Spicy competition

I got to have a lot of fun in a panel session at the Competition Law and Policy Institute of New Zealand annual conference in Auckland last weekend. 

Donal Curtin summarises the whole conference. On our session:

Saturday morning, and we started off with 'Market studies, looking back and looking forward'. It was to have been chaired by Will Taylor of NERA, but at the last moment he came down with the dreaded lurgy, and the ubiquitous Ben Hamlin stepped in to preside over Eric Crampton from The New Zealand Initiative and Lucy Cooper from Chapman Tripp. Two big points from Eric: if you're concerned that competition isn't working in a market, the best first question to ask is, what are the barriers to entry? Why aren't new entrants able to come into a market and eat the incumbents' supernormally tasty lunch? And secondly, when you do that, you're liable to discover that there are "impenetrable thickets" of overlapping blockages which are the real issue: he mentioned the cumulative effects, for example, of regulation (including occupational licensing), statutory protections, zoning and consenting in the planning process, and the Overseas Investment Act. Both Eric and Lucy wondered about the selection process: so far the topics chosen (while good ones) have all been government priorities, and there could well be traction from ComCom being given its head to look at where it thinks there may be issues. Lucy raised something I hadn't thought of: she said that ComCom's strength is in analysis and findings, and perhaps there's scope for the policy recommendation piece to be shared with, or done by, others, given that policy development is an art form of its own. I can see the point, and Lucy (who's been through the supermarkets and petrol bunfights) knows more about process than I do, but FWIW, what you might gain in policy development you might lose in urgency (think s36, and others), unless the policy developers' feet were held to the fire in the same way that ComCom is forced to move right along with its market studies.

The most fun for me came in form of a question from the back of the room. 

I'd noted pharmacy ownership rules as a place where a ComCom market study could look at the restraints on competition caused by regulation. Pharmacies must be at least 50% owned by registered pharmacists. It looks, sounds, feels, smells and tastes like a cartel measure to prevent competitive entry. I note that the only real entry has been by virtue of complex capital structures developed to route around a different set of Australian regs. And while ComCom can put in submissions on this stuff, they get ignored. A market study draws an answer from the Minister. 

Anyway, question from the back of the room (more of a statement) was to the effect of whether I was aware that the only way that pharmacy grads can recoup the cost of their study is by being a pharmacy owner rather than a pharmacist employee. I let that sit there for a minute as the implications of the question worked their way through. Then I thanked the questioner for having made the case for strenuous anti-cartel investigation of those regulations; I think I noted that the pharmacy schools should be included in the study. 

I'd had a column in the Herald in August on related matters that I think I forgot to post here. Will do so now. I think it's why Ben Hamlin introduced me at the CLIPNZ session as the Sardaukar shock trooper of market liberalism. Had always considered myself more Atreides/Fremen-aligned; the Sardaukar support the Emperor, and the Emperor helps enforce (or, is allowed to serve at behest of) a pretty bad cartel. I don't like Empire-supported cartels. 

In Frank Hebert's classic Dune series, the Bene Gesserit sisterhood's supernatural abilities extended only so far. There was a place where their powers could not see – a place that repelled and terrified them.

Over thousands of years of careful influence over royal marriages, the Bene Gesserit sought the birth of the Kwisatz Haderach – the one able to look where they could not and shorten the way.

The Commerce Commission's relatively new market studies powers may not quite make them the Kwisatz Haderach.

Nevertheless, there are parallels.

The Commerce Commission has long been able to pursue anti-competitive activity. Cartels are illegal. Some cartel conduct can draw criminal penalties.

Anti-competitive activity running short of cartels is also prohibited.

But there has been a place the commission has not been able to look.

Section 43 of the Commerce Act exempts activities authorised by government. If a law or Order in Council authorises an activity, that activity is allowed even if it appears to be anti-competitive.

There is some sense to the Section 43 exemption if you think that government generally works well. Parliament and the ministries, at least in theory, will have weighed the public interest and considered any effects on restraint of trade when setting laws and regulations.

A statutory regime may have anti-competitive effects but still be desirable on balance.

In an ideal world, ministries overseeing these regulatory regimes would be running rolling reviews to ensure the regimes continue to be beneficial.

But successive governments have done an abysmal job in ensuring that regulatory and statutory regimes remain fit for purpose.

Reviews of regulatory regimes, when undertaken, tend to have a narrow focus. They do not look at how a regime intertwines with other agencies' regulations and practices and its effects on competition.

Statutory regimes have been the place where the Commerce Commission has been unable to look.

Commerce Act amendments in 2018 allowed the Commerce Commission to undertake market studies.

A market study lets the commission take a broad approach in examining conditions of competition in a sector, including the cumulative effects of different regulatory regimes, land use planning, and consenting practices. The commission then issues a report on its findings, to which the minister must respond.

The two most recent market studies show that rot has festered in places where the commission had previously been unable to look.

Earlier this year, the commission released its final report on competition in grocery retail. The findings should not have surprised anyone passingly familiar with regulatory barriers to entry in the sector.

Councils have not considered competition as a benefit when setting plans. If a single grocery retailer could plausibly serve a new subdivision, council will zone for only one. Any potential new entrant would need to find the small number of available sites zoned for use in grocery retail not already encumbered by covenants prohibiting their use in grocery retail. The Overseas Investment Act adds additional delays and uncertainty for any potential entrant with more than trivial levels of foreign ownership.

The combination of zoning restrictions, consenting practices, and Overseas Investment Act constraints have made it impossible to open any new large-footprint grocery retail chain.

The market study assembled the evidence. If you want more competition in grocery retail, opening a new supermarket chain shouldn't be effectively illegal. It should not have taken a market study to reach that conclusion.

Last week, the commission released the draft report of its study on building materials. Again, the findings should not surprise anyone passingly familiar with the sector. Again, a complex and toxic stew of regulatory barriers makes it far too hard for builders to use materials from overseas. Legislation, regulation, consenting practices, and liability regimes facing councils combine to make a strongly anti-competitive environment providing a heavy advantage for incumbent suppliers.

Suppose you want a more competitive building materials sector to scale up to meet changing demand. In that case, you need to unwind the regulatory morass that makes it far too difficult to use building materials from trustworthy places.

In both its review of grocery retail and building materials, the commission turned its gaze to the place it had not previously been able to look: statutory regimes exempted by Section 43 that combine to thwart real competition. And it found things in serious need of remedy.

Like Dune's Kwisatz Haderach, the commission's market studies authority is powerful and just a bit dangerous.

The commission's very detailed work documenting what had been well understood by sector observers at a high level was not without cost.

Supermarket executive teams would have been tied up for months responding to requests for information while also trying to run supermarkets during a pandemic.

Some future ill-intentioned minister could direct the commission to undertake market studies on areas he wishes to punish. The study process itself imposes a substantial cost, regardless of its findings.

The commission would do well to provide its minister with a list of areas most in need of future investigation. And top of that list should be the places where it previously has been barred from action by Section 43.

Conditions of competition in the provision of medical services would make for a superb market study.

Earlier this year, it was reported that some 150 foreign-trained doctors living in New Zealand have been unable to practice because the rules require them to take up a supervised training position first.

Those positions do not exist for foreign-trained doctors.

The simplest explanation for regulations setting impossible conditions is that the medical professionals who help to set the standards wish to prevent competitors from entering the market.

If we are to have a Kwisatz Haderach, best it be directed in beneficial ways. Let the spice of competition flow.

I'd also chatted with Bryan Crump at RNZ Nights on related matters this week. 

Update. A loyal reader notes, via email:

Pharmacy is an interesting one because they had less regulation when the school was in Wellington. When it relocated to Auckland uni the duration was increased to that of Otago, a full degree. Many would dispute the need for a full degree for a community pharmacy, which is partly why they are largely staffed by pharmacy technicians rather than pharmacists. These sorts of discussions become heated quickly.

