Friday, 22 May 2020

Real Business Covid

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

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

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

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

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

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

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

Thursday, 21 May 2020

Tax attitude data - the IRD OIA slowly progresses

It's been a long saga, and it isn't over yet. But the end is in sight. 

On 12 February, 2019, I put in an OIA request for the data from the polling that IRD had commissioned from Colmar Brunton on tax attitudes. 

On 12 March, 2019, IRD declined the request on grounds that it would be considered sensitive tax data. I brought the matter to the Ombudsman the next day. But it later turned out that they had ordered the data destroyed. 

On 1 November, 2019, IRD gave me revised grounds for having refused the request: that the data had been destroyed. 

I had a chat with the Archivist's Office about what's required for that kind of destruction of public records, then went back to the Ombudsman.

On 12 March, 2020, the Chief Ombudsman provided a substantial slap to IRD and directed them to get the data. 

Some particularly nice bits from that report:
You have acknowledged that IR’s original decision to refuse the request on this basis was incorrect. I agree. It is difficult, in circumstances where IR has not reviewed the information at issue, to be satisfied that its disclosure would be contrary to the Tax Administration Act.
This is particularly nice because IR claimed its original decision was wrong on the basis that the data had been destroyed and consequently couldn't be supplied. They didn't say that their original justification for withholding the data, had it existed, was incorrect. The Ombudsman here is telling them that their withholding as tax secret was wrong full stop.
IR has contended that, in retrospect, Clause 4.3.2 of its Disposal Authority, DA418, authorises the disposal of this kind of information. It is possible this is correct.8 However, as IR did not document its decision of 9 February 2019, I am unable to satisfy myself that IR properly turned its mind to its Disposal Authority when it decided to instruct Colmar Brunton to delete the political leanings data. It is, in short, not clear that its disposal was properly authorised.

I therefore consider that IR was obliged, in the circumstances set out above, to contact Colmar Brunton to seek access to any backups of the political leanings data held by it or Dimensions while considering Dr Crampton’s request. In the absence of such efforts, I am not persuaded, subject to your further comment, that IR was entitled to refuse the request under section 18(e) of the OIA.
The Chief Ombudsman also referred the matter to the Chief Archivist to check whether IRD was also in breach of its obligations under the Public Records Act. 

The Ombudsman asked that, by 9 April 2020, IRD provide him with the steps they would take to give effect to his recommendation.

On Tuesday, 19 May 2020, IRD provided me this update:

Dear Dr Crampton

I am writing to advise you of our next steps with regards to your complaint to the Ombudsman.

As advised by the Ombudsman in his final letter, we requested the data for the Trust in IR research survey from Colmar Brunton. We are currently working through the data and will let you know the result of your request for the data in due course.

Kind regards

Government & Executive Services 

So, fifteen months after my original request, IRD says that they're working through the data to see what they can give me. Stay tuned. I'll have to set a calendar flag to follow this up in 20 working days if I've not heard anything. 

Tuesday, 19 May 2020

Gemmell on the budget

Norm Gemmell's piece over at Newsroom is harsh but fair. 
Before the Budget, I called for a stimulating, but prudent, Budget. That meant:

- moving away from universal, to more targeted, wage subsidies

- setting up flexible spending programmes now that respond to needs as they arise

- reprioritising spending away from short- and longer-term ‘nice to haves’ to essential recovery support

- presenting a credible future debt track beyond the immediate recovery.
Pretty reasonable. 
What did the Budget deliver? Arguably none of the four.

