Monday, 8 March 2021

NZ Economics Forum

Last week's 2021 NZ Economics Forum at Waikato University was rather good, and the whole thing was livestreamed. 

You can catch video replays of the talks here. 

I particularly recommend:

The talks I haven't linked haven't yet been broken out by the conference organisers; they're in the full-day video. 

There are a few more that you might want to catch because they give a worrying insight into what's going on in some of the agencies:
The panel session I was in is here:

Kudos to the conference organisers. Academic conferences are often a bit of a shambles as compared to corporate ones, but this one wasn't - despite changing alert levels and consequent shifts to some presentations by Zoom. 

Thursday, 25 February 2021

For a bigger carbon dividend

New Zealand has an excellent Emissions Trading Scheme covering everything except agriculture - a non-trivial exclusion, but we can come back to that later.

The ETS has a cap. Net emissions from the covered sector cannot exceed the cap. So any other regulations that affect sectors covered by the cap only shift things around within the cap and affect the ETS price. They do not affect the quantum of net emissions. 

The Climate Commission has been proposing a lot of things that look a bit nuts when we recognise that the sectors they're hitting are encompassed by the cap. The Climate Commission has been advancing what seem untenable justifications for things like banning new houses from having gas heating systems - they claim to be protecting consumers against having stranded assets when ETS prices make gas too expensive to run. Consumers aren't idiots though - put a sticker on the gas appliances warning about the coming expected price increases and be done with it.

The more tenable justification for non-ETS measures has always been political economy. I don't think the argument works, but here it is anyway. 

If we relied solely on the cap, then prices would have to rise a lot. If prices rose a lot, there would be political backlash against prices. Consumers would be mad about high power prices, both at the petrol station and on the power bill. Industries exposed to carbon charges here higher than carbon charges elsewhere might leave. And it would be even harder to get agriculture into the ETS. Plus, if ETS prices rose anywhere near that much, people would plant a pile of trees and there would be political backlash against trees in some rural areas. Therefore, we should do a pile of things that we know will cost more than it would cost to just use the ETS, but they're sneaky and opaque enough that they won't let the ETS price risk to ETS-breaking levels. Except for banning tree-planting, which will absolutely make ETS prices rise by far more than they need to, but trust us - we have the model, and you don't. 

There are lots of problems with that, apart from my gratuitous snark about their secret-data modelling.*  ETS prices should be a neutral in agricultural accession into the ETS: just grant existing operators a bundle of credits to ease the transition. They're no worse off, and they face relative prices that would encourage them to shift to lower-emitting options where possible.  

But there's another problem. The Commission leaps to third-best ways of dealing with equity considerations when first-best mechanisms are available. All the backlash - that's because of equity issues in the burden of carbon prices. But the government auctions NZU it creates into the market. It gets money when it auctions those revenues. It could choose to implement a carbon dividend. Take all the money it collects at ETS auction, divide it five million ways, and send everybody a cheque at the end of the year. 

It is an absolutely obvious move. It's the kind of thing that's been advocated by economists in Club Pigou for ages. Here's George Schultz and Gary Becker arguing for a carbon dividend way back in 2013. This isn't some new thing. This is canon for people who like carbon pricing. If Rod Carr doesn't know about it, it would be surprising. I'd also written about it last year

Anyway, run the carbon dividend and higher ETS prices can become a progressive tax and transfer system. While poorer people will spend higher fractions of their budgets on home heating and petrol, they will spend far less in absolute terms on ETS charges because rich people spend more on everything, and carbon is in everything. 

Like, imagine that we increased GST by a percentage point, took all the money, divvied it up 5 million ways, and sent everybody a lump-sum cheque. It would absolutely be a progressive transfer because rich people spend a lot more money, and an extra 1% share of rich person's total domestic spend will be much bigger than 1/5,000,000th share of the pool of revenues collected, and that 1/5,000,000th share will be bigger than an extra 1% share of a poorer person's total domestic spend, right?

Similar for a carbon dividend. 

But the carbon dividend can be even bigger. 

Marc England at Genesis Energy has been worrying that higher ETS prices will mean higher electricity costs across the board. The marginal units of electricity come from thermal generation that include an ETS price, and that means that other generators will ramp up their offers at ETS auction and earn inframarginal rents. 

