Tuesday 30 September 2014

Canadian content

Suppose that you're a government agency charged with ensuring that the greatest number of Canadians get to hear Canadians' own stories.

And suppose some new technology came in allowing Canadians, for a low monthly fee, to stream and watch whatever they might want.

Would you:
  1. Try to make it really really easy for that company to licence Canadian content, so that Canadians and everybody else might get a chance to see it?
  2. Hassle the company and demand that they subsidise the production of Canadian content?
If you're the CRTC, well, they've picked option 2
During CRTC hearings on the future of Canadian television regulation, both companies argued they shouldn't be subject to CRTC regulation, which would force them to be licensed, host a quota of Canadian content and subsidize Canadian television production.

Google and Netflix argued they stream and produce plenty of Canadian content without the CRTC looking over their shoulders.

Both refused to hand over their Canadian content and subscriber information to the CTRC to back up those claims.

"The Commission cannot carry out its duties based on mere anecdotal evidence," the CRTC wrote. "As a result, the hearing panel will reach its conclusions based on the remaining evidence on the record."
I note that Netflix recently lost streaming access to The Kids in the Hall. But Trailer Park Boys still features prominently.

Wouldn't it make more sense for the Canadian government to hit the back catalogues of everything the Canadian government has helped to fund, from The Beachcombers through Degrassi and KITH and everything in between, and help Netflix to get the bundle of rights to allow for streaming? They could also make it a condition of every future funded TV show that the streaming licence is available to all-comers at a reasonable price? If the objective is to ensure maximum dissemination of Canadian content, shouldn't that be the approach?

Netflix doesn't have to run a Canadian outlet. They could kill the official Canadian version, then simply fail to notice that a pile of Canadians sign up using geounblocking services and a 90210 zip code.

One-sided scepticism: research funding edition

It seems the University of Canterbury has been discussing some pretty comprehensive restrictions on research funding.

The Herald reports:
Research funding from the dairying and soft drink industries could be declined on ethical grounds under proposals being worked through by the University of Canterbury.
The university is in the midst of a wide-ranging debate about ethical research funding - who academics should and shouldn't accept money from, and for what research purpose.
Currently, research funding from the tobacco and armaments industries could be declined.
Some academics have argued that should extend to certain industry-funded alcohol, gambling, dairying, mining and soft drink research.
Others believed there should be no prohibition and that the acceptance of funding should be left to individual moral judgements.
Suppose that you're a researcher whose work could draw industry support. You could either solicit that funding quietly, outside of the University's auspices, and draw the money as income for work you do in your spare time, or you could route that funding through the University's Research and Consultancy office.

In the former case, you do not have access to University resources for the work, but nobody really monitors whether you're using your computer, library access, or office time for consulting work. If there's overlap between your research work and your consulting work, it would be impossible to separate anyway. You can charge higher fees because you have no overhead loadings, you have no hassles from ridiculous University rules around how you can spend your earned funds, and nobody pays any attention because you haven't stuck your head up to be shot at.

In the latter case, you do have official access to the University stuff. That access comes with strings. Some of those strings are desirable. It is always better to be upfront and honest about one's funding arrangements. Where there is substantial overlap between funded work and your research work, it seems fair that the University be able to recoup some of that in overheads, even if that halves the amount you might get out of any funded work because of the overhead burden. And, that your work is run through the University means that it is subject to investigation by the University should you engage in dodgy research. That threat of sanction both makes your work more credible and reduces potential reputational risk to the University if roguish academics do naughty things in their spare time. On the downside, you lose a pile of the money in overheads and the University makes it almost impossible to spend any of the money coming in; it's perhaps purely coincidental that unspent money gets swept into the consolidated account at year-end.

When the Department of Economics was facing horrible financial times last year, I sought industry funding for some of my position. I had been doing work on alcohol policy as part of what I considered to be "critic and conscience" duties at the University; I no longer believed that I could spend much time on that work at the University without its being funded.

Other than a pretty small research budget, I got nothing out of it but administrative headaches from the University. The University got a fair bit of money out of it, between salary recovery and a very large administrative overhead charge. We built a ton of academic freedom into the contract, with everything disclosed on the blog. Well, I didn't put dollar figures on it because those would be commercially sensitive. But they covered a fifth of my time plus very substantial overheads with the money going to the University; you figure it out.

Where funding routes through the University, we have the greatest possible ethical safeguards on any undertaken research. Dodginess on a minor consultancy project could put your whole tenured position at risk. So who'd try it? Research misconduct is really really serious.

And so it's just bizarre that parts of the University would wish to block some categories of industry funding rather than simply insist on that all consulting work route through the University, that all work is subject to University guidelines on research and misconduct, and that all funding sources are disclosed.

The Herald called me for comment on the discussions at Canterbury. I have not been part of those discussions, but I know a bit of the background. I was briefly quoted.
Professor Sally Casswell, a Massey University public health researcher with a particular focus on alcohol, said she strongly believed research funding should not be accepted from the alcohol industry.
Such funding was an attempt by the industry to position itself as a partner in policy research, Professor Casswell said, but only industry-friendly policies were supported.
"When universities take money, they are being co-opted into this scenario ... it gives [the alcohol industry] an aura of respectability."
However, Dr Eric Crampton, head of research at the NZ Initiative think-tank, said industry-funded research could be extremely valuable, so long as funding arrangements were disclosed and unethical behaviour could be censured.
Dr Crampton previously worked at the University of Canterbury's economics department and was frequently critical of research on the societal harm from alcohol.
He maintains an adjunct senior fellow position with the department.
One-fifth of his university position was funded through a grant from the Brewers Association of Australia and New Zealand, he said, "and everything that I did was totally up for anybody to look at or comment on, or censure me if I was behaving badly".
"It is distortionary to automatically believe that industry funding is bad and evil and that government money comes with no strings and no agenda."
I'll be a bit more thorough here.

The University's job is to ensure its researchers always behave with the utmost of integrity, both in research conduct and in disclosure of funding. Disclosure is also important.

All funding comes with risk of strings. Had I stayed with the University, and had I produced three years of research saying that alcohol was just terrible, maybe the Brewers' Association wouldn't have wanted to renew the contract with the University even if that research were sound. But that would have been between them and the University. The best way to ensure independence is through longer term contracts and by running the contracts through the University such that the researcher's income or job tenure doesn't depend on keeping the grant provider happy with the findings. Again, I was on a three-year contract with a fair bit of freedom in what projects I thought worth pursuing. People in public health areas reliant on funding from the Ministry, from Health Research Council grants, or from other NGO granting agencies, must keep their funders happy on a project-by-project basis lest the next one not be granted. Consider the incentives under both types of set-up.

One potential concern, though of course I could not know for certain, among those in the Health Sciences group at Canterbury, might have been that the relationship between the Economics Department and the alcohol industry, through me, might undermine the relationship between the University of Canterbury and the health sector. I expect that such a concern, were there such a concern, speaks worse of both the funders and the fundees in that sector. So long as the funding relationship is disclosed, and so long as the University maintains robust processes for disciplining research misconduct, nobody in any other part of the University should worry about how other parts are funded.