A similar issue exists in nursing where the push to turn this large professional group into a university program and remove enrolled nurse pathways, has driven up costs and therefore the need to recover costs. Similar arguments are used in medicine and the same problem exists where under the Cth generalist system we effectively overtrain medical practitioners at great cost.

Pharmacy would be a good one to start with.

Survey says! NZAE on the ETS

I've argued for some time that:

1. Tightening the ETS cap makes more sense than layering stuff on top of the covered sector;
2. Tinbergen means that you should use additional policies if you're dealing with additional market failures - so don't do additional policies unless you have an additional market failure, and don't force the ETS to try to solve things other than carbon;
3. Use a carbon dividend to deal with distributional consequences of carbon prices. This is just first and second welfare theorem stuff. 

The New Zealand Association of Economists survey shows I'm not an outlier here. On these points, the vast majority of New Zealand's economists agree. Support for the carbon dividend over other ways of trying to deal with distributional issues is over 90%, with most of the remaining ones just uncertain. On the other questions, support is north or well north of 80%, with very few disagreeing.

Dave Heatley, in writing up the results, asks a good question:

Firm support for the NZ ETS is, in my view, consistent with mainstream economic theory and practice. I’ll attempt — no doubt imperfectly — to summarise this perspective as:

• NZ now has an efficient and effective mechanism to reach the country’s stated emissions goal (i.e. a staged reduction to zero net emissions by 2050).9

• Having got a capped ETS in place, it's now best to let it work. If there are specific roadblocks, then deal with those directly, rather than taking steps that might undermine the ETS, or skew emissions reduction towards costly actions.

• Cost-effectiveness matters, because the public’s support for the goal may erode should they bear unnecessarily high costs.

• Changed ambition (e.g. a quicker rate of emissions reduction) is best dealt with within the ETS framework, not outside it using regulatory tools that favour particular technologies or groups of emitters.

• Equity concerns are best dealt with via cash transfers.

If, as I expect, many — perhaps most — respondents agree with this summary, and the survey’s results are representative of views of NZ economists, then there is an interesting quandary. These views are substantially at odds with those of the New Zealand Climate Change Commission (CCC) and the Ministry for the Environment (MfE)— the organisations responsible for running the NZ ETS. Does the CCC and MfE know something that NZ economists don’t? Or is it they that are out of touch? A topic worthy of further exploration.

It's a good question. I think a lot of them just use the term 'market failure' to refer to anything they don't particularly like, rather than having it firmly grounded in how economists use the term. I also think that, when they identify a potential market failure, they miss the difference between necessary and sufficient conditions for policy to improve outcomes. A hefty dose of Demsetz-style comparative institutional analysis could be warranted, as well as deeper appreciation for how markets respond to things. 

Supporters of additional measures targeting the covered sector raise a few justifications for those measures. You've likely come across them before. 

There’s a stockpile of outstanding emission permits so there isn’t really a cap.

This really misunderstands what the cap is. The cap is the current quantum of outstanding emission permits, plus the currently issued ones. The annual amount released takes into account the number of units in the stockpile. It’s an explicit part of how they think about the cost containment reserve: the first tranche of units in the CCR are held back in hope that price increases getting up to the price cap encourage people to sell units from their stockpiles. That doesn’t make the cap ‘soft’. It just means that you’ve mis-specified what the cap is.

The ability to hold units serves as a hedge for those particularly exposed. It isn’t purely speculation. And speculation wouldn’t be bad either: it’s price discovery. It’s helping to bring prices to where they should be, which encourages appropriate investment in abatement tech.

People can plant trees so there isn’t really a cap. 

We have a cap on net emissions and a net zero target. Not gross emissions. This was deliberate, and good. A lot of people seem determined to set regulation as though we have a gross emissions target, critiquing removals whenever they can as somehow being cheating. 

Any perceived problems from excess planting are going to be local rather than national, so leave it as a matter for local land use planning if Councils need to do something.

[Rod Carr has been arguing strongly against trees, claiming they'll break the ETS. I think he's deliberately pushing for a gross emissions target, over the net emissions legislated.]

We rely on buying credits from abroad to meet obligations and that’s cheating

There's a good case for being extra diligent to make sure that foreign-sourced credits are sound. The accounting has to be solid. But if you can abate two tons of emissions overseas for the cost of abating one here, we’d be stupid not to. Unless we don’t actually care about emissions.

But there is a good case around fiscal risk at the price cap when the Cost Containment Reserve runs out and govt has to issue new backed credits. 

The price cap has a nominal anchor and that introduces risk: who knows what it will cost the government to back those units. It’s why I've argued, for some time, that the price cap shouldn’t have a nominal anchor: it should be anchored in the weighted average of carbon prices in schemes that the Climate Commission considers to be credible, with a commitment to backing units through purchases in the market with the lowest price. 

Then, it isn’t a fiscal risk for the government. Every unit released at the cap earns a bit of money for the government and helps push the world toward a law of one price in carbon. 

There isn’t an intertemporal cap: we can’t guarantee that future governments won’t just release a lot more credits.

This absolutely isn't crazy. But the solution is to have Parliament set a quantum of unbacked credits that can be released between now and 2050, drawing from that pool whenever it auctions or allocates units, and remembering when it sets that pool that the quantum of unbacked credits that might be used also includes already-issued credits that haven't yet been used. 

That makes it explicit if Parliament exceeds the intertemporal constraint. 

Plus, if you run the price cap mechanism properly, there’s a lot less political pressure to break the intertemporal cap. Prices here would just track prices abroad. Less risk of leakage. 

We can’t guarantee when a stockpiled credit will be used so that puts our emission budgets at risk

So much the worse for the short-term emission budgets. You’d break a beautiful system so that you can meet specific and rather silly short-term constraints on a path to 2050? That’s just dumb. Set the quantum of unbacked credits that can be issued or allocated between now and 2050 and then just stop caring about the path. The path largely sorts itself out. 

Like government could announce the annual releases between now and 2050, but the actual path taken will depend on tech progress (in abatement and in sequestration), expectations of tech progress, interest rates, and international prices (where we reset the price cap to track international prices). 

There are Hotelling-style processes running here. If govt issues more this year than the market would want to use this year, they get held; if it issues too few, they draw from stockpile or we hit the cap and track international prices. 

Artist Resale Royalty and the FTA

The trade deal with the UK requires NZ to implement an artist resale royalty scheme.

I'm no fan of these things.

And so I'm pretty sceptical about Droit de Suite - policies that seek to redistribute portions of realized capital appreciation in artworks back to the originating artist. At the margin, they reduce incentives for gallery owners, curators, and collectors to make complementary investments in new artists. What are the distributional effects?

• A windfall gain in the current period to established artists at the expense of those who made complementary investments in their success;
• A transfer to those artists who become successful from those who never do;
• For a successful artist, a transfer of income from when he's young and poor to when he's old and established.

None of these seem particularly desirable. The first has efficiency consequences as well as distributional effects. The latter two turn art into more of a winner-take-all market. Think of a work from a new artist as a lotto ticket that might or might not pay off if an investor makes a pile of ancillary investments. The value of that lotto ticket is lower if the winning tickets are taxed. So the initial price a new artist's works can attract is lower than it otherwise would be. So all new artists earn less on their early works while those who eventually become successful are paid back with interest. But that's when they're already well off and can supplement their income by doodling on folks' napkins at restaurants.

The RIS on the proposed scheme is now up. It says:

Impacts of proposal 

Benefits would include royalties paid to artists. Modelling suggests a net average of $702,858 per annum would have been distributed to artists and estates between 2018 and 2020 . A substantive part of the royalties would go to well-established artists (or estates) whose work commands a higher price at auction. Less well-known and emerging artists would still receive modest remuneration.

