Sunday, 5 July 2020

Bayesian updating and deities

Maybe we should upweight the chances that there is a deity - one that cares a lot about poetic justice.

Last year, a Bottle-O bottleshop tried to set up in Khandallah Village.

The shop was opposed by a pile of local NIMBYs. 

Among the objections raised were that:
  • The branding was too down-market for snooty snooty Khandallah. Maybe if it was a Glengarry instead of a Bottle-O.
  • That young children walk through the village and while they wouldn't be able to purchase alcohol, they'd see unhealthy things being sold and that would damage their fragile little minds.
  • That the nearest bottleshop is only 1.2 km away, which is probably already too close in Ngaio; there's also one over in Johnsonville. Surely nobody could be inconvenienced by having to walk 1.2 km to get their alcohol. And, there is already beer and wine in the local supermarket.  
  • Maybe disreputable types - persons of low quality - would take the train to Khandallah and sit in the little park and drink alcohol there. [Heavily racist overtones in the Khandallah town hall meeting, we all know what you meant, you horrid elderly lady.]
Imagine that you were a poetic justice God. What would you put in that spot?

Walking through the village today, I finally saw a sign over the window.

25 paces from the Hell's Pizza, we will have a Dominos.


Tuesday, 30 June 2020

Wealth and the life cycle

It's frustrating how hard it is to know some perfectly knowable things.

Over the weekend, the Greens announced that they support a wealth tax on individual net wealth in excess of $1m. 

In a country that had sensible priorities for its statistics department, I would have an easy time answering a simple question. Fixing the underlying problem here I understand to be a big job. But it would be a solution to problems that just keep coming up - not just this one. And it isn't like there aren't other things that the government has tasked Stats with doing that seem rather less important than fixing this problem. 

I would like to know the distribution of wealth by age bands. The 2018 wealth module of the Household Economic Survey has information on the distribution of households by net worth bands, and household net worth by household characteristics, and by a few other ways of slicing the data that would have occurred to a Stats analyst might be useful when they did the thing up in 2018, but nothing that can let me look at it by age. I don't blame anyone for not having this slice in - there are huge numbers of ways of slicing the data and it would be impossible to have all of them up in every release. 

In a system that had functional back-end systems, you'd be able to put in a query and it would just spit out the relevant cross-tabs - generating them on request from the underlying data. IPUMS has had this kind of functionality for ages - you can even run regressions on their data from inside your web browser.

Here, I can't even tell the age distribution of the 216,000 households with net worth in excess of $1.5m - the topcode in their income buckets. 

Why does this matter?

Imagine two states of the world. 

In state of the world A, 5% of individuals have net assets in excess of $1m. They are born with those assets endowed by bequest, and they die leaving those assets to their kids. Nobody else ever accumulates net assets in excess of $1m. There's a landed gentry, and everyone else. 

In state of the world B, 5% of individuals have net assets in excess of $1m. As people move through the life cycle, they move from being net debtors to net asset positions, and retire at age 65. Their wealth holdings peak around then, with draw-downs exceeding the return on their investments. 5% of people are aged 65-69, and every one of them has assets in excess of $1m when they retire, before they start drawing it down. They're all back below $1m at age 70.

We are absolutely not in either of those states of the world. But static numbers on wealth accumulation say nothing about the life cycle. The presumed equity considerations around a wealth tax would have to be different if small numbers of people are ever subject to it as compared to if large numbers of people became subject to it as they reached retirement. In state of the world B, a wealth tax transfers money from individuals' future richer selves to their current poorer selves in an overlapping generations sense, but where people tend to save money in anticipation of retirement it's an odd way of running things. The rest of the system (NZ Super) is designed around taxing people when they're working to help them fund their retirement. Not the other way round. 

Some of what Stats has is suggestive: couple-only households (retirees will be more likely to be couple-only) have median wealth of almost double that of couples with dependent kids. But that's highly imperfect - professional couples without kids will almost certainly find it easier to accumulate wealth if they don't have kids. And, even if you just lumped together everyone over 65, that would also catch lots of people who'd substantially drawn down their savings. The median across that bigger group wouldn't be the right answer either. 

While it would be nice if Stats would pull the number for me - I've requested it, and I understand that there's a two-week lag these days on custom data requests - it's still not a solution to the general problem. It's just frustrating that back-end systems have not been updated so that cross-tabs like this can be generated dynamically by users on the web interface, rather than by specialised request. Fixing this kind of thing once would save the custom data team a lot of work. It's impossible to anticipate all the cross-tabs that might wind up proving useful down the track; adding more tabs to downloaded excel sheets isn't the answer and can't be the answer. The systems need to be fixed so that things that are dead simple to know in principle can actually be known. 

In an election campaign, two-week lags for basic fact checking about the contours of policy can be an awfully long time. I'm not blaming the team at all for it - Stats is always crazy helpful. But the system really needs to be fixed so that things that should be knowable at a click on a browser don't require custom data pulls. 

Tuesday, 23 June 2020

Bootleggers and baptists - art restoration edition

Suppose that after some home mechanic botched a restoration of a classic one-of-a-kind Ferrari, an association of panelbeaters demanded regulation making sure that only Registered and Authorised Panelbeaters were allowed to do any bodywork on classic cars.

It'd be pretty obvious rent-seeking, right?

Conservation experts in Spain have called for a tightening of the laws covering restoration work after a copy of a famous painting by the baroque artist Bartolomé Esteban Murillo became the latest in a long line of artworks to suffer a damaging and disfiguring repair.

A private art collector in Valencia was reportedly charged €1,200 by a furniture restorer to have the picture of the Immaculate Conception cleaned. However, the job did not go as planned and the face of the Virgin Mary was left unrecognisable despite two attempts to restore it to its original state.

The case has inevitably resulted in comparisons with the infamous “Monkey Christ” incident eight years ago, when a devout parishioner’s attempt to restore a painting of the scourged Christ on the wall of a church on the outskirts of the north-eastern Spanish town of Borja made headlines around the world.
An art prof who once headed the relevant professional guild provided the baptist case:
Carrera, a former president of Spain’s Professional Association of Restorers and Conservators (Acre), said the law currently allowed people to engage in restoration projects even if they lacked the necessary skills. “Can you imagine just anyone being allowed to operate on other people? Or someone being allowed to sell medicine without a pharmacist’s licence? Or someone who’s not an architect being allowed to put up a building?”
Would you allow just anyone to tinker with a classic car in the garage?

I see no more public interest in protecting individual works in private hands than there is in protecting classic cars, or older houses. If there is some compelling public interest, the government can buy the things and make them museum pieces, or pay the owners for an easement that comes with conditions around public display and care. Otherwise, it's nobody else's business. And the art-restorers are here acting as rent-seekers. 

HT: A friend who comments "I personally have benefited more from the Monkey Christ restoration than every other work of religious art in Spain."

I think that friend may be right in total too. The modal piece of religious art in Spain of similar vintage is practically unviewed, relative to Monkey Christ. Pop quiz: can you even now, without looking back up, even remember the name of the artist in this case, or of the artist who painted what became Monkey Christ? The Guardian piece linked suggests that more people now go to see Monkey Christ than did before too. Be honest. You wouldn't be able to pick the original version of Monkey Christ out of a lineup of a dozen similar pieces. Sure, a few art experts might, but neither you nor I would. But it would be hard not to know this one, and its backstory. 


Thursday, 18 June 2020

Risk assessments and quarantine exemptions

The past few days have not brought a lot of confidence in New Zealand's quarantine system. It's been a mix of operational failures and poor decisions that have, so far, culminated in an ending of allowing early release from quarantine on compassionate grounds where accompanied by a safety plan around that release. 