Firstly, another two months of universal wage subsidies with slightly stricter conditions (a bigger fall in business revenue) doesn’t make them ‘targeted’. This is despite projections that the economy is already getting back to 80 percent or more of normal working, with a few sectors likely to continue suffering. And when we’re two months closer to that election, the $20+ billions of ‘unallocated’ Recovery Fund can be strategically dropped into the election battle as further subsidy extensions and other vote-targeting sweeteners.
There's good reason to have unallocated funding when you can't guarantee that there won't be renewed outbreaks. But where a lot of the current budget and post-budget spending announcements really sound like election campaign spending - like the increases in Early Learning Centre funding for places with 100% qualified teachers - we may fear that contingency funds will be put to similar purpose rather than held against worsened Covid conditions.  
Thirdly, what of ‘reprioritising’ spending? There is negligible evidence of the Minster’s pre-Budget promise that some spending would be ‘put on ice’. On the contrary, almost every spending ‘vote’ (or should that be ‘special interest group’?) gets a boost over 2020-24, including making sure future inflationary costs are covered. Sweeteners everywhere, from arts and culture to conservation to $75 million for the Ministry of Social Development’s office refit programme. No fiscal constraints here, no public sector pay restraint or postponing ‘nice to have’ project for a year of two.

Do we really need those new Inter-Islander ferries right now when we have massive, more urgent spending needs? And an extra $1.6 billion for ‘retraining’ and apprenticeships. How many Air New Zealand flight attendants or Queenstown tour guides does he think are up for retraining to move on to farms?
Why are we paying $3 billion (up from $0.4 billion ‘prescribed by formula’) to the New Zealand Super Fund in 2021-22 to pre-fund future pension spending, while we also borrow massively to fund today’s crisis? Answer: Labour in opposition criticised the National government for precisely this after the global financial crisis. It dare not be seen now to be doing the same, even though suspending payment makes more financial sense.
I wonder instead why the government isn't going even further: spending down the Super Fund while cutting entitlements from a decade or more from now to balance the thing out. 
From a healthy Crown net worth of 43 percent of GDP at the time of last year’s Budget, this FSR forecasts net worth at 34 percent in 2020. Fair enough – we are coping with extra crisis spending and lower revenues. But, following the Budget, Crown net worth is projected to drop to just 9 percent of GDP by 2024 and only get back to 12 percent by 2030. In other words, a decade from now, during which time another serious crisis could easily have hit us, the Government’s plans for net worth are so diminished that we would be woefully unprepared financially for another fiscal bail-out of the economy.

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

But the Crown’s projected financial vulnerability a decade on reflects Robertson’s failure to offer any credible plan to raise net worth through fiscal prudence down the line. This is despite official forecasts of quick economic improvement: real GDP growth is forecast to be massively positive at 8.6 percent in 2022, and 4.6 percent in 2023.
And Robertson wouldn't say whether he views 42% debt-to-GDP ratios in 2034 as the new normal for fiscal prudence. 

Missing the boat

Grant Robertson thinks New Zealand could reopen to international education next year
Robertson said tourism and international education, two of the largest parts of the country’s services sector, were under “real strain”, but potential opportunities regarding international education could arise next year.
I hope we're not missing the boat. 

North American semesters have August (US) or September (Canada) start dates. Semesters run then until May or June. Students will typically have sorted out their next-year study options well before now, but with Covid on, everything's up in the air. 

But waiting until January means missing the cohort of students that lock in to North American options that are harder to exit mid-year. 

And waiting also misses those students that start looking around to see whether any international options are available for quality English-language instruction in the North American fall semester and see Australia gearing up. Being able to pick some of them up, before they lock into Australia, could matter - Australian universities generally outrank options here. 

I guess I'm just not understanding what the government is taking as the constraint against an earlier opening subject to very strict and rigorous quarantine and testing provisions for inbound students from places that are not Taiwan. 

Yet, if jobs are so important, why did Finance Minister Grant Robertson emphatically squash Education Minister Chris "Chippy" Hipkins' enthusiasm for reopening the country to international students a little over a week ago?


On the Wednesday of the week before last, Hipkins responded to some kite-flying on the issue by university representatives at the pandemic select committee by saying he would look at it "within 24 hours".


The news swept through the tertiary education sector like wildfire, producing a burst of optimism, not only from universities, but also polytechs and private training providers.


The latter two can accept intakes of students more regularly through the year than the universities.


Mark Rushworth, the chief executive at the country's largest private training establishment, UP Education, began talking to media immediately about the potential to bring students in as early as July or August.