Maybe. It's possible, but it's also very likely that higher expected returns to investment in renewables will draw more investment in renewables, unless the threat posed by the government's contemplation of building the Lake Onslow scheme wrecks investment incentives. 

But let's take the inframarginal returns as a potential issue. 

The government owns 51% of Meridian. Who's the one that gets the biggest inframarginal return if ETS prices push up generation prices at auction because of those thermal units at the margin? It's the giant hydroelectric guys, right? 

So. If the government gets the lion's share of any excess returns that happen to obtain if ETS prices rise faster than new generation comes onstream, it can just plug that money straight into the pool for the carbon dividend, right? The government gets a 51% share of any of those extra dividends. Use them to make the carbon dividend bigger. 

Imagine that, at the standup, the Minister gets some cloying question about the terrible impact of higher power prices on poor people. The Minister could simply say, "Our government has absolutely recognised those kinds of problems. That's why every household got a carbon dividend cheque last year of over $500 last year. The dividend more than covers most households' increases in costs, leaving them free to decide whether to put the extra money into keeping the thermostat up, getting a start on insulating the attic, or to help cover some extra groceries. We trust Kiwis to make the decisions that are right for them, and the carbon dividend will help enable those choices."

You can even start imagining carbon dividends end-year big enough that people start wearing "I Love The Emissions Trading Scheme" t-shirts. 

High ETS prices, if you run this all properly, could help embed the ETS rather than break it. 

Right now, it's the darned Climate Commission that risks breaking the whole thing with needless "Hey, let's ban all gas connections and gas bottles, it's for your own good and for the climate - and by the way, you're banned from having a ute" kinds of policies. 

* On the Climate Commission's secret data policy, I encourage you to read Auckland's Prof of Stats Thomas Lumley. He's the one the government turned to when they botched the census and needed people who knew what they were doing to oversee the repair work. And he also thinks the Commission should just publish its model. 

Reader mailbag: quarantine edition

This morning's Inbox comes with a plea that I advocate for self-isolation, rather than MIQ, for visitors coming in from Australia - doing so would vastly increase MIQ capacity, enabling a lot of visitors from actually-risky places to take up scarce slots in MIQ, and enabling more family reunification. My correspondent is in that latter situation. 

I've copied my reply below, lightly edited. I'm getting more than a little frustrated by the state of the border. 
Thanks for your kind words. 

You are absolutely right that taking Australia out of MIQ would free up a lot of space for others to enter.

We have been working on and advocating for a far more risk-sensitive approach since this whole thing started. Our views on it have been in line with the public health researchers at Otago as well, for the most part. 

A rather more risk-sensitive system would:
  1. Recognise the reduction in risk achieved through pre-flight testing.
  2. Triage inbound passengers by risk: where they came from, and the route they took to get here;
  3. Complement existing nasopharyngeal PCR testing with daily saliva-based PCR testing for every single person in the border system, from the people who do laundry for the airlines through to every airport worker and every person in MIQ.
  4. Recognise that daily testing reduces the risk inherent in the use of some facilities. Ventilation is a big risk if you’re letting infected people sit there for days before they get caught, if they’re asymptomatic. Daily testing means that infections are caught promptly and there is far less risk of transmission within MIQ, both to other guests and to staff; recognise also that daily testing of staff means the risk of infection jumping out of MIQ drops to trivial levels. Things get caught before they’re a hop away from the border.
  5. Given (4), expand MIQ to include a lot more facilities. The shift to saliva-based testing reduces burden on nursing staff, which has been a bottle-neck in the system. Facilities that would have otherwise been ruled out because of cross-infection risk would be manifestly suitable, in conjunction with daily testing, for low-risk travellers.*
  6. Maintain data from daily testing. If after 10,000 people have gone through the augmented system, we find zero infections emerge after some day earlier than day 12, consider shortening the duration of MIQ for travellers from lower risk places while requiring that those travellers present for a post-isolation Covid test, just to be sure. Put in the post-isolation testing requirements well before any shortening of MIQ duration, to testbed the system's robustness as an addition to current measures. 
  7. Stop requiring MIQ for visitors from places without Covid. While we don’t have much travel from Taiwan currently clogging up MIQ, we would get a pile of tourists coming in on direct routes from Taiwan if we were the only safe place for them to visit. We should have been doing this since July of last year. No time like the present to start though. 
  8. Start adding MIQ abroad for visitors from high-risk places, with daily PCR testing for three days before travel. Saliva testing makes this entirely feasible. Arrive in LA on Thursday, get tested. Get tested on Friday. Get tested on Saturday again before hitting the Saturday evening flight to Auckland, with secure transit to the terminal. Let AirNZ run it to NZ spec.** 
I see next to no chance the government would agree to self-isolation for arrivals from Australia. Taiwan is able to manage it because they couple it with real monitoring and real penalties for breaches. The government here is unwilling to do that. They also worry about risks where those self-isolating people could have visitors, so even if a tracking bracelet were in place, they would need additional monitoring to prevent family from popping in and then risking spread. 

