Hazeldine on the ETS

I can't disagree with anything Auckland University's Professor Tim Hazeldine has to say about climate policy.

Also mostly pointless, are the multitude of policy recommendations that pour forth from the report. If the real decision-makers in the economy (i.e. all those listed above) are getting the correct price signal from the ETS, then there is generally no justification for further government intervention. What should be done will be done.

The main exception will be in the provision of what economists call "public goods" – in particular research results that can be freely used by everyone, such as how to breed better-mannered cows.

But, in any case, with the emissions price signal sorted, all proposed programmes and policies should just go through the Treasury's standard cost-benefit analysis. The commission is no help here.

And - not so incidentally - the expensive scheme to subsidise purchases of electric vehicles that the commission has foisted on the current government will almost certainly fail the cost-benefit test. Around 90 per cent of the well-heeled beneficiaries of the scheme's largesse would have purchased an electric car anyway - we have just given them an $8000 present.

Along the same lines, but harder perhaps for non-economists to grasp: none of the large sums of money that will be raised by auctioning emission quotas or (the alternative) imposing a carbon tax should be diverted into climate-related programmes in addition to those which will be done anyway because they pass the social cost-benefit test.

These funds should be revenue-neutral. They are incurred by the team of five million, and they should be returned to them, Each billion of carbon tax or quota money would fund a $200 Christmas present for everyone on the team.

Our climate change policy should be solely about climate change. "You can't kill two birds with one stone" is a cliche but it is not trite. It is true and important in almost every policy context. Yet the Commission considers it should in future "consider broader well-being factors, like eradicating poverty, safeguarding food security and addressing other environmental outcomes". Wrong, wrong, wrong and wrong.

I wonder if Tim had my colleague Matt Burgess in mind here: 

So, what to do? The Climate Change Commission has, in just a few months, seriously outgrown its boots. The Government should step in, and with polite thanks for their efforts, de-commission the commission. It should then persuade a super-smart mid-career research-grade Kiwi economist – tough-minded but humble (they do exist) – to take the reins of a slimmed-down secretariat.

Agreeing and disagreeing with Tim Hazledine

Auckland's Professor Tim Hazledine says New Zealand's real problem is low income, not the cost of living. While I agree that, longer term, we do have a productivity/income problem, we perhaps have different takes on solutions.

First, imagine that labour productivity doubled and that wages doubled. Some cost-of-living elements would ease substantially - food and tradeable goods in particular would become much cheaper relative to income. But what would happen to the cost of housing in Auckland or Christchurch? If housing supply is inelastic, then its price goes up with demand. Double incomes, and some of it will turn into improved housing quality via home improvements. But much of it will just bid up the cost of housing. How much of the wage increase would be eaten up in housing cost increases would depend on the income and price elasticities of housing demand and the price elasticity of housing supply - in other words, I don't know. But I don't think it's nuts to think you could eat up a reasonable part of any income increase with housing price increases given tight supply conditions.

Tim writes:

"I don't think it's a crisis and I don't think it's something we can do a lot about," he said.

"The main problem is on the income side and how much money we've got to spend."

He said the key to making things more affordable is to raise incomes and, in particular, to raise the minimum wage.

Hazledine says New Zealand is not a particularly productive country in economic terms.

"We don't have such high wages as Australians in particular do. This is why many New Zealanders move over there."

Incomes in New Zealand have kept in pace with inflation but have not got ahead of it.

Hazledine believes this is part of the issue. "We haven't really grown over the last 20 years and that's the problem."

If we have a low productivity problem, raising the minimum wage is not a particularly good idea. The minimum wage is $13 was $13.50 in 2012. The median hourly wages in the 2012 Income Survey was $20.86, so the minimum wage is 62 65% of the median wage. That's already really high by international standards; disemployment risks are pretty substantial. Stories getting to higher productivity from higher minimum wages tend to either be trivial (all the low productivity people are fired, so all we have left are the higher productivity ones. So yay! Productivity is up!), or, to me, implausible (some kind of efficiency wage story where no employer figures it out on his own; monopsonistic employers having aggregate effects on skill acquisition). If productivity is the problem, I'm really pretty sure higher minimum wages aren't the answer. And Tim forgets to mention that the Australian minimum wage for 16 year olds is half of the adult minimum wage, and that their minimum wages vary by industry.

I agree with Tim that the price of lots of things here seems very high. But I'm not sure that lack of competition is the most plausible answer. I can have books delivered to me from Book Depository in the UK for about 60% of the going NZ price; it's far more plausible that thin market problems and fixed costs in New Zealand are what inflate NZ book prices rather than lack of competition in the market for books.

But lack of competition is a more plausible explanation in other cases. RMA complaints kept IKEA from opening in Auckland and Wellington; furniture here consequently remains rather expensive and nobody will sell me horse-meat meatballs in lingenberry sauce. Westfield v North Shore City Council also showed how the RMA could be used to block competitors' entry.

On the whole, New Zealand runs a pretty decent set of policies for encouraging real competition: very low tariff rates while allowing parallel importation.

Both wages and real household income are up substantially on 1998.* The blue line below tracks median hourly real wages in 2012 dollars; they're up 14.6% from 1998 to 2012.** Hourly wages have continued upwards fairly nicely. Median real household income, the red line, is up 24.9% over the entire period but dropped with the recession and hasn't really come back.*** I'd expect that digging further into the tables would show some of that being due to labour force exit.

I worry that if the agglomeration folks are right, distance and scale will keep hurting New Zealand's relative position. Hiking the minimum wage really isn't much of a solution to this kind of problem. Instead we need to fix land use policy so we can increase population without killing housing costs and keep working to make New Zealand an attractive place for international migrants.

* Alas, NZDotStat only has Income Survey data back to 1998.

** Recall that the GST increased from 12.5% to 15% while income tax rates dropped to offset the increase in the GST. If you're using before-tax incomes, you have to use a GST-adjusted CPI.

*** Note that I've just used Google's default scaling for the graphs; using a zero bottom end would artificially suppress variance.

Partial privatisation

Auckland's Professor Tim Hazledine and I argued partial SOE privatisation on Radio New Zealand's Morning Report Wednesday morning, with minor unintentional contributions from a rather vocal Eleanor.


Tim and I are likely around 90% in agreement. We both think partial privatisation a bit of a nonsense; you get little of the potential efficiency benefits of full privatisation but add downside risk. I don't think it will wind up making a ton of difference; Tim puts more weight on the potential downside outcomes. I think we'd both agree that there's more potential downside risk than upside; he'd have the left tail fatter than I would. I think we both agreed that the "foreigners might buy shares" wasn't much of an issue.

Even if we're considering full privatisation, New Zealand's power companies would be reasonably far down on my list. You can make a defensible case that New Zealand's electricity system is one of the world's least screwed up; mucking about with it is risky. The likely equilibrium isn't a private system but rather a regulated cartel industry with more downside risk than upside. Seamus's worries aren't crazy. If I got to choose between DoC selling off half its estate at auction and full privatization of the energy companies, I'd pick the former.