Thursday 31 March 2016

The UBI and the political constraint

I walk through the basics on universal basic incomes over at The Spinoff. After explaining Milligan's impossible trinity, I note the political constraint that I think blocks Gareth Morgan's proposed UBI. Morgan's proposed UBI would leave some very poor families worse off:
More importantly, though, while relatively low basic benefits could make the system affordable, they would not be politically stable. There would be pressure to layer a benefits system on top of the UBI, or to increase the UBI. It does not seem plausible that any government would be able to withstand the likely months’ long John Campbell campaign that would, every day, highlight a different family whose benefits were cut under the shift to a UBI. We would quickly have a welfare system layered on top of a UBI, increasing the costs while eroding the UBI’s benefits.
I could imagine pushing a button for a low UBI replacing existing income support programmes, combined with generous tax credits for contributions to charities that work to plug remaining gaps. But that button doesn't exist, and even if it did, it wouldn't be politically stable. You would have, every night, John Campbell featuring some family that has been made worse off. Because that is what John Campbell does, and because there is a market for those stories. Even if charitable support programmes were ramping up and would be more effective in the long run, the political constraint would bind. And then we wind up with UBI plus existing welfare.

Over at The Sandpit, I note a few additional problems that John Gibson raises:
[Gibson] then goes through five rather important potential unintended consequences of income transfer schemes, mostly looking at things in developing countries:
  1. Transfers targeted to types of need encourage Tullock-style competing for aid. He notes a programme in Brazil targeting poor families with kids wound up resulting in less weight gain per month for the targeted kids; the families feared that if their kids grew well, the transfers would stop.
  2. If being in formal work means you pay taxes to support protection schemes targeting those outside of formal work, then you get distortions towards informal work;
  3. Transfers to targeted rural households generate localised inflation that hurts non-targeted households;
  4. Programmes can erode existing informal safety nets where people rely on each other and family during tough times. The effect of programmes is then a bit harder to judge where the effective beneficiary is the person who would otherwise be supporting the recipient of aid.
  5. Programmes likely affect household composition, and consequently undermine targeting. He gives the example of the expansion of old age pensions in South Africa: adults with low skills wound up moving in with pensioners.

Learning from Canada: Refugee edition

Most of the time, I'm lauding how New Zealand gets things right that Canada messes up. The GST, no agricultural subsidies, low tariffs, parallel importation, open internal labour markets and lack of trade barriers between Otago and Wellington - NZ has a lot going for it.

But Canada has something important to teach us on refugees. And so I'm very happy that The Initiative will be hosting Dean Barry, Counsellor on Immigration with the High Commission of Canada in Canberra. He'll be with us next Tuesday evening to explain how Canada has been able to respond quickly to accommodate many more Syrian refugees than New Zealand has dreamed possible. 

Canada's population is about 7.5 times New Zealand's. Since November 2015, Canada has welcomed 8,981 refugees through its private sponsorship channel alone. If we put that into New Zealand terms, by population, that would be about 1,200 - almost double what New Zealand will accept over the next two and a half years. And that's in addition to the 15,000 refugees who have arrived through the sponsorship of the Canadian government. 

The event invitation is copied below; please do RSVP as spaces are limited

Canadian and New Zealand responses to last October’s refugee crisis could not have been more different.

Kiwis who wanted to help Syrian refugees did admirable work in preparing for those refugees that New Zealand did accept. But they also had to expend a lot of effort to convince the government to allow more refugees to come. Even when community groups had homes ready to welcome refugees, they needed to convince the government to open the door to let them in.

While Kiwis wanting New Zealand to accept more refugees lobbied the government to increase the refugee quota, Canadian groups could simply raise funds to bring more refugees to Canada. And every time that Canadian groups proved they were able to support another refugee, the Canadian government opened the door. As of 8 March 2016, that door has opened 8,960 times.

The New Zealand Initiative is very proud to host Dean Barry, Immigration Counsellor with the Canadian High Commission in Canberra. Barry will explain how the Canadian refugee sponsorship regime works, how refugees benefit from private sponsorship, and what lessons Canada has learned.

The Initiative believes in practical, evidence-based solutions to public policy problems. And the Canadians here just might be on to something. We hope you will join us.

About the speaker
Dean Barry has worked with the Government of Canada for 14 years, with positions at Industry Canada, Public Safety, the Canada Border Services Agency and Citizenship and Immigration Canada. He is currently posted to Canberra, Australia as Counsellor – Immigration at the High Commission of Canada. In this assignment, he is responsible for a wide range of reporting and liaison activities that cover a broad range of policy and operational areas, from managed migration to systems modernization to passport policy. He is accredited to the Commonwealth of Australia, New Zealand, Republic of the Fiji Islands, the Kingdom of Tonga, the Republic of Vanuatu and Samoa.   

Tuesday 29 March 2016

IPUMS envy

A couple weeks back, I couldn't get NZ Census data going back earlier than the 1996 Census.

I'd then asked one of The Initiative's researchers, who's better on Stats NZ data than I am, to see whether he could find data going farther back. He couldn't. Stats replied that age breakdowns of income data, like the stuff I was doing in the post linked above, would only be available in hard copy publications from past censuses, or as a customised data job.

Meanwhile, IPUMS sends out the following email to its users:

Dear IPUMS user,

We are excited to announce new data available from IPUMS-USA:
  • A new 5% public use microdata file for 1960. This collaboration with the U.S. Census Bureau provides an improvement upon the previous 1% file for 1960. The new data contains more detailed geographic information. You can read more about the 1960 project on our website.
We will be exhibiting at the Population Association of America (PAA) 2016 Annual Meeting in Washington D.C. next week. Visit booth 512 to talk data with us.
You can download a 5% Public Use Microsample of the 1960 US Census via the IPUMS website.

In New Zealand, there's a Confidentialised Unit Record File for the 2013 Census, but nothing for prior censues currently listed. And getting access to a CURF is a bit trickier than getting access to the US PUMS.

Monday 28 March 2016

Disqus issues

I apologise for some ongoing technical issues with Disqus.

A while back, Disqus stopped playing nice with the mobile version of Offsetting. Those comments have been going into the standard Blogger comments rather than into Disqus, and so aren't seen on the desktop version of the site - and vice-versa.

Over the past few days, Disqus seems to have been knocking out comments entirely. Some, I can see in the admin back end at Disqus, but I cannot get them onto the main page. Others seem to have disappeared entirely.

I hope you'll bear with me as I try to figure out how to fix this.

Update: I'm trying this patch, which forces Blogger to use the .com version of the page rather than setting country redirects. Seems I'm not the only one with this problem.

Thursday 24 March 2016

Risky diagnoses

When you're cautious in taking sexual risks, you help both yourself and your partners. The former effect can be purely selfish optimisation. The latter could be due to other-regarding preferences in relationships where you care about the other person, or just a positive externality.

Why does this matter? Consider what happens if more HIV testing is funded. If you're behind the veil and don't know about your status or your partner's, prudence dictates some caution. If you're tested, you know your status but don't necessarily know your partner's. If you're tested and wind up being negative, then the returns to prudence are higher, as you know with certainty that you aren't already infected so you can make things worse, but you might also think that the risks you've taken so far are safer than you'd thought. And how much weight people put on the risk they impose on partners is hard to tell: if you find out you're positive, you either reduce caution if partners' utility doesn't weigh heavily, or increase caution if others' utility counts.

And so what people do on getting a test result is an empirical question.

Enter Erick Gong. He finds that ..., well, scratch that. I'll just quote from his introduction as it's rare to see this kind of clarity in academic writing. Bottom line: if you're going to fund free testing, couple it with funding for anti-retro virals so that when people find out they're positive, they do less harm to others.
I use data from the Voluntary Counselling and Testing (VCT) Efficacy study conducted in Kenya and Tanzania, which randomly assigned people into HIV testing and followed up with them six months later (The Voluntary HIV-1 Counselling and Testing Efficacy Study Group,2000). I construct a measure of people's beliefs about their HIV status before getting tested using questions on the baseline survey. To measure risky sexual behaviour, I use biological markers that are not susceptible to self-reporting bias. Data are collected on newly contracted infections of gonorrhoea and chlamydia (henceforward known as ‘sexually transmitted infection’ or ‘STI’) that occur during the study.5 An STI only results from unprotected sex with someone who has an STI and serves as an objective measure of risky sexual behaviour. The random assignment of testing enables me to identify the effect that HIV tests have on sexual behaviour conditioned on prior beliefs of HIV infection.
My findings suggest that HIV tests have the largest effects on risky sexual behaviour when test results provide unexpected information to an individual. I find that people surprised by an HIV-positive test (i.e. those who believed they were at low risk for HIV before testing and learn they are HIV-positive) have a 10.5 percentage point increase in their likelihood of contracting an STI compared to an HIV-positive control group who had similar beliefs of HIV risk but were untested at baseline.6 I interpret this increase in contracting an STI as an indication that those surprised by an HIV-positive test increased their risky sexual behaviour – an unintended consequence of testing. I estimate that these types on average increased their number of new partners by about 2.4 over a six-month time frame. People surprised by an HIV-negative test (i.e. those who believed they were at high risk for HIV before testing and learn they are HIV-negative) have a 5 percentage point decrease in the likelihood of contracting an STI compared to an HIV-negative control group with similar beliefs of HIV risk but were untested at baseline.7 This decrease in the likelihood of contracting an STI suggests that those surprised by HIV-negative tests decrease their risky sexual behaviour. Both of these results indicate that when people make decisions about risky sexual behaviour, self-interests dominate altruistic preferences. People who discover they are HIV-positive no longer have any incentive to practice safe sex (i.e. ‘nothing to lose’), while those who learn they are HIV-negative face greater incentives to avoid risky behaviour. Finally, when HIV test results agree with a person's beliefs of HIV status, the effects of testing on STI likelihood are not statistically different from zero. This is consistent with an economic model where the behavioural responses to HIV tests are greatest when they provide unexpected information.
I use the empirical results described above and combine them with a simple epidemiological model to simulate the short-run effect of rolling out HIV testing in an urban setting. While this exercise inherently requires a set of strong assumptions, and hence the results should be interpreted with caution, it does address an important policy question. I use the distribution of beliefs of HIV risk and actual HIV status from the Demographic Health Surveys in Kenya, Mozambique and Zambia – all three countries faced with a generalised HIV epidemic. I find that in the cases of Kenya and Zambia, testing leads to declines in new infections, while testing leads to an increase in infections in Mozambique. However, when ARVs are provided at an earlier stage in the infection, testing leads to large reductions in HIV infections in all three countries. Since ARVs greatly reduce the infectivity of HIV-positive individuals, the aggressive provision of ARVs can mitigate the risks posed by HIV-positive individuals who increase their risky sexual behaviour after testing.8
The other particularly interesting bit: surprise negatives yield reductions in risk-taking.

I'd missed this when it came out in 2015. I thank Ole Rogeberg for the pointer.

Wednesday 23 March 2016

Otago Public Health, again.

Otago Public Health just advances from strength to strength, doesn't it? Here's their latest groundbreaking research. In an online survey of smokers, they find that smokers don't like cigarettes that have been made especially ugly. And so they recommend that cigarettes be required to be ugly.
Professor Hoek says the team tested reactions to images of four cigarette sticks that either featured printed warnings or had unattractive colours, such as yellow-brown and green.
“We found that smokers were significantly less likely to choose the test sticks and found all significantly less appealing than the status quo — a white cigarette with a brown filter tip,” she says.
A “minutes of life lost” graphic that went from one minute near the tip up to 15 near the butt had the strongest aversive effect relative to the other sticks tested.
“Requiring cigarette sticks and rolling paper to feature such a graphic, or to be produced in dissuasive colours, would likely increase the impact plain packaging will have on those who smoke, while also deterring others from taking up smoking,” Professor Hoek says.
We've long left the "we only want to provide information so smokers know the risks" world. When the goal is eradication, all policy bets are off.

Here are some other potentially fruitful lines of online survey research for Otago to somehow turn into peer-reviewed journal articles, in journals happy to accept that kind of thing:

  • Noxious odours added to cigarette paper to make people less tolerant of nearby smokers: which particular smells would smokers and those who know smokers find most repellent? Skunk, sulphur or body odour? How much would surveyed smokers cut back their smoking if they expected to smell like a skunk for the next three days?
  • What does an online panel of smokers think about exempting those who are smoking from laws against common assault? By how much would it reduce their smoking if they knew they could legally be punched or kicked while smoking? 
  • Following up on those two last bits of research, are there complementarities between letting non-smokers assault smokers, and making cigarette smoke even more repellent to non-smokers? How severe of assaults on smokers are justifiable before the public health costs of smoker injuries outweigh the long-term costs of smoking? And should the public health system really even pay for the medical costs incurred in justifiable assaults on smokers?
  • Turning designated outdoor smoking areas into hunting preserves for the greatest game: how much money for anti-smoking campaigns could be raised by letting non-smokers pay to hunt and shoot smokers? And what would be the savings to the public health system if smokers were shot before they got cancer? This research surveys an online panel of self-professed "rich eccentrics" who expressed a willingness to pay to hunt people, and an online panel of smokers to see how many would continue smoking if they were only allowed to smoke while in the game preserves. The paper estimates the amount of money that could be raised for anti-tobacco research if the government were not total tobacco-lobby neo-liberal shills who refused to allow progressive policies like hunting smokers despite the government's stated goal of a smokefree New Zealand by 2025.

Inputs and Outputs: Soda Tax edition

My flight back from Auckland over the weekend, cramped into a window seat with a large individual in the middle seat and nobody at all in the aisle seat, had me thinking again about soda and fat taxes.

I simply don't buy most of the fiscal externality arguments (costs to the public health system) for soda taxes. Yes, those who are obese have higher current medical costs than thinner folks. But thinner folks on average live longer and, on a lifetime assessment, cost more in some foreign studies. I've not seen domestic work on it.

But more importantly, for the fiscal externality argument to be anything other than just a transfer, we'd need to show that people actually change their consumption because we have a public health system. Remember that economists care about externalities to the extent that they change behaviour. If they don't, it's just a change in the identity of who pays the bill for something. If the number on the bottom of the bill doesn't change, it's not the kind of externality that causes problems.

And, again, if "the activity costs the health system money" is sufficient basis for tax and regulation to change behaviour, it is easier to list all of the things that shouldn't be taxed or subsidised than it is to list all the things that should be. Books probably shouldn't have a fat tax or be subsidised. Wait, no. Subsidise exercise books, tax cook books for desserts, subsidise healthy cook books. I'm having a hard time thinking of things that don't have effects on health and that consequently wouldn't draw some health tax or subsidy.

Catherine Rempell over at the Washington Post makes the most sensible case around this stuff I've yet seen; she takes the economics seriously. If you want to reduce obesity for some reason, and people have different ways of becoming obese or of getting thinner, then taxing inputs like sugar is a bad way of changing outcomes. The general rule in economics is to target outcomes rather than inputs if it's the outcome you care about. Is the outcome that the health people really targeting just sugar consumption? Or is it being healthier and thinner? If it's the latter, then a soda tax is silly.

After going through all the reasons soda taxes are unlikely to work (elasticities are overestimated; people substitute to other sugars), she hits the nut of it:
Instead of arbitrarily singling out one category of bad foodstuff for taxation — and the categories of bad foodstuffs will always be somewhat arbitrary — a more effective route to reducing consumption of excessive sugar or calories might be a universal, graduated sugar or calorie tax.

But even that still doesn’t quite seem fair or, for that matter, efficient. After all, a calorie tax would also hit people who consume more calories because they are very active, like marathoners. Besides being regressive, a tax on calories or sugar would also effectively, if unintentionally, make it more expensive for trim people to exercise.

In other words, a lot of inputs go into determining whether a person is obese. Taxing some of those inputs distorts the relative prices of those inputs, but it doesn’t necessarily change the desired output: obesity rates.

Which raises the question: Why not just target the output, rather than some random subset of inputs? We could tax obesity if we wanted to. Or if we want to seem less punitive, we could award tax credits to obese people who lose weight. A tax directly pegged to reduced obesity would certainly be a much more efficient way to achieve the stated policy goal of reducing obesity.

Of course, “fat taxes,” even when framed as weight-loss tax credits, seem pretty loathsome. Why is . . . unclear.

Maybe it’s because they’re regressive (but so are soda taxes). Maybe it’s because it sounds like we’re shaming fat people (but arguably so does any policy aimed at reducing obesity). Maybe it just feels unfair to tax people based in any way on their genes, which, like diet and exercise, can also be an determinant of weight.

But if we assume it’s impossible for obese people to lose weight by any combination of inputs they do have control over, it’s hard to simultaneously argue that making one of those inputs more expensive could lead to some nationwide weight-loss miracle. Pop goes the pop-tax rationale.
Emphasis added.

Waiting on someone to claim that she's an industry shill, as that seems to be the favourite NZ argument against anybody who's not drunk the sugar-tax kool-aid.

There are two possible counterarguments against Rempell.

First, if all of the following are true, then a sugar tax can be second-best:
  1. Reducing sugar consumption is the most effective way of improving healthiness for a very large proportion of the people who are targeted;
  2. The target population is responsive to prices on inputs;
  3. The target population is immune to information campaigns in a particular way. So if you tax people based on some measure of BMI or body fat, and tell them "The best way to cut your annual fat tax bill is to reduce your sugar consumption, they have to reply "I really want to reduce my annual fat tax bill and be less fat, but I do not believe you about sugar and there's nothing you can do to convince me." 
There's another way they can be immune to the evidence: "I am happy the way I am, and I enjoy eating the things I eat even though I know they make me fat. Stop preaching at me. Here's my $100 contribution to your stupid stupid campaign to make me be other than I am." In that world, both fat taxes and sugar taxes are evil, not helpful.

If all three of those are true, then taxing the input can be a second best way of achieving the outcome. Taxing outputs works where people have different ways of producing the output and can come up with their best ways of doing so. If we assume that people are too dumb to do that, and that reducing sugar consumption really is a magic bullet, then tax the input.

The other way Rempell can be wrong is if sugar really is simply worse than other things.

If you believe the "Sugar is toxic" people, then obesity isn't really the outcome target. Obesity is one way that having eaten too much sugar manifests, but there are all the skinny people who drink sugar walking around like sleeper agents, oblivious to bad stuff until sugar sneaks up and kills them. Then sugar consumption is the outcome variable that should be targeted independently of obesity. I think it's ludicrous, but some people believe it, and have wrapped that kind of story into generalised anti-corporate conspiracy theories where anything is bad that can have a Big put in front of it.

Tuesday 22 March 2016


There's a lot to like about a guaranteed annual income. Or, at least, there would be if it were feasible and affordable. I don't think it can be both.

Let's recap. On Friday, Labour released a discussion document on the GAI. The document is much better than I had expected, laying out reasonably the benefits and costs of that kind of a system, with a lighter thumb on the scales than I might have expected.* 

The main problem remains linked to Kevin Milligan's trilemma.
You can't pay a benefit large enough to leave current beneficiaries no worse off without simultaneously blowing out the budget, or running a very sharp phaseout rate. This isn't rocket science. The beneficiaries in most need get lots of different payments from lots of different systems because they have multiple needs. Set a GAI to replace all of them, and you'll leave the worst off worse off, or you wind up paying everybody the amount of money that we currently pay to those being paid the very most.

And so we come to Labour's document. They note the main benefits of shifting to a GAI: getting rid of the very high effective marginal tax rates affecting the working poor where multiple programmes abate simultaneously, getting rid of the stigma of benefit receipt,** and getting rid of the paternalism inherent in the benefits system.

When they get to the costs side, they note that a GAI would be rather expensive and that a GAI sufficient to fully compensate those beneficiaries in the worst circumstances would be on the order of $22,000 per year. Note that total Core Crown revenue is about $72 billion per year. A GAI of $22,000 per person would exhaust total Core Crown revenue when paid to just over three and a quarter million people. There are 4.6 million people in New Zealand. Again, not rocket science.

So how to square the circle? Their options suggest a lower GAI, but with top-ups for those in more severe need. But that's a problem. The benefit of having a GAI - getting rid of paternalism, stigma, high EMTRs - putting need-based top-ups on top of a GAI brings the problems of the current welfare system back.

Libertarians abroad who favour a GAI have good reasons for doing so. They mostly suggest funding it by cleaning up foreign tax systems - abolishing the kinds of exemptions and loopholes that New Zealand doesn't have. Now that's still a bit of a cheat: those changes are worth doing regardless of a GAI and should be evaluated separately. But NZ's tax code doesn't have free lunches baked into it - thankfully.

A GAI then winds up paying a fair bit of money to non-working spouses in high income families and to students while potentially making it harder for current beneficiaries in need to access benefits, if the top-ups follow the form of current hardship grants for beneficiaries. And at a not insignificant hike in tax rates.

Treasury's 2010 analysis remains relevant.

Update: And here's the 2001 McLeod Report:
Universal basic income 6.52 Submissions reiterated the case for a universal basic income (UBI).

6.53 A UBI provides a fixed sum to each citizen. Key attractions of this idea are its simple administration and avoiding EMTRs from abatement. There are also philosophical arguments for a UBI (everyone has a right to a basic income; a basic income reflects a return to collective wealth) and against (people have a right to the fruit of their labour).

6.54 There are three practical problems with all UBI proposals, namely:
  • a UBI provides people with money (which gives them purchasing power over goods) without supporting the production of the goods to be purchased with the money;
  • income distribution: New Zealand has few high-income people and many low income people. Each dollar taxed off the few people at the top of the distribution has to be divided among many people at the bottom. This, in turn, means either the UBI has to be low or the tax rate to fund it has to be very high; and
  • churn: The people in the middle of the income distribution pay half their income in tax and receive the same amount back as UBI. Much of the high tax rates of a UBI scheme is required to take money from middle- and high-income people and give it back to them, worsening their incentives without increasing their net income. This means we get the costs of high tax rates without the benefits.
6.55 A UBI has theoretical attractions, but the high tax rates required to fund it and the incentive effects of the payment make it impractical.

* I would link it, but Chrome really really doesn't want to open Labour's page due to an https issue.

** I'm not entirely convinced this is an unmitigated benefit. 

Sunday 20 March 2016

Wishing X caused Y

Imagine some topic, X. 

Most people agree that X is desirable for its own sake - a good thing. 

Many people want to believe that good things automatically result in good outcomes in other areas we can measure, like Y. They want it to be true that good thing X also means improvements in Y.

They want it so badly that they start to think anyone who doesn't believe in the link between X and Y must not really like X in the first place.  

There will be consultancy reports claiming to find links between X and Y. Like places (or people) with more X have more Y, ignoring that there are many other potential differences between the kinds of places (or people) that wind up with lots of X and the kinds of places (or people) without much X. And that those covariates could be what's driving the perceived relationships between X and Y.

Or, flip it around. Suppose some commonly disparaged thing R is commonly believed to cause bad outcome S. The consultancy reports show a link. All the right-thinking people believe the link. If you question the link between R and S, even if you hate R, maybe it's because you secretly like R. 

It isn't hard to wind up in spots where you can't question the link between X and Y, or between R and S, without being believed to be a bad person - and especially if some who question the link really do hate X or like R (or just like investigating contrarian hypotheses, and contrarians are always bad). And then you're in a preference falsification equilibrium, where everyone either lies or shuts up about the evidence on X and Y, or R and S. 

In a world of opportunity costs where you have to choose where to direct your attentions, and there are whole vectors of X Y, and RS, all over the place, what's the point of even heading into areas where you will not only fail to make any progress, but also look like a jerk while failing to make any progress? There are plenty of areas where Treasury hasn't yet decided to play the short "let's be popular" game instead of the long "let's stick with the evidence" one, closing the Overton Window on any kind of reality-based assessment. Windows remain open elsewhere.

Tuesday 15 March 2016

Bankers aren't farmers

On Radio New Zealand this morning, Andrew Little argued the government should lean on the banks to prevent their foreclosing on dairy farms, warning of that foreigners might swoop in and buy distressed NZ farms. 

A few things to consider:
  • Banks do not want to run farms. If they foreclose, they have to find somebody to run the thing pending auction. There are cows that need to be fed. The bank or the receiver takes on all the health & safety, and animal welfare, liability. The most heavily leveraged ones are the ones that'd be first to go; those are the ones where the banks have the biggest stake, and where the banks would take the greatest share of the loss in a fire-sale. A receiver's fees will include all the farm-running costs.
  • If the bank lets the farmer continue, restructuring payments over a longer period, then the bank does not have to run the farm. Banks are only going to foreclose as a last resort. You could even imagine their wanting to delay foreclosure until selling prices improved. 
  • In Little's nightmare scenario, some rich foreigner comes up to the bank and says "Hey, I'll pay you last year's price for that there farm if you foreclose on it." But that foreign buyer has to jump through a lengthy overseas investment act process if he wants to buy. The foreign buyer has no assurance and can have no assurance as to what the current, and potentially aggrieved, owner will do with the darned thing in the period between the OIA process beginning and the foreclosure. 
  • If I were a bank and I feared that a future Labour government might make it hard for me to foreclose on mortgages held by politically preferred groups, I'd be adjusting my loan portfolio today to guard against that risk. 
I wonder if Donald Trump has yet started warning his rallies about how the Mexicans are going to come in and buy all the farms. "Protecting American farms for good American farmers. We need a wall to keep rich Mexican drug-lords from coming in and buying America's land."

Update: Now Little wants regulations dictating pass-through of RBNZ headline rates to retail interest rates. can't happen again?

Fairfax's Tony Wall explains how the New Zealand Educational Institute, a teachers' union, made it very hard to fire a deputy principal who really should have been out of the system.
A teachers union has been accused of "protecting" teacher Robert Burrett before he went on to molest and rape 12 Christchurch schoolgirls, missing a chance to remove him from the profession in the early 2000s.

Pukenui School in Te Kuiti tried to get rid of Burrett, its deputy principal, in 2001 because he was drunk, dishevelled and disorganised.

But according to board chair at the time Steve Parry, the New Zealand Educational Institute (NZEI) made the process extremely difficult.

"They were quite evasive and defensive of the guy, and it frustrated us to a high level," Parry said. "Of course a person has rights and has to be protected, but they were really trying to make things confusing and difficult, they weren't really engaging in the problems we had."
The story then gets messier, with Burrett being paid to leave, the school not reporting him because of the confidentiality agreement they had to sign to get him to leave when they couldn't fire him, and NZEI washing its hands of things.
Stephanie Mills, the NZEI's director of campaigns, said she could not comment on individual cases. The union acted for members in cases of competency or misconduct "in order that every member receives natural justice and due process".

Mills said it was the employer's role and legal obligation to report teachers where there were claims of incompetency or misconduct.

"We are not in the role of reporting individual teachers, because this is clearly a board's responsibility."

She said the union had actively engaged with the Education Council in the development of registered teachers' criteria and the council's competency processes.

It "strongly supported" the profession taking responsibility for maintaining and enhancing the quality of teachers, she said.
So...does this last part mean that things have been improved such that teachers like this can be dismissed more readily and not make it back into the system?

If things have been improved, and if the unions were part of that process improvement, then the story doesn't make enough of that side of things. If they haven't, though....

I wonder whether Tom McCarthy is busy these days....

Monday 14 March 2016

Insurance markets in n-1 things

Tyler at Marginal Revolution points to interesting new insurance contracts where companies can insure against their celebrity spokesperson's potential disgrace.

Premiums run from 0.25% of the sum insured, to just under 1% of the sum insured. Presumably companies and insurers have to come up with ways of ensuring that sponsors don't start shifting to riskier celebrities, or start shirking on monitoring their celebrities' conduct.

Wellington has one chance in ten of a major earthquake over the next 100 years. The same link explains how continuing to be in Wellington after such an event would be far less pleasant than the post-quake Christchurch experience.

I would like to purchase an insurance contract paying me $1 million if there is a major Wellington earthquake.

If we assume that the one-in-ten chance is distributed evenly over that next hundred years, there is a 1/1000 risk per year.

An actuarially fair price for the insurance contract would then be $1000 per year. There is no moral hazard involved; I cannot cause earthquakes. It's effectively a life insurance contract paying out if Wellington gets a big earthquake, where we can define 'big' appropriately ex ante.

I would be happy to pay multiples over $1000 per year for that contract. I won't say how much over, but it's enough over that you'd think somebody would be willing to make a deal.

Missing markets continue to be missing.

No bailouts

Low dairy prices bite harder in New Zealand than elsewhere; dairy is a bigger part of our economy than it is elsewhere.

And so pressure for bailouts is potentially larger here than elsewhere. And so today's "Things I love about New Zealand": our Finance Minister's response to dairy prices:
English told TVNZ's Q+A yesterday that he doubted that would be a threat to the financial stability of the country, banks were stronger than at the time of the global financial crisis and the Government would not step in with any bailout for farmers.
"A few billion in losses is not a threat to financial stability. The regime that's in place now means the banks are stronger than they've ever been with a greater ability to withstand those losses than they've ever had."
He said there was a system for dealing with extreme hardship "because you are going to see, for a small number of dairy farming families, some real distress. But we're not going to be bailing them out."
It was disappointing to see Labour leader Andrew Little calling for bail-outs though. It's this kind of pandering that could box them in when they next form government. It is harder to say no to demands to do silly things when you demanded those same things from Opposition. See also: Labour on Pharmac.

Friday 11 March 2016

Height Tax

Greg Mankiw proposed a height tax as a bit of a reductio on the efficient tax literature. You can't adjust your height; height predicts income. So tax height and incentives around income remain clean. Ta-dah!

Work in the BMJ suggests that the height-income link is causal from height to income and works through genes - but mostly for men. A standard deviation (6.3 cm) increase in genetically predicted male height is associated with a £1580 increase in income. Obesity matters too, but for women. A standard deviation increase in genetically predicted BMI reduced women's household income by £2940.

I still await confirmation of the Python hypothesis that taller archaeologists are better archaeologists.

More seriously, though: some of the fat tax arguments hinge on that the link runs from obesity to income through health. Otherwise, they couldn't run a counterfactual that earnings but for obesity would be the same. That underlies the productivity costs of obesity argument. Where predicted obesity from genetic markers drives income, the argument for fat taxes to improve productivity get a bit fraught.

Thursday 10 March 2016


If it puzzles you that the New Zealand Police can find resources to run raids on marijuana growers, which sometimes turn into armed standoffs, but cannot find resources to solve burglaries, remember this:
The Criminal Proceeds (Recovery) Act enables police to seize assets believed to be the proceeds of crime, with or without a conviction.
Since it came into effect, $382 million worth of assets has been restrained (which means the police hold on to it during an investigation), while $85 million has been forfeited altogether. The funds recovered are used to fund law enforcement initiatives.
Police Minister Judith Collins says police have been “extremely successful” in investigating and seizing the “dirty money” of criminals and gangs since the legislation was introduced.
About 96% of forfeitures and 86% of restraints are linked to drugs and organised crime.
What profit is there in solving a home break-in? Anything you seize has to go back to the property's owners. But if you go after the folks who only commit victimless crimes, well, there's nobody who has to be compensated out of the seizures.

I hate saying I told you so, but I did tell you so.

The cops will tell us that the standoff's lesson is that police should be better armed. But when was the last time that the police needed to do raids, armed or otherwise, on a brewery or a distillery? Or on the Petone cigarette plant? The better lesson is that legalised markets are less violent and have less need for armed cops.

Update: Commenter Ben rightly notes that the funds don't go directly to the police. Here's the NZ Drug Foundation on that:
The lion’s share (70 percent) has gone to Police, Customs, Justice and Corrections. Health gets the rest.

Tuesday 8 March 2016

The kids are all right: NZ Edition

More than a few folks have emailed me the latest from The Guardian on the coming intergenerational war. Youth incomes have been going backwards in too many countries.

And so I pulled together what I could quickly get out of Stats NZ Census data.*

Here's what by-age median incomes look like in NZ, going back to 1991. It's all CPI adjusted to Q1 of the Census year, assuming a Q1 2013 final price. So $2013.

The x-axis has age cohorts. Note that the gap between the 2006 Census and 2013 is larger than usual due to the 2011 earthquake which displaced the normal census year; the great recession also fell during that period.

There was substantial real income growth from 2001 to 2006. Real median Census incomes between 2006 and 2013 only shows growth for old people. There's not been particular decline for youths, and certainly no decline over the period since 1991, with one exception. 15-19 year olds earned far more in 1991 than they did in any later period, with a sharp drop from 1991 to 1996 (which I'd put to increasing tertiary enrolment) and another sharp drop from 2006 to 2013 (which I'd put to the abolition of the differential lower youth minimum wage and consequent labour force exits).

Note further that New Zealand Income Survey data shows reasonable increases in by-age incomes from 2013 to present. 20-24 year olds had total real income growth of 11.8% from 2013 to 2015; 40-44 year olds only saw real income growth of 4%.

New Zealand Income Survey, median incomes by age, $2013.

New Zealand isn't doing too badly compared to the international experience. But the international experience isn't good. And New Zealand has a bad habit of just assuming that whatever's reported in the Guardian about the US or UK is also true here. Youths locked out of housing by the Auckland gerontocracy could be excused for not noticing their very real growth in real incomes as compared to the 1990s; it's all being eaten up by housing costs.

My worry is that imported narratives of stagnant wages (again, note the substantial increases 2013-2015 in NZ Income Survey data, contrary to the international experience) fuel demand for bad policy. The narratives are appealing here because it is easy to think back to the houses your parents could afford, and conclude you're worse off. But adults in their early thirties have real median incomes more than $16,000 higher than they had in 1991.

It's a problem with housing.

* You'd think it would be easy to get these kinds of long term series. I'm probably just bad at it, but I had to pull it out of a few different Census files, and I can't quickly find the 1986 census. The long term series don't have age-breakdowns, so it has to be culled from each Census. A job for another day.

Inequality, envy, and earning

Desert matters. And so inequality statistics on their own don't tell us much.

One of the reasons the macro literature on inequality and growth has issues is that inequality's bad for growth where the road to riches is the license raj, but inequality can be one of the things that comes with economic growth where effort and productivity are rewarded.

Zizzo and Oswald, a while back, found that people were willing to pay money in lab experiments to burn others' income where that income wasn't earned:
Dan Zizzo has found in experimental environments, folks are willing to spend their own money to burn the money-holdings of folks who have more money than they do, especially when they reckon that the folks with more money don't deserve it. I tend to think this sort of behaviour a nasty holdover from the Pleistocene - check Paul Rubin's work on Darwinian Politics for the evolutionary advantages of inequality aversion on the Savanna.
A new experimental result also finds that desert matters. Here's Faillo and coauthors:
Thou shalt not steal (from hard-working people)
An experiment on respect for property claims
Marco Faillo†, Matteo Rizzolli‡ and Stephan Tontrup§

The institution of property is void without legal and social enforcement against theft. To address wasteful competition over resources, societies have long developed strategies that encompass -inter alia- behavioral traits, social norms and legal institutions to promote the respect and enforcement of property rights. On the other hand, a growing body of biological and ethological evidence suggests that several other animal species establish and respect some forms of property even in the absence of institutions. Would human beings respect others’ property in the absence of institutions? Do people posses some innate sense of property, or do they respect property only because of legal and social enforcement? In this study, we explore this issue with a lab experiment that resembles a famous thought experiment proposed by Plato. As Plato sought to understand how one ought to behave when he or she is completely shielded by the consequences of his actions,we study whether people respect property once full anonymity is granted. In this experiment, we implement a FreeForm Dictator game where participants can both give and take up to five scratchcards from a passive counterpart that they have either previously bought outside the lab with their own money (legal treatments) or gained inside the lab via an effort task (effortful treatments). In conclusion to the experiment, evidence is provided of a (weak) sense of property. We also provide evidence that property in the lab is better established through an effort tasks than through the use of subject’s own real property brought from outside the lab.
The neat twist here is that they required physical theft rather than just punching a button on the computer.

Where it's easier to tell that people have earned what they have, there's stronger respect for property rights. One might wonder how much that gets eroded by Wall Street bailouts.

Monday 7 March 2016

Choose your peers

It's a bit tough to make sense of parents' preference for higher decile schools in New Zealand. Sure, pass rates are going to be higher than in low decile schools, but that's very plausibly entirely cohort effects rather than education effects. And lower decile schools will have smaller class sizes and greater per-pupil government funding.

Unless parents are choosing classmates rather than education.

Here's Carrell et al at NBER:
A large and growing literature has documented the importance of peer effects in education. However, there is relatively little evidence on the long-run educational and labor market consequences of childhood peers. We examine this question by linking administrative data on elementary school students to subsequent test scores, college attendance and completion, and earnings. To distinguish the effect of peers from confounding factors, we exploit the population variation in the proportion of children from families linked to domestic violence, who were shown by Carrell and Hoekstra (2010, 2012) to disrupt contemporaneous behavior and learning. Results show that exposure to a disruptive peer in classes of 25 during elementary school reduces earnings at age 26 by 3 to 4 percent. We estimate that differential exposure to children linked to domestic violence explains 5 to 6 percent of the rich-poor earnings gap in our data, and that removing one disruptive peer from a classroom for one year would raise the present discounted value of classmates' future earnings by $100,000.
They're able to identify effects by using within-school-grade variation: basically, if the school has a pile of 6th grade classrooms, effects are identified by variation across those classrooms rather than between schools.

To get a sense of the magnitude, they note that the effects of having four boys from families linked to domestic violence in the classroom is equivalent to the effect of replacing an average teacher with a teacher in the bottom 5 percent of all teachers. And note that effects cumulate where students can be paired with disruptive peers across several years.

If parents think that higher decile schools will have fewer behavioural issues in the classroom to deal with, decile-based heuristics make more sense.
We also show that due to sorting into schools, differential exposure to disruptive children explains roughly 5 or 6 percent of the earnings gap between those who grew up in lower income versus higher-income families. Given that we only have one particular proxy for disruptive peers, we view this as a lower bound of the impact of disruptive elementary school peers on income inequality. 
The benefits to disruptive students of being in mainstream classrooms would have to be substantial to make integrated classrooms desirable overall.

Sunday 6 March 2016

How high is too high: minimum wages edition

Radio NZ listeners tuning in to hear me, Tim Hazeldine and Laila Harre talking minimum wages and living wages this morning might find some of these references useful.

[Update: the audio is here; RNZ's write-up is here.]

Let's start with living wage proposals.

New Zealand's Living Wage proposal is poorly targeted and badly constructed.

For example, look at page 24-25, where they describe how they came up with the weekly expenditure on food. Prices come from the supermarkets with the highest sales volumes, rather than from any examination of where poorer people actually shop. Shelf prices are used, ignoring specials or coupon prices. I'm not in a low income decile, but when things we buy are on special, we stock up. It would be surprising if poor people didn't carefully check coupons and specials when shopping. Food cost estimates that ignore that people adjust their weekly bundle according to what's on special that week likely are missing something important.

As for targeting, look at Treasury's analysis (and here). 63% of households earning below the targeted $18.40 are single adults with no dependants; almost all teens and a majority of those in their 20s earn below $18.40/hour. Those in most need would see most of any living wage abated through clawbacks in other benefits.

Treasury notes that disemployment among teens and young adults is to be expected. And if the point is to focus on those in long term low income, only a quarter of those in the bottom decile in 2002 were there in 2009.

Treasury concludes that the Living Wage project's method was geared to produce a number around two-thirds of the national average expenditure of a two-adult, two-child household. It's blunter than most things I've seen from Treasury.

How does New Zealand's minimum wage stack up?

First, here's growth over time, or at least through 2013, from Treasury's analysis of the Living Wage. The recent increase continues to well outstrip inflation.

If we look internationally, New Zealand's current minimum wage, at 66% of the median hourly wage, is very high. Here's how Treasury illustrated things, using 2009 OECD data:

So, New Zealand's minimum wage is one of the world's highest, in relation to the median wage. This matters when we think about American evidence that hikes in American minimum wages have had little effect on overall employment. A minimum wage that's 40% of the median wage will have rather less effect than one that's 66% of the median wage.

Think about it this way. Imagine the government set a minimum price on new cars. The median car is, say, a Civic that sells for $40,000, and a cheap Kea goes for $20,000. If the minimum price were set at 40% of the median, you wouldn't notice much. At 50%, it would have some effect. And at 66%, even more.

What about minimum wages as antipoverty tool?

Work by Tim Maloney and Gail Pacheco (published version here) showed that a much larger fraction of minimum wage workers in New Zealand come from high decile families than is the case in other countries. This will in part be due to New Zealand's relatively high minimum wage. Here's what the distribution of minimum wage workers, by decile, looks like:

Increases in the minimum wage are poorly targeted if the point is to help those in most need. Only about 40% of minimum wage workers are in households in the bottom 3 deciles.

A ten percent increase in the minimum wage, even if we assume zero effect on employment or hours worked, only reduces poverty rates by 0.08 percentage points in their simulations. If it results in a 3% reduction in hours worked, poverty rates only drop by 0.05 percentage points.

Work in Canada by Aninda Sen and coauthors showed that Canadian minimum wage hikes resulted in increased poverty: a 10% hike there in the minimum wage yields about a 5% increase in the percentage of families living below Canada's Low-Income Cut-off line. The intuition runs as follows. In households above the LICO where the second-earner's earnings are critical in keeping them above LICO, disemployment due to minimum wage hikes easily knocks folks below the line. But there aren't that many families that are close enough below the line that a 10% hike in the minimum wage would bring the family over the line.

And it's also worth remembering that unhappiness from job losses can trump unhappiness from not being paid as much as you'd like.

Back to New Zealand now. The Cabinet paper on this year's $0.50 hike includes Treasury's advice that the hike is poorly targeted and that disemployment effects on youths could have longer term consequences for labour market connectedness. They don't point to it, but here's some evidence.

So, if minimum wage hikes are a bad way of helping the poor, what would I suggest instead?

  • Flatten some of the EMTR ranges where clawbacks compound to provide very little return to the next dollar earned.
  • Fix housing. Fix housing fix housing fix housing. The gap between before-housing-cost and after-housing-cost measures of poverty is striking. Look at Table 2 in The Initiative's latest report on poverty. In 1982, 18% of children lived in households that earned less than 60% of 1998's median household income, before housing costs. That number dropped to 10% by 2014. Great news, right? Except, if we look at after-housing-cost measures instead, we get a rise from 12% to 17%. 
  • Recognise the difference Working For Families, a wage subsidy programme targeted towards those in work with kids, has already made. Earnings subsidies like this have the advantage of not encouraging employers to fire people. 


Addendum: The background notes provided to the panellists pointed to Marc Amlinger's summary of the effects of Germany's recently adopted minimum wage. It notes drops in the number of 'mini jobs' (which they estimate at 133,000 losses) but no particular decline in the number of other jobs. The Ifo Institute for Economic Research's Hans-Werner Sinn, by contrast, puts the number of minijob losses at 170,000-180,000, with expectations of longer term losses of 900,000.

And think too about the refugee crisis. Germany's hosting now huge numbers of refugees, for whom German would be a second language at best, and who need jobs. How many minijobs might have been created for these workers? Is the number of jobs lost the right counterfactual when there should have instead been lots of entry-level low paid positions created with the big influx of refugees?

Saturday 5 March 2016

Drink driving deaths

The police are likely right that it's too early to tell whether the shift to .05 from .08 has saved lives.

Labour's Sue Morony very correctly points out that very few crashes involve drivers between the .05 and .08 limits. There was never much chance that the change would have passed muster if based only on deaths in that cohort - there's just not that much increased road accident risk between .05 and .08.

The chances of the policy's success rather depended on whether .05 meant fewer drivers got to .10 or higher. If people make bad decisions about having another one or two after hitting .06, and don't get to .06 under .05, then the policy could save lives. Whether it passes cost-benefit is another thing. But it'll be interesting to see the police's numbers when they come out. I hope that they properly adjust for prior trends in drink drive rates when they do so.

Friday 4 March 2016

Ganging up on gangs

My column this week in The NBR looks at that "Costs of Gangs" study. A snippet:
Appeals to the social cost of someone’s preferred way of being are a pretty standard way of rallying voter support against them. People like me might be sympathetic to gangs so long as they stick to selling illegal drugs. But if gangs actually cost me through the tax system, that might change my mind about them. And it might make people like me more supportive of anti-gang measures.

In the twenty-two years studied, from the start of 1993 through the end of 2014, MSD tells us that 92% of gang members spent some time on benefit, with an average duration of 8.9 years. Older gangsters spent more time on the benefit as they’d had more time to be able to be on benefit. The total lifetime fiscal cost of main benefits and other assistance provided to gang members and their relations over that period was $714 million.

Now that’s a nice big fiscal cost number. The Dominion Post this week told us that summer costs ACC $2.2 million in sun, sand, barbeque and ice-cream related injury claims. Gangs then cost the country 325 summers, if we follow this general line of reasoning.

But we should pause for a moment and go back to some classic Australian television: Hollowmen. That dark satire of Australian politics had boffins warning a politico against rolling many years’ spending into one big headline figure: “It might get you some headlines, but who needs that?” So the politician of course rolled all the annual numbers together into one big headline figure, because politicians need headlines. 
One minor slip-up on my side: the per capita measure of $6000 per year attaches to the welfare assistance component of $525m, not to the total fiscal cost of $714m. The per capita (over 22 years) figure I'd grabbed was just on the welfare assistance component, not on the whole she-bang. The annual per capita cost that goes with the $714m figure should have been about about $8200. Still far cheaper than NZ Super.

Update: NBR's kindly corrected things in the online version. Subscribe!

Thursday 3 March 2016

America needs Bob Jones

Things were bad for National in the late 70s and in the lead-up to the 80s. Robert Muldoon, then Prime Minister, supported policies that, if continued, would be utterly ruinous for the country. But die-hard National voters would continue to vote National out of tribal loyalty. And no internal coup seemed in the offing.

Bob Jones, a property investor and National Party supporter, saw the mess. He established the New Zealand Party. It ran on an economically liberal platform, in the British sense of liberal. Free markets, an end to the license raj, and a place for National supporters to place their votes if they couldn't hold their noses and vote for Labour.

Bob intended to win. He lost the election, but his policy ideas won. The Muldoonist version of National died. Labour enacted many of the necessary reforms, and National was recast in more economically liberal lines.

Trump looks as bad for the Republicans as Muldoon was for National. But lots of died-in-the-wool Republicans could never vote Democrat.

Will there be a Republican who can stand up and say that a Trumpist version of the Republican Party does not deserve to win, that the Republicans would be better losing than having Trump as its elected President, and that the Republican Party is better than appeals to tribal racism?

Americans, and Republicans who care more about free markets and free people than about having their team win any particular election, really should watch the excellent documentary on New Zealand's 1984 election, and on Bob Jones.

Bob Jones

Trump's likely to be the nominee. More worrying is that he's trading around a 20-25% chance of winning the Presidency. Sure, it's not likely to be as bad as many might think, but that doesn't make it not-bad. Just because an electoral system is more robust to madmen than you might think is no reason to go around letting madmen become President.

Wednesday 2 March 2016

Costly gangs

The linking up of back-end government administrative data turns up interesting results.

The Ministry of Social Development report is depressing stuff. There's a core of just under 4000 known gang members. They're heavily welfare dependent. 92% spent some time on benefit from 1993 through 2014, spending an average of just under 9 of those 21* years on benefit. Over 7000 kids have spent time on benefits linked to a gang member's benefit. Over a quarter of the gang members were linked to child abuse or neglect, though the mother was more often recorded as the alleged perpetrator.

Also depressing are some of the proposed policy responses.
The Government was working on a range of other gang-related initiatives to address the costs of crime, she [Collins] said.

A Start at Home programme was being developed to provide support services for gang members and families by creating new programmes and modifying existing ones.

Multi-agency taskforces were targeting drug trafficking and gang networks, and helped recover over 334 kilograms of methamphetamine with a street value of $334 million in 2015, while seizing almost $14 million of property and profits gained from crime.

New, gang-related laws were being developed, including legislation to place 24-hour GPS monitoring on high-risk offenders like gang members to ensure restrictions on going to gang headquarters could be enforced.

Changes to money-laundering laws, making it easier for police to seize cash found in suspicious circumstances, were also being worked on, along with a firearm prohibition regime to stop certain people from accessing guns.
Figuring out what kinds of support service interventions work is a fantastic idea. GPS monitoring can be better than prison too.

But making it easier to seize cash has led to horrible abuses in the U.S.

The earlier parts of the story, where they roll up together costs incurred over 21 years into one big number, also ain't so hot. Present annual figures for this stuff to allow for reasonable comparisons please?

* The first time I read that, I thought it had been 11 years, not 21. 1993 is becoming unreasonably long ago.