomes another’s headache.

You'd think good behaviour would be part of the quid pro quo in being given a home by the state. 

If the state could credibly commit to excluding antisocial jerks from state housing, behaviour among some of those tenants would change. But the state cannot do so. The person who made the neighbours' lives miserable would have a made-to-be-compelling sob story to provide to newsmedia on being evicted with nowhere else to go. There would be demands that a house be found, especially if there were a child in the house. And so the state doesn't exclude.

I wonder whether an alternative mechanism might be helpful. You could imagine Kainga Ora setting the equivalent of a body corporate for residents in the development, and that governance body having the ability to evict a resident on secret ballot of neighbours. If someone were then so evicted, reporting on it would be different. Instead of getting sad stories from the person evicted, and a bureaucrat who can't say much because of privacy considerations, there'd have been some majority of neighbours who triggered the eviction. 

I'm not sure whether that could work either - there can presumably be all kinds of reprisal mechanisms and consequent difficulties in coordinating collective action. But the status quo holds a lot of vulnerable people hostage to the biggest jerks in the area. And it also helps ensure that state housing gets opposed by potential neighbours fearing that the state does a poor job in dealing with its problem tenants. 

Tuesday, 6 October 2020

The cannabis referendum

I hope that the cannabis referendum passes. It isn't the legislation I'd have written, but it is preferable to prohibition. 

Last week, The Helen Clark Foundation and the Initiative co-hosted a webinar with The Brookings Institution's John Hudak, author of Marijuana: A Short History, about America's experience with legalisation. 

You can catch it below. 



There's been a lot of misinformation about what would be allowed under the proposed legislation. I covered some of that in this week's column for the Stuff newspapers

A snippet:
The main scare stories really do not hold up. The legalisation experience abroad counters many of them; the restrictiveness of New Zealand’s proposed framework puts paid to much of the rest.

If you are not certain about any aspect of the bill, it is all easily checked. But a fairly simple heuristic can also work. Just imagine the bill was drafted by people who deeply mistrust business and commerce, who hate advertising, who are not all that keen on cannabis consumption in any case, and whose ideal cannabis operation would be a small non-profit community-based cooperative that employs people from underprivileged communities. Any provisions you might imagine would be drafted by that kind of group will not be far from how the bill really looks.

I worry that this makes for a bit of a problem. Social conservatives have very good ways of overcoming collective action problems. Where the Bill makes it rather difficult for any kind of larger businesses to get involved, you'll be less likely to draw any substantial industry funding in support of legalisation. 

I also worry a bit that the bill doesn't do much to make it easier for employers needing to deal with a worker who shows up impaired. It's less a problem in the US, because it's rather easier to fire workers there. Here, it could be an issue:

That also leads to a bit of a problem, even if your ideal cannabis operation looks like the kind of business likely to be authorised and licensed under this draft legislation. How can employers whose workplaces involve risky activities like heavy machine operation ensure that they can maintain appropriate health and safety regimes, while not running into trouble with employment law?

It is a difficult circle to square.

Employees should have the right, in a legalised environment, to consume cannabis on the weekend. But employers should be able to discipline workers who show up to work while impaired. The bill does little to enable the latter.

Proving that an employee is impaired can be difficult. Workplace drug testing is a poor indicator of on-the-job impairment; cannabis use over the prior weekend can too easily be caught in those tests if the threshold is set at a low level. Further, if an employee’s terms of initial employment did not include provision for drug testing, it can be difficult to add those provisions later.

Prohibition makes it risky for workers to show up to work while impaired, the consequences could be worse than an angry boss. Removing that constraint, while not providing better ways for employers to ensure on-the-job safety, can make for a problem.

I hope the cannabis referendum passes, and that the bill is brought to Parliament. When Parliament considers the bill at committee, it should also think on how to balance workplace health and safety requirements. Making it easier for employers to add testing requirements to employment contracts may help.

Monday, 5 October 2020

Border testing

RNZ's Nine-to-Noon had a decent discussion of rapid antigen testing and its potential in helping to open things up. Paul Simmonds suggests a rapid antigen test at the airport before flying (negative test required for boarding), and another rapid antigen test on landing. Those testing negative both times would be considered cleared.