If one group in the University fears that their relationship with their funders will be damaged because of the funding arrangements elsewhere in the University, that constitutes a violation of academic freedom in and of itself. If a funding group is sufficiently powerful that its fundees fear for the relationship because of things going on elsewhere in the University, the University might well wish to examine what on earth is going on between that group and its funders. Personally, if the Brewers had ever suggested that they'd have boosted its grant to the University if the University put a thumb on anything going on elsewhere, or that they'd have cut it were the Health researchers to keep getting MoH grants, I'd have told them to get stuffed and immediately disclosed to the Associate Vice Chancellor for Research.

Finally, the kind of attitude that says that it's a-ok to accept government health grants but always evil to accept industry funding is fundamentally antithetical to academic freedom. It's one-sided scepticism again. Governments, and its particular bureaus and funding agencies, have their own agendas.

Those who would bar all but politically correct funding sources doom academic inquiry. Universities with no connections outside of the University are ivory towers. Those only with research and funding connections to politically correct government sources are worse than that: they're ivory leaning  towers.

It simply may be getting to be too difficult for industry to bother trying for engagements with academia when substantial parts of the Universities will work to undermine those arrangements simply because of the funding source.

I continue to be amazed that a University that has had need to seek so much bailout money from the government would countenance blocking legitimate research funding sources.

Monday 29 September 2014

Defending the asylum wall

I penned last week's NZ Initiative column in the NBR print edition. Do pick up a copy. Here's an excerpt.
The overarching policy priority then, for me, is that New Zealand maintain and enhance its “Outside of the Asylum” status.

Parts of the RMA are clearly daft and need to be reformed. The RMA’s role in contributing to housing unaffordability through its restrictions on land supply, both for building out and for building up, are reasonably well documented.

It is also mad that a building in Wellington is simultaneously required to be demolished, under the Building Act, because it is at serious risk of catastrophic collapse in any earthquake, and prohibited from being demolished, under the Resource Management Act, because of the priority placed on heritage preservation regardless of life-risk. This kind of Khafkaesque situation risks our Outside-of-the-Asylum status. It is right and good that the government consider RMA reform a priority.

Other risks have crept in as well. Individually, none of them are nearly as important as RMA reform. But collectively, they chisel away at the wall keeping the Asylum out.

During the last term of government, National and Peter Dunne implemented an eminently sane regime around psychoactive substances. Demand for mind-altering drugs will exist regardless of legal regime; the system that was put in place allowed safer drugs to be sold. Those of us watching Colorado’s legalisation of marijuana hoped that the New Zealand regime could be expanded to allow sales of other currently illegal drugs on their being shown to be no more harmful than those currently legally available.

Because the implementation of the regime had too few licenced retailers, politically objectionable queues developed outside of those shoppes. Substances that had been allowed for sale during the interim period during safety testing were consequently banned pending testing, killing the legal market. Whether any substance can now satisfactorily be shown to be safe, with John Banks’s ban on animal testing, is not entirely clear. The Herald reported on Tuesday that the grey market has consequently re-emerged, this time with a purportedly psychoactive incense. The populist election-year response to a few Campbell Live stories on legal highs was not consistent with our Outside-of-the-Asylum status.
I also have a column queued for Interest.co.nz for tomorrow.

Electoral lotteries

The Timaru Herald asked me for comment a few weeks' back on my non-voting stance. They used about one line from the email below; I'll share the rest with you here.
“I have not voted in any election since the 1997 Canadian Federal election. I also do not buy lotto tickets. In any large-scale election, the odds of making or breaking a tie, which are the only ways that you can change the election result, are so vanishingly small that you might as well buy a lotto ticket and promise to give any winnings to your favourite charity. And buying lottery tickets is a poor way of supporting charities. Work by Casey Mulligan and Charles Hunter in the United States shows that only one out of every 89,000 votes cast in Congressional elections changed the outcome. They went back and checked every election going back over a hundred years. You would have had to have voted 89,000 times to expect to change one outcome. You could vote diligently over thousands of lifetimes and still not expect to change an election. New Zealand results would not be much different: your vote would have to be the one making or breaking a tie in a critical electorate like Epsom, or the one pushing your preferred party to or over the St-Lague quotient threshold. Neither are particularly likely. So why bother?
Most explanations of why people vote fail. If it’s civic duty that drives voting, there are many better ways of doing one’s civic duty. Voting is not a particularly effective use of one’s time in achieving any reasonable civic objective because of the infinitesimal chance that your vote changes the outcome. The best explanation I have seen is that many people just seem to enjoy voting as a means of self-expression. But it is a bit of a rigged game. If you don’t vote, you’re told you can’t complain about the outcome because you didn’t take part. But if you do vote, and your side loses, or if your side wins but does things you don’t like, you’re also told you can’t complain about the outcome: “We won, you lost, eat that,” as one Minister was reported to have said. I prefer not to play. 
It seems reasonable to object by asking what would happen if everybody else stopped voting because of such calculations. But if turnout were sufficiently low, I would probably go and vote. The odds of changing an election outcome where there is low turnout are much higher than when turnout is well above 70%; when turnout is low enough, voting makes sense even if you do not enjoy voting for its own sake. While it is fun to imagine what would happen if they held an election and nobody came, it is an exceptionally unlikely outcome. The calculus here discussed does mean that, all else equal, those prone to being very bad at assessing the statistical likelihood of things, pivotal votes included, are disproportionately likely to vote and so parties have less incentive to cater to the policy wishes of the numerate. While this is unfortunate, my one vote would not change it.
 As a concluding comment, I would urge those people who insist on voting to vote well. Philosopher Jason Brennan argues that we have no specific duty to vote, but that if we do vote, we have a duty to vote well. Voting well does not mean supporting any particular party or set of policy positions, but it does mean that a voter must look carefully at each party’s proposed policies and assess whether the policies would actually achieve the goals that the voter wishes to further. This is hard work, but the costs imposed on the public if you vote without such careful assessment seem to outweigh whatever civic benefits obtain from higher turnout.”
I tweeted Brennan's line on voting well on election day. I hope that doing so wasn't illegal under New Zealand's bizarre election-day legislation.

Saturday 27 September 2014

Peltzman me this, Batman

Peltzman's 1989 retrospective on the economic theory of regulation after a decade of deregulation showed that his model held up reasonably well. The kinds of cost and industry structure factors he expected would affect the viability of cartel-enforcing regulation did affect changes in regulation over the period, on the whole.

I have no explanation for this. Story at National Post mildly NSFW.

It can be hard to explain the pattern of regulation.

Friday 26 September 2014

It takes two to take offence

...the one who's doing something, and the one who takes offence.

This is a classic Coasean-style problem. Should we blame the person who does something that offends somebody else, or should we blame the hypersensitive?

The usual approach is to condemn somebody who's offended people and to push for sensitivity training. This week's example, the Engineering Association at Canterbury does what it does every year: run a road trip where folks decorate their cars and dress up in costume, usually ones that provoke reaction.

Back circa 2006, I remember heading out to the Arts parking lot to see the costumes and the cars before they all headed out to Dunedin for their road trip. A guy dressed as a giant penis walked around the parking lot shooting white ribbons out of the top of his costume.

This year's Roundie 500 drew critique. Maybe it was really worse than prior years' iterations, but I've seen no evidence of it. A group calling themselves the "Taliband" dressed in bathrobes with turbans and had cardboard electric guitars. And the University issued a press release noting that it "strongly disapproves". The association of professional engineers didn't like it either.

