Conference roundup

My column at Newsroom last week gave a roundup of the sessions I attended at the NZAE meetings where the results might be of interest to a broader audience. 

It's ungated now, so folks can catch it there. Along with the usual band of sad old grouchy leftists in the comments section who hate economics and economists. 

I think this was my favourite of all the sessions - but that'll largely be because of my own particular interests. I didn't name the presenter or the shop that did the work as they seemed to want to hold that back until the work is finally ready for public release. But credit really is due. 

There was a superb presentation on problems in cost-benefit assessment, or rather in not using it, when deciding on major projects. Here we can consider ourselves lucky not at the outcome, but that someone is checking.

Economists prefer to rely on cost-benefit analysis when assessing projects – CBA. Some others like to use what’s called Multi-Criteria Analysis – MCA. On that latter kind of assessments, projects get scored across a variety of categories.

Cost-benefit assessment tries to put a monetary value on all kinds of different costs and benefits – some of which are harder than others to turn into dollars and cents. But Treasury maintains a comprehensive spreadsheet (called CBAx) listing the costs and benefits of many things, all of which then provide a standardised basis for assessment.

Multi-Criteria Analysis does not try to do that at all. Instead, a project gets a score within each category, the categories are weighted by their perceived importance, and the project gets an overall grade.

Suppose that you wanted the government to adopt your project proposal, and you knew it didn’t do well on a value-for-money basis. It would have a tough time under CBA. But under MCA, there’s a neat trick. If you add more categories for assessment, the weighting on cost declines automatically. If cost is one of two categories, each category gets 50 percent weighting. If cost is one of 10 categories, then the project’s poor ranking on cost can be outweighed by whatever other categories are added in.

Of course it is possible to require cost to have a high weighting. But it’s rarely done. And then we wind up being surprised by all of the expensive projects that get approved. Cost-benefit assessment is underrated – or, at least, MCA should require that rankings on cost carry a lot of weight. In the assessment exercise described, fewer than 5 percent of evaluated project proposals had a robust cost-benefit assessment.

I am very glad this work is being done, and I expect to provide a more detailed column when the authors are ready to release it into the wild.

In questions after the session, I noted that I've seen a few cases where boosters have tried to claim that their clearly-infrastructure proposal is really a social-type investment warranting Treasury's preferential 2% discount rate. I was annoyed that Treasury seemed utterly indifferent to that risk when they put up their proposal, and hoped that it didn't turn out as badly as I feared. 

The presenter noted that there'd been a full slide on that issue that had been pulled so they wouldn't blow out the time constraint for the session. It is a real and bad issue. As expected. And something that prior better versions of Treasury would have been alert to. 

Pronatal policies

The Institute for Family Studies puts up a pro-natal proposal that I'd not seen before.

Most of the literature I've seen on baby bonuses suggests that the amount on offer would have to be hefty to have substantive effects. This version could harness a bit of loss aversion:

President Trump launched a small savings account seeded with $1,000 to give emerging adults a leg up in his “Trump Accounts,” passed in the One Big Beautiful Bill. The Heritage Foundation has proposed a larger investment intended to mature upon marriage. These ideas are good starts. But the most complete proposal in this regard is a recent proposal in Finland called Vauvasampo. Adapted for the American case, this proposal is simple: every child born as a U.S. citizen in 2026 or any future year would have some amount of money, perhaps $15,000, invested in their name, which we call “American Birthday Accounts,” in honor of our 250th year of independence. 

Beneficiaries could not touch these accounts until they have a child; that is, until they are the legal and custodial parent of a related child born in the United States or under U.S. jurisdiction abroad, and coresiding with that child or else deployed on U.S. government business. At the first birth (or, if preferable to avoid risks of early child abandonment, at the child’s 1st birthday, if still coresident and full custodial), they would gain access to, say, 50% of their account’s value, and the residual 50% would continue growing. At the second birth, 75% of the fund’s remaining value at that time could be claimed. At a third birth, all remaining funds can be claimed. Assuming funds are invested in something like a mutual fund, a $15,000 investment could easily lead to a married couple receiving a baby bonus worth $100,000 for a first birth, with smaller additional payments for subsequent births. Recipients could be permitted to cash out their benefit over multiple years if they preferred, and any new funds gained through subsequent births would be added to this continuing fund. 

