Afternoon roundup

The afternoon's worthies:

• If you want to know why rail in NZ is all messed up, look at how the thing's structured. Egads. 


• New York going back to phonics, after noticing that whole-language ideology caused a lot of illiteracy.


• Matt Nolan on inflation and the Australian budget.


• A National Party candidate out on the campaign trail, handing out flyers for a Law and Order public meeting, walks in on a dairy robbery. Wonder what'll happen when a Labour candidate walks in on one. Seems higher odds than it ought to be. 


• The Motor Trade Association wants vehicle emission checks as part of the Warrant of Fitness. Not crazy for vehicles generally used in places with air quality problems. 


• Alberta's NDP are picking up a policy that was tried and failed at the Federal level: a tax credit for kids' sport. The thing mainly subsidised families who already had kids in sport. 


• Another council leaves Local Government New Zealand. 


• I'm not the only one expecting at least some inflation-adjustment of the tax thresholds. I'd hope that they'd be announced in the budget next week. 


• Worries about government deciding to censor whatever it considers to be disinformation aren't just fever-swamp ravings. Look at what Canada's Liberal Party is putting up for consideration.
  

  The story, it is now admitted, was true. Mr. Chong’s family was being targeted. The Globe’s sources were right, and The Globe was right to report what they had to say – even if they remained unnamed. Had it not, the matter would never have come to light, Mr. Chong would never have been told, and no Chinese diplomat would be going home.
  
  And yet even as the Liberal government was tacitly endorsing The Globe’s use of unnamed sources, the Liberal Party was busy demanding the practice be outlawed. Resolution 472 at the party’s national convention, passed without debate, calls on the government to “explore options to hold on-line information services accountable for the veracity of material published on their platforms and to limit publication only to material whose sources can be traced.” How very tidy.
  
  Understand: the government has no more business “holding” anyone “accountable” for the “veracity” of anything. But the second part, urging the government to ban all material whose sources cannot be “traced” – material like, say, The Globe’s reports – is frankly chilling. Any crank can present a motion of course. But it was the party at large, the party in power, that passed it.

  It really feels like appetite is being whetted about pressing need for crackdowns on whatever a government can consider to be disinformation, and that it will end very badly if it's allowed to happen.
  

Morning roundup

The morning's worthies. 

R₀ on tabs is high. 

• Matt Nolan provides a coherent critique of the government's unemployment insurance scheme from the left. Simon Chapple suggests leveraging off KiwiSaver for short-term consumption smoothing.


• The MoH advice was to end MIQ back in November. I would have disagreed with that advice. But it's interesting because those of us pitching ways of strengthening safety while enabling more travel were always cast as death merchants by those wanting to canonise Bloomfield.


• They told us that there are no slippery slopes. Now they want a new advertising code of ethics "to end the promotion of high-carbon lifestyles and products." It is barking mad, and it has Julie Anne Genter's support. 


• Against genetic denialism


• The odds of an inflation disaster are rising.


• The negative supply shock worsens.


• Richard Prebble is right. The Reserve Bank of New Zealand cannot be trusted under its current mandate.


• Oregon's legalisation of psilocybin therapy ... it's going to be an expensive trip.


• Fairly large investment in solar generation coming for NZ. Remember that NZ's able to make this work without subsidising solar. Just taxes on carbon and a so-far clean electricity market. 


• Last week, David Clark was threatening the supermarkets. This week, Grant Robertson did at the post-Cabinet briefing - check the 16:30 mark where he notes they're still considering going further than the ComCom recommendations - like "separation of some of the entities involved". Robertson wanted inflation, or didn't care about stopping it. And now he needs a scapegoat. 


• ProdComm put out a report last week encouraging fixing NZ's dumb bans on genetic engineering. Reporting has been positive (RNZ, Newsroom, BusinessDesk). Fingers crossed. 


• Thomas Coughlan works through the timeline on MoH "consolidating" RATs.


• The new Transmission Pricing Methodology aims to remove first-mover disadvantage by only charging a transmission customer for the capital cost of the capacity that they need, not the full capacity that gets built when a new bigger line is put in. Effectively that will mean that the lines company bears the risk if it overestimates follow-on demand. They're probably better placed to bear that risk. 


• Peter Griffin on fintech developments in NZ. I'm going to have to catch up on this stuff.

Afternoon roundup

The tab-closing worthies:

• ACT supports a carbon dividend. Good!
• I had to point a lot of people at this last week on Twitter. The 2018 TWG's advice about GST. Says the same thing as the prior National Government's TWG. Good backgrounder for those needing background.
• Peter Martin worrying that Australia picks up NZ's stupid excise holiday.
• Matt Nolan also doesn't like the excise holiday.
• A helpful reminder that at least some of lockdown's costs were inframarginal.
• The borders are opening. Hope there's more hospital capacity by then, or that visitors are provided with appropriate warnings.
• Rotorua asks to be counted as a Tier 1 City, so it can more easily build houses. It's a fun one to think about. Nothing in the Medium Density Residential Standards rule applied to Tier 1 centres is outside of Councils' ability to do on their own. They could upzone on their own. Perhaps best to think about it as a way of binding to broad upzoning, and avoiding the salami-slices that councillors might otherwise be pushed into?
• Larry Summers worries we're heading for stagflation. I wish I had confidence that RBNZ has the competence to navigate the waters ahead.
• Running urban development through environmental planning processes gives NIMBYs lots of room to veto things. Here's Will Rinehart on how it plays out in California under the California Environmental Quality Act. Sounds a lot like New Zealand's Resource Management Act and its problems. PRI has reform suggestions for California.
• Nobody expects the Royal Society's inquisition. Fortunately, it has now been dropped. 

Afternoon roundup

The worthies on a very much belated closing of the tabs:

• Nice roundup in Nature on psychology's problems in social priming

  A promising field of research on social behaviour struggled after investigators couldn’t repeat key findings. Now researchers are trying to establish what’s worth saving.

• Somebody is gluing miniature cowboy hats to pigeons in Los Vegas.

  “They look like happy pigeons to me. It is hard to know, of course, because they will not talk to us.”

• This one's more depressing. The Dean of the University of Virginia's School of Education writes a column for the Washington Post on education and education funding. You'd expect the column would be decent, right? The Washington Post is one of the newspapers that seems to be doing well on subscriptions; heck, I pay for a subscription there. And he's the Dean of the School of Education at one of the top universities in the US. But he claims that real per-student education expenditures have been dropping. Corey DeAngelis points to the actual data showing a 36% real increase over the period. This was a couple days ago, and there's as yet no correction at the Post.


• Average is over: geographic segregation edition. An ultra-Catholic community in Kansas. Excellent long-read; the kind of thing I'd have pointed to Denis for Arts & Letters Daily, back in the day.


• Randy Holcombe on Gordon Tullock on inequality and redistribution. Self-recommending. We might note, though, that New Zealand's overall system has been one of the more targeted ones - I wonder how that ranking's been affected by sillier policies like extra free years of tertiary study.

  People can afford to be charitable with their votes when they know their one vote will have no effect on the outcome of an election. This may be Tullock’s most important contribution to the literature on redistribution and inequality—the observation that because of incentives inherent in the political process, people are likely to vote for redistribution programs they would not choose if the choice were theirs alone.
  