I recommend instead Bryan Caplan's excellent proposed hypersensitivity training course. He has 7 recommended exercises. Here are the first few:
Hypersensitivity is a grave social ill.  It leads to needless conflict, lingering fear,suppression of important truths, and even, as the Astor Place Riot shows, violence and death.  Learning from the success of sensitivity training, I suggest we combat hypersensitivity with Hypersensitivity Training Workshops.  Small groups of students or co-workers, under the guidance of a certified Hypersensitivity Coordinator, must come together to explore the dangers of hypersensitivity.  This evil will always be with us, but by raising awareness we can hopefully make the problem more manageable.

Hypersensitivity Training is still in its infancy.  At the moment, I'm the world's only certified Hypersensitivity Training Coordinator, and even my experience is limited.  But I here propose the following exercises to start a dialog about proper program design.

Exercise #1: The Wall of Hypersensitivity.  Find a partner.  You start talking.  His job is to take visceral offense at everything you say.  After five minutes, reverse roles.  Then we have a class discussion about how your partner's hypersensitivity made you feel.

Exercise #2: In General.  Write down five groups that you identify with, then find a partner and swap lists.  Take turns going down the list telling each other, "In general, group X is Y."  Y can be anything you sincerely believe.

Exercise #3: An Awkward Moment.  Stand before the group and tells a story about a time you inadvertently gave offense.  After each story, the group chants, "It was no big deal!"
Completion of the course should be mandatory for signing up for a Twitter account.

Exercise #3 sounds really great. I bet there isn't an economist alive who doesn't have at least a dozen. If you don't think you do, ask your spouse.

Thursday 25 September 2014

The high cost of free tuition

A potted history.

In the beginning, New Zealand had tuition-free tertiary education restricted to an educational elite able to pass the difficult exams necessary for entry. They were well supported during their education, and they were few, and they were later hit with high top marginal tax rates as a way of ex post recouping some of the tuition costs.

Then, New Zealand shifted to greater access to tertiary education coupled with a reliance on tuition rather than high top marginal tax rates. Students were less well supported, but they did have access to student loans, and they could earn a return on their investment if they wound up choosing well, or at least a better one than their parents would have earned.

Then came a great wailing from the students. Why, WHY?! were they compelled to pay for their education when their parents' generation had not needed to pay? Nobody much pointed out that, under the prior system, entry was highly restricted. Instead, everyone viewed it as a great injustice that we did not provide open-ended public funding for anybody to achieve self-realisation by pursuing endless graduate studies in poetry. And so the 2005 election brought us interest-free student loans and Helen Clark earned a third term.

Soon after, the government realised that students respond to incentives. I recall having pointed out to the intermediate microeconomics students I was then teaching that, if they hadn't already borrowed the maximum at 0%, nothing in particular stopped them from doing so and opening up term deposits at RaboBank (or elsewhere) with a maturity coinciding with when their student loans were to come due. Unsurprisingly, most of the students had already figured that out: they were in the calculus stream of microeconomics and destined for great things.

Because of this kind of incentive, every new tertiary student imposed a huge potential liability on the government. Not only were they on the hook for the government's per-student tertiary subsidy, they were also now on the hook for all of the private portion of tuition costs, less that portion that might be repaid four or more years later without interest. Any increase in a university's private tuition charge then also cost the government directly via increased loan liability. I may be misremembering, but I believe it to be the case that we needed permission from the Tertiary Education Commission for tuition increases. The increase in demand from 0% loans could not be readily accommodated in disciplines with high salary costs and without capacity to increase tuition levies by more than the permitted cap.

Soon after that, the university funding models changed: instead of straight "bums on seats" funding, the universities instead found themselves having to submit business plans to the Tertiary Education Commission specifying how many graduates they intended on producing. Once its multiyear plan was approved, the university ceased receiving any government subsidy for any domestic students enrolled beyond 103% of that university's enrolment target.

Additionally, universities were penalised for students who failed to complete the degree for which they were enrolled. Student degree completion rates then mattered a lot. Auckland University quickly introduced entry bars as they suffered excess demand at going (and government-capped) tuition costs. This let them sort for the highest-achieving students. Other universities found other ways of ensuring that there were degree pathways for all potential customers.

And so we come to the demands in the recent election campaign for free tuition at New Zealand universities, but without a return to the exclusivity of days gone by. My fairly confident predictions of the outcomes of such a policy:
  • Government would be forced to constrain the resulting cost blow-out, either by restricting entry explicitly, or implicitly with more binding student number targets for universities;
  • There would be excess demand for tertiary entry at the regulated price of zero. A fairly severe pecking-order would quickly be established: the university seen as best would have first pick of students up to its capped allotment, and so on down the line. Where prices cannot ration quantity, excess demand has to be mopped up somehow. I'd expect really high effective entrance requirements at the institution with the highest excess demand.
  • Commerce disciplines would be killed. Absolutely murdered. The government has near infinite willingness to subsidise the bench sciences or anything that has cool kit allowing nifty photo opportunities for government Ministers. But I cannot imagine its countenancing sufficient funding differentials based on salary requirements. Any discipline whose costs are based on human capital rather than machines that go bing would be destroyed. Note that Glenn Boyle had already pointed to this problem in his great paper, "Pay peanuts to get monkeys". Because good recent PhDs in most bench sciences in the US are relatively cheap, and any recent PhD in economics or finance or accounting is really expensive because of out-of-academia opportunities, we have a hard time getting good business academics in New Zealand. This would be far worse under a zero tuition regime that would block universities from implementing higher tuition charges in disciplines like finance to fund salary differentials across disciplines. If you think that competent management is a potential stumbling point in raising New Zealand productivity, imagine how much worse it would get if we ruined the business schools. 
  • Universities would be increasingly creative in coming up with ways of charging student levies that somehow weren't really tuition charges. 
  • TEC would need to be more vigilant in guarding against the fake-student problem. If I recall correctly, one of the polytechs rorted the prior system by distributing CD-Roms to people on the street. If they ran the CD-Rom, they counted as a student. I can't remember what they had to do to get some kind of certificate for CD-Rom completion, but the polytech got a fair bit of government money out of the scheme. When the student doesn't have to pay an enrolment charge, these kinds of scams get easier.
  • While the policy would be lauded for being all great for poor people, it really wouldn't turn out that way in practice. Perhaps a few students who still couldn't afford to attend university despite student allowances and zero percent loans and existing government subsidisation of tertiary education and existing scholarship schemes would be able to get in. But the principal effect would be a big transfer to the kinds of middle-class kids who'd be going to university anyway. Highly income-targeted scholarship schemes can be progressive. Free tuition, not so much. 
  • We'd further mess up incentives at the margin to choose between trade schools and lower-value bachelors' degrees. 
  • Somehow, the whole thing would mean that the universities would have to lay off academics and hire more administrators. Just about everything yields this outcome, and free tuition is part of everything. Not having free tuition would likely do it too. Doubling university income would be about the only thing that wouldn't yield that outcome, but only because they could hire more administrators without having to cut academic staffing costs to achieve it.
Statistics New Zealand is starting to get better individually linked data tracking people from primary school through tertiary and employment. I would absolutely love to see some work taking not the average return to university over trade school, but the marginal return as established perhaps by a propensity score matching approach pairing students that seemed, on basis of characteristics and grades, similarly likely to choose university or trade school from high school but who took different paths. It would take a pile of permissions from StatsNZ, and sitting in their datacentre for a while, but boy would it be useful. 

At the end of it, you'd be able to compare outcomes, on average, for students who seemed similar at high school but who diverged in choice of trade school and university. And that might be useful in saying something about the merits, or otherwise, of free mass university tuition schemes.