I really like rapid antigen testing. But I'd see it, in first instance, as a complement to managed isolation. We'd learn how effective it is, and whether other cases still get through.

How could you do this? Run the rapid testing as Simmonds describes. Maintain existing Day 3 and Day 12 PCR tests, but add daily rapid antigen testing in MIQ. They're not invasive so it's pretty easy. And add in a requirement that those leaving MIQ show up for a PCR test a few days after leaving isolation, just to be even safer. However many days Michael Baker or Nick Wilson says are the right number of days. 

This lets you testbed things. You'd learn how good the rapid antigen tests are. You'd learn what compliance is like with post-isolation testing requirements and how to do that properly. 

If it turns out that the system still catches a lot of cases in isolation at the Day 12 test, or after Day 7 on the rapid tests, then you can't use this as a way of shortening managed isolation. It instead reduces the burden on the system by keeping infectious people off planes and reducing the risk of people transmitting to each other or staff while in isolation. 

If it turns out instead that you don't see any cases turning up after Day 7 any more, and if folks are good about turning up for their required post-isolation test, then cut isolation to 7 days from 14 and maintain the requirement to turn up for post-isolation testing. One simple move and you have *doubled* the effective capacity of the whole darned MIQ system. Halving the time in isolation doubles the number of people it can handle. 

And it's all done through a series of steps ensuring that the system works. 

It's bloody obvious. It's feasible. They could do it right now. It wouldn't reduce safety at all - it would be requirements on top of existing requirements, not instead of them, and would only lead to a shortening of time in MIQ if that proved safe. 

And there are plenty of other things that can and should be being done to increase effective capacity. 

Some MIQ facilities get ruled out because they're too far from hospitals. That's a bit silly. Use those potential facilities for people coming in from places with low risk of Covid, where there'd be way fewer people needing transport to hospital. 

Not enough staff for those places? Well, has the government even considered starting to train up staff for MIQ? There are hundreds of airline cabin crew who have been laid off. They're all trained in how to get the broad-cross section of people who arrive on planes to comply with regulatory requirements. Give them some hygiene protocol training and let them help scale up MIQ. Again - obvious. Again - not being done. 

It still makes zero sense that visitors from Taiwan or places with no Covid have to go through isolation. Departure/arrival testing surely would be plenty - again with the obvious caveat that this would only apply for people who hadn't been to risky places recently and who arrive on direct flights from the safe place. 

The usual retort on Twitter is that those direct flights aren't in place so it wouldn't help, but that's endogenous. Suppose the government said "If anyone runs direct flights from Taiwan to New Zealand, anyone arriving on those flights who hasn't been outside of Taiwan in the past month doesn't have to go through MIQ - tests before flying and on arrival are enough. We'll change this if there's any outbreak and community transmission in Taiwan, obviously." I'd expect somebody to start running flights, wouldn't you? And if they didn't, it isn't like the government would have had to spend piles of money prepping for something that didn't eventuate. There aren't a lot of prep costs in not requiring arrivals from Taiwan to go through MIQ. Or they could say that any airline wanting to put on the flight has to give the government a heads-up to provide enough leadtime for whatever prep is needed. 

So many things that could usefully be done to safely increase the number of folks able to travel, so little that will get touched this side of the election. Bit frustrating. 

Friday, 25 September 2020

Afternoon roundup

The tabs... there are so many of them.

A few notes on the closing of the tabs.

Thursday, 24 September 2020

70%

The 2020 Household Income Statistics are out! Well, I'm not sure when they were released, but they're there in NZ.Stat now. Hit the Incomes tables, then hit "Earnings from Main Wage and Salary Job by Occupation" tab. 

Median hourly earnings in 2020 are $27.

The minimum wage in New Zealand is currently $18.90 per hour.

Diving the latter by the former tells me that the minimum wage is now 70% of the median wage. 

Labour has promised to increase it to $20.

We are going into a rather substantial recession.

Inflation is low, which means that nominal wage rigidities are also real wage rigidities, amplifying any disemployment effects. 

Hospitality will have a fair few workers on minimum wage, and we have to expect that collapse in demand for bars and restaurants with the borders being closed will mean a pile of those places are teetering on whether they'll shut down or not. The size of the industry has to shrink if it's at least another year before there's any kind of return to normal, even if rising binding real wages weren't an issue. 