  Tullock (1971) anticipates the arguments made by Brennan and Lomasky (1993) and Caplan (2007), explaining how people can vote expressively and even irrationally for outcomes that redistribute more than they privately prefer. This adds a wrinkle to Tullock’s analysis of motives and justifications for redistribution. Tullock (1997) dismisses justifications for redistribution and looks at motives—the desire to receive transfers, the wish to help the poor, and envy—to conclude that government redistribution will not be very effective at helping the poor. But he suggests government redistribution is larger than the median voter would prefer because of the incentives in the democratic political process that cause people to be more charitable in their voting behavior than when considering private charitable giving done individually (Tullock 1971). Perhaps this unintended consequence of democratic decision making renders democratic government a better mechanism for helping the poor than Tullock (1997) recognized.

• When New Zealand's declining PISA scores were released, we heard a lot about how PISA scores don't matter. I rather prefer Australia Labor MP Andrew Leigh's take on Oz's declining scores.

  Forget how we’ve slid relative to other countries -- it’s enough to compare our own students with their predecessors. Year 9 students today score worse than year 8 students would have done at the turn of the century. If this was a sporting contest, we’d be running slower, dropping the ball more often, and missing more goals.
  
  The PISA tests matter because they are designed to capture the skills that young people will need in the workplace. These tests don’t measure memorisation and rote learning -- they aim to capture the essential talents that will be needed in the labour market.

• Kudos Doc Nolan!


• Phil Twyford continues to provide speeches showing he gets housing better than anyone in Parliament. I don't agree with everything in here, but it's good. And we finally now have the infrastructure financing legislation coming through - the Bill has been introduced, and they're expecting to have it done mid 2020. About three years after they came into office. New Zealand's electoral cycles are too darned short given the length of time it takes to get substantial legislation ready.

  I now want to look in a little more depth at housing and land markets, and transport.
  
  I started by saying urban planning has lacked an economic underpinning. An example of this is the use of the urban growth boundary which is a common planning tool ostensibly to stop cities growing outwards, often described pejoratively as sprawl.
  
  Sprawl is often meant as development on the fringes of a city, far from the centre. But I want to make the point that the better way to think of it is in relation to the time value of travel.
  
  If you are building homes let us say in Pukekohe in the south of Auckland, where people who work in the city centre might face a drive of 90 minutes on a bad day, that might be characterised as sprawl. But when we electrify the rail line to Pukekohe, and build an additional line on the main north-south corridor, as we are about to do, those people will have a 30 min express commuter ride into the city, is it sprawl then? I don’t think so.
  
  The most harmful effect of the urban growth boundary where there is rising demand is to create an artificial scarcity of land driving section prices up.
  
  The boundary is much loved by land bankers whose business model is to buy up rural land and sit on it until the local council shifts the boundary in response to growth pressures, changing the zoning from rural to urban, and then sell it sometimes at ten times its former value.
  
  My intention is not to vilify land bankers. Their behaviour is a rational response to bad policy.
  
  If the urban growth boundary wasn’t bad enough, restrictions on height and density, often justified as protecting the amenity of the low-rise garden suburb, ration floor space, stopping the city growing up and restricting the supply of apartments, and of course driving up prices across the market.
  
  Urban planning has too often failed to grasp that whenever rules stop people building or living in places they want to (typically close to amenity, jobs or transport interchanges) they deny people housing choices, restrict supply and drive prices up.
  
  As Ed Glaeser says, every time you place a restriction on intensification you deny a family access to the city.

• More evidence against Sachs's Millennium Villages. Small or null results on core indicators, no spillover benefits.

Afternoon roundup

This afternoon's worthies:

• Things that make me wish genetic data were in New Zealand's Integrated Data Infrastructure: polygenic scores predict 11 percent of the variance in educational attainment. (full paper here). 
• Matt Nolan's back at TVHE, defending GDP against the fashionable types. 
• There's reasonable support in New Zealand for some cannabis legalisation, but people are still way conservative about allowing marijuana sales in stores - only the Greens are sensible on that one. Me on that stuff from earlier this year; NZIER from before that. 
• The Productivity Commission's terms of reference for its review of local government look good, but note that Labour has excluded discussion of capital recycling through privatisation of some existing Council assets. One excellent way of generating the capital for a new project is selling off an old one. Prod Comm's not allowed to say that. 
• Do you want pirates?
• Epistocracy now!
• Dick Puddlecote on vaping developments in NZ. And note that the Smokefree Coalition's now suggesting a pause on tobacco excise increases. I'd say we should be rolling back the last ones, but great to see more support for a pause. 
• I'm very glad that New Zealand sporting events aren't military recruitment drives. Meanwhile, in America...
• Caving in to internet bullies sets bad precedents.

For an egalitarianism of respect

Last night, debate teams from Victoria University at Wellington and from Canterbury squared off to debate the moot, "This house would ban people with university degrees from marrying each other."

It was great fun. Vic had the affirmative and did a fantastic job with it. Canterbury won, partially because the affirmative wasn't able to show it would be enforceable without substantial offsetting harms.

Matt Nolan, of TVHE fame and who's finishing up his thesis on inequality, was one of the the panellists after the debaters had finished; I was the second. I've copied my speaking notes below, but delivery varied a bit. I think the debate was videoed; I'll update this post with it when it's available.

You might have come in tonight scratching your heads a bit about tonight’s moot. The proposed policy is obviously absurd: a far more intrusive extension of the state into people’s lives than most people would ever consider appropriate.

I’m Head of Research with the New Zealand Initiative. I proposed tonight’s moot because it gets to something more fundamental about inequality than we usually talk about in public debates.

We see a lot of newspaper stories about ever-rising income inequality. As Matt’s explained, and as we show in a report coming out later this year, inequality in measured income rose in New Zealand in the late 80s through mid 90s, partially because of real changes in wages and salaries, and partially because measured income inequality in the early 1980s didn’t include the company cars that some people got and other people didn’t. But, depending on the measure, it’s been flat or declining since then. Poverty remains a real issue. But inequality – there seems to be less there there.

If you track New Zealand Herald headlines with the word inequality in the title against the data on inequality – there’s no basis in the data for the changes in reporting. But it is following international trends. I think we have imported American narratives that might suit their data, but do not suit ours. I also wonder how much of the domestic concern with inequality is driven by dysfunctional Auckland housing markets: when Council makes it really hard to get new housing built, we get bidding wars for existing housing that fuel both xenophobia and resentment of those who might outbid you.

But the failure of inequality to rise here hardly means there is nothing to worry about. There are a lot of things to worry about.

First off, rising incomes at the top in the US seem to reflect greater returns to high levels of skill: those who are able to manage large complicated firms that operate multinationally provide services of immense value to their shareholders. New Zealand’s lagging top incomes then are a worry when we think about overall productivity and economic growth: rather than signalling egalitarian norms, it could rather be telling us that New Zealand’s top talent is more valuable to companies overseas than to firms here, and that’s not something to take lightly over the longer term. In New Zealand, people worry over CEO pay ratios where CEOs earn around 17 times average earnings; in America, it’s more like 250 to 300 times. Would New Zealand really be a worse place if somebody built a company here requiring that kind of talent to run?

But leaving that to the side, there are two broader worries, one of which motivated tonight’s moot.