I can imagine ways of doing it, like adding security cameras at the doors, but it would not take long for something to go wrong. Travellers from Australia include the broad cross-section of New Zealand society, as the government likes to put it. That includes people who consider it appropriate to get early release from MIQ to go to a gang funeral and then breach all of the conditions that were placed on that early release. That so easily could have turned into an impossible superspreader situation. I’d bet, under an “Australians isolate at home” rule, it would be less than a month before a report about a party at one of those houses, and the whole thing would fall over. 

Because the government feels itself constrained against the kinds of monitoring and penalties that let things work in Taiwan, they won’t go near it. The best we can hope for, I think, is the scheme outlined above. And I only put maybe 1 chance in 5 that we can get to that system. 

It has been incredibly frustrating how little progress has been made. Saliva-based PCR testing has been feasible since August and has been in place privately since January. Better systems are possible. There’s no appetite for them; most people take it as a benefit, rather than a cost, that foreigners are kept out. There’s a deep underlying xenophobia driving some of it. That, combined with nervousness about MoH capabilities in managing any change to the system whatsoever has made the status quo very sticky.
Politik yesterday reported that the government's looking at 12-18 months before borders might start "more widely opening". The MIQ system has to be fit for that longer haul. It cannot currently accommodate need, and the costs of that will be increasing. 

* I think this is where there might be disagreement with folks at Otago. They've been arguing for severe reductions in the number of people allowed through, on very good grounds: the new variant is far more dangerous when combined with leaky systems. I'm here arguing for allowing more, but only with strengthened systems that reduces that risk. The new variants are riskier. But with daily testing of everyone in the system, that risk is sharply constrained. While the new variants are more infectious, there's far less chance of it making it through if pre-flight testing has triaged out people who are going to be infectious on arrival, and if daily testing in MIQ catches people very quickly on becoming infected. That reduces the risk of transmission to border workers. And daily testing of border workers massively reduces the risk that it then gets out. And recall that the border workers are all now getting vaccinated. Vaccination reduces the likelihood of infection by about 90%, from early reports. 

** OBVIOUSLY this would be in addition to the current MIQ here, not instead of it. But if it turned out that we just stopped seeing positive cases in MIQ here consequent to that change, we could start revisiting the duration of MIQ here. And, I'd hope, also obviously, if it turned out that visa issues made it impossible to stay at an MIQ facility abroad, we'd be maintaining a tighter-protocol one here for the riskier people who hadn't gone through MIQ abroad. 

Wednesday, 24 February 2021

Border Costs

Cecile Meier walks us through some of the costs of a border system that has neither been able to safely scale up to meet need, nor able to find any reasonable way of prioritising entry into those scarce MIQ spaces.

When Zane Gillbee hugged his family goodbye in South Africa before moving to Wellington, his daughter Lyla was still a baby and his son Callum a happy seven-year-old.

Lyla is now a potty-trained, walking, talking two-and-a-half-year-old and Gillbee has missed it all.

Callum, who is about to turn 9, has been diagnosed with separation anxiety and is on medication for it.

Zane Gillbee is one of the hundreds of skilled migrants who moved to New Zealand for a better life before Covid-19 hit, expecting his family to follow.

There are a lot of people in this situation, but not so many that it would be impossible to fix. 

A Facebook group for families split from New Zealand migrants counts 1600 members sharing increasingly desperate stories.