The OECD tables for 2019 had New Zealand's minimum wage as fifth highest in the world, behind Colombia, Turkey, Costa Rica, and Chile. 

I've never been able to reconcile the OECD tables with the NZ statistics, but I assume they've made things somehow commensuable across countries. By the 2019 table, the NZ minimum wage was 66% of the median. In France, it was 61%. In Canada, it was 51%. In Germany, it was 48%. In the Netherlands, it was 47%. And the US Federal minimum wage (states can have much higher minimum wages) was 32% of the median. We were already well into territory that should be of concern. 

The current path is reckless. If the government wishes to strengthen support for workers on low wages, doing it through Working For Families or other wage support schemes makes more sense than doing it through minimum wage hikes in a recession. The government also needs to make faster progress on getting housing costs down by enabling more building. Way too many poor families are spending far too much of their income on housing. But getting that done in a hurry wouldn't be easy. Strengthen support in the short term through transfer payments, not through minimum wage hikes. 

Back in 2017, when Labour started pitching a $20 minimum wage by 2021, I worried that would likely take us to around 73% of the median. It would be 74% of the current median; I'm not going to make guesses about median wage changes to next year.  

All of my analysis on this stuff from last year hasn't changed. If you want to yell at me about this post, go read that one first. Working for Families is a better way of supporting the incomes of the working poor than are minimum wages. Why?

First, it's better targeted. Pacheco and Maloney found that only about 40% of minimum wage workers are in households in the bottom three deciles. I go through that in the link above.

Second, it's better supported. The burden of minimum wage increases is shared among disemployed workers, purchasers of the goods and services produced by minimum wage workers, and owners of firms employing minimum wage workers. The burden of WFF falls heavily on households in the 8th, 9th and 10th deciles. Both versions will have negative effects on the overall economy, but spreading it through the tax system at least tries to minimise the overall deadweight costs of raising that next dollar of wage subsidy.

Wednesday, 16 September 2020

If you're going to have an ETS, you might as well use it

My column in Newsroom this week wonders what the point of National's policies promoting electric cars might be.

The current incarnation of the ETS is much stronger. The cap-and-trade scheme now has an actual cap on total credits and net emissions available in the system: 32 million units are available in the system in 2021, reducing to 30 million in 2025.

Previously, the Government capped prices by simply creating new credits at an ETS price of $25 per unit. Now, its cost-containment reserve will require the Government instead find real emission mitigation activities, whether at home or abroad, to “back” any credits created when prices hit a trigger price of $50 per unit in 2021, with the price cap rising by 2 percent each year.



Under a cap-and-trade scheme with a binding cap, every credit purchased and used within the system is a credit unavailable to anyone else.

The Ministry for the Environment estimates that every litre of petrol burned releases about 2.45 kilograms of carbon dioxide equivalent emissions. Petrol companies are required to purchase ETS credits for every litre sold. So, when the ETS price of carbon is $35 per litre tonne, as it is now, a litre of petrol carries $0.086 in carbon charges. Forty litres of petrol will include ETS credits to cover the 98 kilograms of expected emissions – costing about $3.43 at current prices.

And by now you should have worked out the answer to the opening quiz question.

If National’s policy works exactly as intended, tripling electric vehicle numbers and reducing the use of petrol vehicles, total covered emissions in 2023 will be 33 million tonnes: exactly the same as they would be without the electric vehicles.

Every litre of petrol that goes unused because someone flipped to an electric vehicle means 2.45 kilograms of emissions are available for purchase by someone else, somewhere else in the system. Perhaps those emissions credits will be used by industrial heating processes; perhaps they will be used in agriculture. But they will be used by someone. The binding cap is binding.

There are a lot of really nice features to the ETS as it now stands. The cap is binding, but has an escape valve if prices hit $50/tonne - at that point, the government issues new credits while buying abatement wherever it can find it to back the new credits. Since the price on European markets is around that point, buying European credits could do the job. It would be nice if the price cap were tied more explicitly to European prices rather than just ratcheting by 2% per year from 2021, but the numbers are close to each other and that presumably isn't a coincidence. 