First, inequality is about more than just earnings potential. Status is about a lot of different things. Those of you watching the Olympics will have noticed that there is huge variation in natural talents, partially a product of training and hard work, partially due to lucky genetic endowments. Some work really hard to make the most of the talents they are given; others don’t; and still others, like me, could never, no matter what, compete on that kind of stage. I caught a great Bill Murray tweet suggesting that a normal person be put into the mix in each Olympic event to show just how far these superhumans are from the rest of us. But it is strange how that would make us more greatly laud the winners, when doing the same thing with natural talents leading to higher earnings would have many instead damn the most able. 

Imagine that, before you were born, you were given a choice: you could have no sporting talent but business skills that would ensure high earnings, or you could be an Olympic athlete with more limited earnings potential but huge recognition for your abilities, or you could be a musician who never earns much at all but has a hugely successful love life. If people vary in how attractive they find the different options, trying to equalise earnings without thinking about the other margins doesn’t necessarily help equality in overall happiness.

Second, and more worryingly, to my mind, and what motivated tonight’s moot, is that one of the underlying reasons for differences across people has a good chance of increasing inequality over the longer term. In short, people are increasingly likely to partner up and have kids with others who are a lot more like themselves than was the case a few decades ago. Work in 2014 in America showed that American household inequality is 20% higher than it would be if couples paired randomly. Much of the story of 20th century America is smart kids moving off the farm to the big city, and their kids marrying other college grads.

Society then starts bifurcating.

Previously, when couples were less alike, kids across different couples would be more alike. Kids wind up looking like the average of their parents, with a bit of pull towards the mean. When the highly educated with strong earnings potential marry each other, whether or not they wind up in work or in the home, the kids of different households not only start out with very different starting points – and not just for the income reasons that people usually point to.

It is right and important that society, whether through government or through charitable efforts, mitigate some of the effect of poor luck of the draw when it comes to baseline ability – and work hard to make sure that everyone has access to the best education possible so that starting disadvantages are not compounded.

But it is more than just that. 

Increasingly assortative pairings means that people have less opportunity to interact with others with strongly differing backgrounds. This is again pretty obvious in America, where urban liberals lack of interaction with, and consequent disdain for, the cultural norms outside of those places helped fuel the Trumpist backlash. Just because I generally share those urban liberals’ views doesn’t mean I don’t see the problem here.

This will become more important if New Zealand follows American trends toward like being more likely to marry like.

Urban Kiwis are fewer generations away from the paddocks than are their American counterparts, and that helps maintain a certain egalitarianism of respect, but that won't last forever. We already are seeing strong pushes to legislate and regulate against the lifestyle choices of those outside of the urban elite. You hear it in trendy Wellington cafes, where well dressed rich folks drinking high calorie mochaccinos speak with disdain about how others drink Coke or eat at McDonalds. It's an inequality of respect.

Poverty is real and important. When it comes to inequality, I think we need a renewed egalitarianism of respect for the choices others make about what is best for them. The more cocooned we are in bubbles away from those who make different choices than we do, the more hesitant we should be to cast judgement.

Self-control

I read the behavioural literature as a meta form of self-help. Here are some standard ways that people can screw things up; here are some heuristics they use that work on average but can yield failures when applied to the wrong domain; here are some strategies for applying the right heuristic at the right time and for avoiding applying the wrong one; here are some common spots where people need to be extra-vigilant to avoid making errors.

Gareth Morgan tweets a link to a write-up of the standard Wansink findings around food:

Why most people don’t have control over how much they eat http://t.co/Cf6lyT1RHt
— Gareth Morgan (@garethmorgannz) February 23, 2014

Sure, in field experiments, you can induce overeating by making people think that they've eaten less than they have (for example, by surreptitiously filling the bowl from below). But does that mean that they're irrational and always subject to error? Or might it mean that people eat until one of two conditions are met: satiation, or end of current portion? If the latter typically comes before the former, people stop eating at the end of the bowl. If the former tends to come before the latter, they'll leave some behind. What interest would a restaurant have in supplying you with more food than you'd really want when doing so might make you less likely to order dessert and will make you more likely to linger longer at the table?

The linked piece also takes a self-help approach to the findings: Try using smaller bowls or smaller plates; don't go for "value" deals if that isn't what you really want to eat.

And so Matt Nolan replied to Gareth:

@garethmorgannz Control still comes from the fact that people can precommit by purchasing smaller packets/portions http://t.co/eI50VkKJdV
— TVHE (@TVHE) February 23, 2014

Morgan replied,

@TVHE You are assuming perfect information
— Gareth Morgan (@garethmorgannz) February 23, 2014

This kind of line really bugs me; it reminds me of the kind of thing that non-economists will come out with when criticising economics. Imperfect information hardly seems to be what's driving food choices. And, perfect knowledge is hardly necessary to make precommitment viable. You just need to know that you often screw up particular kinds of choices.

Odysseus didn't need perfect information about just how lovely the Sirens' call was in order to have the sailors bind him to the mast; he just needed to know that the temptation had proved too tempting for many others. I've never played World of Warcraft, but that doesn't mean that I've erred in deciding never ever to start playing multiplayer online games. I definitely don't have perfect information about it - I've never played it! But I know that I'd find it hard to avoid spending too much time playing online games if I had the added pressure of friends wanting me to come help them on a raid. So I just don't play. Imperfect information has led me to consume what's likely too little gaming relative to an ideal: you don't need to assume perfect information to get precommitment.

Tiki tours and useful idiots

Back during the Cold War, Western intellectuals were given guided tours of the Soviet Block and sent home to heap praise on the wonders achieved by Stalin. They were collectively called "useful idiots": too dumb to see through the Potemkin villages raised, but useful for internal and external state propaganda.

Last week, Liberty Scott started posting and tweeting on Gareth Morgan's motorcycle tour of North and South Korea. He pointed to numerous instances of Morgan's appearance being used in North Korean state media helping to legitimise the regime.

When I visited the DMZ on a USO tour back in 2007, we were given really strict instructions by the American military. Do not smile at the other side. Do not point. Do not do anything that the North Korean agents on the other side could photograph and print in their newspapers as "Westerner points to the Glorious North, admiring the wonders of Juche." I'm not generally all that keen on "do as I say" regs, but these ones made a lot of sense. One of the world's most evil regimes was staring back - literally, guys with binoculars and big-lens cameras - and I was publicity-shy.

But maybe playing the regime-supporting shill while there was needed so that he could have some chance at seeing what was going on.

Matt Nolan at TVHE yesterday pointed to Gareth Morgan's comments on his tour. Morgan wrote:

Having passed successfully through the demilitarised zone Gareth explains to the world’s media why the West’s “beat-up” view of North Korea is completely wrong.

Gareth and Jo and their group were free to set their own route through North Korea, witnessing at first hand the lives of ordinary North Koreans.

What they found surprised them – a people who were poor, yes, but wonderfully engaged, well-dressed, fully employed and well informed. In Gareth’s view, what North Korea has achieved economically despite its lack of access to international money has been magnificent.

He and Jo support active steps towards providing greater opportunities for ordinary Koreans from North and South to interact together – a goal of leaders from both North and South Korea. Hopefully, with enormous interest from the world media, this trip will be the catalyst for such a change.

Unbelievable. I'd thought that he was going to come out claiming that starvation works wonders on reducing feral cat numbers; this is worse.