Immigration lawyer Katy Armstrong conducted a survey through the group, which 700 odd people completed, including 500 who had children.

She estimated the total number of split families of temporary visa holders in New Zealand to be about 2000.

The MIQ system has 4500 rooms. If there are 2000 split families, then that would be about half of the system's fortnightly capacity to get the job done.

The government provided hundreds of MIQ slots for the Auckland boat race. As of late January, Immigration had issued 753 visas for the Cup, including at least a couple hundred dependents of Cup workers. But MBIE can't say how many rooms they've taken up. I suspect it's because they don't want anyone to know. It would be feasible to know. The Immigration side of MBIE knows to whom visas were extended for the Cup. The MIQ side of MBIE knows who was in each room. All it would take it running the one list beside the other to see if the names from the one list match up with names on the other list. 

There simply is no good way for the government to be picking and choosing who should get these scarce spaces. Lots of Kiwis just hate foreigners and are happy for migrants with families abroad to get the shaft, so there's little political pressure to solve this. Lots of Kiwis like boats. So we get the outcomes we get. 

But there is a good way to expand capacity in the system so that more people can travel safely. Testing before travel will knock back the number of positive cases arriving here. If the government ever gets around to implementing the most obvious way of strengthening safety in the border system, that too can help enable greater capacity. 

Daily saliva-based PCR testing makes each person in MIQ far less risky because they can quickly be shuttled to JetPark if they're found to be infected. That means far less risk of infecting an MIQ worker or another MIQ visitor. Combine it with daily testing of every border worker, and there's far less risk of the virus getting out of the border system. You just won't get into spots where you're not sure where it came from, if every single person in the border system is tested daily. 

Because saliva collection doesn't require nurses, another bottleneck in the system is eased.

Because each infection is less likely to be transmitted, some facilities that might not have been safe as MIQ facilities could be safe when combined with daily testing, with pre-flight testing, and with triaging of visitors by Covid-rates in their country of origin. Australia is going to be low risk even when they're having a minor outbreak. America is going to be higher risk for a while. Safe the more secure facilities for the folks coming in from riskier places, open up a few more facilities for people coming in from less risky places, and run daily testing to keep the whole thing in order. 

Safely expanding MIQ capacity matters. We're likely to be stuck with this for the rest of the year, if vaccine roll-out will only be happening in the second half of the year. The costs of keeping things as they are for families like the ones Meyer has spoken with - they're just too high. 

Tuesday, 23 February 2021

Blessed are they that have not seen the model, and yet have believed

The Climate Change Commission's recommendations span the breadth of the economy. They are required to come up with sector-by-sector climate budgets consistent with getting New Zealand with net zero emissions under the Zero Carbon Act. 

The sector-by-sector budgets rest on underlying models. The models build predictions about what will happen as ETS prices rise, and what will happen when some additional constraints are put into the system. Some of the CCC's recommendations then mandate what they think are their best guesses about what a carbon price would do, subject to those constraints.

The scope is vast. The entire economy, really. 

And the Government has already signaled that it will just do whatever the Commission says to do. 

So getting things right seems to matter and is rather high stakes. 

In that kind of situation, you'd think that the underlying models would be available for checking and testing. Getting bits wrong could be really really expensive, whether you want to frame it as economic costs, or as carbon mitigation forgone. 

But the Commission is not in a sharing mood. Here's Kate MacNamara.

Critically, the commission has not provided either sensitivity analysis nor the marginal abatement costs, broken out by industry.

That data matters. Sensitivity work helps economists to understand just how precarious that "less than 1 per cent of GDP" figure is. Will it alter significantly with slight adjustments to inputs? And the industry data for abatement cost would allow interested parties to properly test the assumptions the commission has made.

A commission spokesperson said it was unable to answer questions before the Herald's deadline on Monday. But one reason Carr has given for withholding information is the use of some US$6000 worth of proprietary global trade data from the Department of Agriculture Economics at Purdue University. It isn't clear why this data can't simply be stripped out.

In an emailed response to the letter signatories, Carr also said the board of the commission will consider the request for more time. But he didn't sound hopeful.

"As you know the commission has a deadline to deliver its final advice on or before 31 May 2021. Evaluating submissions and determining the impact of submissions on our draft advice also needs adequate time," he wrote.