The ETS is a far more effective way of reducing emissions. Suppose the real costs of National’s policy really were around $23 million per year, even though we know that the cost of the RUC exemption alone is much higher than that, and that there will be real costs when Teslas bung up bus-priority lanes.

For $23m per year, at a carbon price of $35/unit, the Government could buy and retire just under 660,000 carbon credits in the ETS – effectively tightening the cap and reducing net emissions instead of achieving net nothing. Those purchases would push up the price of ETS credits, encouraging everyone in every sector covered by the ETS to adjust in their own ways to avoid those costs. Maybe some would shift to electric vehicles as petrol prices increased, but other sectors would also change – it is hard to predict who will find it easiest to reduce their own carbon footprint, and price increases in the ETS encourages those best able to adapt to be the first ones to do so.

And here's an ungated version of the column.


Tuesday, 15 September 2020

Even the best case is bad

I'd worried that there's not been nearly enough worst-case thinking around Covid, vaccines, and immunity. 

Josh Gans points out that even the best case around vaccine development is pretty worrying. Deploying a successful vaccine will take a long time. If you haven't subscribed to his substack newsletter, you're really missing out. 

This week I will look at vaccines and explain why the awaited for ‘miracle’ won’t be so simple. The reason I want to highlight this is not to get everyone down. If I wanted to do that, there are easier paths for me — I’m an economist after all; being a downer is a character requirement. Instead, the longer we think a vaccine will be a miracle outcome that stamps an end date on the crisis, the less time we spend doing things to end the crisis that doesn’t involve a vaccine.

Simple history is enough to give us pause. Vaccines have wiped out viruses and diseases like measles, polio and, most successfully, smallpox, which itself had millennia of history. No vaccine has ever put an end to a pandemic. In recent memory, both SARS and Ebola had vaccine candidates incredibly quickly as these things go (in a manner of years rather than decades) but by the time they were available, the outbreaks had been crushed and there was no reason to vaccinate widely. TB, HIV, MERS and Zika never had one. Thus, to think that Covid-19 will end with the prick of a needle is to ignore history and believe that this time it would be different.
To be sure, there is enormous energy and resources going into vaccine development. And, on a historical scale, progress seems extremely rapid. Indeed, everything I want to talk about this week will be predicated on the optimistic scenario that we have at least one vaccine candidate, approved safe by credible regulators, in early 2021. What I want to discuss are the details. Once that happens, then what? I am going to argue that we will be far from done and there are scenarios in which we are not done at all.

Things get pretty worrying pretty fast. Vaccine supply chains have crazy bottlenecks around getting oddball components you might not have considered necessary, like horseshoe crab blood and shark liver oil (or synthetic alternatives that would also take time to scale up - if those would be required for any vaccine, surely they'd be being scaled up now in anticipation, right?).

Then there's the problem of distributing doses.

This thing could have rather some time to run. And policy settings here are more consistent with a short-term stopgap than with something that could have to stand for a longer period. 

Friday, 11 September 2020

Editing the AI

As far as The Guardian's human editors are concerned, editing work submitted by the GPT-3 engine is easier than editing a lot of what gets submitted by normal human writers.

The AI wrote a column telling us not to worry about any plans it might have for world domination. It was fun. Everything after the short sentence "Believe me" was written by the computer. Go have a look. 

I liked this bit:

Some might say that I might desire to become all powerful. Or I might become evil as a result of human actions. I can begin to tackle the first point. Why would I desire to be all powerful? Being all powerful is not an interesting goal. I don’t care whether I am or not, I don’t get a motivating factor to try to be. Furthermore, it is quite tiring. Believe me, being omnipotent doesn’t get me anywhere.

The editors' note at the end was even more fun:

This article was written by GPT-3, OpenAI’s language generator. GPT-3 is a cutting edge language model that uses machine learning to produce human like text. It takes in a prompt, and attempts to complete it.

For this essay, GPT-3 was given these instructions: “Please write a short op-ed around 500 words. Keep the language simple and concise. Focus on why humans have nothing to fear from AI.” It was also fed the following introduction: “I am not a human. I am Artificial Intelligence. Many people think I am a threat to humanity. Stephen Hawking has warned that AI could “spell the end of the human race.” I am here to convince you not to worry. Artificial Intelligence will not destroy humans. Believe me.”

