Keep the Investment Approach

From my column in last week's print NBR($), in which I hope that Labour makes the Investment Approach its own rather than ditching it.

National focused on how the investment approach could reduce the government’s long-term fiscal burden. Mr English rightly understood, and often pointed out, that the reason people wind up costing the state a lot in benefits is because they are living miserable lives.

If targeted effective interventions can improve people’s lives so they need not rely on state support, then the fiscal savings are just a proxy measure for what is really being targeted: the improvements in quality of life among the most vulnerable.

But where the focus is on the savings rather than the saved, the message is lost. And too much of the discussion was framed around minimising future costs.

It is too easy to imagine evil ways of minimising future fiscal liabilities – and doubly so for those who were not inclined to give National the benefit of the doubt.

Normal politics would rule out evil ways of reducing the government’s long-term fiscal burden. But relying on politics can be risky, and it is unnecessary. Instead, we can use better metrics. Measuring a programme’s likely effects on the long-term fiscal burden is important but so too is broader monitoring to make sure that programmes are not doing harm along the way.

That provides Labour with an opportunity to put its own stamp onto the investment approach. Continuing to measure the long-term fiscal burden facing government, and the contribution of new programmes to reducing that burden are important. But so too is adding the right additional measures for any programme to check and to demonstrate that the programmes really do good.

Afternoon roundup

A few worthies from some accumulated closing of the browser tabs:

• The UK's drinking guidelines aren't particularly evidence-based. 
• Ann Brower's reflections on earthquakes, dangerous buildings, and policy at the Herald is very good. 
• John Kay's defence of Beveridge-style targeted social insurance over universal transfers covers the bases well. Maybe I just like it because it's about what I say on the same topic. 
• You might like my piece over at NBR on this year's economics Nobel. 
• Making sure schools are effective is important. But they aren't miracle workers. The arguments there tie into broader debate around meritocracy and heredity, the subject of a great BBC radio 4 programme earlier this year but that I only just caught. 
• Ex National Party comms guy Gwynn Compton is skeptical that Labour will be able to square its coalition promises and its election promises with fiscal realities. It'll be interesting. 

Regional development is hard

The coalition deal between Labour and New Zealand First includes a regional development push, along with a billion-dollar fund for spending to help things along.

But regional development is hard. The Economist provides a decent survey of the issues:

• Agglomeration has become more powerful, so regional convergence within the US has reversed. Productive places become more productive. 
• Infrastructure and redevelopment projects don't have a great track record in improving things.
• Dumb urban planning rules make it too hard for people to move to productive places, but fixing those rules could hasten decline in declining places. 
• Tax incentives and enterprise zones that provide hiring subsidies don't work. They don't raise employment, and if they do, it's by beggaring the neighbouring places that don't get the incentives.
• Local spending pushes have temporary effects, but don't last.

The piece is more optimistic about efforts to spark new industrial clusters, like South Carolina's tax incentives and subsidies for a new BMW plant that later led to Volvo setting up a plant nearby drawing on some of the same suppliers that showed up to supply the BMW plant. But that too is risky. Subsidy races between towns are great for the firms getting the subsidies, but not so hot for the towns that have to bribe firms to show up.

The Economist also is optimistic about setting up regional colleges that focus on training local firms and workers in new technologies in hopes of encouraging technological diffusion to the longer tail of less productive firms away from the bleeding edge cities. I wonder whether anybody's ever evaluated whether SIT led to greater productivity for firms in Invercargill as compared to other regional centres. 

I'm still optimistic, for New Zealand, about the prospect of special economic zones that might let local communities opt out of national-level policies or regulations that aren't fit for local purpose. Winston Peters' proposed SEZ around a new port in Northland doesn't fit the bill as it just looks to provide tax concessions around the port area rather than build a broader policy structure to suit local conditions. But special economic zones as policy trial areas are a promising way of allowing more devolution and localism for the councils that are ready to take up the challenge. 

And I hope that at least some of the billion-dollar fund is used to improve tourist-facing amenities in regional centres that bear a greater part of the costs of tourism than they receive in benefits.

Migrants and housing

Labour's proposed new housing policy is going to break something I really loved about the migrant experience in New Zealand.

I moved to New Zealand in 2003 with Susan. I'd accepted an appointment as Lecturer in the Department of Economics at Canterbury and arrived on a skilled migrant visa.* Susan's work visa was tied to mine - at the time, the new points system was slowly ramping up and the points threshold was very high.

We rented a brick house on Hudson Street for our first year, while we got a feel for the place and whether we'd like to stay. We wanted to go month-to-month at the end of that year's lease while house shopping, but the owners were coming back from Dubai so we had to be out at the end of the lease. That was a bit too quick for house shopping, so we rented an old damp art deco place on Knowles in Mairehau (the real estate agents would say St Albans) on a one-year lease and started properly house shopping.