Some of the safety plans around those compassionate releases have sounded really rather reasonable. Leaving quarantine early, staying in isolation in a private vehicle, then staying in a new private isolation bubble with the family member you have good compassionate grounds for needing to go to see doesn't sound all that high risk. Even where the travelers wind up COVID-positive, it should only affect those travelers and the one additional person. That case wound up falling apart in practice, especially where they hadn't bothered with testing before release, but even with failures it seems the kind of thing that can easily be contained through contact tracing - or at least in principle. It doesn't sound like the kind of thing that gets us back into lockdown. 

In the best case, officials would have ensured that the private vehicle used for travel either had sufficient range to make the trip from Auckland to Wellington or a few jerry-cans of fuel in the back, or that any fuel stops would be at unmanned stations and only when no one else was there and only with masks on and only with cleaning of any surfaces touched... ok, it quickly starts sounding pretty implausible in practice and it all should have raised a few queries about whether it seemed likely that safe practice would have been maintained. But it all seemed relatively low risk in the grand scheme of things. Even if those travelers turned up positive, the consequences would be relatively limited. 

But I just don't get what anybody was thinking in allowing early release from quarantine to attend a gang funeral. 

In any early release where there's risk that the person is infected, there will be risk if people don't follow the plan. And the plan in this case required staying in the car during the funeral. 

But in any of these, there will be different risks that obtain if the plan isn't followed. Even if the probability of failing to adhere to the safety plan's requirements is identical across people released, the risk imposed by failure at a gang funeral is just far higher than the risk imposed at other kinds of events involving even the same number of people. 

This seems pretty obvious. 

A gang funeral, whether it's a Mongrel Mob funeral, or a white power one, or any other gang funeral, will have a lot of people in attendance who will make contact tracing close to impossible. No everyone, obviously. Plenty of non-gang family members or acquaintances might also attend. But enough

Just think through the logistics for a minute of trying to run contact tracing if anything went wrong in the safety plan and folks got out of the car, mingled with guests at the funeral, and then turned up COVID-positive. 

If that happened at any funeral, the contact tracing team would need a guest list, would need to get in contact with each person who attended, would need to ask each of them who'd been in close contact with the case to get tested and stay in isolation until they'd gotten their results, and potentially also to provide contact details for each person they'd been in close contact with since the funeral. 

Thinking though actually doing that for a gang funeral immediately leads to a few complications. 

First, you need a guest list. 

Some in attendance at a gang funeral may well be there in contravention of a parole condition not to associate with other gang members. If those orders are broken at a funeral, would anyone in attendance be willing to name everyone else who was there who the contact tracing team might need to find? Even if there had been no breach of any such order, getting any complete list of guests in attendance, along with reliable phone numbers for fast contact tracing would very likely prove impossible. 

Tracking down each of the people whose names you did get would be very hard.

You might also expect a rather more difficult time than usual in getting any of those you found to name any of the people they'd been in close contact with since the funeral. 

The contact tracing team would need to encourage all close contacts to be tested, and to maintain self-isolation until test results had been released. Compliance could easily be a bigger issue in this case than would be the case for other funerals.  

Obviously these problems wouldn't obtain for each and every guest in attendance. There would be many in attendance happy to comply. But surely the proportion of likely difficult cases would be enough to make the whole thing seem just a bit of a bad idea. If someone did authorise it, you'd almost have to wonder if they just hated the contact tracing team. Because if anything went wrong, getting a large regional cluster seems rather easy, and getting that cluster of cases under control would seem rather hard. It is really easy to imagine it leading to at least a regional-level lockdown, or worse. 

Here's what happened. None of it seems sufficiently low probability that the folks setting the plan should have discounted it as a potential outcome, and the cost of all of it if one of those on leave from quarantine had been COVID-positive and contagious would have been rather high.
Two people who fled from authorities, breaching their Covid-19 quarantine restrictions, had been granted special exemption to attend the funeral of a Mongrel Mob relative in Hamilton.

The Herald understands the pair, aged 8 and 19, flew with four other family members, including their mother, from Melbourne, before being granted an exemption to attend the tangi of slain gang member Deiderick John Grant, known as DJ Rogue.

The 57-year-old was killed at a Slim St, Bader, property on June 5.

The family are believed to have flown to New Zealand to be with their whānau the following day.

The pair were given strict instructions to follow as part of their compassionate exemption, including to remain in their vehicle on the journey to Hamilton - and to wear personal protective equipment (PPE) if they got out. They are also understood to have been told to stay in the vehicle during the tangi.

They were then required, with their other family members, to return to the quarantine hotel, the Pullman, in Auckland afterwards.

Instead, the pair fled.

And last night former police commissioner Mike Bush claimed six members of the Australian family had absconded, though five were now back in isolation at the hotel.

When questioned by the Herald last night, the Ministry of Health revealed the two youngsters had now tested negative.

"The six members were staying at the Pullman Auckland in managed isolation and were granted exemption on compassionate grounds to attend the tangi and return to the facility on the same day.

"Four members of the family returned. A teenager and a child did not. The child was returned to the hotel managed isolation and quarantine facility in Auckland.

"The teenager remains in self-isolation at a family property. The teenager in self-isolation in Hamilton has had a Covid-19 test and tested negative.

"The five family members' request to join the teenager has been declined and they will complete their isolation at the managed isolation and quarantine facility in Auckland."

...

The person [an unnamed source who contacted the Herald] said the family came over from Melbourne to attend Grant's funeral.

"As soon as these kids have left the isolation centre, with their mother who was also part of the set up, they've just gapped it.

"They've breached all of the conditions of their agreement that was set up and just disappeared."

The condition for the mourners to stay in their vehicle at the tangi was "never going to happen", the person said.

"It was just ridiculous."

Hundreds of mourners from all around the North Island were believed to have attended Grant's tangi last week.

The source said the boys, and the rest of their family, mingled with them all.

"The ridiculous thing about the Mongrel Mob funeral in Hamilton ... you could see how many hundreds of people there were there ... these boys who essentially just came in the country from Melbourne were mingling all in amongst those people."

Another condition of being granted an exemption is to provide two addresses of where they would be staying. One would be a back-up.

The source claimed the first address provided to authorities was fake, while their back-up address was Slim St, the property where Grant was killed.

It led him to believe that the addresses provided by visitors were not being verified before their exemptions were granted.

"If that's the security we're providing ... it's just an absolute joke. They should be asking, 'what is the risk here?'"

He said asking families to wear PPE at all times was also "completely impossible" and said the ministry needed to up its game to protect New Zealanders.

"This is the thing, there's how many billions of dollars that's going to be spent, how long it is it going to take for the country to get back on track? How many people have lost their jobs? There's people who have committed suicide.

"It's crazy, and yet I'm guessing it's the Ministry of Health, as they're the lead agency, are prepared to throw it all away for these guys to come over for a Mongrel Mob tangi?

"It actually frightens me about how incompetent these people are."
Read through the account a couple of times. It's always possible that the account is exaggerated or wrong, but none of it is implausible, and I'd expect the Herald to have done some checking. And the very bad consequences of any breach of conditions, if those travelers had been positive, should have been obvious too. 

If the folks on early release from quarantine had been COVID-positive and infectious while mingling with hundreds of attendees at a gang funeral - attendees who had come in from across the North Island, would it be possible to get the consequences under control without another lockdown? 

If officials had any kind of discretion in granting compassionate exemptions like this, why did the very obvious red flags not prompt a refusal of permission to leave quarantine early? The risks if the plan were not followed were far far greater than the risks involved in allowing two people to travel from Auckland to Wellington to share a self-isolating bubble with a single family-member. And there just might be reason to think that those attending a gang funeral might be less likely than average to follow an unmonitored safety plan. Twitter reaction to my incredulity over this case suggests the officials might have feared being called racist for even thinking that a gang funeral might be of a different category of risk than a non-gang funeral. 