Within hours, however, Robertson had hosed down such expectations, citing "next year" as the earliest the sector might see students return.
Smellie's sounding as frustrated as I am: 
And with a quarantine system now working well for returning New Zealanders, there is no logical reason not to treat fee-paying foreign students exactly the same way.

By all means, make them take more tests for Covid-19 before they leave their home country.

And hell! UP Education would happily pay the $3000 to $5000 the quarantine process would cost. That's also cashflow for local accommodation providers and caterers who are currently bleeding out for lack of custom.
He puts it up to four barriers: 
At play now in the policy discussion are four inter-related elements:

• Sequencing: It is completely unrealistic to imagine that international students from third countries will be allowed to start arriving here before the transtasman travel bubble is up and running. The earliest that can start, let alone be subject to a high level of confidence, is July.
But why? There's no logical necessity that trans-Tasman travel, without quarantine, be reopened before quarantined travel from other places. That makes us hostage to Australia's getting their case numbers down. 
• Progress against the virus: A revival of international education will only become viable if the current progress in New Zealand is maintained and there is no resurgence of Covid-19, either globally or in key countries of origin for international students — mainly in Asia.
There'd be no demand for study-abroad in New Zealand from overseas students if we lost the covid-free advantage. Agree. But Covid breaking out in other places makes study here more attractive. And if it's done with quarantine and testing, then it's kept safe. 
• Quality of educational offering: It seems the opportunity will be taken to rethink what kinds of international education providers are desired. Low-rent English language "academies", particularly in Auckland, have been hotbeds of unethical practice, shadow permanent migration scams, and exploitation by New Zealand-based employers of migrant students. There is no desire to facilitate the resurgence of that part of the international education sector.
That's an argument for Immigration NZ to start processing student visas for the universities first along with secondary schools, then for polytechs with degree options where there are either no associated work rights for incoming students or where those work rights are tied to a credible part of the programme of study or are part of homestay arrangements where students billet with families, providing childcare around study for room and board. Why hold everything up? 

UPDATE: to be *real* clear, I'm not here agreeing with the view around 'low-rent English language "academies"'. I haven't seen decent evidence on it. I'm saying that if that's your concern as government, then you could *at least* free things up for the sectors you're less worried about more quickly. All of the thinking in this space currently is going to be entirely messed up by lump-of-labour fallacies. 
• Labour market dynamics: A very large number of New Zealanders who had jobs pre-Covid are going to be looking for new ones very soon. Many of those unemployed will have worked in tourism and hospitality. The last thing the Government wants is for international students to return in numbers to become competitors for those jobs.
As above.
So, international education is more firmly on the Government's agenda than it may have appeared.

But it's complicated.
Meanwhile, the Universities are looking at job cuts. Here's AUT

I went through related issues in this week's column at the Stuff papers
Lifeboats are tricky things. If they are overburdened, they can tip and spill everyone out.

Even with lots of room for other passengers, hauling someone out of the water is precarious and may mean everyone drowns.

When you’re in a lifeboat, you have to be careful.

But is there any image more emblematic of the kind of thing New Zealand isn’t than a guy (and it’s almost always a guy), alone in a lifeboat, rowing furiously away from a sinking ship and ignoring everyone bobbing in the water around him?

It certainly isn’t a very nice picture.

Bigger lifeboats are much easier to row to safety when more people can help. Leaving them to drown, when they could be helping with the rowing, isn’t just nasty, it’s self-defeating – so long as there’s a way of safely pulling others onboard.

New Zealand is an awfully big lifeboat in some rather treacherous waters. Watching the coming tsunami of a terrible recession, this country could use all the help it can get. If a way was found to safely let others on board, shouldn’t it be followed?

It can be done. And it matters.

The first issue is safe entry. If there is no way of safely letting people on board, it matters less how much they could help.

And the first place to look is to neighbours that are as safe as New Zealand – other lifeboats. Boats that raft up together are more stable.