I really don't think they've thought this all the way through. But since the annual amount at stake is less than the value of a single modest house in Auckland, it may not be worth the cost of thinking all the way through. 

Precious agricultural land

Radio New Zealand provides an apologia for the government's National Policy Statement on High-Value Soils. 

It seems pretty emblematic of broader problems at the public broadcaster. 

It isn't that they're Labour party-partisan, or at least not generally. It's that they're so ideologically uniform, deeply sharing a Labour/Green consensus view of the world, that it often doesn't occur to them that there are contrary views out there. 

This one's a half-hour interview with a soil scientist on the importance of highly productive soils and, consequently, the merits of regulations preventing building on them. 

No sense of the trade-offs involved. Very minor discussion of that housing matters, but people can build houses elsewhere. The heritage people say the same thing. And the character area people. And the viewshaft people. And when each group's view of the sacred and inviolable gets turned into policy, you can't build anything anywhere.

Here's what Treasury had had to say on the draft National Policy Statement. I'm still waiting on my OIA request for Treasury's work on the current version. 

No account of substantial losses from uncompetitive urban land markets

• Protecting LUC 1, 2, 3 land would substantially reduce land supply required to enable competitive urban land markets, and bring land prices down to marginal opportunity cost. For an example of the extent of land on which this policy would potentially restrict development, see the first map of Hamilton below, and to a lesser degree the second map. Although the NPS-HPS would not strictly prohibit development, it could severely curtail it by creating substantial transaction costs and uncertainty about planning permission. Absolute economic impacts can result even when policy makers didn’t intend for the policy to be implemented absolutely. Economic investment can be highly sensitive to uncertainty⁴, especially in relation to planning permission and the mind-sets towards growth and development by regulators.


• The excessive cost of urban land (perhaps in the order of $600 billion nationally) is a key national challenge, and the NPS-HPL appears likely to exacerbate this, which would undermine the achievement of the central government’s primary objective for the Urban Growth Agenda to “improve housing affordability, underpinned by affordable urban land”. 

Nobody who listened to The Detail on this one would have any inkling about these problems. 

Or that it mainly protects dairy land, or that the value of ag output on an average bit of land equivalent to an urban lot is on the order of $25. You're banning a house to protect $25 worth of produce per year. Even if you double that or triple it to account for streets and parks and stuff, does it make any kind of sense?

Gross or net?

The Climate Commission keeps trying to push us from having a Net Zero target to having a Gross Zero target. 

Carbon News reports:

Climate Change Commission chair Rod Carr says, if left alone, the planting of pine trees purely for carbon credits will prevent the ETS from playing the part it should in reducing carbon emissions.

Speaking at the Climate Change and Business Conference in Auckland, yesterday, Carr said the government needed to address the problem urgently but in consultation with those most affected by any changes: foresters and landowners.

...

Climate change minister James Shaw acknowledged the commission’s concern that a glut of forestry offsets in the 2030s “could lead to a crash in the ETS price and a return to the bad old days of companies just using cheap offsets rather than actually reducing their emissions.”

The ETS's job is to limit net emissions on a path to Net Zero in 2050. Forest sequestration can be an important part of that. If it is cheaper to sequester a tonne of carbon than to prevent a tonne of emissions, then do the former. 

There can be all kinds of potential problems. If there are biodiversity benefits from native planting over pine, and those are substantial enough to warrant policy involvement, then set a subsidy for the production and maintenance of those habitats. 

Here's Shaw, from the same piece:

“Aotearoa is the only country in the world with an ETS that allows companies to offset 100% of their pollution with forestry.”

He said including forestry in the ETS had meant the cap was a very soft one. 

“That’s because anytime anyone plants enough trees to sequester a tonne of carbon, we automatically generate an NZU, which is a permit to pollute a tonne of carbon into the atmosphere.

“Which means, technically, that unlimited forestry allows unlimited pollution,” Shaw said. 

We don't have a soft cap, or at least not in this way. We have a cap on net emissions. The point of having a net emissions cap is to be flexible. Climate doesn't care about gross, it cares about net. But politicians and, seemingly, the Commission, want to force gross reductions even if that's less cost-effective. 

Caps on net emissions are great because they're agnostic about how net emissions come down, so long as they come down. If carbon capture tech aiming at USD$100/ton pans out, that sets a natural limit on ETS prices. If it doesn't, the ETS encourages finding other options instead. But if we wind up flipping to a gross target, it can't help us. 

One might start to get the impression that none of them actually care about net zero, but instead mainly care about the behavioural changes required for gross emissions targeting, for reasons other than climate change. 

Changes that would make a tonne of sense, if all of this were actually about reducing net emissions through 2050:

• Setting a cap on the number of unbacked ETS credits that can be issued by the Crown between now and 2050, requiring that annual auction and allocation draw from that pool;
• Considering the number of outstanding units when setting that cap to 2050;
• Rejigging the ETS price cap to track a weighted bundle of carbon prices in credible ETS markets rather than just being some nominal amount - this would have us more easily following without exceeding prices elsewhere;
• Using international credits to back units issued at the price cap, unless the government has immediate access to cheaper ways of backing those units - and note that government would earn money at the price cap under this mechanism rather than facing fiscal risk;
• Taking ETS revenues and redistributing them to households as a carbon dividend rather than a slush fund for political favourites.

GIDI and the Emissions Reduction Plan

The Environment Select Committee invited me to provide a supplemental submission on the Emissions Reduction Plan. My initial submission had taken EECA at its word that they had received no advice about the additionality of projects funded under GIDI. More the fool me.

Recall that GIDI is the funding line to subsidise investment in lower carbon tech. Some $600m in new funding for it was announced at the last budget. And this kind of approach is all over in the Emissions Reduction Plan. 

I went through the materials EECA finally released and provided a supplemental submission.

One particularly fun bit: the consultant noted that applicants for GIDI were all over the map in their assumptions about future carbon prices and future fuel prices. That'll matter in assessing whether funding for a project was additional or whether it was something that the company would have done on its own without funding. See 3.6, below.

From my submission:

ASSESSING GIDI ADDITIONALITY 

3.1 Evaluation of the documents released by EECA suggest that GIDI projects do not reduce national net emissions. EECA’s conception of additionality relates to whether a project would have been undertaken as quickly in the absence of funding, not whether net emission reductions then obtain. 

3.2 Recall that cost-effective additionality of GIDI subsidies requires that emissions are mitigated relative to the counterfactual, that those emissions are mitigated at lower cost per tonne than going ETS prices, and that government is able to reduce the number of carbon credits issued because of the measure. If the cost of abatement is lower than the going ETS price, then companies already have strong incentive to pursue mitigation without subsidy; if the cost of abatement is higher than the going ETS price, government could do better by buying back and retiring outstanding ETS credits. 

3.3 Comparison to ETS prices introduces something of a knife-edge. If a company’s investment, proposed for subsidy, mitigates emissions at lower cost than current and expected ETS prices, why is the company not already doing it? If it mitigates emissions at higher cost than the current and expected ETS price, why is the government subsidising something that is not cost-effective? The subsidy has to help the company or industry overcome some other market failure to be cost-effective. And it has to consequently allow the government to reduce the number of issued ETS credits. 

EVALUATION OF GIDI 1.0: DISCUSSION WITH EECA 24 MARCH 2022 

3.4 Concept Consulting’s presentation was developed to help improve the application process for future rounds of GIDI funding. The additionality of funded projects is first assessed at point of funding application; if a project is not considered likely to result in investments that otherwise would not have taken place as quickly, the project will be less likely to be funded. Concept evaluated five applications for GIDI funding. 