Maybe there was some case for the tour somehow facilitating better North-South talks. Unlikely, but not impossible. But that the West has a "beat-up" view of North Korea? They have freaking concentration camps! Morgan's next tour could perhaps hit a few of those off-piste highlights. Morgan found the North Koreans with whom he spoke wonderfully well-informed; it's problematic even asking what that means in a place where preference-falsification is a necessary survival characteristic. As Xavier Marquez wrote:

There is a terrific story in Barbara Demick’s Nothing to Envy: Ordinary Lives in North Korea (pp. 97-101), which illustrates both how such control mechanisms can work regardless of belief and the degradation they inflict on people. The story is about a relatively privileged student, “Jun-sang,” at the time of the death of Kim Il-sung (North Korea’s “eternal president”). The death is announced, and Jun-sang finds that he cannot cry; he feels nothing for Kim Il-Sung. Yet, surrounded by his sobbing classmates, he suddenly realizes that “his entire future depended on his ability to cry: not just his career and his membership in the Workers’ Party, his very survival was at stake. It was a matter of life and death” (p. 98). So he forces himself to cry. And it gets worse: “What had started as a spontaneous outpouring of grief became a patriotic obligation … The inmiban [a neighbourhood committee] kept track of how often people went to the statue to show their respect. Everybody was being watched. They not only scrutinized actions, but facial expressions and tone of voice, gauging them for sincerity” (p. 101). The point of the story is not that nobody experienced any genuine grief at the death of Kim Il-sung (we cannot tell if Jun-sang’s feelings were common, or unusual) but that the expression of genuine grief was beside the point; all must give credible signals of grief or be considered suspect, and differences in these signals could be used to gauge the level of support (especially important at a time of leadership transition; Kim Il-sung had just died, and other people could have tried to take advantage of the opportunity if they had perceived any signals of wavering support from the population; note then the mobilization of the inmiban to monitor these signals). Moreover, the cult of personality induces a large degree of self-monitoring; there is no need to expend too many resources if others can be counted to note insufficiently credible signals of support and bring them to the attention of the authorities.

Even if Morgan was away from his handlers, everyone is a handler. That's the point of a totalitarian regime. Any disclosure can get you and your family sent to a concentration camp because somebody else will have purchased an indulgence by dobbing you in. And the safest course is making yourself believe the things you have to say.

Compare Gareth Morgan's visit with a couple other recent Western visits. Here's Neil Woodburn's travelogue. Here's what Curtis Melvin did while visiting North Korea, and subsequently. Melvin's mapping project would let Gareth Morgan check to see which prison camps he missed along his tour. Liberty Scott's update has some useful recommended readings as well.

Reader mailbag: LVR edition

A loyal reader writes, and I anonymise:

My [partner] is a [high ranking title] at [large professional services firm] and over drinks last night the young [professionals in this industry] (under 28, mostly single, still have student loans, gross income btw 60k and 90k, most 2/3 years’ experience max) were crapping themselves re the RB’s loan restrictions…really pissed about it. Most had planned to buy modest apartments this year using KS… centrally imposed adverse selection bars have costs! I said to go to Mum/Dad and/or finance houses, get a mortgage and then fold the other debt into after a year … impossible to police?

Yes, it is impossible to police. And that's a feature rather than a bug, if the point of the Loan-to-Value Ratio regulations is to increase the amount of collateral standing behind each home loan and thereby reduce systematic risk that could come from a housing downturn. If every one of these young professionals gets their parents to take on some of their mortgage risk by backing it with their own homes, which is effectively what they'd be doing if the parents take out a mortgage to front a 20% deposit, then the kids are less likely to default on the loan to the bank in case of downturn, though they may default on Mom and Dad, and the parents may be on the hook for some unexpected mortgage costs. But that has lower systemic risk. RBNZ noted it in their initial paper too: these workarounds are hardly unanticipated, and I don't think they're unwelcome. They work around the regulations in ways consistent with what the regulation should be trying to achieve.

My correspondent wonders further about effects where some young professionals have recourse to Mom and Dad and others only to the finance companies. I expect here that it has strong equity effects, but the efficiency effects still work in the right direction. Borrowers on the secondary loan market will be paying higher interest rates and so we still see a reduction in demand for highly leveraged loans at the margin. The ones most hurt by the regulations are indeed the ones with least access to family or other capital. But equity isn't RBNZ's job, and those would be the riskiest borrowers in any case - the ones that RBNZ is deliberately trying to knock out of the market.

The bigger problem is the one Matt Nolan points to: RBNZ is grasping at all kinds of justifications for its regulations, and some of them either are way outside of anything RBNZ should be doing, or just don't make any darned sense. I can see some kind of case for it on systemic risk, but I would bet against the regs being justifiable on that basis. Default and bailout risk under OBR is lower than it was prior to OBR. And RBNZ simply should never ever be in the business of trying to protect investors from the risk that their investment might decrease in value. They don't have that kind of crystal ball.

And if the regs don't make sense on a reasonable rationale, we might start worrying rather more about the equity considerations.

Of bus crashes and open bank resolution

Matt and I seem to disagree a bit on how successful the RBNZ's Open-Banking Resolution policy might be in encouraging banks to avoid taking risks that might, on the downside, require a bailout to avoid systemic effects. [Note: substantive update below at *]

Recall that, under OBR, the bank's owners are liquidated first, then their unsecured creditors, before there's ever any move to touch the depositors.* I would expect that if depositors had to take a haircut, there would be reasonable pressure for a bailout. And so there is potential for that some downside risk is foisted on the government.

But we always have to think about things at the margin. Here's a parallel. Right now, if I pay too little attention while driving and smash into the side of a bus, killing me and hurting the people on the bus, my estate does not have to compensate those passengers for the harm I have caused them. A portion of the downside costs of my risk-taking driving maneuvers has been socialised. Does that mean that I take far too many risks while driving? Not in this case: the incentive to avoid dying in a horrible fiery car wreck is sufficient to ensure that I take appropriate care. Requiring that my estate provide compensation would be an inframarginal transfer.

If there were a lot of potential types of car accidents where I'd only be slightly injured but where I'd be doing a lot of harm to others, then the liability regime will matter a lot more. But if I'm guaranteed to die horribly in the event of any car wreck at all, I will take a lot of care. If I have a spike on my steering wheel, it doesn't matter how liable you make my estate for the damage I cause. The spike induces a whole lot of risk-avoidance. Maybe even too much.

The OBR is the spike on the steering wheel. The bondholders and the shareholders are killed in the case of a severe adverse event. That should be enough to induce due caution even if there are a lot of external parties who would suffer harm if the bank blew up. Some externalities are inframarginal.

Three conditions under which I'm wrong and Matt is right, though there could easily be more:

• A bank under such pressure might try a bit of scaremongering to try to whet public appetite for a bailout that would protect the shareholders rather than do anything to affect the deposit-holders. If the government cannot successfully avoid that, and if the bankers know that, then all this is wrong. That's why it's important, I think, to remind everybody, and loudly, that OBR kills the shareholders first and that it's very unlikely that depositors would take any kind of substantial haircut.
• Dysfunctional bank control structures. Suppose that the shareholders appoint a CEO whose compensation has a lot of upside variation with performance and a golden handshake in case of non-performance. And suppose further that the shareholders and bondholders aren't able to adequately monitor the riskiness of the bank's balance sheet. In that case, the one making the decisions isn't the one facing the boiling-in-oil contract and so offloads his downside risk onto both shareholders and bondholders and onto the public via the potential need for a bailout. But are shareholders really that stupid and bondholders that incapable of monitoring?
• Bank cleverness in moving all the unsecured creditors into a preferred secured creditor arrangement so they're ahead of depositors in the queue, and somehow insulating the shareholders from OBR. I'm trusting that RBNZ can prevent this. If not, then the analysis above is wrong. 

Update: More conditions under which I'm wrong:

• Brennan McDonald suggests (comments below) that some of the bigger shareholders might have sufficient political sway to get a shareholder bailout regardless of OBR. He could be right - it is very easy to imagine somebody like John Key looking at a statement from the NZ Superannuation Fund and reckoning that it's easier to bail out the bank than to prop up the Superfund afterwards and deal with the Kiwifund providers' lobbying. Brennan also worries that banks heading towards OCR might tunnel out all the good assets; I'd expect and hope that RBNZ would be keeping a sharp eye on such things. 

* Update 2: I'd outlined the RBNZ's OBR mechanism here. Depositors can take a small haircut fairly easily. Where I had thought that depositors had priority over other unsecured creditors, they are instead counted among the unsecured creditors. So the haircut would be larger than I had previously expected, and so too consequently would be the pressure for a bailout. While OBR attenuates bailout pressure overall by allowing banks to continue trading and by allowing depositors to maintain access to most of their deposits, the larger the expected haircut, the stronger the pressure. Now the OBR also includes provision for that small depositors could be exempted from the haircut, but it would take legislative action to give that effect. If it's done, small depositors pay less attention to their bank's security. If it isn't, bailout pressure come the crisis is stronger. Part of the difference between Matt and I could then be explained by my having mistakenly thought that unsecured bondholders were burned before rather than with the depositors. 

Housing daily: LVR, NIMBYs, and congestion charging

The RBNZ will soon announce its Loan-to-Value rules. Matt Nolan makes a few reasonable points (all my paraphrasing):

• If the policy is targeted at financial stability, then it has to bite on high-leverage first home loans as those are the most likely to wind up in positions of default. 
• I'm still a bit sceptical here as the OBR rules mean that the banks have to burn their equity holders and unsecured creditors before touching depositors if they make a bunch of really risky loans: I'm just not convinced that the banks here are really imposing systematic risk by allowing highly leveraged loans. But maybe the RBNZ has insider information suggesting that the government is way more likely than anybody thinks to start stomping on Councils' NIMBY regs currently preventing new building and so property prices are set for an unexpected fall.
• Further, the choice of "speed limit" will matter. Suppose we've had a road with no speed limit and we're promised one will soon be implemented to stop speeding-related risks. If they then announce a highway speed limit of 100 or 110 kph, that's all fine. If they announce a highway speed limit of 25 kph, not so much. I don't know what fraction of normal-conditions first home loans would be blocked under the new rules, so I don't know whether we're setting a 100 or 25 kph speed limit.
• Politicians mucking about with what the RBNZ is proposing risks undermining the whole purpose of the thing.
• I expect here that Matt's alluding to some of John Key's comments suggesting that first-home buyers be exempted.
• Politicians seem to see LVR as a way of fixing housing affordability; it's not well-suited to that end. 

  At the moment political parties want to loosen financial conditions for home owners, and introduce all sorts of schemes that will get capitalised into house prices.  Instead, the politicians should be looking at it as a distributional issue – it isn’t about giving young households cheap large houses that only exist in fantasy, it is about being realistic about any intergenerational distribution issues that we believe exist due to the inherent “cause” of the current “bubble” or a broader “misalignment” – this has to be relative to what we think is “fair” around the distribution of lifetime resources.  We can’t just “pop” a bubble, but if we understand the causes we can deal with the distributional issues associated with it.  Looking at supply side constraints (which both parties are) makes sense – good to see that.

  But what about the near term?  Worst case scenario, one-off tax all property, given money to group who is “hard done by” – if you aren’t willing to do that, you are faking your belief in a distribution issue. 

  Indeed.
• Matt's sick of Gen X / Gen Y whinging about house prices and wanting transfers. 

I agree with Matt that most of the demand side schemes are horribly misguided. But current housing policy prevents substantial expansion of current supply, inducing large regulatory transfers to those who bought houses when supply was less constrained. In a world where supply could expand (both with increased density and expansion in the suburbs), we wouldn't get the kinds of price run-ups now being experienced in Auckland. Matt's right that more people, and especially young mobile people, should rent rather than buy.

What we really need to figure out are policies that pay off the losers while expanding supply. We have something of a transitional gains trap in housing policy. Current homeowners do get some direct benefits from regulations preventing both them and their neighbours from developing: NIMBY is NIMBY for a reason. But another large effect is that the NIMBY regs keep up house prices as a whole. Sufficiently expansionary housing policy would impose capital losses on homeowners. And we tend not to have easy ways of implementing those kinds of policy changes without compensating those adversely affected so that we can move towards the more efficient equilibrium.

And so I was really disappointed to hear Gerry Brownlee on the radio this morning. One thing that could help Auckland move toward expanding on the fringes would be allowing the use of congestion charging to both internalise the consequent externalities and to help defray the costs of any new roading necessary to service the new communities. It's the kind of policy that compensates the losers (at the margin) while taxing the winners (at the margin). Gerry Brownlee on Radio New Zealand this morning suggested that Auckland wouldn't be allowed to implement congestion charging. Gerry should remember that it's socialists, not free-marketers, that usually recommend that scarce resources be allocated by queuing rather than by prices. If Auckland's willing to move toward sensible road pricing, and they're blocked by central government, we're in rather a bad spot.

Housing Tradeoffs

The RBNZ is looking more seriously at loan-to-value ratio regulations to curb house price appreciation.

I've been skeptical about LVR regulations. If adopted as a "thou shalt not loan more than x% of the house's value" commandment applying to all new loans, they would have substantial effects on first home buyers unable to lean on family for support. If Matt Nolan is right that the banks really still have some implicit guarantee despite the OBR mechanism, there could be public interest in such regulations; a serious recession coupled with housing bubble collapse would then have banks taking a large hit while auctioning defaulted properties. But, any "making houses more affordable" justification for the regulations seemed exceptionally weak as the policy seemed likely to induce a level shift followed by a return to the prior price path. In other words, we'd be back on the same path of housing price appreciation after a one-off drop in prices concentrated among those homes favoured by first home buyers.

Fortunately, the RBNZ is not as silly as all that. They write:

we favour speed limits over outright restrictions. We do not want to ban high LVR lending; we would prefer to restrict it as a share of banks’ total new lending. With a speed limit approach, we expect banks would need to build in their own internal buffers to give themselves a margin of error. Such buffers could reduce as banks become better at controlling their proportion of high LVR lending. Within the speed limit, each bank would make their own assessment of which customers received high LVR loans, based on their own criteria including other risk measures, such as debt servicing capacity, and the potential long-term value of those customers to the bank.

Implemented this way, much of the beautifully written snark I had prepared now has to be deleted.* The equity effects still hold, but in attenuated form. When property prices start ramping up along with LVRs, first home buyers without family backing will get hit even more strongly than they are currently, but so long as the LVR proportion is set sensibly, it won't bind most of the time.

Further, RBNZ recognises all the workarounds that are likely to emerge. Parents will take out a mortgage on their paid-off homes to lend to the kids as starter capital; there's nothing the bank can or should do about it. A secondary loan market will emerge, but borrowers there will incur higher interest rates than they would in the mortgage market, so the system still works to discourage high LVR loans at the margin.

I'm still having a hard time seeing how the policy has anything but transitional effects on home affordability though. I would expect the regulation to result in a one-off drop in the price of starter homes, followed by a move back to the prior expected path of price increases. Effects on homes farther up the food chain will be rather substantially attenuated as the LVR is still less likely to bind for those with reasonable existing home equity to apply to a new home purchase with the sale of the old one; ability to service the mortgage out of existing income ought to bind before the LVR does for anybody with enough equity. NBR notes that John Key wants first-home buyers exempted from the rule; I have a hard time seeing that it would be binding on anybody under that scenario unless lots of folks are buying investment properties with no equity. If lots of investment properties are being bought on very high LVR loans, then I move from mildly meh to somewhat in favour of the regulation change.

Now here's the RBNZ:

While the Reserve Bank’s mandate is to promote financial stability, not social equity, there are clear implications here for housing affordability. As house prices and debt levels trend increasingly upwards, so too housing becomes less affordable, particularly for first home buyers. While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term. Such measures should also reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly indebted home owners.

I agree with Nolan that the RBNZ doesn't have a housing affordability mandate. The best reason I can see for RBNZ's running this is as part of its prudential supervisory role looking over the banks so that they're less likely to take on too much housing risk in the expectation of being able to lay it off on taxpayers in case of a substantial downturn.** I have a much harder time seeing this as part of inflation policy: CPI is based on rent, not property prices, rents seem to lag prices, and I doubt that the policy has much effect on housing prices except among the homes purchased by first-home buyers, and even there only tapering off peaks as LVR spikes.

And it seems odd to highlight affordability for first-home buyers when the policy is most likely to make it rather harder for them to finance their first homes.

* The Game of Thrones analogy might have been overwrought anyway; you'll now never get to judge.

** Again, though, I think that the OBR mechanism does a lot to prevent that state of the world from obtaining.

Open Banking Resolution and Deposit Insurance

New Zealand's Open Banking Resolution system in case of bank failure makes bank failure less likely, and so makes depositor bailouts less likely, but doesn't eliminate the risk that the government might bail out depositors.

Matt Nolan has made this point more than a few times and has urged that we reinstate deposit insurance and require banks to pay for this implicit insurance; I hope instead that the RBNZ and government will find ways of making more credible that the depositors may be burned. If depositors bear risk, then they have to pay a bit more attention to where they put their money and, in doing so, encourage the banks to be more sensible. Further, the simple existence of OBR with a set sequence in case of failure should reduce the panic that pressures governments into bailouts. But if we can't make it credible, then Nolan may be right. 

Toby Fiennes, RBNZ Head of Prudential Supervision, laid it out in a speech yesterday. 

So OBR is about keeping a bank open and providing the government with real alternatives to liquidation or full taxpayer bailout – both of which may be totally unpalatable. It facilitates a rapid and orderly resolution of a bank failure. It does so without changing our basic legal framework around ranking of creditors in a wind-up or insolvency. In particular:

– It does not change the fact that depositors’ and other creditors’ funds are at risk. It is a well-established legal principle that people stand to lose money if a business that owes them money cannot meet all its obligations. Banks are the same as any other business in this regard.

– It does not change the ranking of creditors. Shareholders will be the first to lose their investment. Once shareholder funds are exhausted, subordinated creditors bear losses, followed by all other unsecured creditors on a pari passu basis, meaning that those with an equal legal claim get equal treatment. This is the same as in a liquidation.

Two features of OBR make it particularly well-suited to the principles for crisis resolution I outlined earlier. They are:

– Its flexibility. OBR deals with the immediate crisis, including payments and liquidity issues around failing banks, without closing off long-term solutions.

– It reduces moral hazard. Bank shareholders, management and investors know that in the case of bank failure the authorities have a viable option that would put their stakes at risk. The mere presence of OBR in the toolkit will impact expectations of government support.

Fiennes continues:

It is important to emphasise that OBR and deposit insurance are not in any way alternatives. OBR is also applicable in a world where we have deposit insurance as in one where we don't. Deposit insurance usually involves the establishment of an insurance fund, to which banks contribute. There are many different variations on, and within, that basic framework, but OBR can cope with all of them. For example, if there’s an insurance fund, the fund itself could stand as a creditor in the OBR. This is how the FDIC (the US deposit insurer) is treated in failed US banks.

New Zealand does not currently have any form of deposit insurance or deposit guarantee. This position was confirmed by the Minister of Finance in 2011 (http://www.beehive.govt.nz/release/maintaining-confidence-financial-system). There are three reasons for this position:

– Deposit insurance is not always effective in preventing bank runs by retail depositors. UK-based Northern Rock suffered a classic retail run in 2007, despite a deposit insurance scheme being in place.

– Deposit insurance is hard to price accurately and fairly; and brings with it difficult boundary issues. Should it be just for banks – as is currently the case for OBR – or should it also include finance companies, building societies and credit unions? How would we ensure that the least risky banks do not end up subsidising the more risky?

– Deposit insurance will increase moral hazard, making the banks more susceptible to failure, which brings with it the need for more, costly regulation.He also notes that a large bank's failure could easily overwhelm a deposit insurance scheme and that the costs of deposit insurance in encouraging bad bank behaviour outweigh the benefits of avoiding depositor losses. So even in Nolan's world where the government cannot credibly commit not to bailout, the inefficiency caused by the certainty of a bailout (rather than the weighted expectation of one) can be large enough to make the scheme undesirable, even if the government does wind up bailing out the banks.

As I'm not a banking guy, here are a few things I particularly do not know much about and would materially affect the ability of OBR to reduce bailout risk:

• The proportion of secured versus unsecured bank liabilities. If there isn't much that can be burned through before hitting depositor assets, then the haircut landing on depositors would be greater and so too would be the political pressure for a bailout. 
• How easy it would be for banks to shift away from unsecured liabilities, knowing that risks put on depositors make bailouts more likely.
• Bank ownership structures. The NZ banks are owned by big Oz banks that have an implicit Oz government guarantee that's actually worked into their Fitch credit ratings (as best I understand things). Suppose something bad happens and one of the Oz banks and its NZ subsidiary both are going down. Do we know what assets are really with the NZ subsidiary and which are with the Oz parent? Will there be incentive to restructure the equity profile depending on which side of the ditch is looking stronger? Can they tunnel equity back to the Oz parent in the NZ subsidiary is looking dodgy and so leave less to burn through in OBR? RBNZ runs some strong prudential regulation; I'm sure they're on top of this stuff. I just don't know anything about it.

The greater the proportion of the burden borne by bank shareholders and unsecured creditors other than depositors, the lower I'd expect to be the pressure for bailouts. If deposit holders are to take a ten percent haircut if bad things happen, I doubt that they could muster nearly as much bailout sympathy as depositors facing a fifty percent haircut. 

Fiennes concludes:

But there’s always the remote possibility that a bank does get into trouble, at some point. If that happens there are no simple solutions. It will be messy, people will lose money and how it is dealt with will depend on circumstances at the time.

OBR is a tool that gives government an additional option to taxpayer bailout or liquidation. It is not the only option that will be available on the day. Its mere existence provides important incentives for bank shareholders and management to minimise the risk of failure.

New Zealand does not currently have deposit insurance, for reasons that are more to do with moral hazard and the sheer difficulties of defining boundaries and pricing than consumer protection. We believe it is better to keep the risk of failure very low, including through a strong regulatory framework, than to build structures that can distort incentives and behaviour.

If, however, deposit insurance were to be introduced, it could easily be accommodated within our toolkit of OBR and other crisis measures. It is not a case of choosing between one or the other – they have different objectives and can work alongside one another if need be.

We have to distinguish between best-case deposit insurance and achievable deposit insurance. How well you think the government can price the bank's underlying riskiness and how well the political system can ensure fair actuarial rates rather than implicit subsidisation of riskier banks will matter in your evaluation of deposit insurance's desirability. But note too that the world in which the government is really good at assessing bank's risks is also the world in which prudential regulation likely works well. I lean towards staying out of deposit insurance, but I'm not hugely confident in my point estimate here - as I noted earlier, I'm not a banking guy and really don't have enough information to be very confident.

Update: I failed in copying the second bit of Fiennes's speech the first go-round. My computer was trying very hard to crash while I was posting.

Living Wages and Raising Rivals' Costs

In an impassioned plea against the unions' forthcoming 'living wages' campaign, Matt Nolan deplores that unions push for this kind of thing without considering the costs:

I mean I swear to god unions, and their determination to get what they want without thinking about the consequences for other people, makes me sick.  There are people who struggle, and as a society I think we should try to help them – part of this is ignoring faux research by unions, and making sure that we actually push government to sufficiently redistribute to the poorest among ask (with the acknowledged cost that this redistribution does lead to less income/production overall).

I'm not sure that they're failing to consider the consequences; raising rivals' costs is a pretty established technique for improving one's position. But that might not be everything that's here going on either.

The Herald reports* that the campaign will first target local councils. As John Gibson showed a couple of years ago, public sector workers already earn an 18-22% wage premium over the private sector, correcting for a big pile of worker and job characteristics. His paper didn't split Council workers from other public sector workers, so maybe Councils pay substantially less, but it hardly seems likely. They're not the first place you'd look to push if you were wanting to raise low-band wages. But they are likely the most sensitive to political pressure from union-based campaigns.

A few things to note:

• If Councils push wages up for Council employees, non-Council companies will start winning more of the tenders for contracted-out services. If Councils then are likely to require that companies taking tenders implement living wages, we could view this as a Union strategy for raising rivals' costs. 
• If the cost of Council services as a whole go up, the burden falls on ratepayers; Council service provision seems likely to be pretty inelastic to costs, and I'd expect especially so since Auckland city cartelisation.
• Private business owners will rightly ignore the campaign, unless they think that warm glow enjoyed by customers would make the wage increase worthwhile. My bigger worry on this front is that some future government could formalise things by requiring living wages for all government contractors. 
• In general, the burden of assisting the working poor is better born through things like Working For Families - the overall tax system - than by the firms employing low productivity workers and the people purchasing their products and services.

Chris Dillow very nicely made the case against living wage mandates last week: the costs of disemployment far outweigh the gains made by those remaining in employment. And recall as well that there is no particular reason that all wages need be sufficient for raising a family anyway: there are tons of jobs that are usefully done by high school students and other part time workers before they move on up to bigger things. Forcing those jobs to pay a lot more than they otherwise would will kill a lot of entry level positions.

As I suggested last year,

We can mandate that all wages are living wages, but we can't mandate that all the people who'd like to have work at that pay are able to find jobs.

* I'm not sure if they're reporting or campaigning here. A week-long series of articles timed to coincide with the Unions' policy launch? How much did the Herald charge the unions for the advertorial? The Herald advertises the forthcoming series:

The series
Today: Who earns below $18 to $20 and why
Tomorrow: Exploited migrants
Wednesday: Cleaning wars
Thursday: Living wage unveiled

Update: Partial retraction. The "Exploited migrants" story is rather good, much of it being about what you'd expect given how immigration policy runs (though they don't quite paint it that way). Restrict students on a visa to 20 hours work, and those willing to work more are then complicit with their employer in visa fraud. They can't really then do much without risking deportation. Require evidence of employment for a permanent resident's visa, and some will pay people to hire them.  

Solving for equilibria

The Greens think that poor people can't solve for the equilibrium. Voluntary labeling of healthy foods has been proposed, with one option being "traffic light labeling". Here's Mojo Mathers:

If you are a food manufacturer of a particular product and look at the criteria and find out that your product will get a zero for health (the lowest score possible proposed in the report), would you still say “yes! Sign me up, that will help sales”?

No, you wouldn’t.

So a voluntary scheme will just end up on the healthy foods, and consumers who don’t currently read the back of labels will still not know which foods they should think twice about before purchasing."

This part of the reasoning is exactly right. Under a voluntary disclosure regime, the best label first. The first runner-up labels second to avoid being pooled with the second and third categories. In the end, everyone labels except those who would receive the worst ranking.

But we tend to expect that everyone can solve this kind of model: that the absence of a "yellow light" or "green light" label conveys as much information as the presence of a "red light" label. I suppose it's an empirical question. I prefer voluntary regimes where organic, GMO-free, dolphin-safe, or other standards-meeting manufacturers can label their products as such and customers can infer what they like from the absence of a label - and especially where some mandatory labels can wind up doing harm.

Equilibrium solution the second: the inefficient dining decision. Matt Nolan finds himself at a family dinner where, nobody wanting to be the only one to order a large dessert and nobody consequently being first-mover, everyone winds up in a sad coordination failure. Knowing the risks of such sad equilibria, and knowing that others usually feel the weight of social convention and social pressure more keenly than I do, I try to take on these first-mover costs myself by ordering the dessert and the drink. It's efficient that I do so, and I get to feel good that I relieve others of the burden of feeling bad about being the first one to order. I love the happy confluence of my interest and the social good in these kinds of cases.

Previously: Efficiency over Etiquette

Director's Law: New Zealand edition

Matt Nolan brings Director's Law to the Timaru Herald:

So with a recession, spiralling inner-city house prices and a rising cost of living, is the Kiwi middle-class also feeling the squeeze? You might think so, but some economists reckon the numbers tell us we've never had it so good.

"They don't know how lucky they are," declares analyst Matthew Nolan of Wellington's Infometrics.

Jean-Pierre Du Raad, chief executive of the New Zealand Institute of Economic Research, agrees. The middle-class squeeze is "a bit of an urban myth", he says.

Since 2001, our middle-class median income has risen by 21 per cent. Yes, the recession has hit, but it's arguable the middle class has suffered less than the poor and the rich. In part, that's because of Director's Law.

Named after the late American economist Aaron Director, it suggests the middle class will always have undue political influence because of its size and aggregate wealth.

"The middle class has political power, so the things they are concerned about are acted on," says Nolan.