Matt Nolan has a few comments on it here, but focuses more on general principles than on the abominations that would follow a zero-tuition policy in the real world.


Wednesday 24 September 2014

The quake vote

Were I still in the business of proposing future honours research projects at Canterbury, I'd be pitching this one. Anybody please feel free to run with it: I'd love to know how it goes.
The National Party decisively won the 2014 election, taking the Party Vote in all but the poorest of Christchurch suburbs. While National polled well even in Christchurch's more earthquake-affected Eastern suburbs, National polled well everywhere. 
Take 2008, 2011, and 2014 polling-place election data. Combine it with Census data for the meshblocks forming the natural catchment for each polling place. Predict National's 2008 party vote on the basis of underlying demographic characteristics. See whether changes in those characteristics predict changes in local-level National Party support in 2011 and 2014 for areas outside of Christchurch. Then, add in CERA data on land earthquake status in Christchurch as additional explanatory variable for Christchurch in 2011 and 2014. Christchurch's poorer neighbourhoods were also its more quake-affected ones. Was voting in quake-affected poorer Christchurch neighbourhoods substantially different from voting in poorer Auckland or Wellington neighbourhoods?
Can we reasonably interpret Christchurch's pro-National vote as endorsement of the handling of the rebuild? If more quake-affected polling places returned a higher-than-otherwise-expected National vote, then perhaps we can. If National fared more poorly than expected in the more quake-affected polling places, then perhaps not. You could also exploit split-ticket voting here. Informal Twitter discussion after the election suggested Labour voters would support their local Labour MP while giving their Party Vote to National as expression of disapproval with the Labour leadership or of support for National's overall policy agenda. Was split-ticket voting in Christchurch different from split-ticket voting elsewhere, correcting for the pre-quake Christchurch split-ticket vote in 2008? Was Gerry Brownlee's electorate vote stronger or weaker than we might expect for a government Minister?
If it is possible to get EQC and CERA data on the proportion of completed earthquake claims in each meshblock, that would be a fine additional variable. Finally, if you have time, give some thought to how migration from 2008 to 2014 might have affected results: would the out-migration of the worst-affected residents introduce attenuation bias?
I would love to know how EQC completion rates affected National's Party and Electorate votes.

Monday 22 September 2014

Prediction failures

The flat payoff curve problem hit iPredict's vote share markets.

A contract paying $0.01 for every percentage point National got was trading at $0.44 just prior to the election: far below National's outcome of 48%. At the same time, iPredict's contract paying $1 if National were to win more than 44% of the vote was trading well over $0.80. What gives? You can tell convoluted stories trying to rationalise it around improbable underlying probability distributions, but it was just flat payoff curves.

I owned 250 contract of Vote.National. I paid an average of $0.4376 for those contracts. I will gain just under 5 cents per contract, for a gain of $10.60. To get that almost eleven bucks, I had $109.40 locked up in those contracts for a year. Sure, a 10% return seems fine, but it's a pretty heavy carrying cost where the opportunity cost is contracts elsewhere providing greater return (and more risk).

If we look across the "Pays $1 if National gets over x%" contracts, we get a fair odds line of 46.5% prior to the election. A contract paying $1 if National did better than 46.5% was trading around $0.50 in the last couple days before the election. That's still much worse than National's eventual outcome, but not nearly as far out as the 44% used in the Herald's comparison. I'd been warning folks round the office for at least the last month not to trust the continuous contracts because of the flat payoff curve problem and to rely instead on the ranged $1 contracts.

Why were the latter so far out too? That will be a fun one for the iPredict crew to look at. The fair odds line on the Greens was between 13.5 and 14%; the Conservatives were pegged between 4.5 and 5%. I don't know whether people were hedging (then why not short PM.National instead of the vote markets?), or failed to adjust thoroughly for that young Green and Internet/Mana voters might disproportionately fail to turn out.

How did I do?

  • Well over a year ago, I'd shorted ACT's winning an electoral seat. I hadn't cleared that short position after Seymour was nominated because the prices had moved to what seemed then a fair price: I don't trade to reverse past errors, only when prices currently look wrong. So I lost $26 there;
  • Up $171 on PM.2014.National, trading whenever prices seemed to have over-reacted either way;
  • Up $5.61 (so far) on Vote.2014.Nat, having bought at around the $0.42-0.44 range. I bought a pile at $0.4475 back in March when prices seemed offensively out of whack with the $1 contracts, but then gave up trying to bring some sense to that market;
  • Up $5 shorting that Act would win 2 or 3 electoral seats;
  • Up $5 shorting that Russell Norman would be the next finance minister;
  • Up $76 shorting Labour, trading whenever the market seemed to have overshot on either side;
  • Up $45 shorting that the Conservatives would cross 5%.
  • I was up on trading on Internet Party contracts, but I'd closed out all those positions well before the election and so am not entirely sure how it all netted out.
But I lost a couple of side-bets. 

Back in January, I'd reckoned that an Internet Party could cross 5% if there were an Internet Party and if there were a big Snowden release in the middle of the election campaign. I bet a round or two of beers on it with one loyal reader of this blog. I no longer believed the Internet Party likely to cross 5% when Kim DotCom sabotaged the Snowden event by releasing an email that everyone but him believed to be a forgery, but that sure wasn't a condition of the bet. I also owe BK Drinkwater and KiwiPollGuy $20 each. 

Friday 19 September 2014

Coasean seating

Paul Walker has a series of posts* on the Coase Theorem and Josh Barro's column on property rights and reclining airline seats.

This had all seemed really very simple to me at the outset. It still seems really very simple; I don't know why everyone else has complicated it so much.

Each passenger is in a contract of carriage with the airline.

The airline has decided to put the recline button for my seat on the arm of my seat rather than on the back of my seat. The airline, which is profit maximising, has decided that the rights should lie with me, the recliner, rather than with the person behind me. I can push the button, and recline, but the person behind can offer to pay me not to. If the airline had not wished to grant me this right, the button would not be there for my use.

In the alternative, where the button were placed on the back of the seat, I would have to ask the permission of the person behind me that he might push the button. He might seek compensation for doing so, or the whole negotiation might start a fight.

The airline could be choosing the option that minimises the number of cross-row unpleasant seat discussions, since only a subset of reclinings will yield such discussions under the status quo where all of them would require it under the alternative. But if the gains from being able to recline were sufficiently low, they could choose to install seats that did not recline.

If enough anti-recliners took sufficient umbrage, there'd be returns to offering a no-reclining section. That that also hasn't happened says something about expressed versus revealed preferences.

Paul says it isn't clear where property rights lie. But recall that the interesting cases in Coase are always in the high transaction costs worlds. There the judge is called upon to assign default rights so that problems are avoided at lowest cost. The airlines are the judges. They compete with one another. They all have assigned the default rights this way when some could have chosen otherwise. If they've all set the default this way, when they could just have easily flipped it the other way, should reasonable people not infer that property rights lie with he who has the switch?

That some individuals wish to force a transfer through use of anti-reclining devices does not indicate that the existing rights are unclear unless we also believe that a bank robber indicates uncertainty about true ownership of the cash in the till.

Full disclosure: the only time I would ever recline my seat is on a long overnight flight where most people hope to sleep.

* In order: here, here, here, here, here.