This baby bonus money could be counted as income, which means that part of its cost would be directly recouped through interactions with means tested programs and income taxes: beneficiary families at both very low and very high incomes would receive smaller after-tax-and-benefit returns. All families of any income would be eligible, but in practice the real benefits would be most generous for middle-income married families, subsidizing fertility the most for working- and middle-class families. Because only children born in the U.S. would be eligible for the investment, concerns about subsidies for children of immigrants would also be alleviated: it would be essentially a subsidy only for U.S.-born individuals to have their own children. Because married couples would be eligible for each parent’s baby bonus, the benefit would effectively double for married couples. To avoid creating subsidies for teen pregnancy, fund accessibility could be set aside until parents reach an appropriate age (perhaps 21 for a first birth, and a slightly higher age for subsequent births). 

Bang-for-buck, American Birthday Accounts are the single best way to get more babies born in stable families than almost any other policy imaginable. In the long run, since many individuals will have fewer than 3 children (and many will be childless, thus leaving many funds unclaimed), those unused funds can be reinvested in the program to create a rolling national family trust fund, which would render the program zero-cost to taxpayers after the first eligible generation had completed their childbearing. Even without that reinvestment, the budgetary cost for an investment of $15,000 to $20,000 per child would be between $45 and $80 billion per year. For comparison, U.S. public schools spent just under $19,000 per year per student in 2021, so this program amounts to the public investing just one year of schooling worth of public resources into children’s future family life. 

Refugee sponsorship

About a decade ago, Canada's Counsellor for Immigration at the High Commission in Canberra came to Wellington to explain how Canada's refugee sponsorship programme works. 

His discussion of it at The Initiative's event is here. 

The basic deal: whenever communities can get together to raise the funds necessary to support a refugee's start, Canada will open the door to another refugee. Outcomes have been very good - or, at least, sponsored refugees have better outcomes than those arriving through the government's quota.

The previous Labour government here set up a trial programme. And it's now being made permanent. 

The Government has announced the Community Organisation Refugee Sponsorship (CORS) programme will become a permanent part of New Zealand’s refugee resettlement system.

Associate Minister of Immigration, Casey Costello said the trial of the CORS programme shows it can deliver strong outcomes for refugees in employment, housing, education, and community connection.

“Making it permanent means we can build on the skills, partnerships and knowledge developed through the pilot. This is a positive step and provides a programme that we know works,” Ms Costello says.

The permanent CORS programme will begin 1 July, with organisations able to apply to become approved community sponsors from that date. The introduction of the programme will be scaled, with 50 places available in the first year.

But there are a couple of substantial differences as compared to Canada's regime. Hopefully New Zealand's can evolve towards Canada's in time.

Canada has a high nominal cap on the number of allowed sponsored refugees. 

New Zealand will cap the number at 200.  

Canada's sponsored route sits on top of the government's route. However many refugees the Canadian government is prepared to support, communities can fundraise to support more. Those sponsored refugees are additional. 

New Zealand's will be subtractive. The total number is capped, so whenever a community gets together to sponsor a refugee, one will come through that channel - with no effect on the numbers allowed to come here. 

CORS will be delivered alongside New Zealand’s Refugee Quota Programme, maintaining an overall number of refugee resettlement places available at 1,500. Places will be progressively allocated to the community sponsorship pathway as it scales up, with the Quota Programme adjusting accordingly. This allows CORS to be funded from within existing baselines.

The Refugee Quota Programme will remain New Zealand’s primary humanitarian pathway, and any allocated CORS places that are not taken will return to the Quota Programme. 

“In the current environment, this is the best way to ensure a programme that we know works well can continue into the future,” Ms Costello says.

“The Government remains firmly committed to an overall resettlement intake of 1,500 people per year. New Zealand currently takes the third largest number of UNHCR mandated refugees internationally, behind Canada and Australia.” 

If the concern is resourcing, because the government covers some of the cost in a refugee's travel here, it could make more sense to increase the amount of funding that a community group must raise so it covers the total cost, and then allow it to be additional to the government's quota. 