3.5 The presentation noted deficiencies in GIDI 1.0 that could and should be improved in future rounds, including insistence that every application use standard assumptions about future changes in fuel costs, in inflation, and in ETS prices. Applications used 2030 ETS prices that varied from $40/tonne to $140/tonne, and 2040 prices that varied from $40/tonne to $180/tonne. Gas prices in 2040 ranged from just over $10/GJ to over $20/GJ. 

3.6 It is somewhat surprising that GIDI 1.0 allowed applicants to set their own assumptions on ETS prices, fuel prices, and inflation. Treasury’s guidelines for cost-benefit assessment and its CBAx tool, for example, are set to provide a consistent approach. Projects should be assessed using the same ruler. If one project is funded, and another is not, because the projects made different assumptions about ETS prices and future inflation rates, the right decision will have been made only by chance. Worse, if applicants know that they can manipulate the process by setting assumptions painting a rosier picture of their project’s suitability for funding, it would be foolish to expect that they would not do so. 

3.7 The section on additionality says, “It appears that four of the five projects evaluated may not be additional.” Concept considered that, on the applicants’ assumptions, every proposed project would have paid itself off in less than four years, without a subsidy. And three of the four projects would pay themselves off within four years even if carbon were not priced. In other words, most of the projects Concept evaluated could and should have been undertaken by the companies on their own, even if the ETS price were zero. 3.8 Concept noted that, in some cases, small projects with high internal rates of return may not be undertaken without government support. They provided examples where resource constraints or financing constraints mean the project with an attractive-seeming internal rate of return may not make it to the top of a company’s priority list. 

3.8.1 As simple example (provided by us rather than by Concept, by way of illustration), a $10,000 project with a 200% internal rate of return might not be worthwhile if it sucks up a lot of internal administrative resources that are not appropriately costed in determining the rate of return. The real internal rate of return could be strongly negative if undertaking the $10,000 project meant diverting the attention of a project manager responsible for a $10,000,000 project with a 10% internal rate of return. 

3.9 In other words, if a project seems to make sense but is sufficiently small that a company does not find it to be worth prioritising, government support for the project may be necessary. But if that is the case, it seems quite unlikely that the project can do much to affect national net emissions. 

3.10 In other cases, debt constraints were considered as potential hindrance against taking up projects with a promising internal rate of return. If covenants on existing debt set hurdles on taking on further debt, then some projects might not be pursued. 

3.11 But other alternatives might be available in such cases if the potential returns were substantial. A company might lease equipment rather than purchase it. Or it might seek an equity contribution from shareholders, if those shareholders could be convinced that the rate of return were high enough to warrant the investment. In general, should it be the role of government to provide grants to companies that have found themselves credit-constrained? If it is, might we expect more companies to find themselves to be credit-constrained? 

3.12 In both cases, EECA subsidy might encourage a company to change its priority ordering of projects, perhaps bringing forward a low carbon project while pushing back another project. There could be some reduction in that company’s emissions over the period in which the investment is in place thanks to GIDI funding before the company would have made the investment on its own. In that case, any benefits of the funding should only be assessed over that short interval of time, rather than over the lifetime of the equipment. And any wider cost-benefit assessment would need to consider the costs of deferring the projects that were pushed back in the priority ordering. 

3.13 Concept notes that GIDI 1.0 evaluation placed 20% weighting on economic stimulus driving domestic employment and 10% weighting on speed of spending. Neither makes any sense in assessing projects for carbon reduction but may be important for make-work projects. Make-work projects might be ill-advised when Reserve Bank views employment rates as unsustainably high. 

3.14 Concept notes that GIDI 1.0 evaluation scoring placed 10% weighting on “level of innovation and co-benefits”. Concept noted that demonstration benefits can be valuable, but “should potentially come with a requirement that information is shared with the wider industry.” 

3.15 EECA Chief Executive Andrew Caseley noted, in his defence of his agency’s view that Concept’s advice constituted author opinion, that assessing additionality is complex and requires information on a range of factors that might not have been available to Concept, including companies’ “internal decision-making processes, their risk appetite, financial measures such as cost of capital, sector norms in decarbonisation decision-making etc.” 

3.16 Concept may not have had information on each of these in assessing the five applications, but its presentation and correspondence clearly suggested that it was thinking about these issues. Sector norms in decarbonisation would be a rather plausible reason for considering the benefits of demonstration projects. Concept had to point out to EECA that the value of demonstration projects is higher if the funded business has to share information with others that might benefit from it.

Even more innovative than I'd thought

In last week's Insights newsletter, I celebrated public sector innovation and entrepreneurship. But I'd underappreciated just how innovative folks have been!

I'd written:

Entrepreneurship is highly rated. My son’s school even renamed their NCEA Level 1 economics paper “Entrepreneurial economics” and their accounting paper “Entrepreneurial finance.”

But entrepreneurship remains underrated. Entrepreneurs’ alertness to opportunity, and determination to see it through, are a fundamental source of rising living standards. 

Public sector entrepreneurialism often goes unnoticed. Results may not always be as desirable as in the private sector, but who are we to judge?

So let us recognise some remarkable public sector entrepreneurship.

Public sector bodies traditionally did not get involved in electioneering. But that missed an opportunity! Supporting a candidate who supports the agency’s views could make both better off.

Local government candidates extolling the merits of new cycleways feature in NZTA advertisements. The ads will have to stop running during the regulated period, but name and face recognition count for a lot. Voter memories might be short, but they aren’t that short.

It’s an innovative move that, somehow, seems allowed by law. So why shouldn’t they?

Public funding of sympathetic documentaries about Members of Parliament who are sympathetic to public funding of documentaries? It’s obvious win-win in hindsight, but it took entrepreneurial alertness to spot the opportunity. Kudos to New Zealand On Air.

And let’s not forget EECA’s exceptional achievement earlier this year. Deeming a consultant’s presentation as mere opinion, and out-of-scope of my OIA request, rather than in-scope advice? A masterstroke!

The Wiri alcohol licensing trust has been promoting candidates for local body elections – including election to their own board.

Unlike some other licensing trusts, Wiri has no monopoly on local alcohol sales. But friendly councillors would be helpful when central government considers tighter alcohol restrictions.

Local campaigner Nick Smale complained Wiri’s actions were unethical. But should we blame the Trust? They discovered an opportunity. That kind of gumption should be celebrated rather than discouraged.

Monopoly licensing trusts able to earn cartel-like rents could follow Wiri’s entrepreneurial example. In 2014, the Auditor General said they were “probably the least scrutinised part of the public sector.”

Lack of oversight provides tremendous opportunity for entrepreneurial innovation. Why not recycle trust cartel profits directly into billboard and radio campaigns for friendly candidates? It’s an entrepreneurial opportunity ready to be taken up.

So stop complaining about a moribund public sector. Innovation is all around us. You need only be alert to see it.

If New Zealand’s high schools taught civics, they could even rename it “Entrepreneurial politics”.

That bit about NZTA not running ads featuring candidates during the regulated period? They've been more innovative than that. And why shouldn't they? Nobody will tell them that they shouldn't, not even the Public Service Commissioner who's presumably perfectly pleased with their conduct. [Important update below!]

Jem Traylen over at BusinessDesk has been all over this file, most recently on Monday. Jem writes:

Such are the slow machinations of the state at these lofty levels, particularly when it seems the public service has embarrassed its political masters for the third time on the same issue of political neutrality in government advertising. 

Meanwhile, we’ve had ads featuring local body politicians running as early as January in a local government election year, with some as recently as Sept 2. 

The formal election period commenced on July 8 – nearly three months after Hughes was first notified of the situation by the NZ Taxpayers’ Union's April 12 complaint.

And I'd left out all of the wonderful innovations by the Mahuta-Ormsby family, and by the bureaus very happy to accommodate New Zealand's shift away from the rule of law, and from impartial and impersonal institutions, back toward kin-based contracting norms that do wonders for development. 