Compared with New Zealand, Taiwan has fewer active Covid-19 cases, a lower average daily case count, tight border controls and a stronger pandemic response system. Auckland has had more recent cases than Taipei. Sitting here in Wellington, an incoming flight from Auckland poses greater personal risk than an inbound flight from Taipei.

New Zealand could, unilaterally, decide to allow visitors from Taiwan – while maintaining the option of closing the border again should its conditions worsen.

But unless Taiwan is sufficiently comfortable with New Zealand’s pandemic response, returning visitors would face quarantine.

Hopefully, negotiations between New Zealand, Australia and Taiwan are underway to let these lifeboats raft up together. If that means some Taiwanese oversight of New Zealand’s tracking, tracing and testing systems, so much the better for New Zealand: it would be like inviting a lifeboat expert onboard to ensure everything’s in order as we raft up together.

It’s hard to argue against rafting up for stability; it’s entry into that set of rafted boats that’s more contentious. But it can be made safe.

Last week, Laurel Chor tweeted her experience of flying to Hong Kong from Paris via Heathrow. Arriving passengers filled in quarantine orders, health declarations, were issued tracking bracelets, and sat, with appropriate spacing, in a wide hall.

They underwent Covid-19 testing and waited for eight hours for the results before heading to two-weeks’ mandatory and monitored quarantine.

Safe entry is certainly possible. It is a hassle, and it would not be cheap. But inbound travellers from riskier places could bear that cost through a biosecurity levy. Mandatory quarantine would put off most casual tourists but others would join New Zealand’s lifeboat for a while to help with the rowing task ahead.

Two weeks ago, I argued for this kind of entry regime for international students. Last week’s Reserve Bank Analytical Note showed international students contribute 1.1 per cent towards New Zealand’s Gross Domestic Product. This takes into account their expenditures in the broader community. Rather than facing the prospect of bailing out the universities, the Government could allow overseas students to safely join this lifeboat and help row the boat faster.

This would not just help the universities, it would help the country. Substantial employment depends on those students’ contributions while staying here. And with a bit of marketing, New Zealand could attract top tier students who would rather not attend online classes at US universities.

The California State University system announced last week it would only have online instruction during this autumn semester. New Zealand can provide a far better university experience by letting them onto its lifeboat. But this requires speedy action to attract students who are already looking at August semester start dates in the US.

Many others could help with the rowing if a quarantine system was in place – from international film productions to international sporting leagues and more. Making the recession less bad helps this country while helping them. And it can be done safely.

It would be silly to be in a lifeboat, trying to outpace a coming tsunami, and leaving others to the waters when they could safely be brought onboard to help. The rowing job ahead is not a small one. 

Monday, 18 May 2020

Crisis budgets and returns to prudence

The Spinoff asked me for comment ahead of last week's budget.

Here's some of what I'd told them, hit the link for the rest:
The government should have two priorities in this budget. First, and most importantly, the health system needs to be ready for the medium-to-long term changes that the pandemic has forced on the country. Second, the government needs to ensure the temporary measures necessary are in place for all of us to deal with the current mess.

Those two priorities lead to one unavoidable consequence. Permanent spending increases – increased spending on matters unrelated to the pandemic that are locked in and hard to reverse – means less room for dealing with the pandemic.

Why is that the case? The government will need to take on debt to deal with the current crisis. Tax revenues will be down and spending will have to be higher. But while the Public Finance Act allows this kind of response to emergencies, it also requires the government to think about the path back to prudent debt levels. This requirement makes a lot of sense: we just cannot know when the next crisis will hit; the Alpine Fault is overdue. We will need room to deal with the next crisis too.

Returning to prudent debt levels after this is all over will be much harder if the government locks in increases to baseline expenditures; that would limit how much debt the government could afford to take on now. An adequate response to the current crisis requires fiscal discipline about matters unrelated to the pandemic response.
After lockup ended, I wondered why the government didn't seem interested in the tiny investments it would take to be able to start reopening the border to safe travels: travel from safe places, or under strict quarantine and testing requirements.