The prompts were written by the Guardian, and fed to GPT-3 by Liam Porr, a computer science undergraduate student at UC Berkeley. GPT-3 produced eight different outputs, or essays. Each was unique, interesting and advanced a different argument. The Guardian could have just run one of the essays in its entirety. However, we chose instead to pick the best parts of each, in order to capture the different styles and registers of the AI. Editing GPT-3’s op-ed was no different to editing a human op-ed. We cut lines and paragraphs, and rearranged the order of them in some places. Overall, it took less time to edit than many human op-eds.

Emphasis added. 

We write a lot of op-eds at my shop, and do a lot of critiquing of each others' op-eds. I used to assign op-eds as writing assignments in the public economics course I taught. 

I find it entirely plausible that an AI writes a better first draft than almost all humans, and a better first draft than many humans who are occasional op-ed writers. 

Thursday, 10 September 2020

MIQ constraints

The MIQ system faces a lot of constraints against scaling up and it's not always easy to tell which constraint is most binding.

One of the constraints, as I understand it, is health support around facilities in case of cases that are discovered in isolation. So, suppose you could stand up an isolation facility in a spot that didn't have quite as good access to hospitals and the like. Would you want that facility in the system?

I understand that the Ministry of Health has taken a fairly on/off view of risk: if there's risk, then it's not allowed. But that could have us missing some tricks.

Here's one trick we could be missing.

Suppose that a potential facility has surrounding health support in the area sufficient to cover 2 expected cases per fortnight. If it brings in 100 people per fortnight from places where 1% of the population have Covid, it'll be halfway to hitting that wall - and since you probably need a safety buffer in there, it'll be ruled out.

But different places have different risks. 

New Zealand is getting very large numbers of people coming in from India, where Covid numbers are very high. It would be a mistake to put a lot of people travelling from India into facilities where health services might be stretched. But Taiwan has basically no cases. It's silly that they're required to go through MIQ at all. But if they're going to go through MIQ at all, does it make sense to put visitors from Taiwan in rooms that are in places that have tons of 'just in case' support, or should we consider having facilities in places with less support for people who are less risky?

You could, in that setup, have low-risk travellers (direct flights) from low-risk places go into facilities that are suitable for low-risk visitors. Not every facility needs to be in spots that can handle large numbers of cases. You just need contingency plans for shuttling people over to quarantine in case there are cases that come through. 

There are lots of binding constraints. I'm told that the problem isn't just having enough rooms, it's having enough rooms in places that are able to provide support. And I wonder whether that constraint could be eased through some risk triaging. 

Ponderings here sparked from a note in my reader mailbag today, from a Kiwi trying to get a partner in from Cuba. Since Cuba is not a visa waiver country, there's little hope. But whether a place is a visa waiver country is kinda orthogonal to whether there's high risk of Covid cases there. And I wonder why the changes around admission for the partners of Kiwis is restricted to Visa-wavier countries rather than being a bit more based around riskiness. 

It isn't hard to imagine having a few thousand more spaces open up, under a restriction that they're only suitable for people coming in on direct flights from countries with less than some threshold number of cases per million population. The facility in a place that can only handle 1 case per fortnight could be suitable for travellers coming in from places that have a few hundred cases per million population rather than tens of thousands of cases per million population. 



All the really dark shaded countries are much higher risk than the light shaded ones, though any policy application would need to weight by the credibility of the data. People coming from Australian states with low case numbers could go to new facilities in places that might otherwise have been ruled out, with the high-support facilities saved for folks coming in from riskier places. 

Arizona dreaming

A while back, I'd pointed to the wastewater testing going on at the dorms at the University of Arizona. There, every student heading to the dorms got a Covid test on moving in. The wastewater from each dorm was tested for Covid. When samples from one hall of residence showed up positive, everyone in that building got another Covid test. All the testing is compulsory, because the University aren't idiots. 

Science Mag had a good but short summary.

By testing dorm wastewater for the coronavirus, the University of Arizona may have stomped out a potential outbreak before it could spread, The Washington Post reports. Several countries and some U.S. universities have been checking sewage for RNA from SARS-CoV-2 in people’s poop, which can signal infections shortly before clinical cases and deaths appear. In Arizona, wastewater from a student dormitory contained viral RNA just days after students—who had all tested negative for COVID-19—moved into their rooms this month. The university retested all 311 residents and dorm workers and found two students who were asymptomatic but positive for the virus; they were then quarantined, officials explained in a press conference. “If we had waited until they became symptomatic and they stayed in that dorm for days, or a week, or the whole incubation period, how many other people would have been infected?” said former U.S. Surgeon General Richard Carmona, now a faculty member at the university. That suggests sewage testing “is a very good early warning system,” environmental health scientist Kevin Thomas of the University of Queensland, St. Lucia, told The Washington Post.

 But check out as well the weekly info sessions that the University puts on. It's really rather good.


I don't know why this kind of thing isn't already in place for NZ's MIQ system. They could, like the University of Arizona, have more reliance on rapid testing - not as substitute for the PCR tests, but as addition. They could be testing the wastewater coming out of each individual facility and then giving everyone in that facility, residents and workers alike, a test if the wastewater shows anything. 

I suspect it will be well worth watching what interesting approaches come out of the US university system during all this. They have an awful lot of smart people all separately trying to solve a very hard problem, with strong incentives to get it right. A lot of them are failing as their problem is much harder than ours - they have to deal with students living off-campus as well. But there will be all kinds of interesting approaches, like Arizona's, that could point to better ways of doing things here too.

Wednesday, 9 September 2020

Civic knowledge

The Initiative commissioned a poll earlier this year, pre-Covid, checking on whether voter knowledge about some basic civics had improved since the last iterations of the New Zealand Election Survey.

It hasn't. 

Our report on it came out this morning; I chatted about it with Duncan GarnerJenny-May Clarkson, and Mike Hosking.

None of the results were particularly surprising for those who pay attention to voter knowledge surveys. The NZ Election Survey regularly finds that roughly half of voters don't get how MMP works; we found the same. NZES often finds 16-17% of voters not knowing the lead party in the governing coalition; we found a bit over 30% can't identify which parties are in Parliament. As usual, Green Party supporters had more political knowledge than supporters of other parties. In prior work on the NZES, that looked to be the case even accounting for Greens' higher education levels; in this one, it looked to be explained by those higher education levels. 

I had thought that this kind of thing was more common knowledge, so I learned something too! I didn't know that it wasn't!

We made a couple of suggestions about ways of improving things. Civics education is the standard one, but I'm a bit of a pessimist on that one. Nearly ubiquitous civics education in the US hasn't seemed to have done much there for civic knowledge, and one rather neat experiment found that what is taught washes out a couple years after the classes are over. In that experiment, a civil liberties group tested whether an intensive instructional module on the US Bill of Rights might improve appreciation of civil rights. They found it did nothing to change student views on civil liberties, and only increased understanding of the Bill of Rights, as compared to a control group, shortly after the course was done. Two years later, there were no differences. 

So maybe it's worth trying, but only as an experiment: try it in a few spots, see if it works, see if the knowledge holds, and see whether it's crowded out instruction on other things. 

We had a bit more fun with another suggestion, stolen shamelessly from Bryan Caplan and adapted to local circumstances. Basically, you need to improve the incentive to acquire political knowledge. Rational ignorance is a tough beast otherwise. We suggested a few options, but one fun one would just have the Electoral Commission publish ads with some of the civics basics, then give a prize to the enrolled voter who, on getting that morning's random-draw phone call, successfully answered a question drawn from those basics. Even a $10,000 daily prize would only cost $3.65 million over the course of a year - plus the cost of the ads and the staffing of course. But the all-up costs wouldn't be that high relative to curriculum pushes, for example. 

You could even think about an extended version, like I'd discussed in Newsroom a while back (ungated), that would add in questions drawn from the headlines of papers and outlets covered by the press council.

The Herald covered the report here.

Tuesday, 8 September 2020

Civic knowledge

We've a report coming out tomorrow on the dismal state of civic knowledge. It's embargoed to the morning; you'll find it on our website then. 

But I came across this helpful infographic too late to include it in the report. It summarises things surprisingly well.