Raise a toast to all of these spectacular innovators. They will lead the country into a new age. 

Update: The Public Service Commissioner has weighed in!

Afternoon roundup

So many browser tabs before the rebooting can happen...

• In praise of the Auditor-General
• Economists flocking to Silicon Valley
• NZTA runs ads supporting local government candidates who support NZTA cycleways. It's win-win. But probably not win-win-win.
• The Character Protection Racket. See also: Mt Vic, Wellington. 
• Fuelling the Energy Transition - a report from Energy Resources Aotearoa, which includes some neat case studies on marginal abatement costs and carbon prices driving uptake of lower-carbon tech.
• Globalisation and regional energy markets
• Pattrick Smellie on the polytech reforms
• What AirNZ status do you have to hit to make sure that you don't get seated next to the violent Mongrel Mob guy with Nazi tattoos on his face who's shirtless because they asked him to take off his Mongrel Mob jacket and he wasn't wearing anything under it?

Water entity debt

This really doesn't seem like a good idea.

Central Government provided sweeteners for local councils to encourage them to participate in the Three Waters Reforms. Two rounds of contestable funding for local projects. 

The first round is funded by central government. The Waikato Times reported that it's being used for all kinds of projects far removed from water infrastructure: passenger rail business cases, improving the local pool, walkways, contemporary art and more. 

That part seems silly but perhaps less harmful. Far better if the funding were being used to get the local waterworks up to spec for whatever might come in water reform.

But the second tranche seems a really really bad idea.

The Waikato Times writes:

“As we already have project ideas worth more than the $16.46m in available funding, community feedback to help council make the final project decisions will be vital," he said.

Ideas that aren't included as part of the Tranche 1 application may be carried over to Tranche 2 or form part of the new long-term plan next year.

The council says Tranche 1 funding is expected to have no direct impact on rates, as it is a grant from central government.

Tranche 2 funding will be debt-funded, with the debt transferred to the new Water Services Entities.

“As such, this will be repaid by water users of the respective entities,” the council says in its consultation document.

“How the entity decides to recover this debt and any subsequent impact on rates is unknown at this time.”

So. Local councils pitch for Tranche 2 projects that could be every bit as water-related as community art projects. They get funded by debt that's loaded into new amalgamated water service entities. 

Local councils have a complicated relationship with those proposed amalgamated entities. But if a council winds up bearing something like 1/N of the cost of whatever projects they pitch, they'll have pretty strong incentive to make sure that every dollar that their council can get through the thing goes to their council - regardless of how weak the case for it might be. 

S&P had already found the water entities are going to be aggressively leveraged, and that the Crown's backstop guarantee really matters in getting a reasonable credit rating for the things. They might be even more leveraged than S&P had figured, if they're also going to be loaded up with piles of council pork-barrel projects in addition to having to fund necessary water infrastructure. 

It might not be crazy to have Tranche 2 funding available for water infrastructure upgrades in advance of amalgamation. It still seems a worse idea than having the new entities make whatever decisions make sense across their areas as a whole. But encouraging councils to run a pile of pork barrel projects that load into the debt burden of amalgamated water entities - I don't know what the heck they're thinking here. 

The background documents have the main difference between Tranche 1 & 2 being expectations around the extent of co-design and co-implementation of projects, not whether they have anything to do with water services. 

And they also confirm that the water service entities are taking on a billion and a half in debt out of this, while claiming that it's okay because water users will benefit from it, and because the value of the Crown backstop is bigger than the debt loading. 

Who will provide the funding?

The support package will be met by both the Crown and the new water services entities.

The Crown will provide $1 billion of funding towards the better off component of the package, as an investment into the future of local government and community wellbeing.

The Water Services entities will provide $1.5 billion of funding, comprising:

• An estimated $500 million towards the no worse off component of the package

• $1 billion towards the better off component of the package.

It is appropriate for water services entities to bear some of the costs associated with the support package given that future water customers stand to benefit most from reform. From the perspective of future water customers, the size of this benefit is significantly greater than the cost associated with providing some of the funding for the support package.

Moreover, given most future water customers are also ratepayers, they stand to benefit from the additional investment into community well-being. 

We also note that the proposed support arrangements provided by the Crown to the water service entities (such as a liquidity support), are expected to reduce the borrowing costs. The net present value of the reduced borrowing capacity is expected to be greater than the $1.5 billion of funding provided by water service entities through the support package.

It seems mad.  

Morning roundup

The morning's worthies, on the closing of the tabs:

• Simon Bridges on an odd proposal to stop counting travel time savings when running CBAs on new roading projects. There's a good case that congestion charging is the first-best way of dealing with congestion, but travel time matters. 
• In praise of the Auditor General
• I really hope the final version of the Future for Local Government's reform paper is stronger than is here signalled. 
• Richard Harmon on the GST change that didn't happen. It's such a strange one. You'd have thought they'd have lined up the 'like clean tax' people on the right to have a supporting case ready. 
• If I've read this right, it's setting up some horrible incentives around Tranche 2 "Better off" funding. Projects with local benefits unrelated to water get loaded into the debt taken on by the new amalgamated water services entities?

Stupid GE bans

One cost of regulation is the innovation you never get to see. 

We know about how New Zealand's stupid ban on genetic modification is causing problems for GHG reductions in agriculture. Even field trials of promising rye grasses have to be undertaken over in the US because the government bans them here.*

Michael Donaldson over at The Pursuit of Hoppiness points to another problem. Perhaps even more important than global warming and the climate response. This one's about beer.

Michael writes:

Before I explain just how world-leading this product is, we first need to understand thiols.

Simply, thiols are organic compounds that contain sulphur. They are present in varying levels in different varieties hops as well as other plants.

Thiols come in all sorts of chemical configurations. Most create odours reminiscent of rotten eggs or garlic while others produce can pleasant flavours such as those found in coffee or grapefruit. The thiols that brewers most want deliver potent characteristics of tropical fruit, notably passionfruit and pineapple.

Popular hops such as Citra, Simcoe and Mosaic include plenty of thiol precursors, but New Zealand hop varieties such as Nelson Sauvin, Motueka and Southern Cross have overly high levels of thiol precursors, which is why they are so prized.

Ruffell has always been intrigued by these flavour compounds.

“I’ve been thinking about thiols since around 2013. We have high levels of thiols in New Zealand hops and we don’t really know why and that’s always interested me.”

He then learned that Marlborough-grown sauvignon blanc grapes are unique in the world for their high level of thiol precursors.

Ruffell says there are number of factors that make Marlborough Sauvignon Blanc grapes so high in thiol pre-cursors. Some of it has to do with terroir, some with specific UV light in that part of the world, and he understands there is also “a stress response from plant” so machine-harvested grapes have higher levels of thiol precursors than hand-harvested grapes.

“In 2018 I had this concept which eventually became Phantasm,” he explains.

...

In terms of flavour delivery, Ruffell says thiols are so potent the equivalent of “thimble-ful in a swimming pool” is enough to make an impact.

“I joke about it as MSG of beer — add a little bit and it just helps everything really pop.”

At the moment, the brewers getting the benefit of this flavour bomb are in America, and there’s a regulatory reason for that: genetically-modified yeasts.

To get the best out Phantasm, it helps if you can use one of the new genetically-modified yeasts on the market, known as thiolising yeasts.

New Zealand’s strict regulation on genetic modification (and ditto for Australia, Canada and many European nations) means those yeasts are not available here.

“At the moment Phantasm is almost entirely sold into the United States and that’s because they can use genetically-modified yeasts to unlock the best characters of Phantasm,” Ruffell says.

“We’ve kept Phantasm under the radar here and we sell exclusively to America because of those GMO yeasts. We can get pretty good results with non-GMO yeasts but it’s not quite the same.”