During the Syrian refugee crisis, Canadian communities could work together to help support more arrivals while Kiwis instead had to lobby the government to increase the quota. I'd hoped that the sponsorship regime could provide flexibility that the government's quota can't. It will not do that job under this setup.  

Biosecurity as religion

During the Commerce Commission's market study into groceries, Coriolis Consulting put up a chart with some thumb-suck order-of-magnitude estimates on costs here. 

I was reminded of that reading this BusinessDesk piece on on biosecurity rules around blueberry imports. 

Annual revenue for the sector is about $150m. 

Peru exports a lot of blueberries to the US. Wholesale prices there are around $6.60 USD/kg, so about $13 NZD per kilo if you include GST. 

Here the things run about $10-$12 per punnet, or maybe $80-$96/kg. 

Air freight and logistics for getting blueberries from Peru to here would add a lot of cost. 

Imagine a bad-case outcome where a biosecurity failure means the complete end of NZ blueberry production and we had to rely on imports from Peru and Chile (which somehow manage to have production despite being subject to whatever NZ is worried about). 

How high does the probability of that outcome have to be for our current biosecurity rules to make cost-benefit sense? Is it really just religion?

Kalshi, and the case for bigger sandboxes

I've been following Kalshi for a while. 

I remember back in the iPredict days, Matt Burgess figured prediction markets were a billion-dollar idea.

Kalshi's now attempting a capital-raise at a $40 billion USD valuation. 

Incredible.

But it never could have happened here. Not at the sandbox-level scale authorised by the Securities Commission. 

I had a piece in the Herald on it a couple of weeks back. I'd there cited Kalshi's Series F that had a $22 billion valuation - and they're now pitching for $40b. Amazing. 

Ungated version of the piece is here. Our country's regulators need to allow a bit more ambition. 

When Victoria University of Wellington’s great little prediction market, iPredict, announced that it would be shutting down back in 2015, it had a couple hundred thousand dollars of traders’ deposited funds in the bank. It was a very small, very limited, academic enterprise.

Kalshi is a US-based prediction market. It is regulated by America’s Commodity Futures Trading Commission, the CFTC, which fully authorised it in 2023.

It is identical in principle to what iPredict was. But Kalshi’s Series F funding round raised a billion dollars at a $22 billion dollar valuation earlier this year. Their annualised trading volume recently hit $178 billion, generating annualised revenue of around $1.5 billion.

The difference between iPredict and Kalshi does not come down to the difference in scale between the US and New Zealand – though that certainly matters. The scale, the ambition, and the permissions differ considerably.

iPredict ran as a futures exchange authorised by the Securities Commission, able to quickly define contracts and let traders figure out what they were worth. Contracts like, “Pays $1 if National forms government after the next election, pays $0 otherwise.” Prices on those contracts tell you traders’ expectations about probabilities – and they were highly accurate.

Anyone could sign up to trade, and many people did – at very low stakes. Accounts with five or ten dollars in them were common.

It was small because New Zealand’s regulators wanted it that way. They were happy to let iPredict play in a small regulatory sandbox with laudably liberal rules on how it operated because nobody was allowed to put very much money into it.

And because nobody expected anyone to authorise anything more ambitious, there was no point in even asking.

At first, traders were allowed to deposit only up to $2000. That limit later increased to $10,000. If traders had larger accounts with more money on the line, regulators would not have felt safe letting iPredict run as it did. Regulation around how it defined contracts would have hardened. It may have had to start issuing a full prospectus on each one.

Issuing a full prospectus for a prediction market contract would destroy the real value that a prediction market can bring: quickly establishing new markets when they are needed. Jeremy Maletz is head of Prediction Markets at Susquehanna International Group – a substantial American market-maker in equity options. Maletz argues that where it can take a year to create a new hedging contract on traditional markets, prediction markets can do it in a day.

Suppose that your business depends on trade with Taiwan. If China blockaded Taiwan, you’d be in trouble. It’s always possible to diversify your business. But it should also be possible to hedge against that risk more directly. A prediction market could quickly list a contract that pays out if that event happens before a set date, and doesn’t otherwise. Traders on the contract set the price; organisations like Susquehanna prepared to take on some risk provide liquidity.