I had a bit of a chat with Duncan Grieve about it at Spinoff

Then I filed this with Stuff:
The Budget headlines will focus on the extent of the Government’s additional support for households and businesses through extensions of the wage subsidy programme, worker retraining initiatives and job creation schemes in areas like environmental improvement and house-building.

The Government avoided locking in too many increases to entitlement spending. But it will still take until 2034 for its net debt levels to fall to levels twice what they were prior to this crisis.

What seemed more absent was a vision for economic recovery grounded in some of the advantages New Zealand now enjoys. The Budget presents a vision of a Government-led recovery with a comforting message: the Government is there to provide support, jobs or retraining — a sealed lifeboat bobbing on rough seas until the storm clears.

But small investments in setting rigorous quarantine facilities so others can safely join our lifeboat would pay off rapidly — and many times over — while enabling different visions.
One bit that did worry me during lock-up: the budget documents project net debt rising to well over 50% of GDP, but only dropping to 42% of GDP by 2034. I asked Minister Robertson whether he viewed 42% Debt-to-GDP ratios as being the new long-term fiscal prudence, or how much longer it would take to get back to normal levels. Rather than answer the question (which I thought was a fairly simple one), he said he viewed himself as acting prudently and in line with his obligations under the Public Finance Act. But I hadn't said that taking on debt was imprudent. I had wondered about whether the end point in the forecasts was just because they couldn't see getting back to prudent debt levels within the forecast window, or if they'd revised their view on what counted as prudent. 

However, Government borrowing is considerably greater at $140b over the next five years. New operating spending, excluding welfare and health, peaks in 2022, long after the economy is expected to have turned the corner.

It is also hard to find evidence of the reprioritisation referred to by Grant Robertson. Nearly every part of the public service sees new spending.

Wednesday, 13 May 2020

Documenting what led to lockdown

Marc Daalder goes through last week's document dump and plots out the path to lockdown.

You need to read the whole thing and subscribe to Newsroom. 
When Ardern announced the alert level system on March 21, it was met with an immediate outcry by epidemiologists and other health professionals for a move to Level 4.

Baker, who had been calling for lockdown for the better part of a week, reiterated his view on RNZ shortly after the announcement. He was convinced New Zealand's testing wasn't ready to find the cases out there and also raised a handful of concerns about contact tracing.

In the end, it was the contact tracing that would prove the slowest to scale up. A report on contact tracing commissioned by the Ministry of Health from University of Otago infectious diseases expert Ayesha Verrall found Public Health Units (PHUs) were overwhelmed by the case numbers they faced in late March.

"When New Zealand moved to Alert Level 4 on 25 March, many PHUs were at or beyond their capacity to manage cases and contacts, even with increasing support from the newly established [National Close Contact Service]. During that week, nationwide daily case numbers ranged from 70-86," Verrall wrote.

Even two weeks into lockdown, only 60 percent of contacts could be easily reached by phone and PHUs had no insight into what happened to cases they referred to the centralised NCCS. Verrall wanted to see the PHUs and NCCS able to trace all the contacts of 1000 new cases every day, up from just 70 on March 25.

In fact, the documents released by the Government show that by March 18, PHUs could trace fewer than 50 cases a day. On the same day, 39 Covid-19 cases entered the country. The situation was quickly spiralling out of control.

Exactly why the country was so unprepared for Covid-19 remains unclear. Newsroom has previously reported on international assessments in which New Zealand scored just 54 out of 100 points for pandemic preparedness. Domestic epidemiologists, including Baker and fellow University of Otago expert Nick Wilson, had long raised these concerns.

Nonetheless, the country's poor preparedness meant there was no viable alternative to lockdown. While countries like Taiwan and South Korea have managed to chart a suppression or elimination path without resorting to lockdowns, they also have far more robust public health systems than New Zealand.
In February and March, I just wasn't expecting failure to scale up contact-tracing to be the problem. I'd thought that part was simple - just hire more people. Not doing it proved expensive.

Newsroom also provides this helpful timeline.

 

Tuesday, 12 May 2020

Evening roundup

The evening closing of the browser tabs brings the following worthies: