Wednesday 21 December 2016

Cultural preservationism

Branko Milanovic worries that a world of free migration would be a world where some cultures would cease to exist. He says some countries would empty quickly under open borders, and suggests their cultural traditions would then end.
Destroying the variety of human traditions is not costless, and I can see that one might believe that maintaining variety of languages and cultures is not less important that maintaining variety of the flora and fauna in the world, but I wonder who needs to bear the cost of that. Should people in Mali be forced to live in Mali because somebody in London thinks that some variety of human existence would be lost if they all came to England? I am not wholly insensitive to this argument, but I think that it would be more honest to say openly that the cost of maintaining this “worldwide heritage” is borne not by those who defend it in theory but by those in Mali who are not allowed to move out.

There is a clear trade-off between the maintenance of diversity of cultural traditions and freedom of individuals to do as they please. I would be happier if the trade-off did not exist, but it does. And if I have to choose between the two, I would choose human freedom even if it means loss of tradition. After all, are traditions that no one cares about worth preserving? The world has lost Marcomanni, Quadi, Sarmatians, Visigoths, Alans, Vandals, Avars and thousands others.  They have disappeared together with their languages, cultures and traditions. Do we really miss them today?
Those trade-offs exist at the margin, but consider this too:

The dancing snow-shovellers are from the Maritime Bhangra Group in Halifax, Canada. 

Culture is dynamic. We've lost the Visigoths, but we've also lost the French as they existed in 1600 (though we have some reads into it from literature, music, and rural Quebec). Insisting on cultural preservationism in the cross-section by preventing migration would not be that much different from insisting on cultural preservation in the time-series by setting out enclaves isolated from further cultural development. Like Amish communities, but set out to preserve "America as it was in 1950", or endless other iterations. One neighbourhood in Portland might be required to maintain man-buns, forever.

Milanovik is right in his ultimate policy conclusion - that any benefit there might be in preservationism is dwarfed by the improvement in welfare generated by letting people move to places where they can have happier lives. 

But I think he's too pessimistic about cultural preservation within multicultural western societies like Canada's. The cultural traditions of home adapt to the local conditions. Like Bollywood-style snow-clearing. 

I also expect he's not right in the general equilibrium. In the first stage, sure, you'd get big migration in response to open borders. But huge existing differences in incomes due to institutional and policy inefficiencies are maintained over time in part because of border walls. Tearing down those walls pushes us closer to Tiebout worlds, where differences across communities' policies are driven by heterogeneous preferences rather than by whether you're stuck with powerful kleptocratic rulers. Maybe, just maybe, the resulting cultural differences across countries would be more authentic than the ones we get where the Dictator has his own ideas about what national culture should look like.

Tuesday 20 December 2016

The targeted cohort

If you're surprised by the latest results from the Dunedin cohort study, you haven't been paying attention:
We integrated multiple nationwide administrative databases and electronic medical records with the four-decade-long Dunedin birth cohort study to test child-to-adult prediction in a different way, using a population-segmentation approach. A segment comprising 22% of the cohort accounted for 36% of the cohort’s injury insurance claims; 40% of excess obese kilograms; 54% of cigarettes smoked; 57% of hospital nights; 66% of welfare benefits; 77% of fatherless child-rearing; 78% of prescription fills; and 81% of criminal convictions. Childhood risks, including poor brain health at three years of age, predicted this segment with large effect sizes. 
A relatively small group generates the preponderance of social cost. And it's G-loaded. A rough measure of child intelligence at age 3 predicted a lot of bad outcomes.

Some of those relationships eased back in multivariate analysis with childhood SES included. But that's a tricky thing. If income is increasing in IQ (albeit concavely), then childhood SES depends on parents' IQ, but parents' IQ is a predictor of the child's adult IQ independently of of childhood SES. Some of the effect of childhood measures of brain health on adult outcomes is then unduly attenuated by inclusion of childhood SES in the regressions as some of the IQ effect could be picked up as a measured SES effect. On the other side, a higher IQ kid born into a lower SES household with lower IQ parents would select into worse environments for cognitive development over time, following the Dickens-Flynn kind of model. You need twin studies or adoption studies to start teasing that out properly.

While a fifth of the Dunedin cohort was responsible for massive amounts of the cohort's crime, prescriptions, hospital stays, fatherless children and social welfare costs, another cohort had almost nil costs.

The paper is optimistic about the potential for interventions on the identified group to reduce long-term costs and improve outcomes. I agree that identifying the cohort for targeting is important, but I'm a bit more pessimistic about the chances of success.

They note the data is right-hand censored at age 38 years. I wonder how many children had accrued to people in each of the above-pictured cohorts by that age.

Monday 19 December 2016

Stay weird, Portland - but not like that

Weird can be good and bad.

Good weird:

Today, Portland, Oregon, became the first jurisdiction in the United States to use the tax code to address the phenomenon of outrageous CEO pay. The City Council passed an ordinance, sponsored by City Commissioner Steve Novick, that requires publicly traded corporations to pay a surtax if they pay their CEO more than 100 times their median worker.
It looks like the levy would run through the business license tax for firms that operate in Portland and who consequently would have to get a business license. The Tax Foundation comments:
Whatever the ratios turn out to be, however, the Portland ordinance, if approved, might be little more than window dressing—more of a gesture than a policy prescription. Maybe CEO pay is too high and maybe it isn’t, but a Fortune 500 corporation is unlikely to renegotiate its chief executive’s compensation package to avoid an additional tax hit of a few thousand dollars in Portland, Oregon.