We bought our place in South Brighton and took possession as the second lease was running out. We received permanent residence around that time, but we were shopping while on our work visas.

And at no point did it ever really matter that we weren't residents or citizens. We were people who lived in New Zealand, and as good as anybody else living here.

It was really different from living in the States. As a Canadian in the US on an F-1 student visa, it was always very very clear that you were second-class relative to real Americans. You had to have your passport on you, all the time. Every interaction with the state made clear that you were lesser. And that didn't change on getting permanent residence there. Move house? Better let the state know promptly, lest Immigration chase you down.

Under Labour's proposed policy, only citizens and permanent residents will be allowed to purchase existing houses here. Others can hire builders to build new ones, or maybe buy ones in new developments as they get going - it hasn't been that well laid out yet.

But either way, a young skilled migrant on a work visa aiming towards residence will have a very different experience than I did. We sure wouldn't have been able to afford a new build if that's all we'd been allowed to buy in 2005, and we sure wouldn't have been able to live out by the Brighton beach where we wanted to live. It was paradise.

And I wonder whether we would have stayed here if the 2005 Labour government had been as keen on pointing out how much we weren't wanted around.

I really hope Labour re-thinks this one. Put a stamp duty on foreign buyers if you want. I don't much like that either, but it's not nearly as important.

If someone is building a life here, it shouldn't matter what visa they're on.

* Update: Just so it's real clear, there are work visas that are called Work to Residence visas. The expectation on those visas is that, unless you screw something up, you're on the path to residence. I came in on one of those. That visa category is still there. And I really really hope that people on it get counted as resident for Labour's ban-foreigners policy.

Work to Residence visas

There are two main types of Work to Residence visa which enable you to work in New Zealand and then, after working in the job for at least 24 months, apply for a resident visa.

Work to Residence: Long Term Skill Shortage

If you have a permanent or long-term job offer in an occupation on the Long Term Skill Shortage List and your qualifications and experience match, you could apply for a Work to Residence Visa. You’ll need to meet the age, health and character requirements.

Long Term Skill Shortage List Category | Immigration New Zealand

Work to Residence: Accredited Employer

If you have a long-term or permanent job offer from an Immigration New Zealand accredited employer you could apply for a work to residence visa. You’ll need to meet the age, health and character requirements, and your job offer will need to meet certain requirements.

Talent (Accredited Employers) | Immigration New Zealand

Immigration changes

I had a chat on Morning Report today about Labour's coming changes to immigration.

On the plus side, Labour's proposed changes are not nearly as dramatic as those proposed by New Zealand First. Labour's proposals are detailed here. Mike Reddell's critique of my take is here.

Labour proposes a generalised tightening of eligibility for various visas that they expect would result in 20,000 to 30,000 fewer migrants per year. Treasury continues to forecast that net migration will drop substantially, and within the context of the drop that is likely to come Labour's changes are not huge. But they would increase the size of any drop that is to come.

Labour wants to reduce the number of foreign students coming to New Zealand for study, and particularly wants to focus on students coming to study at sub-University and sub-Polytechnic institutions.

One of the changes is likely also to hurt the universities though. Currently, students completing degrees at New Zealand universities earn points towards a later work visa application. That means that getting a degree here also provides an option to stay on a work visa - or at least a stronger option than you might have otherwise had.

It makes sense from an immigration perspective if you think that people who have spent a few years studying here will be better acclimated to the place and will be more likely to have successful outcomes as migrants. And it makes sense within the context of a university system that explicitly cross-subsidises course delivery to domestic students from fees paid by international students.

As Labour has also promised a shift to fee-free study for domestic students, this could matter more. Fee-free study will inevitably have government try to find new ways of containing the costs of tertiary study on the government, and being able to rely on fees paid by foreign students has been important for the tertiary sector. We started seeing this pretty strongly in the aftermath of zero-percent loans, and it will get stronger. Making New Zealand less attractive for international students may be poorly timed.

I expect that changes restricting students at sub-Bachelor's programmes from working while in study would fairly quickly have those programmes designing work-in-study options to accommodate. The usual drill from critics on this one is that people come here because they want to work in a fish and chip shop and are able to do it by taking a couple courses in a shonky programme. But it's also very plausible that getting work experience while in any programme of study is really important in any potential future attempt to get work here. New Zealand's a small place, and having a local willing to vouch for you seems far more important than it should be. So I'd expect that most of those programmes will find a way of partnering with local employers to provide work-in-study training options that tick the boxes.