I often say we don't know how lucky we are in New Zealand. In this case, we are incredibly lucky about which case turned up unlucky. If the travelers from Melbourne had wound up Covid-positive rather than the travelers from London, things could be very very very worse. 

We need better processes if we don't want to keep testing our luck. 

Tuesday, 16 June 2020

Plasma compensation

Kerre McIvor over on Newstalk had a bit of a go at me on the issue of compensating plasma donors. She worried about that facilities paying for plasma would locate in and prey on poorer communities.

I think that gets things entirely backward, and is beside the point even if it didn't get things entirely backward.

It's beside the point because gaps in NZ's supply are currently made up from donations by compensated plasma donors in the United States. Prohibitions here just shift the location of the paid person, and if you have any reason to expect that whatever ethical checks there might be on practice around donors would be stricter here than there, then you should want it to happen here rather than there. Note that I have zero concerns about practices in the US either though. 

But more fundamentally, if your view of the world is that there are some people in such desperate circumstances that they'd turn to plasma donation as a last resort, and that they need to be protected against that somehow because the horrors of giving plasma are just too risky to be encouraged by anything as dirty as cash, I just have trouble understanding that whole line of argument. If someone's conditions are that bad, how can banning that person from accessing what they view to be their best option be in that person's interest? Surely the better answer is to find other things that might improve that person's circumstances. There aren't really that many cases where banning people from their best alternative really makes them better off. 

And plasma regenerates in two days. The ban doesn't prevent someone from going and doing some giant irreversible thing out of some desperate circumstance. It prevents them from making maybe $30 or $50 for spending an hour on a machine that takes some of their plasma. It's not like "Hey, I hear you're desperate. Can I have one of your eyes?" Plasma sorts itself out. And if you're the sort of person for whom plasma doesn't sort itself out, pretty unlikely you'd make it through the medical checks to be a donor (and you might even then find out about something that you need to find out about). 

If it's of any interest, here's one of the Canadian centres that pays for plasma. The payment structure is rather neat. Plasma regenerates after 2 days; they require at least 2 days between visits (no more than 2 visits per week) and pay more for the second donation. The whole structure is geared around encouraging repeat visits. Why would that make sense? There are going to be big onboarding costs with any new donor. They have to screen donors and go through a pile of health checks. After those are through, ongoing monitoring is easier. So the centre's costs will be sharply declining in the number of donations per donor. The worst thing would be dealing with a giant surge of one-off donors motivated by some publicity campaign. You want repeat donors. 

So here's the compensation structure:

First donation of the week: $30.
Second donation of the week: $50.
After your 25th donation: $25 lump sum bonus, and an extra $4 per donation.
After your 50th donation: $150 lump sum bonus, and an extra $5 per donation.

If you made 100 donations in a year - take two weeks off for holidays - you'd be on $4529 for the year for 150 hours' commitment. Better than $30/hour, for hanging out on a table catching up on your reading. 

I just don't get folks who'd consider that to be exploitative. It's an utterly alien mentality. If that's exploitative, what about someone desperate for money who takes any job that's riskier than donating plasma and pays way less? Is there anything that shouldn't be banned, if that's your view of exploitation? 

There are variants of this stuff that seem worth taking seriously. Mike Munger's discussions of voluntary versus euvoluntary exchange are fruitful. But banning compensating plasma donors because of invented concerns about coercion isn't that. 

Monday, 15 June 2020

Bloody Well Pay Them

Georgetown's Peter Jaworski's produced an excellent report on the need for compensation for blood plasma donors. The report was released yesterday by the Adam Smith Institute, in conjunction with the Niskanen Centre and the Australian Taxpayers' Alliance. 


Despite New Zealand’s prohibition on donor compensation, or perhaps rather because of it, about an eighth of New Zealand’s needs for plasma therapy are filled by imported American supplies that rely on compensated donors. The New Zealand Blood Service’s May 2020 Annual Statement of Performance Expectations considered the annual increase in demand for immunoglobulin (an important plasma product) to be “not considered sustainable”; imports are expected to make up over 15 per cent of New Zealand’s needs by 2022.

Reliance on American blood plasma products is even heavier elsewhere: the report tells us that America now supplies about 70 per cent of global need for plasma product – in part because American companies have expertise unavailable in developing countries for providing safer products, but more fundamentally because donor compensation helps ensure sufficient supply.

Developed countries with no shortage of expertise also rely heavily on American plasma imports.

The report tells us that the United Kingdom, which prohibits donor compensation, relies almost entirely on American blood plasma products; imported American plasma product meets over 80 per cent of Canada’s need for plasma therapy – and over half of Australia’s.

In one sense, there may be nothing particularly wrong with this.

Some people, particularly medical ethicists, think it is fine to pay phlebotomists to collect blood but that it is wrong to pay the people providing the blood or plasma.

Those with such views get to be happy that policy accords with their sense of morality – so long as they don’t look too closely at where we wind up finding plasma products instead. And ability to access American markets where donors are compensated means that we in New Zealand are less likely to fall short despite our country’s ban on donor compensation. But there are other and worse consequences.

The ASI report argues that bans on donor compensation in places like the UK, Canada, Australia and New Zealand, which are perfectly capable of making their own immunoglobulin products, push up the price of plasma products for poorer countries without those capabilities.

Saturday, 13 June 2020

Dear Prudence: Welcome to my Nightmare

My Newsroom column this week worries about the government's abandoning of normal measures of fiscal prudence

Prior to all of this mess, the government's targeted prudent debt levels were 15-25% of GDP. It made a lot of sense in a country subject to substantial risks. Treasury had always figured there had to be room to accommodate one big crisis or two minor ones within a maximum debt to GDP ratio of 60%. We're going to be hitting 53.6% in 2023 and 2024 - low by some standards, very high for a small country that likes to be able to borrow in its own currency and without backstop from someone like the EU or ECB and with very high levels of private debt from foreign lenders. 

And that could be fine if every single dollar of it were absolutely needed in Covid response. But there's been a ton of spending in and since the budget that has little to do with Covid, or mitigating its economic consequences, and absolutely no effort to reprioritise spending from other areas. 

And that's putting us close to a terrifying cliff. 

Remember that we need headroom more than other countries. A big earthquake hitting one city in a country with dozens of major cities is more manageable than one hitting Wellington, or Christchurch, or both. 

Here's my nightmare. Welcome to it. I hope that it's just dreamland stuff and that Treasury's Debt Management Office has done a whipround suggesting that there'd be appetite for further debt on reasonable terms even up to much higher ratios. 

But here's the nightmare nevertheless.
In 2023 the Alpine Fault opens up, as a foreshock. Damage is substantial enough to trigger reinsurance, but GNS predicts a high probability of a bigger earthquake to come - and the Wellington Fault is also under pressure. Kinda like September 2010, but bigger because it's the Alpine Fault, and with higher probabilities of a February 2011 to come.

The debt-to-GDP ratio is already around 54% of GDP. While Treasury and others had been comfortable with those kinds of debt levels because credit agencies said everything was fine and because nothing obvious was happening in the spread between inflation-indexed bonds and standard ones (not that any such spread could open up under QE), there's a very very big difference between international agencies' assessments of creditworthiness for marginal changes around one debt level and appetite for lending another 20% or 30% of GDP. Treasury's modelling had always said to leave room for another 20% in case of a Wellington earthquake; GNS worries that Wellington and the whole South Island are ready to go - say 40% chance of a bigger quake hitting both. Reinsurance obviously becomes absolutely unavailable. The entirety of the predicted shock will hit the government's books because the government backstops EQC and EQC has basically nothing in reserve consequent to the Christchurch earthquakes - or at least nothing relative to the scale of what's expected. Either the government will be taking on more debt to cover EQC's liabilities, or it will find ways of short-changing claimants in ways that would make EQC's Christchurch record look positively generous. 