Thursday 18 September 2014

Market segmentation: candidate beauty edition

Low-information voters are more likely to vote on candidate looks alone; higher information voters add in other information.

There's a lot of randomness involved in party leader selection, or at least with regard to candidate attractiveness. But we can say that, at the margin, a party that cares about winning and that relies more heavily on low-information voters ought to lean towards more attractive candidates at the margin.

I'd written a few years ago:
In equilibrium if we've a thick market of potential candidates, I can't see how this generates any particular inefficiency. Sure, it gives an additional dimension over which parties need to optimize in candidate selection, but in sufficiently thick markets, the tradeoff in moving from the slightly less attractive to the slightly more attractive candidate won't be that large. The only problem is if you've got thin markets such that the quality gap on other margins is large as you move up the beauty scale. But that too should be a disequilibrium phenomenon. They've said that politics is show business for ugly people. Well, if the returns to beauty start ramping up in political markets relative to other markets, more beautiful people start selecting into politics rather than other endeavours. Hamermesh found that the beautiful select into professions where beauty is rewarded; why should this be any different?
Will Hayward at Auckland Uni put NZ candidate photos up for an audience of American raters, none of whom could be expected to know anything about the candidates' parties or positions.

The findings? Based only on photos, Laila Harré was seen as most competent, trustworthy, and attractive. Jamie Whyte was second from the bottom on attractiveness, with Hone stuck in last place.

We probably can't draw much from it. But it does seem to matter at the margin for low-information voters.

Note that, by photos, the competence ranking was Harré, Key, Peters, Whyte, Cunliffe, Flavell, Norman, Harawira, Turei, Craig, Turia. Expect that low information voters may well be assessing candidate competence on similar basis. At least some of these rank orderings seem out to me.

I want to eat a weka

It's been more than five years since I first posted on Roger Beattie's felicitous "Eat them to save them" campaign. And I still am not allowed to buy a weka for dinner.

Roger is one of New Zealand's great enviropreneurs: the National Farming Review called him an Eco Anarchist. He loves the environment and sees the best way of saving it as ensuring that it's profitable to save it. Weka are endangered, but they're easily farmed and tasty. Why aren't we raising them for the restaurant trade and conserving an endangered species in the process? The Department of Conservation says no. They say no incredibly incoherently. But their "No" is what matters.

Roger features in Vice's "Munchies" column this week. Here's an excerpt.
How do you think we should be protecting endangered species?We need to change the legislation. We wonder why we’re losing 6 percent of our kiwi population per year. The Department is right in identifying the problem, but have the wrong solutions. A market solution is necessary. If private individuals want to do conservationist things, there should be no impediment. We farm native paua, plenty of people are propagating native trees—but certain native species can’t be farmed. No species that have ever been farmed have ever died out. Since man has been in New Zealand, we’ve lost 44 bird species because they were protected. If you’ve got the choice between something being protected and dying, and something being farmed and thriving, that’s not much of a choice.
What species do you want to farm first?In terms of sustainable farming, you have to have a species that is friendly and tasty. What I do know about is weka. Weka grow fast, they can be farmed with only a relatively small amount of capital, they eat a variety of food, and are cheap to grow and keep. We’ve bred hundreds of them and given them away. You’re not allowed to sell them without a permit. You’d end up in jail.
I'd love to see work on the economics of allowing the breeding and sale of jewelled geckos, or tuatara, for the pet trade.

Wednesday 17 September 2014

Capital Gains Tax Bleg

When I first started writing posts on capital gains taxes three years ago, starting with this post and this one, they were sort of a bleg. I have never understood the rationale for CGT, as the arguments that are usually put seem to involve shifting definitions, or incomplete partial-equilibrium analysis. So I wrote those two posts to explain why I thought the arguments in favour don't add up, hoping that someone could counter with a coherent argument. With a CGT defended within the context of a coherent model, it should be possible to phrase the debate in terms of differences in either values or empirical beliefs about the economy. Three years on, I have seen a lot of public discussion of capital gains taxes, but still don't understand what is the model from which proponents draw their conclusions.

But now I have a different bleg. I would like to know how actual CGTs that have been implemented elsewhere (or the ones proposed by opposition parties in New Zealand) would deal with a particular issue. This issue is easiest explained with a series of examples:

  1. Imagine that you are a householder with a portfolio of $2,000 of shares in a single company that is earning a 5% rate of return on its capital. At the start of a new year, you decide that you want to save some more, so you buy $100 in a different company using money you have earned in the previous year but not spent. You now have a portfolio of $2,100. This increase in the value of your portfolio would not be classified as a capital gain. It simply represents increased savings.
  2. Now imagine that instead of putting the $100 into a different company, you bought $100 of freshly issued shares in the same company that you already have a shareholding of $2,000.  That still doesn't count as a capital gain, right? The company uses the money from its new share issue to buy some capital equipment, which will also earn a 5% rate of return, but what they do with the money is irrelevant.
  3. Now, imagine that in the previous year, you were paid a dividend of $100 by the company in which you own $2,000 of shares, and you bought $100 of freshly issued shared by the same company. Again, this makes no difference. The fact that your purchase of new shares was in exactly the same amount as your dividend payment, is irrelevant; the additional $100 was paid for out of your total income and was available for buying shares because of a choice not to use it on consumption. 
  4. Now make one more change. Instead of paying out $100 in dividends and then issuing $100 of new shares, the company simply retains the profit, pays a dividend of $0, and uses the money to pay for the new capital, as above. The company has increased its ownership of capital equipment by 5%, and so the value of the existing shares will increase by 5%. So now our shareholder sees that his shareholding portfolio has increased from $2,000 to $2,100, just as in all the previous cases, except in this case he hasn't bought any new shares; he has seen what looks like a capital gain of 5%. Except, it is not really a capital gain; the reinvestment of profits by the company instead of paying out a dividend is a form of saving that is imposed on its shareholders.  

In the absence of taxes, the only difference between example 3 and 4 is in the default position. In 3, the shareholder receives the dividend and needs to make a decision to buy new shares to turn that dividend into saving. In 4, the default is that the dividend is saved, and the shareholder would need to sell $100 of shares to convert that saving into consumption.

But what if we add capital gains taxation. Wouldn't a CGT induce a difference between example 3 and example 4, adding additional taxation in the latter but not the former. And wouldn't this induce a distortion in which the tax system created an incentive for firms to pay out all their profits as dividends and then raise new capital rather than retaining profits for investment? What I would like to know is how to other countries deal with this distortion in their CGTs (if at all), and how would the opposition parties in New Zealand plan to deal with it.

It is also interesting to note that currently in New Zealand, there is a slight tax distortion that favours retained income over dividend payout (as the corporate income tax rate is lower than the top rate of income tax). At the time the rate was lowered from .33 to .30 in 2008, the then Labour government said this was a deliberate distortion as a kind of nudge to encourage retained earnings and hence make saving the default. Does Labour now think that we should be changing the nudge to consumption by moving the tax advantage the other way?

Oh Christchurch, revisited

My chapter on the failures in the Christchurch rebuild is up at Public Address.

I'll be speaking on it at a lunchtime panel tomorrow in Wellington. Perhaps I'll see you there.

From my chapter:
If we learn anything from the intersection of the work of Jane Jacobs and of Ed Glaeser, it’s that cities are organic. The best parts of cities emerge from the distributed decisions of thousands of property owners, building near each other to take advantage of complementarities in location that they could foresee and that the planners couldn’t envision. SimCity takes no account of the wishes and dreams of the Sims. All of the small actions of distributed individuals can add up to something wonderful, if only Council and the bureaucrats would get out of the way and let it happen. Instead, we had the worst of all possible worlds: the insistence that a perfect central plan supercede these decentralised decisions, but absolutely no bureaucratic capacity to set or follow through with a plan.

Monday 15 September 2014

Parker versus NZIER on Capital Gains Taxes

Labour finance spokesperson, David Parker, sent this letter to the New Zealand Institute of Economic Research, regarding a report they wrote for Federated Farmers on Labour's proposed captial gains tax policy. 

I don't have time to read the original report or the earlier one by BERL referred to in the letter. What struck me, however, is that the points of disagreement are really quite tangential to the issues that should be at the heart of a debate on the merits of a capital gains tax (CGT). Let's take these in turn.
  1. Parker believes the tax will raise more revenue than NZIER do. A CGT that is designed to ensure savings is directed to the most productive investments rather than be motivated by differential tax treatments is one that would raise zero revenue. Any CGT that increases revenue is one that increases the existing tax distortion penalising saving relative to consumption. Of course, one might have the objective of increasing the tax on saving for the equity objective of increasing the tax paid by the rich, but that is a different objective. Either claim the tax will raise revenue, or claim it is about encouraging productive investment, not both.
  2. Parker believes the proposed CGT will be more progressive than NZIER do. This may be true, but if the objective is to increase the progressivity of the tax system, the policy question is whether it would be better to achieve this through increasing the income tax rates that would target high levels of wage and salary income as well, rather than just one component of capital income. 
  3. Parker believes the current income-tax paid on trading is not important enough to make the claim that we currently have a CGT. That is possibly true, but it misses the point: We do have a perfect, all-of-the-advantages, none-of-the-disadvantages 13% CGT. It is called GST
  4. Parker believes that a CGT will have more impact on housing speculation than NZIER. Again, this is possibly true, but why is that a good thing? Let's reiterate some points made previously, here and here
    • Housing speculation is only profitable if house prices are expected to rise in the future. That is, speculation can't permanently increase house prices; it can only bring the increases forward in time. A policy designed to make speculation less profitable is a policy that admits that nothing will be done to curb the underlying drivers of house-price inflation. 
    • To the extent that bringing forward future house price increases creates an incentive to build more houses, speculation will actually lower future prices. One can claim that the tax distortion that means home owners pay no income tax on the imputed rental they earn from themselves leads to a country having too large a housing stock, but not if your rhetoric is about making home ownership more affordable. 
    • And curbing speculation in home ownership, to the extent that it has an impact on home affordability must operate through making renting more expensive. Again, this might be an objective, but not one that is easily squared with rhetoric concerned with poverty levels. 
One final point. Parker claims that the Australian experience is illustrative, because they had a CGT excluding the family home, their "home ownership rate was lower than New Zealand's. Now it is higher and ours is at a 60-year low". Is the claim that Australia's CGT had an impact on New Zealand's home-ownership rate? Or is this a difference-in-difference estimation that assumes as a control that Australia's rate would have fallen like New Zealand's but for the CGT? 

One of these is a lie

From February:
The GCSB and the SIS were asked whether they get funding directly or indirectly from the governments of Australia, Canada, the United Kingdom or the United States.

Both withheld the information. They also refused to say whether any foreign government paid for any positions within the agencies.

However, they did confirm that they do not collect wholesale metadata on New Zealanders and, to the best of their knowledge, American counterpart the National Security Agency does not either.
Vodafone is setting up cable and internet at our new house this morning. I should then be able to watch tonight's relevant programming.

If GCSB and the SIS were just playing semantics over the term "wholesale", I call that a lie.

I wrote in February:
The GCSB has to know that there's a strong chance that, if they have been collecting metadata or if the Americans have been collecting it here, it'll be revealed in the forthcoming Snowden releases. They'd also know that, if they lied to Parliament, it would be very bad, and that if the Americans were doing it here without GSCB's knowing about it, GCSB would be seen to be incompetent or wilfully ignorant. I further expect that Kiwis wouldn't have much truck with semantic tricks on verb tenses or definitions of "wholesale". And so I must expect that they know that it isn't being done here and hasn't been done here. This makes me happy.
I hope to stay happy.

Update: here's the RadioNZ interview with Greenwald.

Friday 12 September 2014

Strategic voting on the right

So the latest chatter on the NZ right is that strategic voting for the Conservatives is a great idea. I'm going to disagree.

Under New Zealand's MMP system, a party enters Parliament on earning one electorate seat, or 5% of the Party Vote. In the former case, the MP enters Parliament with however many additional MPs the Party would be entitled to if there were no threshold in the Party vote: 2% of the vote gets 2% of the seats, if you have an electorate. If you don't have an electorate seat, and you get 4% of the vote, those votes are wasted: the composition of Parliament is determined by the Party Votes of those voters supporting parties that enter Parliament.

And so what do you do if you're on the right, if you want a National-led government, and if you're worried that National will lose if the 4% (or thereabouts) gained by the Conservatives is wasted? You could be tempted to vote Conservative to help push them over the line so they go into coalition with National. National then isn't forced to look to Winston Peters and New Zealand First for support.

I think this reflects short-term thinking. Winston Peters is near retirement. After he has retired, it seems pretty unlikely that New Zealand First will continue. The Peters personality cult will end. And, for a single retirement term, Peters' price may more likely be in approbation than in real policy.

If the Conservatives enter Parliament this term on a strategic vote, we might expect them to be around for a couple decades. They're socially conservative and, thus far, fiscally incoherent. Maybe they'll increase alcohol excise four times over, maybe they won't. They propose tax cuts but no spending cuts; Christine Rankin said they'd square the circle by turning a billion in alcohol excise revenue into four billion.

I wonder whether alcohol taxes could really go up by enough to make that happen: we start getting into tax territory where I'd be real nervous about applying current point estimates of the price elasticity of alcohol demand. The usual point estimate is -0.44: a 100% increase in the price of alcohol would result in a 44% decrease in consumption. A 133% increase in excise means about a 40% increase in the cost of low-priced beer and a 103% increase in the price of low-cost spirits in New Zealand. A 133% excise hike reduces consumption of low-priced beer by about 17%, so you get a 110% increase in revenue for the 133% increase in tax on beer, assuming no substitution over to home brewing and distillation. I'd expect things get more price elastic as you keep hiking things further (the income effect has to start biting sometime). I doubt you're into backward-bending territory with a 400% revenue increase, but taxes are going to do far more than quadruple to get quadruple the revenue. I really don't like where that's heading.

It's that kind of populist socially-conservative nanny-state knee-jerk economic incoherence that I expect a lot more of if the Conservatives get embedded into the system. Hey, let's propose a fiscally incoherent platform and then wave a referendum wand to find out how to plug the hole!

Is getting a third National term without NZ First really worth getting the Conservatives into Parliament? I suppose it depends on your discount rate. I don't like the long game on this one. I'm sure National could work with the Conservatives and make something decent out of it, but it doesn't seem a particularly good strategic vote for social moderates or liberals on the economic right who care about policy rather than just about keeping John Key in office.

Maybe Paris is worth a mass, but is Key really worth a Craig? I'd really really really prefer that National go into coalition with either NZ First or the Greens, or even a grand coalition with Labour.