Ruffell expects that to change in the future, noting that Omega Yeast’s Cosmic Punch is an example of a yeast that could have been developed through breeding “but they just have a precise, elegant way of doing it” in the lab. (For geeks, what Omega have done is take the IRC7 gene in the Chico yeast strain, where it’s inactive, and inserted it into London III strain and “connected the pathways” to make it active).

Where ever it’s been used in America, the reaction to Phantasm has been incredible.

Brandon Capps, owner and head brewer at New Image Brewing in Colorado said it helps him create the “ultimate realisation of what hazy IPA could be”. 

“Does it taste like citrus? Does it taste like papaya? Maybe overripe nectarine or plum would be the closest description I can find. It’s just this really interesting flavor that tastes like biting into a piece of tropical fruit.”

Emphasis added. 

Hippies are a problem. 

HT: Glenn Boyle. I'd caught the article on Twitter, saw an interesting new Garage Project beer that I wanted to try, didn't get down to the important stuff below the fold. Glenn read the whole thing. 

* A set of regulations so intractable and impossible to comply with is identical to a ban, so pedants can go soak their heads. 

Local government games

Councils find accommodating urban growth to be costly, so they use what tools they can to restrict it. Until that underlying problem is solved, they'll keep finding new ways to obstruct growth in places where people want to live, but where accommodating growth is just too hard.

Thomas Coughlan picks up on Auckland's move to designate too many houses as being under 'special character areas.'

It is understood the Government thinks what Auckland Council notified in August is unlawful, breaching the spirit and the letter of both laws, mainly because of the way the council has applied "special character area" protections liberally in Auckland's villa belt.

Government can keep setting new rules on top of councils, but it's balloon-squeezing. Until and unless they sort out the underlying mess that makes councils behave like this, they'll just keep reaching for other tools. We've already seen Greater Wellington Regional Council pull in greenhouse gas emissions as reason to block new subdivisions. 

How to fix it? 

• Recognise that it's a deep structural problem in councils caused by decades of misaligned incentives, which have encouraged strongly anti-growth cultures to develop within councils.
• Change the underlying incentives to make growth a benefit, rather than a cost, for councils. Do so by:
• Providing grants to councils for every new dwelling built, so they share in the benefits of growth;
• Enabling councils to issue long-duration revenue bonds to fund infrastructure, financed by revenues from that infrastructure's beneficiaries, separate from council main balance sheets.
• Recognise that, until those incentives have time to work their way through, councils are going to need constraints. 

One simple set of constraints, until the cultures have time to update, which may require a lot of staff turnover, would set UDAs on top of councils as competitive issuers of resource consents and building consents. 

For councils where the median home sells for more than 8x median household income, UDAs could be instructed to disregard viewshafts, frontage setbacks, height limits, balcony requirements, floor-to-ceiling limits, and whatever it is that design panels normally do when issuing consents. For councils where the median home is between 5-8x median household income, there could be a smaller set of "without regard to" things. 

These are just indicative. Don't ask me; I'm not a property developer. Ask someone like Matty Prasad. Or Arthur Grimes, who'd done the work showing the shadow cost of all the darned restrictions. Void the most costly ones when and where housing is unaffordable. Where housing is less than 5x median household income, the UDA wouldn't be put into operation.

Basically treat it as training wheels. When Council's demonstrated it can't drive the bike without crashing and making a mess of everything, put training wheels on that constrain against the most costly things they get up to. The training wheels come off when housing's affordable. 

Medsafe delenda est

The solution is still really really obvious. If two trustworthy regulators have approved a medicine or vaccine, have it automatically approved in New Zealand. Let Medsafe have a veto lever it can pull in extraordinary cases, but don't let them pull it very often. It has to be for extraordinary cases, not just because they hate the loss of control.

FDA processes already mean that vaccines run behind the curve, trying to catch up to variants. Layering more on top of that just means that government can and will always blame the pharmaceutical companies for not getting applications in, when there's little point for any of them to prioritise doing paperwork for a tiny country at the far end of the world when there are bigger markets to serve first. 

From Newsroom today ($):

Astrid Koornneef, the director of the National Immunisation Programme at Health NZ/Te Whatu Ora, told Newsroom on Friday that Pfizer has yet to apply for either its BA.1 or BA.5 vaccine to be used in New Zealand.

"Medsafe is working with Pfizer on their plans to submit data to New Zealand on variant vaccines. This is expected to happen over the coming months," she said.

"Medsafe will be assessing this data as a priority once received."

Koornneef didn't answer questions about whether the Government's existing contracts with Pfizer cover these new vaccines or whether another agreement would have to be inked.

"Our agreements with Pfizer remain commercially sensitive and confidential, as are all our purchase agreements for Covid-19 vaccines. However, we have well-developed relationships in place with a range of vaccine manufacturers and continue to monitor progress in this space, including the development of potential new versions of vaccines as they emerge."

Pfizer did submit an application to Medsafe in August for its Covid-19 vaccine to be approved for children aged six months to four years. Currently, the vaccine is only authorised for those aged five and up.

The application is being assessed as a priority, Koornneef said, but there are many steps before a decision to use is made by Cabinet.

"Provisional approval by MedSafe is only the first step in the process. Subsequent steps include seeking Covid-19 Vaccine Technical Advisory Group science and technical advice, followed by a recommendation for consideration by the Director-General of Health."

Disinformation stuff

The Stuff papers have been checking into which candidates for local government are actually antivax conspiracy theorists.

So why are we doing this? It’s certainly not fun, or enlightening work. Mostly, it’s depressing, tedious and disturbing. In the last fortnight, I’ve swung from despair, to irritation, puzzlement, and occasionally amusement.

But facts and transparency are cornerstones of democracy. Stuff is drawing attention to these candidates because they cannot distinguish fairytales from reality. They are anti-science. They lack critical thinking and sound judgment.

And while they claim the opposite, many seek to disrupt democratic institutions. Many share a common disdain for the rules, procedures, and norms of representative governance. (In the case of VFF, they have made explicit their aims to make the country ungovernable.)

If voters elevate them to decision-making roles, they should do with this knowledge.

There are two separate things going on here.

I agree with Vance that it is dangerous to elect people who cannot distinguish fairytales from reality, and who are anti-science. But local government hasn't got a ton of remit over Covid- or vaccine-relevant stuff. An antivax local government could refuse to set vaccine/mask requirements in council-owned places where those requirements might make sense, but what else could it really do?

On this aspect, I am way more worried about councilors who believe anti-science fairytales about rent-control, zoning, and about the possibility of reducing national net emissions through council measures targeting emissions already covered by the ETS. A lot of them think that stadiums and convention centres are great for economic development. They're all wrong. Anti-science councils can really screw things up when relying on fairytales in those areas. But none of those get picked up in anti-disinformation campaigns.

The second part of Vance's argument is stronger. If those candidates' hidden aims are to throw sand into local government gears, that's a bigger problem to the extent that councils pursue objectives that are worth pursuing. 

Inflation and profits

Stuff's Daniel Smith asked me for comment on profits and inflation, and the case for a windfall tax. I'll copy below what I'd sent through as there wasn't room for all of it in the story. 

A temporary boost to profits is a consequence of high inflation, rather than a cause of it. High inflation, caused by the combination of global and local monetary responses to the pandemic, supply shocks, and high levels of government spending, pushed up consumer prices first. A lot more money was chasing a reduced quantity of goods. Firms responded to that increase in demand by raising their prices and hiring more workers. Consumer prices were bid up first. During that interval, firms earned higher profits in part because real wages had fallen: wages moved up more slowly than the prices of goods and services. Now, firms competing for workers are bidding wages up. As real wages return to normal levels, company profits will return to normal levels. 

It makes no more sense to claim that high profits cause inflation than to claim that low profits cause recessions. They’re linked, but not in that way.

A windfall tax on company profits is an exceptionally bad idea. It is not an appropriate response to high inflation. It would not help consumers. And it would further erode stability in expectations around the policy environment. 

A windfall profits tax winds up hitting exactly the firms that should be expanding. Remember that high current profits, driven in part by continued fiscal and monetary stimulus, will not be uniformly distributed. Companies seeing smaller increases in demand for their goods and services will not be seeing those higher profits. High profits in some sectors give those sectors incentive and ability to expand. They do this, in part, by bidding workers and materials away from other sectors where demand is lower. Their doing so is a good thing – it shifts workers and materials over to areas where their services are far more valuable. The profits provide the signal about where greater output is needed, and the incentive to provide it. A windfall tax blunts that signal while reducing those firms’ ability to bid workers away from areas where their services are less valuable. 

Perhaps more importantly, a surprise windfall tax on company profits would undermine institutional stability and credibility. Companies invest based on expectations about how policy works. Tax policy in particular tries to provide stability by sticking to a principled approach, with any changes being very well signalled through the Generic Tax Policy Process. Whenever that process is undermined, we wind up with bad tax policy and an erosion in institutional stability. If companies expect tax changes at random if they invest here, and particularly expect to be hammered simply for having had higher profits than expected, the burden does not just fall on those companies. It falls on all of us. New Zealand becomes a risker place to do business, so investors will demand a higher return to reflect that higher risk. Capital becomes even more scarce in a capital-poor country, which hits long-term productivity and wages. 

It is a terrible idea.

There is one area where government could and should consider redistribution of excess profits, however. 

For years, the New Zealand Initiative has advocated for a Carbon Dividend, following Canada’s example. There, the vast majority of government revenues from its carbon tax are sent back to Canadian households as a carbon dividend, to help them to make their own adjustments to a higher carbon-price world. The Initiative has advocate that the government similarly direct all of the revenues that the government earns when it auctions ETS credits into a carbon dividend. The government is likely to earn on the order of $1.7 billion dollars this year when it auctions carbon credits. Sent back to households as a carbon dividend, it could provide a family of four with about $1300. We have also recommended that, whenever the government earns higher than normal profits from its 51% stake in the power companies, for example if higher ETS prices wind up feeding through into higher electricity prices overall, those excess dividends should also be put into the pot to provide a higher carbon dividend.

I suppose that I should also have noted that companies already pay higher company taxes when profits are high, that it's particularly odd to look at for New Zealand's oil and gas sectors. Sure, anyone pulling oil out of Taranaki is now getting higher prices for it. But that all falls under a royalty regime. You could argue that that regime should have provision in it for different royalty rates depending on what happens with prices, but that ought to be set out before companies put in their bids for exploration permits. Not ex post. 

Oh - the $1.7b is just the current ETS price multiplied by the number of units to be auctioned this year. It's a thumb-suck and will vary with what happens at the next auctions. 

Mclaughlan on the administrative state

There's a lot going wrong. Danyl Mclauchlan documents a few of the problems in an essay for The Spinoff, building a case that they're all symptoms of government administration being run for the benefit of government administrators. 

• Giant shortage of nurses; nobody bothers to put nursing on the priority list for automatic residence.
• Health system falling apart for want of doctors and nurses; $11 billion project to reform the health bureaucracy;
• $200 million so far on reforming the polytechs, the Chief Exec of the merged entity disappeared before resigning, and the whole thing is set to fall apart;
• $120 million for business cases for Let's Get Wellington Moving, while Wellington's infrastructure is collapsing;
• The fire service got centralised at considerable expense and is now falling apart;
• ...but wait, there's more! Danyl writes:

In the past few months the government has created a new anti-terror research centre, committed $300 million to replace the school decile rating system with an equity number, created a a new ministry for disabled people, a new national health provider, a new health authority for Māori, a new ambassadorship for Pacific gender equality, a new supermarket watchdog. It’s hard at work creating a new mega-sized public media entity – estimated cost $350 million – and establishing four new regional wastewater entities at an estimated cost of $296 million (the total three waters reform is priced at about $2 billion). It has purchased Kiwibank for $2.1 billion. 

Some or all of these might turn out to be worthy enterprises but there’s a huge assumption in this government and on the left more broadly that they can only be Good Things – that questioning the rapid expansion of the administrative state can only be right-wing hate speech, part of a covert neoliberal plot to gut health, education, welfare. 

Aren’t we seeing an erosion in state capacity alongside all this centralisation and expansion? Aren’t outcomes in health, education and welfare trending down rather than up? What’s going on? You can’t have effective public services without bureaucracies, but it’s not clear that the torrents of money flowing into them are delivering more value to the public or to the marginalised communities some of them are named after. It’s almost as if the primary role of the administrative state is shifting from serving the people to the redistribution of wealth to the staffers, lawyers, PR companies, managers and consultancy firms that work in them, or for them. A billion dollars a year in public sector consultancy is an awful lot of money when you’re running out of teachers and nurses because you don’t pay them enough, and the fire trucks are breaking down.

The whole essay deserves reading. 

I'm not sure whether the underlying thesis is right. A permanent managerial class may have taken over, but there's no reason it has to be as stupid as New Zealand's has been. 

The people in the civil service aren't that different from the ones who were there under the last government. Many were appointed under the last government. Peter Hughes has spanned multiple governments. 

Danyl again:

Lasch mourns the decline of the mid-20th century socially democratic left; the working class movement that built the modern welfare state. And he notes that the PMC often imitates their rhetoric but primarily employs the state as a means to appropriate the public’s wealth for themselves while defecting from its core institutions. He notes: “They send their children to private schools, insure themselves against medical emergencies… In effect, they have removed themselves from the common life. Their only relation to productive labour is that of consumers. They have no experience of making anything substantial or enduring. They live in a world of abstractions and images, a simulated world that consists of computerised models of reality.”

And this disconnection from the physical world and their fellow citizens means their politics is increasingly therapeutic rather than material; it’s the politics of personal self-esteem, emotional wellbeing, self-expression, self validation, relentless positivity. Jacinda Ardern gave a nice demonstration of this in a recent interview on TVNZ’s Q+A with Jack Tame. When asked about her government’s failure to deliver across multiple policy areas and what she’d learned from these mistakes, she replied: “You know what, I would not ever change the fact that we have always throughout been highly aspirational. We have always focused on how we can make New Zealand better…  In setting out a vision for what that should look like, you will still hear me talk about New Zealand as a place that should be free of child poverty. Absolutely, because anything less in my mind… anything less demonstrates that we don’t believe that things can and need to improve.”

Danyl's dead right that vision and aspiration have been front and centre, with delivery left as afterthought at best. But I don't think that's entirely down to the bureaucrats. One of the first things that Labour did, on taking office, was abolish the targets that the previous government had set on the public service. They abolished accountability while setting aspiration as end in itself. 

Maybe it's the public sector's fault for being too ready to let Ministers get high on their own supply, but even in cases where the Ministries have been courageous in providing advice Ministers didn't want to hear, it didn't make any damned difference. MBIE warned about the problems in Fair Pay Agreements; government wanted to push ahead anyway. 

I tend to think this stuff starts at the top.

If the Minister of Finance demands evidence on value-for-money in adjudicating between different budget bids, because there will always be more bids than there's space to accommodate, that drives demand for rigour in analysis. If the Government wants everything put through a soft-focus wellbeing lens instead, then that razor gets dulled. And if you combine it with a ludicrously soft budget constraint where government borrows $50 billion, nominally for Covid, and then spends it on any darned thing that passes a comms test, you'll get what we've had. 

And it worked for the government for a while. But the Gods of the Copybook Headings eventually return. 

It all looks pretty bleak. Europe's heading for disaster if the energy futures market is anything to go by. Covid shocks were bad but what happens when European factories supplying critical parts into NZ supply chains can't afford to run? There's terrible mess ahead, we can't afford for policy to continue to be this persistently stupid, and there's no reason to hope that policy will stop being this persistently stupid.

What's perhaps even more depressing is everywhere else looks even worse.

How much ruin is there in a country?

Test to exit

It's great that Emily Harvey and Dion O'Neale have done the modelling work on test-to-exit from Covid isolation. It's crazy that policy and advice has been this bad for this long.

Recall that, way back in May, testing expert Anne Wyllie pointed out some problems in how MoH was doing things. At the time, MoH was advising people to ignore positive test results if they'd completed their seven days of isolation. But they had absolutely no evidence in support of that advice. They had looked at the average duration of infectiousness, and simply concluded that if you were above that average period, then your positive was likely false. It really was that stupid, because Ministry of Health really is that stupid. 

MoH updated the advice, somewhat, to say that a negative test was not necessary to leave isolation. Requiring a test to exit would have been a policy decision that would have had to have been made up the chain somewhere. But it is just crazy that they didn't say, for example, "While a negative test result is not necessary for ending self-isolation, it is strongly recommended. Those who continue to test positive are likely to still be infectious. Leaving isolation while positive, even after 7 days, puts others at risk." That would not have been a policy decision requiring higher-ups to decide something. They would have just been doing their job in providing the best possible advice. 

But that was too hard for Ministry of Health, somehow. And so bad advice has been up there for months. And because not enough people know that the Ministry of Health is utterly incompetent, they rely on the Ministry's advice. Employers who don't know better may encourage people to come back to work, following the letter of the guidelines. Schools may tell students to come back, not knowing that they're putting the rest of the class and the teacher at risk. 

The worst of all possible worlds is when government advice is viewed as authoritative but is actually terrible. It would be better that no advice were given. 

Harvey and O'Neale put up the modelling showing that 5 days of isolation, combined with test-to-exit, results in fewer overall days in isolation. Safe people spend less time needlessly in isolation; risky people are less likely to put others into isolation. 

Blogging has been far lighter than usual because Castle Crampton has been Plague Palace. The Boy tested positive on Friday evening. The rest of us tested positive Saturday afternoon. Whoever gave it to him might not have given it to him had they had to test to leave isolation. But people just follow the irresponsible Ministry of Health advice, because they believe that they can trust government. 

I've spent a fair bit of time sleeping. Hopefully back to office next week, but taking it easy, and regardless of government advice, nobody's leaving this house without a negative test. Because it would be irresponsible of us to put others at risk. 

The Ministry of Health is so incomprehensibly bad.

An odd approach to tax policy

Pattrick Smellie has had about the best summary on the messes in the last round of proposed tax changes.

Earlier this week, the government put up a pile of tweaks to tax policy. This sort of thing is usually pretty bland. But included in the mix was a change to the GST treatment of management fees on Kiwisaver funds. 

Pattrick writes:

A regulatory impact statement, which it’s not clear if most ministers had read or been briefed on before waving this proposal through at a cabinet meeting, warned that maybe $103 billion of KiwiSaver savings would not occur as a result of the changes. 

Stuff’s Rob Stock broke the story yesterday afternoon and all hell broke loose on a policy whose introduction broke every rule in the political book. 

Quite apart from apparently attacking the KiwiSaver scheme's basic premise – to build funds for the future – it was introduced without so much as a press statement. A properly prepared government would at least have tried to control how such a political hand grenade was first reported. 

No such effort was made. 

Cynics will think this was the government sneaking it in and hoping no one would notice. 

Well, maybe, but look what actually happened. 

It is equally likely that somehow, amazingly, this proposal didn’t cause even a momentary flicker on anyone’s political radar.

It's a really strange one because the change looks like it could have been defensible. 

The most recent Tax Working Group laid out the usual case for exempting financial services from GST. There can be huge valuation problems in sorting out what's the value of the service provided and what's the value of the underlying traded thing when it all gets bundled together.

I'm hardly an expert on this stuff, but I know that motivated people sometimes point to the exemption for financial services when they try arguing for exemptions on other stuff. So I'd looked at it at that point, saw that there was darned good "It's just too impracticably difficult to levy GST here so we're not going to" reasons for it, and concluded that the "let's exempt meritorious things" people were being disingenuous in pointing to the financial services exemption. 

So when news broke on a plan to set GST on financial services here, it seemed odd. Hadn't IRD already concluded this stuff is just too hard? I checked back in the papers from the TWG Secretariat and they hadn't foreshadowed any areas that could be pulled from the actually-too-hard basket. 

But those difficulties shouldn't apply when it comes to explicit fees levied in financial services. Whether it leads to other distortions and new structures to try to turn fees into margins, that's beyond me. It's at least possible and possibly even probable that the proposed change had made sense on a basic-tax-principles assessment. 

It seems the kind of thing where, if the RIA on it has, at paragraph 49, $103 billion in reduced Kiwisaver fund balances by 2070, they might have considered better preparation on this one. It's plausibly defensible, but got killed within a day through bad comms. 

The same bundle brought GST changes for platform service providers like Uber, and this one could turn into a right mess. It's very much a what-sucks-least problem, and all options are going to suck. I'm just not convinced they've picked an option that sucks least.

Recall that there's a de minimus regime around GST where if an outfit has less than $60k in revenue it isn't required to file for GST because the time and hassle for everyone involved is greater than the amount of tax that might be collected. Makes sense, right?

So what then happens if a tech innovation means a lot of new small part-time entrants are able to enter a sector, many of which will be under the de minimus threshold because it's a part-time deal for them? IRD might start worrying about base erosion and about distortions favouring the small-time operators. 

But how can you do anything about it that doesn't make things worse? All the options are bad too. 

IRD canvasses some in the RIA, and came up with the following. 

For driver-partners who work with platforms like Uber and who are GST registered, no changes. They charge GST, claim back expenses; Uber pays them a GST-inclusive price from riders and claims back the GST that they've charged. All fine. 

But for drivers below that threshold, the platform will charge GST on the ride. 

Now that's a problem because the drivers will have paid GST on their fuel, oil, maintenance, vehicle - all the inputs where GST would normally be claimed back. Remember that part of why the de minimus threshold works is because minimus is smaller than you might have thought. At the same time as they're not charging GST, they're also not claiming back GST on expenses. So the net is a lot smaller than you might have figured. 

If Uber, or Lyft, or whoever, is charging GST on the full cost of a ride, and the suppliers aren't claiming GST on inputs, then you've double-charged GST. And that's a big problem. 

IRD proposes a workaround. The platform would collect 15% GST on the full cost of the ride. It would submit 6.5% up to IRD and send 8.5% back to driver-partners as a deemed input cost proportion. 

I don't know where the split came from - whether it's some overall average of how this stuff nets out, or one specific to transport, or something else. 

But it will wind up requiring the platforms to implement a pile of new accounting to track things, which might need runway to sort out.

Suppose I drove for a few ride-share companies. Would I be able to set up one GST-registered company where all my driving for one platform gets accounted, have it take more than its fair share of the costs of fuel, maintenance, and everything else, and have my driving for the other platforms come under the deemed cost regime? Possibly isn't worth the hassle to set up, but IRD might need to watch that driver-operators aren't trying it on. 

GST normally avoids this kind of problem; folks claim back GST on expenses while paying GST on sales. But a deemed-expenses kind of set-up would break that. 

Maybe the thing is defensible if it really is less bad than potential base erosion and distortions where platforms change industry structure, but I'd hope that they'd talked with the platforms about practicabilities and implementation. It sounds like it could be tricky.