Tuesday, 30 August 2016

Broad-based growth?

If everyone is better off, the sum total has to increase. But the total also grows if a few are much better off. Increasingly, it's the latter kind of economic growth New Zealand has experienced.

Further, broad economic measures by definition aggregate individual experiences. But can mask significant underlying differences across regions, ethnicities or family background.

Our economy has grown significantly over the last three decades, but some measures of income and wealth distribution show compelling evidence that trickle down has not worked.

Income inequality, as published by the Ministry of Social Development, has not improved since the early 1990s after a significant worsening in the 1980s.
The reader might be forgiven for drawing the inference that incomes at the bottom haven't risen much since the early 1990s.

Here's Brian Perry's most recent statistics. I highlighted the relevant row.

Over the 20 years from 1994 to 2014, real household income for the bottom ten percent increased 44%.* For the 30th through 80th percentiles, it increased around 53%. And it increased 64% at the top. Incomes went up across the board.

If we take the period from 1982 through to 2014, incomes at the bottom rose by less; they dropped during the the late 1980s. But we still have real income growth ranging from 15% at the bottom to 64% at the top. Real income growth for the equivalised household at the fiftieth percentile is 28%.

After housing costs is far less pretty a picture, with real decline in the bottom decile. There are real problems caused by excessively expensive housing, which need to be addressed through appropriate changes to zoning and to council incentives to let more housing be built.

If we're looking at household incomes though:

  • There was decline almost across the board from the late 80s through early 90s. Pain was concentrated in the bottom four deciles, which saw substantial real declines in equivalised household income. There were tiny gains at the very top. None of this is a problem of "growth benefiting the rich", rather, it's a story of the costs of substantial economic restructuring.
  • Income growth since 1994 has been stronger and broadly shared. Incomes at the bottom are up 44% on where they were in 1994; incomes at the top are up 64% on where they were in 1994.  
It's hard to see evidence in there of New Zealand's having increasingly experienced growth that only benefits the top. If we look at the most recent years there available, 2011 through 2014, incomes at the bottom are up 8% while incomes were flat for the 95th percentile. 

I agree with Shamubeel that GDP is hardly a general measure of good stuff. We noted a few of the problems with GDP in our Case for Economic Growth two years ago. But we also noted that rather a lot of good stuff does correlate with GDP.

It's good to have lots of different measures of good stuff. But it's better to properly price in things like negative environmental externalities than to throw out GDP and give up on economic growth. New Zealand has really rather poor overall economic growth figures. Stronger growth from solving some of the barriers to productivity growth lets us afford all kinds of good things, including better environmental amenities.

* Here and elsewhere, though, always be sceptical of the numbers for earnings in the bottom decile.

Saturday, 27 August 2016

The Town of the Future

When we moved to Christchurch, we'd always chuckle a little when driving south down the state highway. Rolleston, the first town south of Christchurch, advertised itself as the town of the the future.

They were prophetic. And Selwyn Council there helps show the advantages of not amalgamating every darned place. After the earthquake, Christchurch Council seemed unable to get its act together to zone more land for housing, or even to let people put a wall up in an existing dwelling as a secondary unit.

Fortunately, Selwyn was there and ready to grow - and hadn't been merged into some supercouncil that would have been hobbled by Christchurch. John McCrone's piece in the Christchurch Press is typically excellent:
At the offices of Selwyn District Council, Deputy Mayor Sarah Walters says Rolleston's pace of growth is indeed confounding all expectations.
It is hard for outsiders too appreciate just how fast the town is whizzing along, Walters says. "Which makes it a great success story on one level, but an interesting dynamic, an interesting challenge, on other levels," she adds, mixing a groan with the smile.
Walters says to get a grip on the numbers, Rolleston's population was scratching to get to 3000 just 15 years ago. The opening of a New World supermarket in 2002 was the first sign of something possibly starting to happen.

"Rolleston was beginning to develop a little bit. But the council at the time thought Rolleston was only going to get to about 4500 people. So to build a supermarket at that time was a big sign of commitment."

However, then came the Canterbury earthquakes and a flood of house-construction. Walters says under emergency government powers, greenfield land intended to be developed over many decades was released onto the market all at once.

By 2013, the population of Rolleston had breezed past 9000. Today it stands at 14,000. Predictions it will hit 19,000 within 10 years are beginning to look like an underestimate.

Walters says the mix of arrivals is cosmopolitan. "We seem to have a lot of English especially." And rather than being all quake refugees, it is more often the case that people have sold a home in Christchurch, allowing them to make the step further out.

But above all the demographic is youthful, says Walters. It is largely young families that are coming. And this is making Rolleston a 1960s baby boom story all over again. 
You see people pushing prams everywhere.Council figures show that a quarter of Rolleston is aged under 15, compared to a Canterbury average of 16 per cent. And just 8 per cent are over 65 – half the usual number.

So Walters says six years ago, Rolleston had a single primary school. Now that one is bursting at the seams, having become the largest in the South Island. And the ministry has had to build three new primaries, with a fifth, Lemonwood, about to open after Christmas.

And also opening after Christmas is a first secondary school, Rolleston College. With 250 Year 9 pupils as an initial intake, it will be the fastest growing secondary school seen anywhere for a long time.

Friday, 26 August 2016

Zero percent - redux

Earlier this week, we covered Labour's disappointing response to our report on zero-percent student loans. Other comment round the traps:

Stephen Joyce defended National's continued support for the policy National more sensibly opposed while in opposition:
He says the issue is about trade-offs and the government has it about right.

"There's those on the left that want to give students more stuff and those on the right who want them to pay more for stuff. Our view is that the settings are about right and have broad public support.

"There's a significant subsidy of tertiary students in New Zealand and it reflects about 80 per cent of tertiary costs, which is quite high given there's a lot of private benefit from it, but there's a broad public consensus that government should make a contribution," he said.
The Herald noted that our report has an ally in the Child Poverty Action Group's report, which also suggested considering reinstating interest for better means-testing.
In 2014, the Government's share of the full cost of each student's tertiary education was 71 per cent, rising to about 82 per cent after the subsidy provided by interest-free borrowing is accounted for.
If interest were reinstated with none of the savings going back into the sector with means-tested support, the government's share of the costs of a student's degree would still be substantial.

Rachel Smalley broadly agreed with our proposal:
Studying is never easy. You're always juggling a million things. Money is either tight or non-existent. Always. Is it worse now then when I studied? I'm not sure. I studied in a different era. I paid interest on my student loan and because I knew that debt was accruing-interest, it incentivised me to pay it off. I worked three jobs while I studied because I didn't want to rack up too much debt. I worked in a pub on a Friday night, in a bank one day a week and I wrote for the evening post on the weekends too.

I thought I had it pretty tough back then. It was a struggle. I was juggling work and study, but I survived, and within about three years I'd paid off my student loan -- a student loan that was interest-bearing.

Would I have benefited from an interest-free loan? Of course. That loan would have been paid off earlier -- perhaps six months or even a year earlier. But in hindsight, it did teach me a pretty valuable lesson in life.

Everything comes at a cost. Nothing is free in this world.

And while it will take a bold politician to admit it, the $6 billion decade of debt that we've shouldered subsidising student loans, is $6 billion that would have been money well-spent elsewhere.
RNZ's The Panel discussed it, but didn't really get anywhere. Newshub covered it as well, but suggested there would be little appetite for change.

Chris Hipkins continued to say silly things over on Newstalk:
Labour's education spokesperson Chris Hipkins says spending money on education is never a waste.

..."I'm firmly of the view that if we do a better job of educating New Zealanders, then we'll end up spending less money on the prison system, we'll end up spending less money on the welfare system."
Memories of the bumbling report on Adult & Continuing Education that got Really Big Numbers on the benefits of night courses in Indian cooking by assuming that anybody taking any such course was 50% less likely to commit any crime.

But leaving that aside, surely we do more good in getting at-risk kids into the right kinds of study by taking money given interest-free to rich kids and shuffling it over into better tertiary prep and guidance counselling at schools with a lot of at-risk kids, no?

David Seymour and Jacinda Ardern squared off on it in the Sunday Star Times. David rightly excoriated National for maintaining Labour's policy. ACT's newsletter summed things up very well as well, though it benchmarked the effects of reintroducing interest by reference to the equivalent tax cut. We'd proposed shifting the funding to other parts of the ed sector.

David Farrar agreed with us. The Standard didn't. 63% of readers at the National Business Review wanted interest reinstated.

Read properly, our report is decidedly left-wing. We suggest taking money currently provided indiscriminately to tertiary students, who disproportionately come from richer backgrounds, and targeting the money instead to schools with poor track records of getting kids into tertiary (which will disproportionately be serving kids from poorer backgrounds). Some could also provide means-tested support for tertiary students who are in more need. I'd expect that's best done through debt relief for graduates finding themselves in cases of real hardship, but it could also be used to strengthen means-tested allowances or provide scholarships.

I find it somewhat bizarre that this gets characterised as right-wing, but that seems the simplest way for partisans to divert attention from their party's failed policy.

Crossposted from The Sandpit

Thursday, 25 August 2016

One-way heritage bets

What a mess of a system.

Suppose you want to force owners of heritage buildings to protect them for you at their expense rather than your own. You can lodge legal challenges to consents issued to the owner allowing changes.

If you win, you've succeeded in forcing the owner to provide you a service for free.

If you lose, you might have costs awarded against you. And if you do...
One of Auckland's most active, successful heritage groups is planning liquidation after a $27,000 bill from losing a battle to save one of the city's oldest hotels.
Devonport Heritage Inc is holding a special meeting on September 14 to vote on the appointment of a liquidator and a notice has just gone out to all members from chairwoman Trish Deans.
Margot McRae, deputy chairwoman, today said that liquidation was planned as a result of a $27,000 bill for court costs after the group's unsuccessful Environment Court attempt to save the Masonic Tavern in 2010.
The story goes on to talk about the hundreds of thousands of dollars in court costs faced by Councils defending issued resource consents against these kinds of collection-proof outfits. Left unmentioned are the even higher costs when a property owner's plans are put on the back burner for years while waiting for the legal challenges to wind their ways through - and the costs of unaffordable housing in Auckland when NIMBY organisations have an easy time doing this.

I had a chat yesterday with an interfaith group representing the owners of a pile of historic churches.

One of the costs of heritage building ownership that I hadn't considered: how it ramps up the cost of insurance. It's one of those things that's immediately obvious the second it's pointed out, but otherwise you might miss - and I'd missed it before. Insurers obviously demand more to insure a building that has to be reinstated to a historic standard than they do to replace a building with equivalent functionality.

A lot of small congregations would be more than happy to replace an older building with a new one with the same functionality anyway. But replacing a badly damaged old building with a new equivalent is tough when the old building is under heritage protection. And so these churches are facing substantial annual insurance bills reflecting the costs of rebuilding to an unwanted heritage standard.

There really should be a put option in there where the heritage people objecting to a change should have to purchase the building at its RV on request by the owner - or withdraw the heritage listing.

Who's progressive?

While we at The Initiative have been pretty happy with the hearing our report on zero percent loans has received, some of the partisan responses have been more than a little depressing.

It would have been surprising if Labour would have said, "Yeah, you know what, we messed that one up. Shouldn't have done it. Oops."

Here's Chris Hipkins:
Labour's education spokesman Chris Hipkins takes that a step further and says taking away interest-free student loans "reinforces inequity".

"It would make inequity worse because those on the lowest incomes would be penalised the most. It's an incredibly regressive system."

Hipkins said the think tank was taking a "narrow view of the value of tertiary education".

"This is exactly the type of ideological right wing clap-trap i've come to expect from the successor to the business roundtable."

"They assume it's all personal benefit, they don't look at the fact we put significant taxpayer subsidies into higher education...because it is not a purely personal benefit, the whole of the country benefits," he said.
Chris has things entirely backwards here, in a way that has me not sure if he knows what the word regressive means, or whether he doesn't know how the student loan repayment system works. Or maybe it's just a fingers-in-the-ears "If I say right-wing enough times maybe nobody will read the report" thing - I was a bit surprised by the twitter traffic following Labour's playbook on that one.

First off, we never assumed that the returns to education are entirely private. We noted that students currently cover 16-18% of their costs of study, but we didn't say that should go to 100%. Reallocating some of the money currently spent on tertiary subsidies back into secondary schools, as we recommend, would increase the private contribution towards tertiary education a bit. If we thought it was entirely private benefit, we would have recommended scrapping the remaining tuition subsidies built into the system. We didn't do that though.

The regressive part is at least as odd. We recommended taking something that's currently universal and targeting the spending in highly progressive fashion. Means-tested funding can include debt forgiveness for hard-cases down the track, as the UK does when it wipes out student debt that has no chance of being recovered. The reallocation of spending toward secondary schools with poor track records of sending kids to tertiary would disproportionately go to schools serving poorer kids. And the benefits of better guidance counselling, which we also recommended as part of the package, would disproportionately go to kids whose families don't know how to navigate NCEA and tertiary - again, not my family.

And remember too that loan repayment under the income-contingent repayment scheme is highly progressive. On leaving study, student debtors are charged 12 cents on every dollar earned above $19,084 until the balance of the loan is paid off. So the marginal tax on every dollar above that threshold is 12%, but the average tax rate starts off very low and then rises. A person earning $19,085 pays 12% on the last dollar earned, but only pays $0.12 in loan repayment tax on $19,085 in earnings: a 0.0006% average tax rate. A person earning $119,084 on graduation pays 12% on the last dollar earned, but pays $12,000 in tax: a 10% average tax rate.

A tax schedule where the marginal tax rate is always above the average rate is the definition of a progressive tax. The income-contingent student loan repayment scheme is then rather progressive. If you take out $100,000 in loans and only ever earn $19,000 per year, you will never pay off your loan, but neither will you ever make a payment on your loan. The effective burden (on the debtor, but not the taxpayer) is zero, except in cases where the existence of the student debt makes accessing other credit more difficult. Those on the *lowest* incomes wind up paying nothing back.

I'd have thought that our policy proposal, which takes money that is currently given indiscriminately as interest rate subsidy to every person taking out a loan for tertiary study, regardless of their means, and targets it instead to poorer cohorts and poorer schools, was really rather strongly progressive. But Hipkins calls it 'inequitable'.

I'll turn to what the Ministerial Consultative Group had to say on "ensuring equity" in their 1994 report:
Both society and individuals benefit from higher education. For this reason both should be expected to contribute. Until now, most direct costs have been met by taxpayers. However, unless those who benefit contribute in an equitable manner, as demand increases, the needs of others will go unmet.

Ensuring fairness requires individuals to contribute to the costs of their tertiary education in accordance with their ability to pay. This is best measured by their lifetime incomes. Individuals who earn significantly higher lifetime incomes should be expected to make a greater contribution to the cost of their tertiary education.

As an illustration, the present average value of the additional income earned by a male graduate is around $150,000. Currently, such a graduate would typically contribute no more than 20% of tuition costs. The balance of tuition cost is met by the taxpayer. In effect, the taxpayer confers a large capital grant to graduates. Similar grants are not made available to people who want to establish a business. For example, a young farmer buying a herd to become a sharemilker could not expect the taxpayers to meet 80% of the costs.
The income-contingent repayment scheme achieves the kind of equity that the Ministerial Consultative Group here talks about. That doesn't require zero percent interest rates.

In our view, the real inequity is in access to tertiary study. If you're coming out of a school with no guidance about which NCEA courses to take, no idea what's involved in tertiary, and poor preparation in those courses you have taken - that's a far bigger barrier to tertiary success than potentially having to spend an extra year or so making student loan payments at the end of study.

Crossposted from The Sandpit

Monday, 22 August 2016

Zero Percent

Every year, the New Zealand Government writes off hundreds of millions of dollars from the value of the loans it provides to tertiary student borrowers. It has been doing this for a decade now. Ten years on, it looks like the scheme has done nothing to improve access to tertiary education, to reduce student debt, to reduce debt repayment times, or to discourage Kiwi students from heading abroad. Instead, students leave university with more debt that they take longer to pay off, more overseas based borrowers have outstanding debt, and tertiary enrolment rates have dropped.
What are we doing?
Last week, The New Zealand Initiative released its report on our Decade of DebtWe there argue that the government should reinstate interest on new lending, from 2018. The savings should be put toward measures that improve real tertiary accessibility, like better tertiary preparation at secondary schools with little history of sending kids on to tertiary study.
The report’s drawn a bit of attention and consequently kept me pretty busy last week. I chatted with Mike Hosking on Newstalk before heading over to cover it with Paul Henry.

My more extensive talk with Kathryn Ryan on Radio New Zealand’s Nine to Noon is here; I also chatted with John Gerritsen about it for RNZ’s Checkpoint.
At the NBR, I contrasted the $602 million interest-rate subsidy with the $504 million in means-tested student allowances targeted at lower income students, and noted a few other problems:
Similarly, without caps on borrowing for living costs, students may be tempted to borrow rather a lot of money at ‘zero percent’ and put the money into term deposits. The scheme would collapse without caps on borrowing. But with caps on borrowing for living costs, students without family resources to rely on have to take on part-time work to cover rising accommodation costs. They would often be better off if they could take on more debt, even at interest, and pay it back when in employment. Instead, these students struggle to juggle employment and study.
The Child Poverty Action Group’s report on student debt, released last week, reaches some similar conclusions. It has further found some students at the bottom have turned to credit card debt to make up the gap between living costs and what they are allowed to borrow at zero percent. The constraints established to keep rich students from rorting the system have real costs for those at the bottom. And more than twice as many students from decile 9-10 schools go on to tertiary study as do students from decile 1-2 schools. Does this make sense?
…It is time to stop seeing the government’s interest-free student loan policy as simply being “bad economics, but good politics.” It is bad for a lot of students, bad for the tertiary sector, bad for tertiary accessibility, and bad for equity. Train-wrecks should not be good politics.
At Interest, I reminded worried would-be borrowers that, under New Zealand’s income-contingent repayment scheme, the only thing that reinstating interest does is lengthen the term of repayments:
New Zealand has an excellent income-based student loan repayment system. Everyone with student loan debt pays a 12% tax on every dollar earned over $19,084 until the debt is paid off. Whether the interest rate is 0%, 2%, inflation plus 3%, or any other percent, the minimum fortnightly payments would not change. What changes instead is the duration of payments. If the interest rate is higher, every dollar borrowed takes a little while longer to pay off. But the fortnightly repayment burden is no different.
How much longer would repayment take? Suppose you left tertiary study with the median student loan balance, inflation adjusted upwards from the most recent stats available: $16,700. And suppose that you followed the typical earnings path for someone with a Bachelors degree, as published in the most recent StudyLink data. Finally, suppose that you paid only the minimum 12% on every dollar earned above the threshold. If the interest rate were 2%, it would take an extra three months to pay off your loan. If the interest rate were 4%, it would take an extra 6 months. At 6%, it would take an extra 10 months. At 8%, 14 extra months. None of these are especially terrifying figures.
Of course, not all investments pay off. The dairy farmer who borrowed at 8% to buy paddocks just before the crash in milk prices might have debt that outstrips the farm’s assets and wind up going bankrupt. And someone taking on tens of thousands of dollars in student debt in pursuit of degrees with little to no chance of employment will take a very long time to pay off their debt, regardless of the interest rate.
Let’s consider a plausible bad case. Suppose you took out $60,000 in student loans for a degree that had no real payoff. Your starting salary winds up being $20,000, then you follow the normal path of annual salary increases after that. Even under zero percent, it would take over 23 years to pay off that debt. Even a 2% interest rate would add four years of repayment. But the problem really isn’t interest, is it? The problem is taking out tens of thousands of dollars of debt for a degree that doesn’t lead anywhere.
And that’s why we recommend a strong refocusing of how government spends its money. If the point of the zero percent policy was to improve tertiary accessibility, and to reduce the student debt burden, the zero percent policy has failed. We suggest better uses for the money currently going toward interest rate subsidies.
Again: we don’t recommend putting interest on existing debt. People signed their loan contracts under certain expectations, and it wouldn’t be right to mess around in that. But we sure as heck could start doing it on new lending as students get better advice about tertiary options.

What’s been most fun since the report came out was watching who provides partisan defences of a failed Labour-National policy, and who thinks things through a little more. More on that to come.

Thursday, 18 August 2016

And now for a word for the sponsors

Canadian Senator Ratna Omidvar talks with the Center for Global Development about Canada's refugee sponsorship programme.

Hit the link for a longer, wider ranging interview.
While other countries, including the UK and the US, have seen their politics dominated by domestic concerns about refugees and migrants, Canada prides itself on a sunnier narrative.

“Canada’s approach to migration is increasingly different from that of the rest of the world,” Omidvar says.

“Different” in this case means “much friendlier.” Canada has accepted more than 25,000 Syrian refugees, many more than the US, and Canadian prime minister Justin Trudeau has personally welcomed refugees upon their arrival in the country.

Why the difference? Omidvar, founder of the Ryerson University Global Diversity Exchange think tank and former chair of Lifeline Syria, a group that helps private citizens sponsor refugees to come to Canada, calls it “Canadian exceptionalism.”
I was happy to see that New Zealand will be at least looking more closely at this kind of model, with a small limited trial coming.

Next week, The Initiative will be hosting the final of its Next Generation Debates. Canterbury and Auckland Universities will be debating the moot "New Zealand should accept 60,000 refugees per year". Come join us. Our panellists will be Hon. Paul Goldsmith, Minister of Commerce and Consumer Affairs, and the Greens' Spokesperson for Immigration, Pacific Peoples, and Ethnic Affairs Denise Roche.

I'm agnostic about what the 'right' number of refugees is. But I think that the Canadians have a process that lets that number emerge endogenously when people are willing to help. And I think Kiwis are ready to help.


Wednesday, 17 August 2016

Irrational surplus

In 2009, Matt Burgess and I argued that irrationality isn't a reason for abandoning consumer surplus. If flaws in perceiving the cost of some kind of potentially risky consumption activity lead to overconsumption relative to a fully informed or fully rational norm, that means there'll be some excess cost associated with that level of consumption. 

The true marginal cost curve then lies above the perceived one, with the perceived one affected by, say, the consumer's preference to believe that he's less likely to suffer harm than the average person. Some in the public health crowd were trying to argue that the potential for irrationality meant we couldn't use consumer surplus anymore. We showed instead that it might imply more consumption than the person would find optimal, but that just gives us an excess burden equivalent to the red area. You could benefit those consumers by encouraging them to shift to the left a bit, but that's hardly the same thing as saying they get no consumption benefits at all.

We got yelled at a bit for (in others' views) not being sufficiently cognisant of the behavioural lit which (in my view of their view) means anything goes and welfare economics disappears.

Levy, Norton and Smith take on consumer surplus in tobacco cost-benefit assessment in July's set of NBER working papers. They provide a behavioural welfare economics where consumers might overconsume a bit due to some irrationality. They argue that the optimal tax in that context, for a biased consumer, puts in place a price wedge equivalent to the consumer's overestimate of the benefits of consumption. 

So the consumer whose biased view leads him to a demand curve of Db, where an unbiased one would have Du instead, can be made better off by t* bridging the gap; in the absence of that, you'd have deadweight costs of the same size, represented by the triangle bounded by P+t, Db, and Q0. 

Either way, consumer surplus remains the best framework for analysis. And their behavioural welfare graph - same deal as Matt and I argued in '09. I'm not trying to make any priority claim here - this is just bog standard "what is totally implied by intermediate microeconomics" stuff. 

In Appendix Figure 3B, they also show the analytics where taxes are above the optimal level with biased consumers. As you'd expect, there's a welfare gain from the first bits of reduced consumption, followed by welfare losses that increase in the the deviation of the actual tax from the optimal tax. 

I particularly liked this part:
A third implication is that we can rely on consumer surplus calculated using the unbiased demand curve for welfare analysis, because the unbiased demand curve reflects the value that fully informed and rational consumers place on different aspects of well-being (e.g., their own health versus the enjoyment from smoking). In particular, it is not necessary to calculate the health gains of a particular policy and then calculate an offset for foregone enjoyment; it is sufficient simply to look at changes in consumer surplus. 
They conclude:
Even if consumers are not rational, the correct response from an economic perspective is not to abandon welfare analysis in favor of policies that maximize health; rather, it should be to figure out how to perform welfare analysis when consumers are not rational. We propose that health economists should embrace the behavioral welfare economics framework developed for this purpose, developed primarily with reference to environmental economics.

We acknowledge, however, the practical difficulty of implementing this framework. In particular, the behavioral welfare economics approach requires knowing the shape of not only the biased market demand curve, but also the shape of the hypothetical unbiased demand curve. This is a tall order. Once again, we propose drawing on the literature in environmental economics and behavioral welfare economics for inspiration (Allcott and Sunstein 2015; Chetty 2015; Mullanaithan et al. 2012). Researchers in this literature have for some time focused on the empirical question of identifying the extent of bias in consumer choices.
And it would get more fun where consumers vary in their deviation from rationality.

Tuesday, 16 August 2016

Not even wrong

Some policy proposals are just so end-to-end nonsensical that it's hard to know where to start.

Today's example:
Tagging booze products with "irremovable stickers" to track where problem drinkers get their grog is being debated for Wellington.
The city's district licensing committee mulled over the idea as police and alcohol industry groups debate issues around booze-fuelled crime, litter, and disorder.
Let's start by assuming the thing could be done. Should it?

Suppose you found that people who go on to litter or cause other trouble primarily buy their liquor from Retailer X. The best you might then hope for would be some checks that that retailer is upholding standards on not selling to drunk people. But beyond that, what do you want them to do? Refuse to sell to people who they think might go on to litter? How should they judge that?

Look at it from another perspective. Everybody knows, but nobody can show, that at least some opposition to new liquor licenses comes from agents of those who have existing licenses. What happens if a licensee knows that it could get its competitor in trouble by leaving some of that competitor's bottles lying around in playgrounds. Might be tempting.

This really seems a "if you could push a button to magically implement the policy, it still wouldn't be a great idea" thing.

And then we start thinking about practicability.
Stephen Palmer, Medical Officer of Health, said the idea emerged at a licence renewal process for Liquor King in Kent Terrace.
Palmer said a neighbour objected to the Kent Terrace licence renewal, using photos of littered booze products at a nearby school.
Both the retailer and Lion queried suggestions that any particular outlet could be blamed for the garbage.
"It's very easy to put a sticker on things at the point of sale ... that seems to me to be the most simple thing," Palmer said.
It might seem simple to people who've never, say, bought a case of beer or seen anybody else ever buy a case of beer or seen a case of beer at a store. Everybody else in the world might recognise that the retailer would have to open each case and label each beer, either at point of sale or when it's stocked.

A couple other notable problems:
  • In my cupboard at home is a beautiful bottle of a Garage Project beer that's wrapped in paper, tied at the top. Would the retailer put a sticker on the paper that might be discarded before point of consumption, or on the bottle underneath? Would they have to rip open the packaging for the useless label's insertion?
  • If the labels are put in at time of sale, that causes queues. If it's done when the product's received at the store, you lose flexibility: stores can shift product across outlets if something sells unexpectedly quickly at one shop rather than another.
The Police figure that the labelling could be done by the producer:
Wellington Police alcohol harm reduction officer Sergeant Damian Rapira-Davies said it was important to understand the "causal nexus" connecting liquor retail, consumption and abuse.
People breaking alcohol laws or bylaws were often committing "gateway offences", which led to fighting, sexual assaults or domestic violence.
"It's about looking at a range of things that create a lot of problems we've got."
He was confident brewers or distillers could comply with any requirement for tracking labels. "If there's a demand for particular packaging, then the industry will meet it."
The only way I can imagine this working is numbered bottles and cases, with a back-end database matching bottle numbers to case numbers through to distribution. And where the producer sells directly to a retailer, that might work. But you'd then be requiring that all the distributors keep logs on which batches wind up where. It really quickly looks like an administrative nightmare.

But it's all simple, so long as you don't start thinking about it too hard.

Even if we assume this mess could be done, to what good purpose could the stickers really be put? And if it's such a great idea, why not:

  • Tag houses with the last real estate agent who sold it, then have the cops lean on any realtor who sells to somebody who uses the house for selling or making P.
  • Tag cars with the car dealer, so that cars bought by dangerous speeders can be tracked back to the real criminals: the person who sold the car to somebody who went on to speed.
  • Tag police officers with the name of the university that gave them a sociology degree, so we can appropriately assign approbation when things like this came up.  
Fortunately, there's no way that Wellington Council would go for this. 

Unfortunately, given the police's recent behaviour, we may reasonably expect that the police will start leaning on off-licenses to 'voluntarily' sticker their products as part of license renewal processes.

Alcohol and mortality, yet again

Sellman's right about one thing: alcohol consumption does increase your risk of cancer.

But unless your family history of cancer gives you a lot more to worry about than your family history of heart disease, you should be looking at the stats on all-source mortality rather than the stats for any particular disorder.

The latest American Journal of Public Health has a pile of articles looking at results from the Nurses' Heath Study. That study's followed 120,000 nurses over decades. I've previously noted findings from that study showing that moderate alcohol consumption is associated with more successful ageing.

In this month's edition, Mostofsky, Mukamal, et al look over alcohol consumption and a wide range of disorders, along with all-source mortality. The findings (keeping in mind that a standard drink is 10 grams):
  • All-cause mortality:
    • light drinking, of 1.5-4.9 grams per day, gives a relative risk of 0.83 as compared to abstainers;
    • moderate drinking, of 5-29.9 grams per day, gives a relative risk of 0.88;
    • heavier drinking, >30 grams per day, gives a relative risk of 1.19
That's the big one. Unless you have particular family histories to worry about, drinking about a standard drink per day reduces your risk of dying to 88% of that of a non-drinker. A glass of wine or beer every other day reduces it to 83%. These numbers are very close to the ones I usually report from DiCastelnuovo and Donati. 

Here are all the subcategories of risk listed. I hadn't realised the protective effects against diabetes were so strong. Alcohol is associated with higher risk of cancer, but lower risk of a lot of other things. That's why I like the all-cause mortality figure. I also like the prior work on more successful ageing, because morbidity matters too.

Let's jump to their conclusion before listing all the things.
As noted earlier, most of our work has focused on moderate alcohol consumption. The adverse effects of heavy consumption are well known. Although moderate drinking appears to increase the risk of colon and breast cancer, these risks are more than counterbalanced by the boost in cardiovascular health—especially in middle age and older, when CVD accounts for an increasingly large share of disease and deaths. We still do not have strong enough evidence to suggest that women who are nondrinkers start drinking later in life to reduce their risk of CVD or total mortality, although this would appear to be a reasonable option in the absence of any contraindication. However, there are many other lifestyle choices documented in the Nurses’ Health Study that can substantially reduce a woman’s risk of chronic disease without the potential downsides of alcohol.
Yeah, but are those other lifestyle choices as fun? And it isn't like having healthy lifestyle choices across the board makes alcohol less helpful - it shows up as helpful even in studies restricted to people with healthy behaviours.

Bit different from the nonsense New Zealand 'no safe level' talk. Now here are the gory details on all kinds of illnesses and their associations with alcohol consumption.
  • Hypertension
    • light drinking (0.1-5 grams): relative risk of 0.88
    • light/moderate (5-10 grams): relative risk of 0.84
    • Elevated risk for >30 grams per day: relative risk of 1.61
  • Diabetes
    • Lowest Type 2 diabetes risk for those consuming 1-2 drinks per day: 40% lower risk than for lifetime abstainers. Smaller benefits for heavier drinkers.
  • Coronary Heart Disease
    • light to moderate drinking (0.1-14.9 grams) gives relative risk of 0.77; "12.6% of all confirmed CHD events could have been prevented if they had all adhered to this optimal level of alcohol intake."
  • Stroke
    • Moderate consumption (5-15 grams/day) lowers stroke relative risk to 0.85.
    • Heavy consumption increases risk, but figures not provided.
  • Colon Polyps and Cancer
    • Heavier drinking (>30 grams per day) has: 
      • 1.84 relative risk of colorectal adenoma.
      • 1.79 higher risk of hyperplastic polyp of the distal colon and rectum, which indicates high risk of colorectal carcinoma
  • Breast Cancer
    • There's about a 10% higher risk per 10 grams per day alcohol intake. 
  • Total Cancer
    • Cancer risk increases linearly in consumption, with highest risk among those drinking more than 45 grams per day: relative risk of 1.30. 
  • Bone density and fractures
    • Moderate drinking increases bone density, but can lead to poor balance and falls; chronic heavy drinking can reduce bone density and lead to poor balance and falls. They report a relative risk of 1.73 for fractures for women of BMI less than 21 drinking more than 15 grams per day, but I start getting nervous when the data gets sliced that finely - I don't know whether they were adjusting their confidence intervals for multiple testing.
  • Gallstones
    • Reduced risk of gallstones. Every 15 grams per day reduces risk of gallstones leading to cholecystectomy by 14%, with the lowest risk for daily drinking. 
  • Cognitive function
    • At age 70, light drinking women had better cognitive functioning scores than non-drinkers. 
  • Moderate drinking after diagnosis of chronic disease
    • Drinking in moderation among women with diabetes reduced risk of subsequent CHD;
    • Drinking did not affect prognosis after a diagnosis of colorectal cancer.
I really hate the obsession with "links to X" studies. There are all kinds of effects going either way from alcohol consumption, including that people enjoy the experience.

Update: I'd missed Sellman's last line in that DomPost op-ed, where he talks about drinking's negative effects on coronary health. Moderate drinking massively reduces your risk of CHD. People see what they want to see. 

Magic mobility bullets

There are (probably) no magic bullets, only trade-offs.

Landersø and Heckman look at intergenerational mobility in the US and Denmark. The former has far less income redistribution than the latter. One of the many welfare policy tradeoffs is that strongly progressive income tax regimes to fund large scale redistribution reduces the return to education because of the resulting after-tax salary compression. And so if part of your basic model of the world is that poor kids do not take up education because of family deprivation, then you have a tradeoff: the same policies that reduce that problem also reduce incentives to undertake education in the first place.

They find that there is a real causal negative link between generosity of public assistance and educational enrolment, using a policy change that affected welfare access by age, raising the minimum age of eligibility for full social insurance payments. The caveats:
The results presented here establish a negative relationship between educational enrollment and the level of public benefits, albeit with two caveats. First, it is beyond the scope of this paper to estimate the underlying behavioral parameters—we strongly encourage future research to explore this relationship further. Second, we neither have precise estimates of the potential gains from the greater equality in childhood investments and fewer pecuniary costs of education in Denmark than in the U.S., nor the disincentives for educational attainment that wage compression and public benefits constitute. Hence, we cannot determine whether the similarities in educational mobility in the two countries occur because the effects offset each other, though we find this to be a plausible explanation given the evidence at hand.
They also find that neighbourhood sorting remains rather important.

They provide an appropriate caution on noting the substantial gaps in cognitive, language and emotional skills among Danish kids from higher and lower income backgrouns:
While the Scandinavian welfare state invests heavily in children throughout childhood and redistributes income (consumption) during adulthood, it has not eradicated the strong influence of parents and early childhood conditions. As a consequence of the complementarity between skills and investments, later life universal schooling investments during childhood or adolescence may be ineffective in reducing gaps between advantaged and disadvantaged children. 
They conclude:
Despite Denmark’s far more generous welfare state, its extensive system of preschools, and its free college tuition, the family influence/child education relationship is very similar to that of the U.S. In both countries, much of the average association between parental resources and the educational attainment of children can be explained by factors set in place by age 15, including child skills. However, distributions of cognitive test scores of disadvantaged Danish children are much better than those of their counterparts in the U.S.

The failure to promote greater educational mobility in spite of providing generous social services is most likely rooted in the welfare state. Our findings point to wage compression and the higher levels of welfare benefits as being counterproductive in providing incentives to pursue education. The low returns to education observed in Denmark, in particular at the lower levels of education, help explain the disconnect between the egalitarian childhood policies in Denmark and the roughly equal levels of educational mobility in Denmark and the U.S. The sorting of families into neighborhoods and schools by levels of parental advantage is likely another contributing factor. While the Danish welfare state may mitigate some childhood inequalities, substantial skill gaps still remain. 
Perhaps better outcomes at the bottom in Denmark are due to the country's more extensive redistribution, or perhaps it's due to the advantage of having a country of Danes. But the resulting wage compression causes other problems.

Update: Jim Rose points me to this write-up on the study at The Atlantic.

Monday, 15 August 2016

Film Fetish

Usually, clean tax policy and lack of subsidies can be a warranted source of Kiwi pride.

But look at this mess.
The New Zealand Screen Production Grant, which pays back a proportion of a movie’s expenditure in New Zealand once the project is completed.

...[MaryAnn Hughes, Disney’s vice president of film and television production planning] says “New Zealand was very clever and forward thinking in its latest changes to the production incentive in 2014,” by offering what New Zealand Film Commission chief executive Dave Gibson – whose organisation administers the scheme – calls a “straightforward” 20% rebate.

That “provides us certainty,” Ms Hughes says, “and our finance budgeting group can budget for the 20% base incentive and factor that into our budget.”

Pete’s Dragon is also the first production to qualify for a 5% uplift to the incentive by “providing some sort of significant economic benefit that goes above and beyond bringing the film to New Zealand and providing the economic impact of job creation and money spent on the ground,” Ms Hughes says.

In the case of Pete’s Dragon, the negotiation resulted in Disney making an advance commitment – something the studio normally doesn’t do – that included:
  • shooting at least 90% of the film in New Zealand;
  • spending at least 75% of the total budget for visual effects in New Zealand;
  • employing New Zealander in at least six key personnel roles;
  • ensuring at 75% of the production crew were Kiwis; and
  • a detailed agreement with Tourism NZ and Film NZ that enables New Zealand to promote and enhance New Zealand’s screen and tourism interests.
Mr Gibson acknowledges “there’s a little bit of ideological resistance from some Treasury people” to the screen production grant but he believes “the government is still reasonably comfortable” with it.

That’s because of the “lovely economic phrase, clean additionality,” he says.
It isn't implausible that paying filmmakers gets more value for money than other tourism promotion efforts. But it looks like Kiwi taxpayers covered a quarter of the film's costs.

Even if it were the case that it would have been filmed elsewhere but for the subsidy, is there such a thing as 'clean additionality' when the government has other things it could have spent the money on, and when taxpayers do as well? Why does this 'additionality' apply uniquely to the film industry rather than to other foreign investment?

It's good to hear that Treasury still objects to this kind of thing. It's depressing that the NBR, the country's business paper of record, let Gibson's characterisation stand without asking Treasury about it. Surely opposition to subsidy-based industrial policy is more than just ideological.

Gibson continues later
“And then if you look at the trickledown,” Mr Gibson says, “you’ll get very, very strong numbers on it, because a lot of people in the film industry – and this is likely one of the reasons why there’s sometimes a little bit of prejudice about it, but it’s a good thing actually – are pretty well paid, so they’re tending to be paying tax at a very high rate.

“Most of them are turning back the money to the government at a rate that’s far higher than 20% – there’s a lot of GST, a lot of coffee being drunk, a lot of restaurants, a lot of cars being hired ...”
Well, if it helps fund coffee-drinking...

The case for this stuff should stand or fail based on whether the tourism promotion value beats other government-funded tourism promotion.

Update: Here's what Treasury said about the effectiveness of film subsidies last time round:
Treasury Comment 
96. Treasury does not support any further subsidies for the film industry. The two evaluations of the current subsidy regime show at best small economic benefits, with limited evidence of spill-over benefits within the film industry, tourism and New Zealand in general. Further subsidies will only increase costs and offer weak benefits. The 2011 evaluation indicated that the LBSPG delivered net economic benefits of $13.6m over the 7 years 2004-2011, at an annual rate of return of less than 1%. In addition, the 2011 evaluation is based on generous assumptions about premiums paid by large productions on goods and services. The current regime is also estimated to have had an overall negative fiscal impact of $168m once tax revenue that would have been earned anyway is taken into account.  
97. Other jurisdictions are offering large subsidies to attract films and further New Zealand subsidies will simply add to this cycle and future demand for larger subsidies. Permanently matching overseas subsidies to generate activity in New Zealand is not a sound basis for economic development policy and favours the film sector over other industries. 

Taxi fraud

The government's been rather insistent that Uber drivers have P-endorsements - a process adding substantial costs for Uber drivers and making it pretty unlikely that folks would sign up for the occasional shift. The government says it's needed to keep customers safe - that Uber's end-to-end GPS tracking of driver and passenger, and Uber's own checks on drivers, aren't enough.

The solution? 
He said changes had been made to the system to ensure it would not happen again.

All trips were now matched with GPS data before drivers were paid, and both scheme providers and users would be made aware of the correct procedures to follow, Bayfield said.
If only there were some company out there that did end-to-end GPS monitoring and billed automatically on trip completion. Couldn't trust them though. Their drivers might not have a P-endorsement.

And it's these P-endorsed incumbents that the government's trying to protect by cracking down on Uber.

My Insights column last week was on point.

Sunday, 14 August 2016

Amazing that anything gets built

The Three Kings saga helps illustrate why landowners might become land bankers, and why Auckland housing has been such a mess.

I'd noted it in my piece in June at The Spinoff:
Just look at the mess in Auckland where a developer wanting to build housing for 1500 households in an old gravel pit at Three Kings, turning much of it into parks and open spaces, has bought almost a decade’s worth of objections and processes and hearings. How can anybody build anything to scale under those conditions? In the middle of a housing crisis, with daily news stories about the number of children having to live in cars with their parents because there are not enough houses to go round, NIMBY activists block new construction. 

Every time a NIMBY cries, an angel has to sleep in a car, or in a garage.
The NBR reported last week that the mess continues:
Fletcher Residential’s controversial $1.2 billion Three Kings quarry development may have to be substantially redesigned after an interim decision from the Environment Court.

The court has heard an appeal from the South Epsom Planning Group and Three Kings United Group over Auckland Council’s plan change allowing Fletcher to rezone 15.1ha of the former quarry and Auckland Council and the Crown to swap 6.5ha of reserve land with Fletcher Residential for the development.

The court has laid out 13 issues – from land contouring, protection of volcanic features, building form, sports fields, view shafts and connectivity – in the development that South Epsom Planning Group, Three Kings United, the council and other parties need to comment on before a final decision on the appeal is made. Fletcher Residential is excluded.

The court says it became clear after looking at the evidence and witness statements before the hearing the real issue was not whether Fletcher Residential’s development should go ahead but rather what form it should be.
They've been in community consultations since 2008. Eight years.

The moustache-twirling developer is a hackneyed theatre set piece. Here's Circa Theatre's version from 2014, when a horrible horrible developer proposed buying Granny's cottage to put up some townhouses.

And from their promotional materials:
I’m having a blast in this production as Sir Roger Bounder, the evil property developer with no heart and a lust for profit. Nothing can touch Sir Roger for devilish good looks and a mind like a steel trap. He’s obviously the main role that everyone will admire – or else! It’s always great fun to be booed!
We reminded the kids after the show that building houses lets people not be homeless. Would that the theatre could get its darned villains right. Hint: when you're in a housing shortage, the ones trying to build housing probably aren't your villains.

Saturday, 13 August 2016

Crowdfunding for feel-good public goods

I endorse much of what Mike Dickison says in the Wanganui Chronicle:
ONE way for us to preserve the natural heritage of our country is to put our money where our mouth is and buy it.

This is done all the time privately by landowners setting aside parts of their own property as a QEII covenant, protected against future development.

The public version of this was the Givealittle campaign to purchase Awaroa Beach for over $2 million and add it to Abel Tasman National Park. Overseas, rainforests in developing countries have been saved by paying locals to not cut it down, or buying them and turning them into reserves. Perhaps, rather than use legislation or treaties to preserve nature, we could harness the free market.
I'd caveat the rainforests one with that payment for the preservation should go to the forests' proper owners, which isn't necessarily the government that auctions them out to the rich folks who want to help.
Currently there is a thriving trade in moa bones in New Zealand; because of a legal loophole, remains of extinct species collected on private land aren't protected by the Wildlife Act. One response would be to shame Trade Me into no longer listing moa remains. Another would be to lobby to change the legislation. But a third option, if we truly care about fossil bones, is to buy them ourselves.

The worst offenders are looters who pull moa skeletons out of caves and sell them piecemeal. Economist Eric Crampton suggested we set up a PledgeMe account for buying "intact, at-site, and undisturbed" moa remains on private land. This would encourage people to locate the bones and landowners to preserve them undisturbed. The skeleton would become the property of whichever museum the PledgeMe campaign nominated, and could be put on display or stay safe in a cave. It's a fascinating idea, and one applicable to other valuable goods on private land that the public have an interest in preserving.
I think I'd suggested it on Twitter.

He moves from there to suggesting we not use the mechanism for longfin eel protection. Long story short, New Zealand has a bizarre system where introduced trout are protected under all kinds of rules to make sure that recreational fishers on the rivers have a good time for a long time, but native and threatened eels are fished for what's often pretty low valued uses. He suggests instead that the government just put an end to that fishery:
But there's another counter-argument. The longfin eel fishery is public property, but it's exploited for private profit: a few dozen eel fishers making a trivial $500,000 a year. Rather than crowdfund to buy back something we already own, we could simply tell the eel fishers to go catch something else.

Despite the potential of crowdfunding as a conservation tool it's perfectly okay for democracy to overrule the free market. Just as it's no longer acceptable to hunt whales and seals, future generations will be aghast that we exported longfin eels.
Wouldn't it make more sense for the total allowable catch for longfin eels to be set to sustainable levels, then open a crowdfunding market up for conservationists to buy back quota beyond that?

I totally applaud moves to use crowdfunding to let people coordinate around these things. It forms an assurance contract: the campaign only activates if you've raised enough money to do the job, so your $5 only goes into the pot when there's enough money collected that your $5 will make a difference.

Friday, 12 August 2016

Taxes don't build houses

I'm still not a fan of capital gains taxes as a way of digging our way out of a shortage of houses. Taxes don't build houses. Me at The NBR (ungated, but dated - you should subscribe - their coverage is worth paying for). A snippet:
More broadly, though, capital gains taxes of all forms tax future consumption more heavily than present consumption. Taxes on wages and salary incomes do not affect choices of whether to save or spend from today’s income. Taxes on consumption, if they are not expected to change over time, are also neutral between spending today and spending tomorrow. But taxes on savings mean that tomorrow’s consumption is more heavily taxed than today’s. 
Real world implementation issues abound. Investment in New Zealand does not enjoy tax-preferred status, so the case for taxing capital gains is far weaker than where investors can defer income taxes by placing income into sheltered investments. And every dollar spent out of capital income draws 15% GST. 
It would be near impossible for Inland Revenue to implement a capital gains taxation regime before its systems refresh. What descriptions I have heard around Wellington suggest the tax computers are held together by No 8 wire and the world’s last remaining stock of COBOL programmers. Any substantial tax changes could make the system’s 50 million lines of code collapse in a flaming heap.

If capital gains taxes are meant as solution to Auckland’s housing problem, it may well be impossible to implement it within the next six or seven years. It could well be faster to get new apartments consented in Epsom. 
Nor will taxes make Auckland housing more affordable for a simple reason: they do not get more houses built. The fundamental problem in Auckland remains a zoning-induced shortage of housing.