Being able to set contracts quickly, when they are needed for hedging, is valuable. But that value is small if deposit limits are tight.

iPredict consequently ran on the smell of an oily rag, barely able to wash its own face, and certainly unable to cover the cost of meeting anti-money-laundering regulations imposed by the Key-led National Government. Somewhat ironically, the constraints under which it operated meant it was nigh-impossible for anyone to ever really try laundering money through it. It simply did not have the trading volume to bring that risk.

The deposit limits didn’t just mean that iPredict could not afford those kinds of costs. They also meant that the thing was hamstrung from the outset. It could never take up the kind of role that Kalshi is quickly moving into in making financial markets simply work better.

Kalshi is innovative. Last month, they were authorised to launch America’s first perpetual futures contract. Normal futures contracts come with expiration dates. A perpetual futures contract simply tracks the value of a defined indicator.

Perpetual futures contracts on house prices would be immensely valuable. Contracts could track the value of the median home in our major cities. People could save for their first home by buying the relevant house price index. No matter what happened to house prices, your progress toward a deposit would be locked in.

New Zealand’s Department of Internal Affairs decided that, because Kalshi had not been authorised by the Financial Markets Authority, it must be gambling. So they sent a letter to Kalshi demanding that it not let Kiwis trade there. And Kiwis can no longer set accounts.

It does not just stop Kiwis from trading on the outcome of the next American election. It also will substantially hinder financial market innovation and hedging options. Our regulators ensured that no Kiwi Kalshi could ever emerge and now ensure that foreign innovation cannot reach our shores.

The regulatory attitude is hardly limited to prediction markets. And it is stifling.

It is very small thinking from a country that can ill-afford it.

Levies as end-runs around the Generic Tax Policy Process

A few years ago, Willie Jackson proposed levying tech platforms to fund news outlets. 

I'd warned that this kind of thing amounts to a dangerous end-run around IRD's generic tax policy process.

Levies can make sense in some contexts. If a producer group agrees to be levied to fund research or marketing that has industry-wide benefits, that's fine. Agreement tests whether those benefitted actually benefit. 

Or if it amounts to a user-charge that can't easily be collected in other ways. It requires a tight link between what's being funded and who's being levied to pay for it.

But Jackson's proposal was nothing like that. There's no link between tech platforms and news outlets that would warrant a levy. 

The levy instead tried to use force to recreate a relationship that had been superseded by technological change. In olden-times, newspapers were the best place for advertisers to reach customers. Google and Facebook became better ways of linking advertisers with eyeballs. Since platforms 'stole' that link, it must be reforged through levies. It's a terrible approach to tax and tech policy. 

Paul Goldsmith was initially enthusiastic about continuing with that approach when he was made Minister, but it's since been shelved. 

Now Goldsmith's back with a new levy proposal. This time, Disney and Netflix will be levied to fund NZ content creation. 

Same problem as last time. There is no link that justifies a levy here. 

NZ taxpayers subsidise local content creation; it gets broadcast on by anyone willing to pay for the rights to distribute it. It's a generally decent approach because what gets created still faces a market test. NZ content creators are perfectly free to license to Netflix or Disney or anyone else who's willing to pay, and those outlets will be willing to pay if they expect the additional offerings to get or keep subscribers they otherwise would have missed. It's fine.

Irene Gardiner, president of NZ Screen Producer's Guild Spada, has views:

“The big international streaming companies operate here without any regulation. They don’t pay company tax here, they use our broadband infrastructure that the taxpayers paid for, and they have no requirement to commission any local content or contribute to the New Zealand screen sector in any way.

“We’ve been lobbying the Government for some form of legislation in this area for over two years.”

Gardiner worries that after legislation was introduced in Australia last year, New Zealand is getting “left behind” – particularly amid the “devastating” impact of streaming services and Big Tech on local media.

“If any of the big streaming companies, Netflix or Apple or Amazon, had taken a genuine interest in commissioning in New Zealand and done some significant commissions in the long time that they’ve been operating, I think we’d feel differently. 

“But the reality is that they haven’t, and so if they’re not going to do it voluntarily then here we are.”

Households pay for broadband. Their broadband subscriptions help cover the cost of the broadband network. They can choose to stream whatever over that fibre, including Netflix or Disney or Amazon or whatever else. 

If Kiwi subscribers put value on seeing NZ content on any of those platforms, those platforms would have incentive to offer it. As it stands a lot of NZ content is only available on really crappy NZ services where you can't pay to avoid ads. If Kiwi viewers hate ads more than they like seeing NZ content, then they won't watch there. You could maybe make a case that international streaming platforms, by offering a far better product, wind up meaning declining viewship for stuff only available on TVNZ+ - but that would be a case for TVNZ+ to start offering a no-ads subscription version. 

And presumably any platform seeing potential gain in it could outbid TVNZ+ or whoever else for the streaming rights. If they aren't, then the benefits they see in increased global subscriptions aren't worth the cost - even though the product's creation and consequent cost was likely heavily subsidised through existing content subsidy schemes. 

If there were a principled tax-policy basis for taxing international digital platforms, that case should be evaluated through IRD's generic tax policy process. 

This levy-based approach will prove increasingly tempting to a government that does not want to reduce spending to meet its tax revenue, doesn't want to increase taxes transparently, and wants to provide services through other funding mechanisms. 

Coming up with new tied levies is a way of short-circuiting all of that. "It's not a tax, it's a levy" to keep the Taxpayers Union from yelling at them (probably won't work) but also to keep it away from IRD analysis on whether the proposed tax is coherent with the rest of tax policy. 

Appropriation first, policy afterwards

The government has not yet announced what it wants to do in the online child-protection space. There's a member's bill endorsed by Luxon that tries to follow Australia's social media age limits. But the education select committee wound up with much broader recommendations and Stanford's tasked with responding to them. 

What that'll all turn into is anybody's guess. Australian age-gating for social media? Ofcom-style 'let's make everyone do an ID check to look at darn near anything on the internet while sending angry demand letters to American platforms that don't want to comply with UK regs'? Something else?

Whatever it is, the government seems to figure the regulatory regime will cost $8.5 million per year when it's up and running.

The budget includes this new initiative, which gets $6m in the first year rising to $8.5m in each of the last two forecast years: "This initiative provides funding to develop policy and possible regulatory options to improve children’s online safety, subject to future policy and funding decisions."

None of that makes sense if it's an appropriation for developing policy and possible regulation. It's too much money, and it rises over time rather than declining in the out-years when the policy development work is largely done.

And if you look into the Vote Internal Affairs categorisation, well, the thing's classed as regulatory services - not as policy and related services. 

It's far more plausibly an operational allocation for running a new regulatory regime.

One that, as yet, not only has no supporting legislation, but also no hint of what it's meant to be doing. 

My column in Newsroom this week, now ungated, goes through it.

All of this is pretty dumb.

Nobody has yet figured out a way of age-gating social media or potentially sensitive stuff online that doesn't suck. 

New Zealand is unlikely to be the first place to find a way of doing this that doesn't suck. 

The potential harms are real, but often overstated and highly heterogenous. 

There are existing controls that parents can use to gate access for their kids. Some of those controls are undermined by school accounts that parents cannot control. 

The government could be very helpful in providing resource to schools to help parents understand the tools that are available to them, and in helping schools to not undermine their families' choices by setting school accounts whose controls don't mirror those set by parents (or otherwise provide circumvention options on time limits or app limits by logging into the school account on their device or on a school-provided device). 

Anything beyond that, and just enforcing existing law on other bits around grooming etc, should be a watching brief. If somewhere else *does* find a way of my trilemma, great! We could piggyback on their version if voters wanted to do that. We wouldn't have bespoke compliance costs that platforms would be quick to ignore - or to use as basis for just blocking countries that are too small to be this stupid. 

And I just despair when I hear people from industries that have suffered enormous costs from legislation set to 'send a message' regardless of any cost-benefit assessment claiming to support social media bans because they 'send a message'. Crooked timber...