The government puts a good face on it, reminding everyone of NZ's strong reputation for fiscal prudence and that we're a sound borrower. But quietly, in the background, all of the usual larger buyers of NZ government debt are telling the government, a bit sheepishly, that they're just not able to help us out this time. The risk is too great if the government needs access to another 25% or 30% of GDP on top of its current borrowing. It's been able to get through the foreshock, but if the bigger one comes, things are going to be rather dicey.

In 2024 the bigger one comes. The government needs to take on the debt but knows it has no buyers. Its options are not good. JP Morgan, or a comparable agency, comes round and says "Look. We know you're in a tight spot and we can help. Here are the terms. I expect you'll find them hard to refuse. Your extra borrowing is now denominated in other peoples' currencies because we all know you'll be too tempted to devalue your way out of this mess at these levels. And the interest rates will be high because of the risk. You'll find those interest rates become even higher in real terms for you if your dollar drops in the ways you might need it to to sort things out. You can likely expect that any old debt you want to roll over will likely have to take on similar conditions, at least until you've gotten things back in line. You're going to be back into the world of the 1980s in which the government was spending over 6% of GDP as financing costs on debt. But you really have no other option. It will take you a good couple of decades to get out of it, even with tight control on your spending, and you and I both know that you've forgotten how to do that. You're going to have to learn it again. The Gods of the Copybook Headings have limped up to explain it once more. They always do. They're reliable like that.
The odds of the scenario are low because the odds of the Alpine Fault opening up in any particular year are low. Last time I asked GNS about the risk of the Wellington Fault opening up, it was on the order of 0.83% per year. But it's overdue. It could happen tomorrow; it could happen in fifty years. The longer it takes to get debt-to-GDP ratios down to levels where the government can stand to take on an additional 20%+ of GDP in borrowing, the more likely it is that the earthquake comes before the books are ready for it. If they're projecting ratios of 42% by 2034, well, that's not prudent.  

We must be feeling awfully lucky, if the government is running its accounts the way it currently is. Again - none of this is argument against taking on debt to deal with the pandemic. This is rather argument against the current very lax spending controls in areas unrelated to pandemic response, and the push from many quarters to implement measures that will make it harder rather than easier to grow our way out of this.  

I desperately hope the Debt Management Office at Treasury has had its chats with the usual suspects and that I'm entirely crazy to be worried about this. If they're all very happy to continue with normal kinds of practices up to 80% or 85% of GDP, then I'd sleep easier. 

The Government’s projected path for paying off new Covid debt is very slow, and predicated on some perhaps optimistic assumptions about core government spending returning to more normal levels after 2024. Combined with its willingness to take on more debt to fund ongoing initiatives like higher pay in childcare centres and expanded school lunch programmes, it appears the solid bipartisan consensus about prudent debt levels has been broken.

Before Covid-19, the targeted net core Crown debt range was 15 to 25 percent of GDP. During the budget lockup, Finance Minister Grant Robertson was asked if his projected debt levels in 2034 represented a “new normal” for prudence, or if he expects a continued slow path back to pre-pandemic levels. Unfortunately, he declined to answer – simply defending the new debt as necessary and prudent.

But prudence in a crisis like this also requires making it easier to win back the necessary headroom for dealing with future misfortunes. Treasury’s modelling was based on the likely need to increase debt by about 20 percent of GDP should Wellington be hit by a major earthquake. Since no one knows when a geological fault might open up, taking a decade or two longer than necessary to win back that headroom seems just a little imprudent.

Thursday, 11 June 2020

Afternoon roundup

A much belated closing of the browser tabs brings the following worthies:

Wednesday, 3 June 2020

Safe entry matters

Last night's chat with Bryan Crump on Radio NZ's Nights programme went through why getting safe entry at the border matters, and how we might think about it.

The government seems to have everything backwards currently. It results in horrible inequities and the usual amounts of muppetry because they're starting at the thing from the wrong end.

Right now, if you want to enter New Zealand and you're not a returning resident or citizen, you have to convince the Minister that you're important enough to be let in. That kind of regime was hard to avoid during the worst part of lockdown because you also needed exemptions from piles of other mobility restrictions if you were coming in as an essential worker to fix Wellington's sewer pipes. But it's got things the wrong way around now that lockdown is over. Instead, the principle should be that if you can enter safely, you're allowed in - with no signoff from the Minister unless that were somehow already required for whatever visa you'd be coming in on.

Starting from the economic necessity of getting particular people in has the government picking winners - it's the aristocracy of pull all over again. James Cameron has pull; some poor guy whose pregnant wife is here in New Zealand while he's in Australia doesn't. Because being allowed in is a function of their having the Seal Of Approval, safety gets less consideration than it should. Tom Hunt's story from yesterday of quarantine-bound Avatar film crews mingling in hotel reception with regular guests - that kind of muppetry absolutely cannot be allowed to happen. And maybe it didn't - the story relied on a non-quarantined guest's reckon that the crowd she went through at reception was that film crew. But it is the kind of thing that's more likely to happen if the guiding principle is "Movies are important and Avatar Sequels about that main Avatar and the other Avatar - that's what matters and it matters so much that we'll pay them tons of money to make those movies here"

You need to flip it.

If people can come in safely, they should be allowed in. 

If someone is coming in from Taiwan, and they haven't had any travel anywhere else, and they're on a direct flight that doesn't stop anywhere or come otherwise from anywhere that's risky, that person is safe. Taiwan is cleaner than we are. If AirNZ wanted to run direct flights to Taipei, picking up only people who are Taiwan residents without other travel and bringing them back here - we should basically be treating that as a domestic flight other than needing folks to go through customs. 

If someone is coming in from the US or UK, they should have to show the gate agent abroad that they have a booking at a quarantine facility. When they get here, they shouldn't mix with anyone in the airport or elsewhere - direct shuttle to quarantine. Test on entry. Test on exit. Monitored constantly in between on pain of deportation for breach of quarantine. Register all contact details for a third follow-up test a week after quarantine if folks think it's needed for the tiny proportion of cases that take longer than two weeks' incubation. Run the whole thing on a user-pays basis: additional passenger charges at airport to cover the costs the airports face in dealing with inbound arrivals from risky places; quarantine provided by private providers who'd compete with each other and charge prices commensurate with the experience provided. 

All government would there be needing to do is sign off on the adequacy of any quarantine provider's facilities and processes. That's it. No determining whether someone is sufficiently worthy, no winner-picking, no aristocracy of pull. What does that do? Instead of government deciding it only has X quarantine places available and has to ration them out to the Most Worthy Filmmakers, demand for coming here would drive quarantine supply. If there were more people wanting quarantine spaces than there were spaces available, prices would bid up. The bidding up of prices would encourage other hotels and the like to shift into being quarantine facilities and to get their spots signed-off. 

Anyway, enjoy my chat with Bryan about it. Billions of dollars ride on getting this right. 

Tuesday, 2 June 2020

Well, I haven't stopped worrying

Justin Giovannetti over at The Spinoff has a column titled "How New Zealand learned to stop worrying and love government debt." 

I'm quoted in it, but I haven't stopped worrying or started loving government debt. 

Taking on debt during a crisis is necessary when that's needed for crisis response. Its being necessary doesn't mean you have to love it. 

But the government has gone rather past that, piling in lots of additional spending unrelated to the pandemic. 

I suppose folks who think tax is love recognise that more debt is more future taxes, and so figure that debt is also love. 

I agree with Cameron Bagrie's concerns about paying the thing off - especially when the debt is larger than it needs to be because the government has not kept other spending in check, and when that extra spending comes with ongoing commitments that will take up room in future budgets that could have been used for debt repayment. 
Eric Crampton, chief economist at the free-market think tank the New Zealand Initiative, said while he shares some of the opposition’s concerns about new spending, the country is entering this economic crisis from a good position.

“The rest of the world has gone absolutely crazy and either we’re sane or staying sane longer than anyone else,” he told The Spinoff.

“Throughout all of New Zealand’s recent history all governments have maintained reasonable debt levels. There have been problems like the Christchurch earthquake, they run up a deficit and then they get it back in line. You don’t have those big structural deficits that are hard to fix,” he said.

Crampton said the government’s current plans, for a debt half the size of the country’s economy, is about as large as New Zealand should go. Anything bigger risks possible trouble in case the economic situation worsens or natural disaster strikes.

Cameron Bagrie, the former chief economist at ANZ, said that New Zealand needs to keep a “squeaky clean public debt” because of the country’s small size and high private debt levels. However, he says the response to Covid-19 was the right one.

“The government needed to go big, leaning on the government balance sheet is the best response in the near-term. I have two concerns. I don’t think we have a well thought out economic plan on the other side and I think people will get increasingly concerned about how we’ll get debt down,” he said.

According to Bagrie, his biggest concern is that taxes will need to go up to finance debt repayment in the future. It could be a defining question for the coming election. National under Muller will promise to do a better job of managing the books and keeping taxes low. It’ll be difficult for Labour to promise the same spending restraint, which could mean less infrastructure investment in the coming years, he said.
Meanwhile, Shamubeel is happy for there to be even more borrowing. He used to care about the quality of expenditure; perhaps that part didn't make it into print? 
Shamubeel Eaqub, an economist who is respected by many on the political left, said Crampton and Bagrie are just wrong. New Zealand doesn’t have a debt problem, he argues.

“Not only can we handle the debt that we’re planning to borrow, but we can take on a lot more if we need to. I’m not sure where this idea comes form that we’re so small we can’t borrow money. Some people are stuck in the 1980s when it comes to interest rates and borrowing,” he said.

Countries like Belgium and Portugal went into this economic crisis with public debts larger than 100% of GDP and are looking to borrow more, he said. Nearly any ranking of advanced economies has New Zealand as one of the least indebted countries in the world for decades to come.

Don’t look at charts that show debt approaching the same level as 1992 and freak out, according to  Eaqub. “The world is different now,” he said. “Banks will look at us and see a debt to GDP ratio of 55% while Belgium is at 150%. Who do you think they’ll want to borrow to?”
Belgium and Portugal have the ECB to bail them out if it came to it, and no opportunity to inflate or devalue their way out of debt. Their debt is then less risky. 

New Zealand's currency can devalue in a really big hurry if things go badly - which would also worry investors looking at New Zealand government debt. New Zealand bonds paying off in New Zealand dollars could suddenly have a rather poor return if the dollar crashed in a crisis. 

Shamubeel would have us in a perilous position come the Big Earthquake. 

Bottom line: it makes perfect sense to spread the costs of a massive pandemic over time by using debt. Adding to that debt to fund additional baseline activities is a bad idea. 

But hey, if you figure I'm just some 'stuck in the 1980s' dinosaur, here's Prof Gemmell, Vic's Chair of Public Finance. He's saying the same thing I did, which is a good thing because it's based on the same principles that I taught when I lectured Public Finance at Vic. Fine to increase debt to deal with the pandemic; we have capacity for it. But we need to get back to prudence rather than aim to be freaking Portugal. 
Secondly, plan a future debt trajectory. Much current debate surrounds the eventual taxpayer cost of massive public debt increases, perhaps rising from 20-50% of GDP. As with the post-WWII debt response, this will need to be brought back down, but more slowly than after the GFC, for example.

Public debt increases are global, and New Zealand will not look like a bad international credit risk for the foreseeable future. Plus, with interest rates almost certain to remain low for years, the government’s debt servicing costs have never looked better. Nevertheless, a credible plan towards lower debt is essential if we are to be well prepared for the next crisis – as we were for this one. 
Is it kind to bequeath debt to your children?

The theme of New Zealand’s approach to the pandemic Covid-19 is “be kind”.

It motivated a prolonged lockdown requiring $22 bln of government spending commitments and a further contingency of $39.3 bln. Since borrowing is a core part of this policy, it is reasonable to ask if kindness will determine how we deal with the debts the policy creates?
From a healthy Crown net worth of 43 percent of GDP at the time of last year’s Budget, this FSR forecasts net worth at 34 percent in 2020. Fair enough – we are coping with extra crisis spending and lower revenues. But, following the Budget, Crown net worth is projected to drop to just 9 percent of GDP by 2024 and only get back to 12 percent by 2030. In other words, a decade from now, during which time another serious crisis could easily have hit us, the Government’s plans for net worth are so diminished that we would be woefully unprepared financially for another fiscal bail-out of the economy.

Let’s be clear. New Zealand economists are not calling for future ‘austerity’ to get the Government’s books back into balance within a few years. Instead, there is widespread support for suitable, not profligate, spending to assist faster growth of the economy to reduce the debt burden to previous levels over, say, a decade or more.

But the Crown’s projected financial vulnerability a decade on reflects Robertson’s failure to offer any credible plan to raise net worth through fiscal prudence down the line. This is despite official forecasts of quick economic improvement: real GDP growth is forecast to be massively positive at 8.6 percent in 2022, and 4.6 percent in 2023.

Water is too precious to be so cheap

Me at the Dom Post on Auckland's water shortages:
Residential users in Auckland at least are charged for water use – something not true in all cities. But there is no difference in the price of water in a dry year as compared to a wet one. A thousand litres of water in Auckland, from July 1, costs $1.594; WaterCare assumes that 78.5 per cent of that water finds its way to the wastewater system and adds additional wastewater fees.

All up, a thousand litres of water costs $3.77 – less than a flat white. Filling up a 60,000 litre swimming pool, in the middle of a drought, costs a bit more than two full tanks of petrol – unless the neighbours notice and dob you in and you’re fined for breaking the water rules.

The same water shortage affects power generation and residential water use. But because electricity prices rise in dry years, councils find no need to try to police households to make sure that electricity is only used for the most important purposes.

Instead, Government just makes sure that poorer households are not too badly affected by rising power prices through things like Winter Energy Payments.

Moving to a more responsive water pricing system would not just encourage households and businesses to conserve when conservation is most important. It would also provide incentives to build water storage facilities, filling them when water is cheap and selling the water when shortages make water more valuable.

Prices that do not reflect underlying scarcity are a recipe for shortages. Water is too precious to be sold so cheaply.
My earlier report on cap-and-trade systems for water is here.  

Saturday, 30 May 2020

Reader Mailbag: the proposed forestry legislation

Back in April, BusinessDesk warned about some pending legislation around logging; I went through some of it then at Newsroom:
BusinessDesk last week reported that Jones is considering levies on log exports to fund some kind of “re-setting” of local industry, or a variety of regulations to ensure domestic lumber processors have their needs met before logs are exported.

The story noted how local lumber processors are struggling to compete with processors elsewhere when international prices for logs are high. Jones viewed protections were necessary to ensure a viable domestic log processing sector in New Zealand.

But it’s worth explicitly stating what that means. Jones, as Minister, would effectively be setting a price cap on logs, restricting exports whenever international demand is high. This would be a transfer of money from timber farms, which would otherwise profit from higher prices, to sawmills.

It would also mean a substantial shift in New Zealand trade policy. If another country banned the export of raw materials to New Zealand to subsidise its own processors, New Zealand’s processors might see that as basis for a complaint about unfair trade practices. New Zealand’s trade negotiators can boast about New Zealand’s clean record in following trade rules. If Jones has his way, those negotiators will have New Zealand’s trade restrictions in lumber thrown at them any time they object to trade practices which disadvantage Kiwi companies.

So it is misguided on pragmatic grounds that it will disadvantage New Zealand as the world leans toward greater protectionism – New Zealand has more to lose than most from a weakened rule-based international trading system. Wellington should be working to support that system rather than help tear it down.
The legislation is working its way through now. And it looks to be a complete disaster. BusinessDesk again had some excellent reporting from the Select Committee hearings, and on consequences like cancelled plans for lumbermill expansions.  

Stephen Layburn emails me today with more on the legislation:
Here’s one live example – the Forests (Regulation of Log Traders and Forestry Advisers) Amendment Bill

The submissions on the Bill are illuminating. Sadly, they are much more illuminating than officials’ reports.

IMHO, this has to be amongst the leading contenders for the worst piece of emergency legislation promulgated by the Government.

A glance at the regulatory impact statement elicits some truly worrying signs, in terms of both:
  • strained application (or disregard – depending on your point of view) of the most basic of economic concepts; and
  • a fundamental misunderstanding of the economics of domestic wood processing – and the nature of the NZ wood resource and its uses. 
Where, for example, is the comparative analysis of the over-arching policy espoused in support of the Bill - and the investment policies of the Provincial Growth Fund? Both are overseen by the same Departments.

From where I sit, the much-needed restructuring of domestic processing must be part of a much wider analysis of the wood resource, its uses and the new technologies coming on stream. To take just one example, surely, a key part of that study must include what New Zealand is going to do about important issues such as social housing. On the latter score, the appalling spectacle of clusters of campervans being used, during the COVID-19 lockdown, to house families in rural Northland – because they provided a better solution to the leaky, cold, houses available to those affected families must be a wake up call that technology such as prefabricated housing (using available domestic timber resource) needs to be applied urgently to address a problem that most New Zealanders would (if asked) agree needs to be addressed – right now.

Instead, we have another go at occupational licensing and more regulatory hurdles - that will hobble an industry and stifle innovation.

What next, legislate to require the coarse wool industry to prop up ailing carpet mills? Or force fine wool growers to supply the local craft industry rather than pathfinders like Icebreaker?

This is just a subsidy disguised as public good legislation and should be confined to the dustbin.

I am sure that it was Bernie Galvin who said (30 years) that past Presidents of the Manufacturers Association were buried 3ft under – so they could still get the next hand out.

I am not an economist or an industry expert, I have just spent a lot of time saving or closing down processing facilities. One issue that simply isn’t mentioned is that one of the reasons I am advised the economics of LVL plants are “challenging” – is that the resource isn’t stiff enough.

So you have the PGF, Scion and NZTE putting a huge amount of $$ into new technology (which will fix the stiffness issue) – and then the (same) Govt implementing a protection racket for old world technologies. Just terrible.
Could the government perhaps consider, well, not doing this?

New normals

I had a chat with RNZ's Emile Donovan for The Detail as part of his whip-round of views on where this is all taking us. I show up last in a roundup including Simon Wilson, Sam Sachdeva, and Megan Tyler. 

Enjoy!

Friday, 29 May 2020

Fingers crossed! Dave Guerin on The Border Issue

From Dave Guerin's excellent Tertiary Insights newsletter ($):
Quarantine Winston Peters was supportive of opening up now to international students. That comment came as Jacinda Ardern announced officials and industry representatives were working on a Trans-Tasman bubble. She said that it could be in place by September, but we suspect she’s continuing to underpromise so that she can overdeliver on an opening in, say, Jul. Officials are also working on international student quarantine options. The ODT had more on SIT’s proposals for a student quarantine centre in Queenstown, which is supported by the Queenstown mayor.
If they are planning on having things good to go earlier, it would be nice to tell folks about it. You can't admit international students for July semester entry if you don't know until July that entry might be allowed!

I really hope Dave's right

RBC and COVID

From my column in this week's Newsroom Pro (ungated)
No recession is purely of one model. A Reserve Bank failing to respond properly to a real shock can compound a real recession with a monetary one. Second-round effects from a real shock, as unemployment rises and people fear for their jobs, can bring a more Keynesian-flavoured problem. And easy credit to prop up zombie firms can sow the seeds of more Austrian-style problems down the line.

But this time, it’s real – or at least that’s the underlying problem. Let’s go through some of those issues.

The major changes in business practices brought on by a contagious disease – for office desk spacing and consumer preferences about being near other people – mean that existing configurations of workers, buildings and equipment will evolve.

Economists will describe this as a technological shock. Five months ago, the recipe for mixing workers, equipment, buildings and supplies yielded profits.

After the shock, that recipe becomes impossible but no new recipe is as profitable, yet. Meatpacking plants were never designed for 2m worker spacing, for example.

Some of these changes will only last until New Zealand returns to Alert Level 0. But some will linger as the virus remains overseas. The international arrivals lounge may take some time to get back to normal.

But that is hardly all of it.

The collapse in tourism is a lot more like a huge negative price shock to an important export commodity than it is to a traditional Keynesian domestic aggregate demand problem.

Supply chain issues when international suppliers and deliveries are less reliable is another kind of technological shock: firms used to rely on speedy delivery of needed materials, now they need to store greater stockpiles.

Shifts to working from home is its own kind of shock to the demand for services in cities – simply giving people more money will not jumpstart demand at Lambton Quay lunch counters or retail outlets when fewer people want to be downtown. It’s a real change, not just one caused by issues in aggregate demand.

More than anything, firms now need an easier path to reconfigure and change. Policy must embrace greater dynamism, rather than building in protections to entrench current practices.

Last week, The Spinoff reported Vodafone’s adaptation includes training its retail staff as online chat agents to help clients which have shifted to digital. In many countries, rigid labour market regulation stymie that kind of change – and it is easy to imagine similar policy changes might happen here.

The Government has so far mainly reached for familiar tools and policies to fix this recession: quantitative easing to avoid unintentionally contractionary monetary policy, fiscal stimulus to boost aggregate demand. Things like the wage subsidy scheme were more directly keyed to the specific nature of the Covid-19 problem.

But who is thinking about simplifying business adaptation?

If a restaurant wants to turn its disused car parks into outdoor seating areas, would city planners get in the way by enforcing minimum parking restrictions that never made sense and now make even less sense?

If a building owner wants to change some commercial offices into apartments, would the zoning laws allow it?

If a company needs more capital to leverage a post-Covid opportunity, would new restrictions in the Overseas Investment Act and a lack of domestic capital sources scuttle the business?

And if a tourism operator wants to pivot to support high-income visitors for months’-long stays, rather than a fortnight (with appropriate quarantine and testing), will the border even be open?

Coming out of months of restrictions, the Government must start thinking of ways to enable everyone to get on with the job of recovery. There is a lot of work to do.

A principled border re-opening

As much as I don't look forward to Avatar sequels, I can't argue against the government's letting the film crews back in. They underwent quarantine, so the entry was safe.

What I do worry about is the process. It seems to get things backwards.

Currently, entry is barred to foreign nationals unless there is a strong economic reason for their coming in. If they meet that threshold, they're quarantined and then allowed to operate. 

But that requires the government to pick and choose among potential visitors and that path is fraught. It also causes a lot of damage: lots of folks on work visas desperate to come home, but unable to.
Lawyer Alastair McClymont has been inundated with hundreds of pleas from migrants desperate to get back into the country along with calls from employers in industries like agriculture who want their managers and workers back. 

"There is a complete vagueness around the rules and an inconsistency in how the rules are being applied. It is just creating mayhem." McClymont said.

"Within the migrant community they're worried about what's going to happen."

"They need to really make a decision and they need to make it very quickly and they need to be very clear about who's going to qualify and who's not going to qualify."
The principle should be reversed. If you're able to enter the country safely, you should be allowed in (subject to the normal visa stuff that's always applied). Basically it would require showing proof of having a spot at a quarantine facility when you rock up to the ticket counter to board a flight to New Zealand. The government wouldn't have to provide the facilities but would probably want to have an oversight role in certifying them and ensuring compliance. 

What happens under that model? If there are more people wanting to come here than spaces available, prices bid up. If prices bid up, more hotels and other facilities get converted into quarantine facilities. Eventually you hit a point where the cost of bringing the next quarantine room on-stream just outweighs the value of getting here to the next person who wants to come here. Government doesn't have to decide which uses are most economically important; people demonstrate it instead in the usual way - just as we don't have government deciding who should get the next car or computer or anything else.

I've been pleading that the border be reopened to safe entry (testing, quarantine, more testing) in time for students to come here for the July semester. Auckland Mayor Phil Goff also is very keen for international students to be allowed back in

Here's me on the AM Show talking about it. If nothing else, my having missed last week's appointment at the barber's because I was home sick may have provided amusing results. 

Otago University epidemiologist Dr Michael Baker said in principle there was no reason why foreigners should not be treated in the same way as returning New Zealanders, who have been allowed into the country on condition that they stay in quarantine for two weeks.

"The current extreme form of management is 14-day quarantine, but there is a reasonable chance that a mix of other measures could shorten that," he said.
It's just so frustrating. In every other area, we desperately hope that sectors can get up to a fraction of what they were at pre-COVID. With international education, there's a strong growth potential - getting students who'd otherwise have gone to the US to come here instead for a normal university experience. 

It's also very frustrating and disappointing on a more personal front.

Since moving to Wellington, we've helped host students attending the Campbell Institute. It's an English language school. Students from overseas can billet with families. In some cases, they pay room and board. In others, like ours, they provide some assistance with childcare before and after school. It's a wonderful programme. 

Campbell had the international connections into schools around Europe and beyond, vetting the students coming here for those who'd be suitable for the demi-pair programme while vetting local families. Our kids get to learn a lot more about the world beyond New Zealand; the students get an immersive English-language experience. We've hosted students from Germany, France and Argentina. 

Last week, the school told host families and students that it will be closing. With no prospect of the border reopening, there's nothing else for it. There's an obvious market niche for this kind of thing, but economies aren't machines - they're organic. This isn't something like replacing a broken cog when it's time for the machine to run again. It's more like cutting down a tree and never quite knowing whether another like it will take its place. Developing the connections and nous to make this kind of business run is hard work. The school only needed to know when it might be able to bring students in again under quarantine. The government's continued dithering killed it. Meanwhile, the government spends billions on make-work schemes.

Some job losses and business failures with COVID are inevitable. International export education could instead be a growth sector. 

Oh the Vogonity. 

Thursday, 28 May 2020

The COVID and the damage done

Wednesday's Law & Economics Association of New Zealand lunchtime panel discussion on limiting the economic fallout of COVID included Andreas Heuser, me, and Richard Meade. 

Panel Discussion on Limiting COVID Economic Fallout – 27 May 2020 from Andreas Heuser on Vimeo.

Richard made the case for running something like the student loan scheme for non-students, and for business. Richard and I independently hit on the idea of extending the student loans scheme to non-students. I'd pitched it back in March as part of our initial COVID-response batch of papers. I still think it rather preferable to helicopter-money options.

I went through the importance of scaling up contact tracing as alternative to future lockdowns, suggesting we use a structure like the Army Reserves. Get trained in it, spend a weekend a year on a refresher course, and be ready to be called into service if needed. Then I went through the case for safely reopening the borders before re-emphasising the need to maintain fiscal prudence if we want to get out from under the debt COVID makes us take on.

Andreas covered impending liquidity crunches and contrasted NZ's business support regimes with some of those found abroad. I still need to wrap my head around the idea that IRD is acting now as a bank. 

Afternoon roundup

A much belated closing of the browser tabs brings some worthies:
  • Kiwibuild never made sense. If it were needed, it couldn't work because the same things that block private development would block Kiwibuild. And if it could work, it wasn't needed. The government tried anyway, sticking bloodymindedly to a stupid election promise dreamed up on the back of a napkin in a taxi as the legend has it. And it continues to be a disaster. I hate to say I told you so, but ...

  • Kiwiblog links to Adam Creighton at The Australian on NZ's economic problems. Creighton's been on the crankier side when it comes to matters Covid, but he's not wrong on the economic worries here. Notable is that he has Graham Scott on record raising concerns as well; he's former Treasury Secretary and recently retired from the Productivity Commission. 

  • Nouriel Roubini is more grim than usual:
    What I have argued this time around is that in the short run, this is both a supply shock and a demand shock. And, of course, in the short run, if you want to avoid a depression, you need to do monetary and fiscal stimulus. What I’m saying is that once you run a budget deficit of not 3, not 5, not 8, but 15 or 20 percent of GDP — and you’re going to fully monetize it (because that’s what the Fed has been doing) — you still won’t have inflation in the short run, not this year or next year, because you have slack in goods markets, slack in labor markets, slack in commodities markets, etc. But there will be inflation in the post-coronavirus world. This is because we’re going to see two big negative supply shocks. For the last decade, prices have been constrained by two positive supply shocks — globalization and technology. Well, globalization is going to become deglobalization thanks to decoupling, protectionism, fragmentation, and so on. So that’s going to be a negative supply shock. And technology is not going to be the same as before. The 5G of Erickson and Nokia costs 30 percent more than the one of Huawei, and is 20 percent less productive. So to install non-Chinese 5G networks, we’re going to pay 50 percent more. So technology is going to gradually become a negative supply shock. So you have two major forces that had been exerting downward pressure on prices moving in the opposite direction, and you have a massive monetization of fiscal deficits. Remember the 1970s? You had two negative supply shocks — ’73 and ’79, the Yom Kippur War and the Iranian Revolution. What did you get? Stagflation.

  • If you haven't sorted out a VPN yet, you might want to. Tracy Martin wants to be the boss of what you get to see on the internet: content filters that always risk misclassifying content and creeping to cover more and more stuff. Just VPN around the stupidity.

  • The Shane Jones problems in forestry continue: his musings about nationalising the industry (go ahead and call it something else if you want, but setting something up where Shane Jones gets to decide which logs get sold to whom and at what prices...) have stopped the expansion of a pulp and timber plant in Tangiwai. BusinessDesk has the details (you should subscribe).
    "Submitter after submitter have told the committee the consultation on the Forests (Regulation of Log Traders and Forestry Advisers) Amendment Bill has been farcical and its rushed implementation under Budget urgency an abuse of process.

The Kiwi dollar is our currency and nobody else's problem

Oliver Hartwich in The Herald:
A small economy like New Zealand should be cautious. Being small has some obvious advantages, not least that smaller countries can be nimbler in changing circumstances. But that tiny size also limits the ability to get away with bad policy.

To illustrate this point, consider the United States. As the world's largest economy, it has a greater ability to retreat from the rest of the world. To be clear, even a very large country like US must exploit its comparative trading advantages. But because the US' market is huge, it could withdraw from international trade and still keep the impacts on its consumers and businesses moderate.

The same is true for monetary and fiscal policy. The US is not just the largest economy on the planet. It also has (at least for the time being) the luxury of being able to print the world's de facto reserve currency. Or, as John Connally, the Treasury Secretary of the Nixon Administration, once said, "The dollar is our currency, but your problem." As a result, the US can run massive fiscal deficits and money printing programmes without much restraint.

As a small country, New Zealand simply does not have the ability to withdraw into its shell like the US can. Reducing New Zealand's participation in global trade would be a catastrophic outcome of this crisis. For a start, too many products are not made in New Zealand. Cars, specialist machinery and pharmaceuticals are all imported. For lack of scale, import substitution would be a disastrous choice.

Given New Zealand's small size, the percentage of its economy traded internationally has been relatively low for some time. As a percentage of GDP, imports and exports are just over 50 per cent, a remarkably low number by comparison with other small economies like Denmark (103 per cent), Switzerland (119 per cent) or Ireland (208 per cent). New Zealand is trade-dependent but not nearly trading as much as expected or hoped.

The same is true for monetary and fiscal policy. The NZ dollar may be the world's 10th most traded currency, but that ranking overestimates our dollar's importance. It is only involved in about 1 per cent of global trades and is not regarded as a reserve currency. To paraphrase Connally, the Kiwi dollar is our currency and nobody else's problem.

New Zealand cannot debase or inflate its currency as much as other countries. It is dependent on other countries having faith in the stability of the NZ dollar, so any political moves to undermine it are potentially dangerous. If New Zealand or its dollar disappeared tomorrow, the world would barely notice.

The general picture for New Zealand is becoming clear: this country is too small to be a must-have in anyone's portfolio. Against this background, the political direction of travel in the Covid-19 crisis is worrying.

Since March, New Zealand First ministers have announced a wish to reduce New Zealand's trade engagement. Shane Jones openly toyed with a tariff on log exports and is now rushing through legislation to redirect forestry towards national manufacturing. Winston Peters has talked about onshoring manufacturing even when goods are more expensive to produce in New Zealand.

The Government is also making it harder for international investors to come to New Zealand. Minister David Parker is pushing through changes to the overseas investment rules requiring Government approval for buying 25 per cent of Kiwi businesses, regardless of the dollar value.

None of these initiatives will improve New Zealand's international trading position. Combined with the inevitable decline in the country's export revenue from the shuttering of tourism and export education, serious problems are emerging for both New Zealand's current account and net international investment position.

On top of this is the slow merging of fiscal and monetary policy. The Reserve Bank has signalled it would monetise government debt if it is asked and it has already started a large quantitative easing programme, which Governor Adrian Orr has indicated could be expanded if needed.
The pandemic requires our firms to be able to be nimble. They have to be able to adjust, retrench, find what new opportunities they can, and rebuild in ways that fit the current environment. New microeconomic rigidities that the government might throw in, including trade and capital restrictions, just make all of that harder.  

Friday, 22 May 2020

Real Business Covid

There are lots of different models of business cycles because there are lots of different kinds of business cycles.

If a downturn stems from something in the real economy, rather than something messed up on the monetary side or in finance, we need to think about Real Business Cycle models. 

What are the stylised facts of the current mess, at least for NZ?
  • Massive negative technological shock across a broad range of sectors meaning that existing combinations of labour and capital are far less productive than they once were. Restaurants need more space to accommodate the same number of clients, or fewer clients in the same space. Factories, meatpacking plants, and offices need more spacing between workers. Some of this shock will be temporary - we will eventually get to Alert Level 1. But even then some of the shock will be longer-lasting: the international arrivals lounge will be very different when folks coming in from Covid-places have to shunt over to a quarantine facility and have to be kept separate from those coming in from Australia. 
  • A collapse in tourism that feels a lot more like a huge negative price shock to an export commodity than it does like any domestic aggregate demand problem. If world milk prices dropped by 95%, we wouldn't dream of trying to solve it with domestic "drink more milk!" campaigns.
  • Supply chain issues that also feel like a negative tech shock.
  • A shock to work arrangements for office types now more able to work from home; many of us will take advantage of it for as long as possible, with consequent effects on demand for lunches in town. This isn't a normal kind of AD shock - just giving people more money wouldn't increase demand for lunches in town when people prefer to work from home and are now allowed to do so. Some of this could persist for a long time if firms have discovered that a lot of workers are no less productive when working from home and prefer working from home.  
  • Jump in unemployment consequent to all of that.
  • Oh, and a massive drought in some dairying parts of the country - the exemplar RBC shock. 
  • Shifts in consumer demand to online. 
Am I missing anything there? None of that would argue for accidentally contractionary monetary policy - RBNZ needs to keep us within the inflation bounds. 

But this is way different from the GFC. We could yet get GFC messes out of Europe, but I don't think we're there yet. Fingers crossed. The underlying problem is a massive terrible tech shock. And that puts us into RBC land.

What do you do in RBC-land to get out of the mess? You don't tell firms to run four-day work weeks! Rather the opposite: you should be looking for ways of removing labour market rigidities to make it easier to adjust! Fortunately, things already are pretty flexible here. Vodafone retrained and redeployed retail centre staff to be chat assistants for online customers for example. That would be impossible in some places due to rigid work role definitions. Remember that episode of Community where they couldn't get a bulletin board replaced because of union job definitions?

Sure, there's a quasi-Keynesian role that would be played by income support measures. And I still like the idea of letting non-students access the student loan system. But the underlying problem is supply, so we need to figure out how to let supply adjust to the temporary new normal, and to the longer term changes.

A short potential list:
  • Sorting quarantine at the border to start letting visitors back in. It wouldn’t fix all of the problem, but international students would come back real strongly – us and Oz would be the only places going able to offer a normal university experience. It just blows my mind that they haven't sorted this out. It isn't just international education that's an opportunity here. Anything else that could relocate and that depends on not being disrupted by Covid - is it that hard to imagine international sporting codes shifting to here and Oz to keep up the TV revenues? Film and tv - they're looking at no filming for a while over there. What else? I don't know, and that's the point: set the quarantine rules and facilities on a user-pays basis and then let folks come in subject to quarantine and testing. Entrepreneurs will be the ones to figure it out, rather than boffins designating new classes of allowed entry. Instead of the America's Cup people lobbying to get in, they'd just need to have sorted out quarantine for their arrival. 
  • Lengthening school days and shortening school holidays so the kids make up for lost time and so the parents have an easier time working longer if they want to. Everybody hates this idea when it's pitched this way - imagine it instead as a proposal for free after-school care with enhanced learning outcomes and educational holiday programmes. Does that make it sound better? I really enjoyed the couple months home with the kids and expect they learned more than if they'd been at school. That won't have been the case universally. Lots of kids will have fallen badly behind. 
  • Reducing rather than increasing holiday entitlements or stat holidays. I know that won't fly, but we at least shouldn't be increasing things. Egads. I still think it would be a good idea to deal to the Easter problem though
  • Checking what bits of labour market reg could be abated, even temporarily, to make it easier for everyone to adjust
  • Easing consenting regs to make it easier to do things. The Auckland Unitary Plan is like six thousand pages. Germany’s planning guide for the whole country is 500 pages, with 100 pages being the actual rules and the rest being references and explanatory notes. We know that rigidities in land use planning are making a mess of things. Peter Nunns put figures on it a couple years ago. Ease them! If someone wants to make a bet that demand for downtown office space will be permanently lower and wants to convert an office tower into apartments, zoning shouldn't get in the way of that right?
  • Ease access to capital to make it easier for firms to finance their response – the Overseas Investment Act changes look to make it harder instead.
Anything else I'm missing?