You might have hoped that plans that have potential to re-engineer the entire economy would have more provably robust underpinnings. 

A couple years ago, our shop started putting out some new measures on school performance, based on work in the SNZ datalab by our excellent Joel Hernandez. We put up a technical report to go with it to show our workings, and we made all of our code available to anyone else in the datalab to check over and build on if they wanted to. 

If Joel's work turns into policy, we'd be really happy about it, but there isn't a direct channel there.

The Government has signaled they'll just do whatever the Commission tells them to do. But the Commission has done less to make their workings available for testing and checking than we did for a report on school performance. Our remit was small. Theirs is, potentially, the re-engineering of the entire economy. 

Blessed are they that have not seen the model, and yet have believed the results as described by their analysts in a series of webinars. 

Friday, 19 February 2021

Covid loans?

The excellent Richard Meade makes the case for Covid loans instead of wage subsidies. You can read the journal article on it, or his column over at The Conversation

Richard and I independently came up with the idea way back in March/April. I'd included it in our first comprehensive pandemic response policy paper, 26 March, with a bit more detail in a second short policy piece on 27 March. and he emailed me his two-pager on it about a week later. He'd not seen my version of it beforehand; his was better worked-up than mine was. Richard cites our version in his journal article. 

I'd liked it as a complement to the wage subsidy programme. We'd pitched a slightly different version of the wage subsidy scheme, based on Germany's short-time work scheme (see our short piece of 27 March), but given the time pressure it's impossible to fault the government for putting out the system it did put up. They made it work incredibly quickly, and the officials who got it through deserve medals. It avoided a pile of scarring. 

At the time, we all expected far worse employment outcomes, even with the wage subsidy programme. You can't just turn off tourism for what looked likely to be at least a year without having a pile of problems right? 

I'd figured that opening the student loans scheme to non-students, for borrowing up to a capped amount, with penalty interest applying ex post to any amount of borrowing that was above realised income losses, would likely work. 

There would be huge admin cost in trying to expand the student loans scheme; I'd thought this way of backloading a lot of the administration would make it more feasible. Easy approvals up front, but knowledge that penalty interest (recouped through the tax system, just like student loans) applies if you borrow more than your income loss would discipline. And it would mean that a lot of the admin would come at the end of the tax year, rather than while the bureaus were up to their eyeballs in trying to sort through the wage subsidy scheme. What those folks got done late March - just amazing. 

The big advantage in relying on something like extensions of the student loan scheme is that it automatically targets assistance to where it is needed, if you apply penalty interest for borrowing above realised income losses, and because it lets the government deliver more assistance in a hurry for any amount of cost it is willing to front in providing that assistance. If the government gives out a dollar as a grant, that costs a dollar plus the deadweight cost of taxation. If the government gives out a dollar as a loan, it gets some of that back. And that means it can loan out rather more than a dollar for the same expected one-dollar cost. 

Richard has it up as a substitute for the wage subsidy scheme. And I expect that's where policy has to turn over the longer haul: credit support rather than wage subsidies if we get more lockdowns, but government-funded Covid leave (now in place!) so workers and firms don't bear the costs of workers staying home while waiting on test results. 

Here's Richard:

Furthermore, since any firms and households borrowing against their own future incomes will ultimately be repaying their debt, COVID loans represent an asset on government balance sheets.

This offsets the extra liabilities governments take on by borrowing to finance these loans — something wage subsidies do not do. This increases the affordability of a loans-based approach from a government perspective (even allowing for defaults and subsidies implicit in student loan schemes).

Using illustrative data for New Zealand, my paper shows COVID loans are 14% cheaper than wage subsidies (and small business loans) in terms of their impact on net government debt.

More importantly, they are almost 2.5 times as effective in terms of the level of support they offer. And since 67% of the cost of COVID loans ultimately falls to those who make use of them (allowing for defaults and implicit subsidies), they place less of a burden on future taxpayers than deficit-funded wage subsidies.

The point of the wage subsidy scheme was to make sure firms could have a rapid reboot after lockdown. Making it the go-to in any outbreaks risks providing too much support in places like tourism where resources should shift to other uses. 

Hopefully this will all soon be irrelevant. But it is fun looking back through the email correspondence on it from back then. 

Thursday, 18 February 2021

MIQ and the America's Cup

I was curious how many spaces in New Zealand's Managed Isolation and Quarantine system were taken up by folks coming in for the America's Cup.

It looks to be unknowable, at least for now.

Immigration NZ has a list of people who were invited to apply for entry visas for the Cup, and another list of people who subsequently applied, and another list of those who were approved. There were 753 people whose entry visas were approved as of late January, with another 16 applications then under consideration. 

But we don't know how many rooms that takes up. A lot of those 753 will have been dependents of arriving America's Cup workers. Sometimes dependents travel with the worker. Sometimes they arrive at a different time. If they come in together, that would be one room. If they come in separately, it would be more than one. 

And some of those 753 might have decided not to bother coming through after having gotten their visas.

And some will have self-isolated on boats.

On the other side of MBIE, the MIQ people have lists showing which people were in which rooms and when.

But they've never looked to compare names across the two lists. It would seem likely to be pretty easy; you could even brute force the thing by just sorting the two different lists alphabetically and then eyeballing it. 

Anyway, Immigration told me their numbers, and I wrote on them in last week's Insights newsletter in our 3 slot - the one we reserve for satire or dark humor

The Aristocracy of Pull

If you want to get into New Zealand during the pandemic, it’s not that hard.

The government just needs to consider you to be a priority for a scarce managed isolation space.

Simplest is to be attached to a subsidised government programme. If a government programme falls over, there are real consequences. Political consequences. If private projects fail for want of critical staff, that is obviously less important.

Back in August, being a racetrack specialist mattered. The Provincial Growth Fund considered horse tracks critically important, so those workers got in.

But government racing priorities change with new coalitions, and the America’s Cup is on in Auckland. Its importance is as obvious as the dollars government and Council have thrown at it – about a quarter of a billion of them, regardless of business cases that struggled to show benefits in excess of cost even before Covid.

The argument for subsidising and prioritising the Cup is so powerful, they don’t need to explain it in a business case that stacks up, and they don’t need to revisit it when circumstances change.

Immigration New Zealand tells me that, as of the 21st of January, 753 people had been granted visas for travel into New Zealand for the Cup and a further 16 applicants were waiting on decisions. That is roughly equivalent to one in seven arrivals over one MIQ cycle – though MBIE has not yet told me how many MIQ spaces have been needed.

Being vital for projects involving racing or films could help your prospects for getting a space. A film about a horse race on a boat could tick all the right boxes.

Alternatively, if you worry that urgent need to enter the country might arise, cultivating a sympathetic media profile could be helpful. When 1.2 million Kiwis were born abroad and another million Kiwis live abroad, the number of legitimate urgent travel cases will always exceed capacity. Selection will be impossibly hard. Being featured on the news could help you while making the government’s selection job a bit easier.

Finally, if all else fails, being elected as a list MP might help, but it’s hard to tell. One MP took a spin on that roulette wheel in desperate circumstances and won, despite long odds. Lucky spins do happen.

Fortunately, scarce spaces in MIQ are allocated according to democratically chosen priorities. A bit of political pull is all you need to ease things along.

The Herald's Tom Dillane asked about the numbers; here's what I told him. 

Priority at the border has been and should be returning Kiwis. The government consequently reserves only a small number of spaces for workers essential to a wide variety of industry and business needs. Taking up hundreds of MIQ spaces for what is fundamentally a large government project – a boat race that would not be occurring in the absence of some quarter of a billion dollars in public funding – means fewer spaces are available for workers critically important for other projects. That is the real cost of these spaces: the opportunity lost when the government prioritises workers and dependents for its own projects over anyone else’s. We regularly hear not only of essential skilled workers unable to get a spot in MIQ, but also about critical skilled migrants in New Zealand deciding to leave because they have not seen their families for a year and have no hope of bringing them in. Prioritising the entry of hundreds of dependents of boat race workers, over workers already here who have not seen their families for ages, suggests the government’s priorities are out of whack.

Dillane's story is here. The headline isn't right - it's over 700 entries, with at least a couple of hundred of those being dependents. But Dillane wouldn't have written the headline. He goes through the numbers; I sent him through the OIA material. 

I still have a request in with MBIE asking whether they can compare across those lists.