"They are always trying to transfer things to themselves. They are not being selfish as individuals... we all want our lives to get better, it's just human nature."

So in New Zealand, that means political decisions that benefit the middle more than anyone else: The expansion of Working for Families tax breaks, the removal of means-tested superannuation, subsidised healthcare and interest-free student loans.

Du Raad says 40 per cent of the extra $1.5 billion invested into Working for Families went to middle-class families (a two-parent family with two children earning less than a combined $126,300 will receive Working for Families assistance) and says the 2010 tax switch, where GST rose and income tax went down, benefited the middle class by $10 to $25 a week.

Nolan also notes that a proportion of people around the 60th percentile (that's richer than 59 per cent of people, poorer than 39 per cent), who aren't paying net tax, they get more from the Government than they give - almost certainly due to Working for Families.

So where did the myth of the middle-class squeeze come from? Well, says Nolan, the middle class knows how to make a noise, everyone's feeling the recession, and many have paid attention to the noises coming from America.

He concludes:

"It seems strange," concludes Nolan, "to demand transfers [of wealth] to the middle-class at the same time we're demonising those unemployed during a recession and making it harder for them to get benefits."

I'm not sure there's been that much demonisation of the unemployed here; welfare reform has been more targeted at longer term beneficiaries with a goal of getting those on the domestic purposes benefit back into work. There may have been tightening up of regs around the unemployment benefit (Matt will know more about this than I do), but I've not seen much excoriating the currently unemployed.

Paying for earthquakes

Matt Nolan walks us through why quantitative easing to pay for the Christchurch Rebuild isn't particularly good policy. If we need a monetary push, the place to start is interest rates - and then only if RBNZ thinks we're going to be below the 1% lower inflation bound over the medium term. If we need a fiscal push, which is highly debatable, doing it through earthquake spending might not be as helpful as the Greens might like - especially as regulatory bottlenecks and regulatory capacity constraints in Christchurch seem to be holding things up at least as much as money.

Let's recall how standard public finance says to pay for things like earthquakes. If the status quo ex ante had about the right mix of spending and taxation, then you cut spending in non-earthquake areas, increase spending on earthquake rebuilding, perhaps slightly increase taxes in the short term but definitely take on debt to spread the rebuilding costs over the longer term. This is bog standard public finance. Paul Krugman and Steven Landsburg agree. I walked through the argument slowly a while back.

What do we get if the government prints earthquake bonds and RBNZ prints money to buy them? Here's Nolan:

Now you may believe we should fund the rebuild with a one-off tax – that’s fine, in that case get the government to put a tax in place directly (or to directly cut spending from other place).  However, taxation by stealth of this sort is likely to be worse in multiple ways:

1. We have betrayed RBNZ independence for virtually no reason … understandably a sneak tax by the RBNZ would make people less likely to believe them in the future about holding to their inflation mandate.  As a result, we run into the time-consistency issue in monetary policy again, and it will become more painful for economy when the RBNZ tries to commit to its inflation mandate again.
2. We have a relatively rough redistribution of resources due to this.  By putting in our sneak tax through QE, we transfer resources to those with assets, those doing the rebuild, and those who can easily adjust prices/wages – while hurting those on fixed income, and those who have saved.  It is an inflation tax – pure and simple – and as a result, it will initially transfer resources from those who can’t protect themselves (generally the poor) to those who can (generally the rich).  If we introduce the tax through fiscal policy instead we can sort out these distributional issues a little better.
3. A country that is willing to introduce QE as a clear fiscal transfer – when there is no monetary policy reason – will destroy its credibility with international lenders.  People will scoff at this, but such a policy will increase the level of “inflation insurance” lenders ask for – increasing the cost of credit in New Zealand.

These are obvious and true costs, that have been seen from similar policies around the world for hundreds of years.  QE really isn’t anything new, and if we want a fiscal transfer of this sort just say it (as the Greens previously have to be fair), and do it through fiscal policy – it has nothing to do with the RBNZ.

I suspect Matt's "that's fine" at the start is more recognition that the policy at least is honest rather than that it's a good idea. Borrowing for major one-off capital expenditures is far better than a one-off tax.

Matt's also a little harsher about those peddling crank economics than he's usually willing to go:

The constant banging on about the exchange rate and the RBNZ shows a fundamental misunderstanding of the “issues” NZ faces.

The Greens, and Ganesh Nana, are wrong in stating that the RBNZ has failed.  Distinctly and totally wrong.

I approve.

Bernard Hickey was calling on Twitter last week for a review of the desirability of central bank independence. Matt and I got a bit testy. This is one of those issues where re-politicising whether the central bank should be independent has almost the same effect as removing independence: if RBNZ believes that its independence is conditional not on meeting the PTA but rather on making a mob of monetary cranks happy, then it might be tempted to start skewing its policy. And even if it doesn't, if people think it might be, that also starts wrecking expectations. There's reasonable latent public demand for bad monetary policy. Feeding and encouraging the trolls is a remarkably dangerous game. It's fine to debate what optimal monetary policy is. But suggesting that because RBNZ isn't following your preferred one, we ought reconsider central bank independence... that's intellectual vandalism on par with saying we should do away with Pharmac because you didn't like the Herceptin decision. In sum:

• Good: trying to convince RBNZ of your views on monetary policy.
• Bad: whipping up the hooples to break central bank independence.

Critique and the customer

If the point of an economic consultancy report is to convince serious officials at Treasury, the Reserve Bank, or the relevant Ministries of the economic case for something, and if the consultancy report has serious errors, you can do good by loudly critiquing it if it is wrong. Those who need to know whether the report is right will check the critiques and, if truth-seekers, will update. I understand that some of the serious folks at the Ministry of Health have strongly updated their views as to the appropriateness of Cost of Illness studies around alcohol consequent to critiques, very correctly noting that cost-effectiveness is the better measure.

But if the point of an economic consultancy report is to excite the hooples and to give a sciency justification for whatever some bunch of rent-seekers is trying to push, then critiquing it loudly only serves to provide advertising: this firm will produce the big shonky but sciency-looking number that your industry needs to get public support for whatever you're trying to push.

"Noise made, overtures to outside interests and enlistment of the hooples’ participation is what this situation demands." Al Swearengen, Episode 20, "Childish Things", Deadwood.

If that's what the reports provide, critiques might make things worse by letting the interests know who's best at exciting the hooples.

Want to show that your industry is the key linchpin for the regional economy? Want to show that your party's policy is the one for advancing economic prosperity? Yelling about how a particular consultancy produces numbers that are great for propaganda but bad for policy only serves to fuel demand where the ultimate audience are the hoopleheads.

What else can you say about a consultancy report that includes this in the concluding remarks?

The biggest cost will be loss of face for the “Mainstream Economists” especially the Bank economists, who have continually told us that this is the panacea: There Is No Alternative.  Their experiment will be at an end.

The audience isn't Treasury, the Reserve Bank, the boffins in the Ministry of Finance, academic economists, or anybody serious. It isn't you, Matt, as correct as your critique may be. Neither is it you, Paul: I watched you writing your critique as I went meta.  It's the hooples. And it's the reason that the New Zealand Economic Association really really needs an annual awards ceremony for the worst piece of economic consultancy work produced in the country every year.

So that the hooples can better be advised of the reputation of certain outfits.