Tax reform, over the longer term and after the IRD systems refresh, is well worth looking into. There are poisonous fishhooks in a lot of proposals that look attractive but shifting to the kind of land taxes suggested by Arthur Grimes has clearer merit. 
At best, tax reform fails to help a housing shortage. At worst, it distracts from the more important problem of getting new houses built.

Thursday, 11 August 2016

Happy journalistic mischief

Economist Stephen Gordon had a great rule of thumb about economic impact reports.
Wouldn't it have been fun if, instead of just doing a cut and paste from Otago University's press release on Otago University's massive economic impact, a reporter there would have checked if any academic economists in Otago University's economics department would vouch for the economic impact assessment.

As for the multiply by two rule, the press release says the direct spending by staff and students is $881.1 million, and the trickle-down effects get you to an overall $1.55 billion. Not quite two. So it looks more like "Estimate costs, multiply by 1.76" in this case.

The press release does not link to the cited report. It says the report was "released", but I couldn't find it anywhere on the university's website.

Like every other Economic Impact Assessment, though, it did its job. The newspaper reported the Really Big Number. Nobody's going to check. Nobody ever does. Mission accomplished.

In no way should this post be construed as an offer to provide QA on that Economic Impact Assessment.

For an egalitarianism of respect

Last night, debate teams from Victoria University at Wellington and from Canterbury squared off to debate the moot, "This house would ban people with university degrees from marrying each other."

It was great fun. Vic had the affirmative and did a fantastic job with it. Canterbury won, partially because the affirmative wasn't able to show it would be enforceable without substantial offsetting harms.

Matt Nolan, of TVHE fame and who's finishing up his thesis on inequality, was one of the the panellists after the debaters had finished; I was the second. I've copied my speaking notes below, but delivery varied a bit. I think the debate was videoed; I'll update this post with it when it's available.
You might have come in tonight scratching your heads a bit about tonight’s moot. The proposed policy is obviously absurd: a far more intrusive extension of the state into people’s lives than most people would ever consider appropriate.

I’m Head of Research with the New Zealand Initiative. I proposed tonight’s moot because it gets to something more fundamental about inequality than we usually talk about in public debates.

We see a lot of newspaper stories about ever-rising income inequality. As Matt’s explained, and as we show in a report coming out later this year, inequality in measured income rose in New Zealand in the late 80s through mid 90s, partially because of real changes in wages and salaries, and partially because measured income inequality in the early 1980s didn’t include the company cars that some people got and other people didn’t. But, depending on the measure, it’s been flat or declining since then. Poverty remains a real issue. But inequality – there seems to be less there there.

If you track New Zealand Herald headlines with the word inequality in the title against the data on inequality – there’s no basis in the data for the changes in reporting. But it is following international trends. I think we have imported American narratives that might suit their data, but do not suit ours. I also wonder how much of the domestic concern with inequality is driven by dysfunctional Auckland housing markets: when Council makes it really hard to get new housing built, we get bidding wars for existing housing that fuel both xenophobia and resentment of those who might outbid you.

But the failure of inequality to rise here hardly means there is nothing to worry about. There are a lot of things to worry about.

First off, rising incomes at the top in the US seem to reflect greater returns to high levels of skill: those who are able to manage large complicated firms that operate multinationally provide services of immense value to their shareholders. New Zealand’s lagging top incomes then are a worry when we think about overall productivity and economic growth: rather than signalling egalitarian norms, it could rather be telling us that New Zealand’s top talent is more valuable to companies overseas than to firms here, and that’s not something to take lightly over the longer term. In New Zealand, people worry over CEO pay ratios where CEOs earn around 17 times average earnings; in America, it’s more like 250 to 300 times. Would New Zealand really be a worse place if somebody built a company here requiring that kind of talent to run?

But leaving that to the side, there are two broader worries, one of which motivated tonight’s moot.

First, inequality is about more than just earnings potential. Status is about a lot of different things. Those of you watching the Olympics will have noticed that there is huge variation in natural talents, partially a product of training and hard work, partially due to lucky genetic endowments. Some work really hard to make the most of the talents they are given; others don’t; and still others, like me, could never, no matter what, compete on that kind of stage. I caught a great Bill Murray tweet suggesting that a normal person be put into the mix in each Olympic event to show just how far these superhumans are from the rest of us. But it is strange how that would make us more greatly laud the winners, when doing the same thing with natural talents leading to higher earnings would have many instead damn the most able. 

Imagine that, before you were born, you were given a choice: you could have no sporting talent but business skills that would ensure high earnings, or you could be an Olympic athlete with more limited earnings potential but huge recognition for your abilities, or you could be a musician who never earns much at all but has a hugely successful love life. If people vary in how attractive they find the different options, trying to equalise earnings without thinking about the other margins doesn’t necessarily help equality in overall happiness.

Second, and more worryingly, to my mind, and what motivated tonight’s moot, is that one of the underlying reasons for differences across people has a good chance of increasing inequality over the longer term. In short, people are increasingly likely to partner up and have kids with others who are a lot more like themselves than was the case a few decades ago. Work in 2014 in America showed that American household inequality is 20% higher than it would be if couples paired randomly. Much of the story of 20th century America is smart kids moving off the farm to the big city, and their kids marrying other college grads.

Society then starts bifurcating.

Previously, when couples were less alike, kids across different couples would be more alike. Kids wind up looking like the average of their parents, with a bit of pull towards the mean. When the highly educated with strong earnings potential marry each other, whether or not they wind up in work or in the home, the kids of different households not only start out with very different starting points – and not just for the income reasons that people usually point to.

It is right and important that society, whether through government or through charitable efforts, mitigate some of the effect of poor luck of the draw when it comes to baseline ability – and work hard to make sure that everyone has access to the best education possible so that starting disadvantages are not compounded.

Increasingly assortative pairings means that people have less opportunity to interact with others with strongly differing backgrounds. This is again pretty obvious in America, where urban liberals lack of interaction with, and consequent disdain for, the cultural norms outside of those places helped fuel the Trumpist backlash. Just because I generally share those urban liberals’ views doesn’t mean I don’t see the problem here.

This will become more important if New Zealand follows American trends toward like being more likely to marry like.

Urban Kiwis are fewer generations away from the paddocks than are their American counterparts, and that helps maintain a certain egalitarianism of respect, but that won't last forever. We already are seeing strong pushes to legislate and regulate against the lifestyle choices of those outside of the urban elite. You hear it in trendy Wellington cafes, where well dressed rich folks drinking high calorie mochaccinos speak with disdain about how others drink Coke or eat at McDonalds. It's an inequality of respect.

Poverty is real and important. When it comes to inequality, I think we need a renewed egalitarianism of respect for the choices others make about what is best for them. The more cocooned we are in bubbles away from those who make different choices than we do, the more hesitant we should be to cast judgement.