Conflicts disclosure: I'm modestly short on the Conservatives' crossing the 5% threshold at iPredict, but long on National winning.

Update: Conservative leader Colin Craig has clarified the party's position: they want to hike alcohol taxes, but not to $4 billion. He also notes that our excise system "is nowhere near consistent with Australia's." He should note that the Australian system is nuts. The anti-alcohol campaigners rightly point out that the WET is distortionary and messes up relative alcohol prices. He also notes that alcohol is cheaper than water. When the kitchen faucet at my house starts supplying Emerson's at no charge, we can have a talk about that.

LEAPs forward

Foreign Policy gives us a somewhat implausible critique of Honduras's LEAP zones, the ZEDEs.

First, a bit of history. Paul Romer shifted from academic work on high-tech growth-theory macroeconomics to pursue institutional innovation. He realised, correctly, that you can't do much to change a country. But you can, perhaps, make some progress in a small region. Set up a small autonomous zone in a developing country with access to sound law, sound money, property rights and decent infrastructure, and you'll kickstart development not just for that special economic zone but also for the rest of the country through remittances at first, then through institutional leakage as the host country starts adopting the best parts of what makes the zone work.

I've been a fan of these for a while. A few years ago, a final exam question in my undergraduate Public Choice class asked students to imagine themselves a billionaire who wanted to make the world a better place: should the billionaire's bequest go to Seasteads, or to Charter Cities?

Honduras changed its constitution to allow a few of these to emerge. The Zones for Economic Development and Employment, the ZEDEs, can now be created. They differ from charter cities in that they're broader regions in which cities could be established, but they don't have to be cities.

Mark Klugmann spoke about these at Mont Pelerin this year; here's a Reason write-up from early August.

Now, over to Foreign Policy. The author there provides two critiques:

  1. The ZEDE board is stacked with Cato-type free-marketers;
  2. The zones, when established, will expropriate the current inhabitants who don't always have well-documented rights to their property.
I believe the first one to be true. It's because I believe the first one to be true that I put rather less weight on the second one. If there's anybody who fights against government expropriation and eminent domain abuses, it's Cato-type free-marketers. A bunch of Cato-type free-marketers are not likely suspects in a "expropriate peasant farmers to benefit big corporates" scheme.

The article's worth reading for a bit of background. And Paul Romer tweets that he's also a bit worried. I'm not worried about any zones that might be established by Klugmann's group. If others use the provisions for setting up other zones, that could be different. 

My print piece in today's National Business Review hits on the ZEDEs. I wonder whether we could establish special economic zones here as experiments. Imagine getting rid of the RMA in a few areas and there reverting to tort and nuisance. 

Perhaps shifting to reforms in special economic zones is an abandoning of the prospect of large-scale reform in New Zealand. But perhaps it is also the best we can achieve under the current electoral system. It could also be a reasonable approximation of best-practice: try something new in a few places, see if it works, then either scale it up or end it depending on outcomes. The idea seems fertile. 

If it didn't work, the harms are limited. But if it did....

Feeling Chuffed

It was a great day for the ECON department at Canterbury on Wednesday. Our very own Rachel Webb, successfully defended her doctoral thesis, The Health Economics of Macrosomia. Rachel has been a part of the Department for many years, having previously completed her Bachelor's and Honours' degrees at Canterbury prior to starting her Ph.D. Eric blogged on a preliminary finding from Rachel's thesis here last year.

Rachel's successful defence comes on the heels of some other notable achievements of our recent students: James Graham has just started his doctoral studies at New York University, as one of the 26 New Zealand recipients of a Fulbright Award, and the only one with a degree in Economics; Nick Sander has just started his doctoral studies at the University of California, Berkeley; James Horrocks has recently completed his MBA at Cambridge; and Reza Baqaee is just finishing up his Ph.D. at Harvard.

These are not our only success stories by any means, but the notable thing for me about these five is that they were all in my Honours welfare economics class in 2009. The thing I have enjoyed most about teaching in our Honours programme over the past 14 years has not only been the incredible quality of our students, but also the diversity of their academic backgrounds, in large part because we have made a feature of the fact that one can major in Economics as part of an Arts, Science, or Commerce degree. James Graham and James Horrocks both did double majors in Economics and Philosophy; Nick and Reza completed combined Honours degrees in Economics and Maths, and the same class included students with undergraduate degrees in History, Physics and Finance. Keynes is famous for his statement that a master economist "must be mathematician, historian, statesman philosopher". It is too much to ask that students coming into graduate Economics have studied every one of these other subjects in detail, but the next best thing is to have a class that collectively has that breadth.

Thursday 11 September 2014

Me and Eaqub on Christchurch

Shamubeel Eaqub and I contributed chapters on the Christchurch earthquake and rebuild to a book that came out last week. The Herald covers it here.
Shamubeel Eaqub, NZIER principal economist and from Lincoln outside Christchurch, wrote about "overly restrictive policies on height, density and urban limits" which he said needed to be considered.
Centrally planned clusters never worked because the beauty of cities was that the close proximity of different people, skills and ideas gave rise to new ways of doing things and that was the lifeblood of innovation, Eaqub said. "Creating strict precincts based on one vision of how an economy or community is organised is misguided," he wrote.
The Christchurch Central Recovery Plan had good elements but was too restrictive on building and urban design practices.
"The plan has good enough elements to get the tick but it is taking too long to implement. The longer we wait, the higher the chances of permanent damage to Christchurch's economic future as the South Island's economic capital," he warned.
Eric Crampton, ex-Canterbury University economics lecturer and now head of research with the New Zealand Initiative in Wellington, wrote how the length of time it took to plan the new city centre had disastrous consequences.
"In Christchurch, the three-year-long quest for the perfect central city plan stopped anyone downtown from proceeding with any work at all for far too long, bleeding downtown's prospective recovery as businesses fled for the suburbs or left town entirely," he wrote.
You can, and should, buy the book here.

I'll be on a panel discussion as part of the book launch here in Wellington at LT1, School of Architecture and Design, 139 Vivian Street, at 12:30 on the 18th of September. Come along and say hi.

The Auckland launch, which I won't be attending, is on the 17th, with details at the link above. I missed the Christchurch launch on the 31st, unfortunately.

English gets it

"After the election, there's a Resource Management amendment bill that standardises a lot of the planning processes. That could be quite a step forward. We'd like to do a lot more intensive look at the incentives on councils and council officers and the way they make decisions that restrict the availability of land -- the political pressures to restrict densification within cities (which are) pretty strong here in Auckland, and the interaction with infrastructure."
English said the Government and councils needed to better understand why some Councils, such as Waimakariri and Selwyn in Christchurch, were keener to build infrastructure for new housing than others, such as Auckland.
If development isn't in a Council's financial interest, or if the incentives are so weak that a bit of NIMBY pressure can make the difference, then don't expect Councils to allow more development.

Wednesday 10 September 2014

Kirznerian alertness failure?

If this had been my product, I would have quickly sent retailers some stickers to put on the packs and asked them to shift the product to a higher shelf where the kids can't get them easily. 

A confectionery company is dealing with a sticky situation after penis-shaped gummy lollies made their way into some of its packs, costing the company thousands of dollars in recalls....One out of every 20 or 30 bags would have one or two little gummy penises in them, he said.
The company had apologised to the customers and compensated them with free lollies.
Collecting up all the bags of lollies and dumping them at the tip had cost the company thousands of dollars, Van de Geest said.
I'd bet that, had they stickered the packs and put them on the top shelf, they would have sold out quickly with buyers hoping to be the lucky one to find the prize inside. The stickers could have the picture of the offending gummi along with a note "Every 20th pack has a prize! Collect all the colours!"