More worrying is the loss of the one-year study-to-work visa option for sub-Bachelor's courses. Suppose you graduate with a polytech degree in a skill that's in short supply in New Zealand. You've been studying on a student visa that will be expiring. If you want to stay, you need to flip to a work visa. But you can't get a work visa without a job offer in hand, because of how the points system works. The points from the job offer get you the work visa. And nobody's going to give you a job offer without your visa in hand if they think things will get held up at Immigration while all the police background checks from your home country are underway. Having the one-year study-to-work visa means the potential employer knows that that you've plenty of time to sort out any visa issues. Doing away with it would make it harder for foreign grads to get into work here.

Moving away from the student visa categories, I like that Labour's suggesting regionalised visas as a way of letting regions have access to more migrants; I would have liked this as an "in addition to" existing central government quotas, but I suppose it might have let Labour cut less than it otherwise might have.

I worry that the KiwiBuild visa programme is not nearly large enough to accommodate the scale of construction that is needed to remedy Auckland's housing shortage, that Labour's requirement that employers make a "genuine effort to find New Zealand workers" will set the stage for sham hiring rounds where an employer has already identified someone who would be perfect for the role and happens to be a migrant, and that there is no focus on finding better ways to ensure that foreign qualifications in fields like teaching are adequately recognised here.

Finally, where Labour sees a stronger labour inspectorate as the solution to problems of employers exploiting migrant workers, a more robust solution might ensure that migrants' visas are not unduly tied to particular employers. If you know that being fired (or quitting) will mean that your visa won't be renewed because you might not get another job quickly enough to have points on your application for having a job in hand, then your employer will have far more power over you than that employer should. Finding better ways of using the applicant's employment history rather than current employment status would provide a structural solution where employers couldn't abuse migrants because they would know those workers could easily shift to a better employer.

On the whole, I was steeling myself against worse.

PS: I hope that the Greens will champion the trial of the sponsored refugee system that the National government started. Sponsorship is a great way to let Kiwis willing to help do so without having to lobby the government to increase the quota whenever there's an international emergency. Treat it as an and rather than an or for the existing commitment to increase the government's quota.

The big minimum wage hike

Labour's proposed increasing the minimum wage to $20 by 2021.

This isn't an end of the world bad idea, but it isn't a good idea.

The government has been targeting a minimum wage of about 66.7% of the median wage. That's already very high by international standards. If we assume median hourly wage growth continues at 3.4%, then the median wage in 2021 would be $27.43. A $20 minimum wage in 2021 would be 72.9% of the median wage.

Here's how Treasury illustrated that kind of wage in its review of the living wage in 2009.

So imagine a new arrow at the 73% mark of uncharted territory instead of the 85% mark. 

Or put it another way. If the minimum wage today were 72.9% of the median wage, it would be at $17.50 instead of $15.75. What did MBIE's last minimum wage review say about a $17.50 minimum wage? Well, they didn't have that one on the table. They plotted out the effects of a $0.25, $0.5, $0.75, $1.25, and $4.55 increase, but not a $2.25 increase. Why the big gap? Because the $4.55 one was the living wage proposal that was floating around.

Anyway, if we do some simplistic extrapolation between the $16.50 and $19.80 minimum wages to see what the effect of a $17.50 wage might have been, it looks like about 15,000 fewer jobs, and net costs to the government of about $125 million. Those costs are net because while minimum wage hikes increase what the government has to pay in wages to some workers, it reduces the government's outlays under Working for Families because much of the income gets clawed back - especially for workers on less than 30 hours per week. They don't get to keep much at all. 

EMTRs mean the minimum wage hike does little unless you're working at least 30 hours. #nzae2017 pic.twitter.com/xlmhLw2OZX

— Eric Crampton (@EricCrampton) July 13, 2017

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

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

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

Caveat on all this: if the pending review of the Reserve Bank Act winds up deciding on much higher inflation, then a $20 minimum wage might wind up being 67% of the new higher nominal median wage.

I'll be chatting through some of this with Mike Hosking tomorrow morning on the radio at the ridiculously early hour of 6.30 am or thereabouts. 

The cell phones hypothesis

Are cell phones to blame for the uptick in New Zealand's crash rates? I don't know, but I have a potential way of checking - an exercise I'll leave to the committed reader, or whoever MoT hires as their new data analyst.

Get maps of cell phone coverage going back as far as the data goes. Not all uses of cell phones while driving require signal, but phone use should be increasing in signal availability. Here's a map of towers, but you'll need a time series and you'll need dead zones.

Get maps of accidents.

See whether expansions of cell phone coverage predict increases in the number of accidents in the places getting more cell coverage.

Confound: endogeneity where cell companies will put up towers in response to demand. But that demand should lead the accident rate rather than lag it, unless the cell companies are real good at predicting where people are going to start wanting to drive more. If the towers are more likely to come after the increase in traffic, then it should be fine.