So, Kirznerian alertness failure? Or, more likely, horror at potential outrage from parents hurting them in the longer term? I would have thought that the "top-shelf plus sticker" approach would have been enough to guard against parental backlash, but it isn't my money on the line.

Housing consensus

I love that both the left and right in New Zealand now agree that supply restrictions are the main cause of housing unaffordability.

At the 10:40 mark in panel discussion with Sean Plunkett, NZ Initiative's Oliver Hartwich points out that freeing up land supply would do more to stop speculative investment in housing than would Labour's proposed capital gains tax. Labour's Phil Twyford replies that Labour will direct Councils to increase the build rate, increase the supply of greenfields land, and liberalise restrictive planning laws.

Fix supply, and the demand-side pressures largely take care of themselves.

Tuesday 9 September 2014

Negative value added: education edition

Remember the story of the West German auto exec who, after touring the Trabant plant, wept because the value of the steel and other inputs going in exceeded the value of the car coming out? The Trabant plant was destroying value.

That's how I felt on reading the New Zealand Qualifications Authority standard on economics. Or at least this bit. They are making the students dumber by teaching them things that are not so.

Here's the particularly offensive bit:
3.  Market failure refers to situations when a market fails to deliver an efficient or equitable outcome. Efficiency occurs when Social Marginal Cost equals Social Marginal Benefit. Equity occurs if a situation or outcome is considered to be fair. The different market failures relate to: consumption externalities, production externalities, public goods, imperfect information, inequitable income distribution. 
4.  Government interventions refer to interventions in a market by central or local government. For example, these may include, for each market failure, a selection from:
  • subsidies, taxes, regulations, property rights and government provision (consumption externalities) 
  • subsidies, taxes, regulations, property rights and government provision (production externalities) 
  • government provision (public goods) 
  • regulation (imperfect information) 
  • progressive taxes, welfare benefits, collective provision and minimum wage (inequitable income distribution). 
This just isn't so!

Pick up any reasonable intermediate microeconomics text. Market failure occurs when the conditions underlying the first welfare theorem fail to hold. That doesn't necessarily mean that there's anything the government can or should do to fix things, but it opens up the possibility that there could be interventions that improve outcomes. The kinds of things in the first four bullet points are pretty standard textbook analysis, though we'd need to caution that the failures are necessary but not sufficient basis for intervention.

The last bullet point is right out. Draw the standard Edgeworth Box and derive the contract curve. Any of the infinite number of points on that curve are consistent with market efficiency (the First Welfare Theorem), but only some of the points will be consistent with particular views of equity.

If the government decides that one point on the curve is preferred, for equity reasons, to the one that would be achieved by markets, it can push things in that direction through appropriate redistributive measures. That's the Second Welfare Theorem. But we would never describe equity-based interventions as correcting a market failure. If we were on the contract curve, where marginal rates of substitution and marginal rates of transformation all lined up nicely, but we just didn't like that point for some reason, that just isn't a market failure. And I would have given a failing grade to a student who would have described it as such. Heck, I ran multichoice questions specifically checking against this kind of fallacy. NZQA is teaching students how to get a failing mark on intermediate micro exam questions.

Even worse, were we to take the Second Welfare Theorem as justification for equity-related interventions, the Theorem does require that least-inefficient means be used to get to the preferred point on the contract curve: typically, lump-sum redistribution of initial endowments. In the real world, you aim for the least distortionary taxes available: maybe land value taxation, maybe progressive consumption taxes. But you sure as heck don't go for minimum wages. That's a good way of ensuring that you never get back to the contract curve, or that you stay farther away from it than you could have using alternative measures like wage subsidies (or, to be consistent with theory, lump-sum transfers).

Why does this matter? There are decent theoretical reasons for interventions addressing First Welfare Theorem considerations. They're sciency. And, if designed properly with appropriate side-payments, they can in theory make at least one person better off while making nobody worse off. But there just aren't such justifications for equity-based policies - they're based on aesthetic considerations. It would be like having an engineering class move on from efficiency considerations in engine design to say that it's also an efficiency failure if the engine is painted blue instead of red.

Somebody please fix NZQA so that the economics standard isn't teaching kids how to fail their intermediate micro exams?

Update: in comments, Granite26 very correctly notes:
In your red vs blue engine example, it might be more correct to say 'uses too much fuel regardless of the efficiency with which it is converted to horsepower'. We should all be riding Mopeds, you know
Update 2: Paul Walker points me to the source on the Trabant story.

Against Scottish Independence

As a New-Zealander/Canadian, the Scottish referendum on independence is really none of my business, but I feel compelled to write strongly against separation. And, while Economics is my area of relative competence, and I think Paul Krugman in absolutely right in this piece that independence would come with a high economic cost to Scotland, it is not the Economics of independence that motivates this post.

You see, when I was a lot younger, I would have cheered loudly for independence. Like most people, my sense of identity was closely tied up with my citizenship, and, growing up in New Zealand, one manifestation of that tribal national pride was a deep-seated resentment at the remaining symbols of our close ties to the U.K. and England in particular. I was a strong anti-monarchist, hated the presence of the Union Jack on the New Zealand flag, hated the use of a crown in symbols of government departments, etc. My silly sense of identity was further tied up with my name, that saw me identifying more closely with 25% of my ancestry that is Irish with sympathy to the additional 25% that is Scottish, rather than to the 50% that is English. 

So what changed: Two things really. The general answer is that I grew up. While tribalism is probably an instinct that has roots in our evolution as a species, rational thought should be able to overcome its sillier manifestations, and I look back at my former attitudes with some embarrassment. I was like petulant teenager who overcompensates in trying to assert his independence as an adult separate from his parents by rejecting parental advice without thought but then finds that he can be secure in his status as an adult without rejecting his family roots. I now see that it is easy to maintain an identity as a New Zealander without the need to reject any of the aspects of New Zealand society that owe their origins to our English roots. And parliamentary democracy, the common law, John Locke and cricket are pretty darn good roots to have. 

But the more specific change was that I emigrated to Canada, and took out citizenship there living in Quebec at the time of the constitutional crisis of the late 80s and early 90s. Indeed, one of my first votes as a Canadian was in the '95 Quebec referendum on separation. I was by then a proud Canadian, but as a relative newcomer I could observe with the perspective of an outsider. And what I observed was the destructiveness of petty tribal politics, the magnification of the importance of past injustices, and the associated diminishing of the positive aspects of a shared history. And it made the immaturity of my own youthful tribalism apparent to me. 

Scotland has been linked politically with the rest of the UK for longer than Quebec has been with the rest of Canada, and there aren't the same language and religious differences that have made Quebec distinct within Canada. Yes, there are differences in averages between Scotland and England, particularly in political outlook, but identity politics often blinds us to the fact that differences between groups are typically small relative to variances within groups. It is far healthier for a society to emphasise the similarities within that society rather than the differences, and Scotland has been an important part of the culture of Britain that has been so influential on the modern world. David Hume, Adam Smith, and golf are pretty darn good roots as well. 

So I strongly hope that next week, the Scottish give a resounding vote in favour of remaining part of the United Kingdom, and furthermore that the is a general agreement never to even countenance such silliness again.