And even if somehow the tax did lead some company (perhaps a Portland-based business, with much higher liability in the city) to reconsider executive compensation packages, there is very little reason to believe that any of the savings would accrue to employees. Like it or not, businesses are not benevolent societies, and it would be curious if companies with allegedly inequitable compensation schemes would, having made a savings on executive compensation, simply gift that amount to employees in the form of pay raises. Rather, any savings would likely accrue to shareholders or perhaps be reinvested in the company.

Assuming there are any savings at all. Corporations presumably seek to avoid paying their CEOs more than they are worth to the company. They may get this wrong—perhaps even frequently. If they thought that the company would do just as well with a lesser-compensated chief executive, though, they would likely go that route, and if their initial judgment was correct, a company that actually feels compelled, for tax purposes, to curtail executive compensation would see a decline in its fortunes, with attending losses for shareholders and wage earners alike.
So a surtax that raises little in revenue but makes a statement about the weirdness of Portland. I prefer Darth Vader with flaming bagpipes on a unicycle.

HT: Glenn Boyle

Friday 16 December 2016

Assorted links

The Friday closing of the browser tabs brings us a few gems:
So endeth the lunchtime closing of the browser tabs. My but they accumulate. 

Different strokes for different folks

Yesterday, the Initiative's excellent policy analyst Jenesa Jeram squared off against the Ministry of Health's superb health economist Sarah Hogan for a fun Christmas debate for the Government Economics Network. The moot? "New Zealand needs a sugar tax to protect us from Christmas excesses".

The positions were assigned by the hosts; Sarah had to argue the case for a sugar tax. She did as good a job in doing so as is really possible, given the inherent indefensibility of the thing. And Jenesa's case against was very good as well. I really liked the introduction; one of our hosts suggested that the moot should have been "New Zealand needs a sugar tax like it needs a hole in the head."

I was less enthralled with one Wellington sugar-tax campaigner [lousy Chatham House rules] who zipped in at the end, not having caught the presentations properly, to ask Jenesa whether she were 'totally cool' with high diabetes rates since she argued against a sugar tax. Where a sugar tax has tiny effects on consumption, one can both not like diabetes and think that a sugar tax is a bad idea, as Jenesa pointed out to him more kindly than I'd have been tempted to in her place.

The attendees at the debate voted at the end to reject the moot (and so to reject a sugar tax) by about a 2:1 margin; Sarah won for best presentation - she did do an excellent job in presenting the far more difficult case. I had urged Jenesa to follow the example set by MoH economist Bronwyn Croxson when she debated against me on the merits of Christmas full-stop: she plied the audience with chocolate-covered almonds. Unfortunately, Jenesa's scruples are too binding for such things.

As I clear through the browser tabs at the end of the week, here's the New York Times with a reminder against One Big Thing approaches to obesity. Different diets work for different people - obesity and its treatment can be rather person-specific. Some can have massive success with one diet, which does nothing at all for somebody else, and appetite-suppressing drugs can also work for some people too.

Thursday 15 December 2016

Cataloguing Outcomes

Ever wanted to know what the government's targeting, how it's measuring outcomes, and what programmes are intended on hitting those outcomes?

Here's Superu's Treasury and Superu's Government Outcomes Catalogue Tool. The rather slick Excel tool lets you select the domain you want, the sub-domain, and filter a bit on demographic, unit or coverage basis. Hit Search and it'll tell you what initiatives are in place, the indicators they're using as measure of the stated outcomes, whether it's part of the better public service goals, and for what groups the outcomes are measured.

And some of the outcome domains:

I can't see any linkage through yet into what the figures are on the measured outcomes, but I'd expect those would come in time. At least now you can tell pretty easily what initiatives are out there, their status, and how they're intending on measuring things.

Kudos to Superu for getting this out. 

UPDATE: Credit where credit is due, and apologies. It is on Superu's site, but it looks like Treasury did the bulk of the work on this one. Apologies!

Wednesday 14 December 2016

Iwi assets

A new report from Phil Barry and his team at TDB highlights some great success in iwi asset management.
We estimate the total assets of the post-settlement entities are now valued at around $6b. This report considers eight iwi - Ngāi Tahu, Ngāpuhi, Ngāti Porou, Ngāti Whātua Ōrākei, Port Nicholson Block, Rangitāne o Wairau, Tūhoe and Waikato-Tainui - with combined assets of around $4.3b.
Treaty settlements provided substantial assets to iwi. By and large, they've been well managed. The separation between commercial and social arms seems important:
The eight iwi we have reviewed generally have similar corporate structures. While these structures are often complex, typically there is an overarching trust that makes decisions about distributions and the nonfinancial objectives of the group, while a separate commercial entity has been established to manage the group’s commercial assets and to make investment decisions under a commercial mandate.
One side is profit maximising; the other side uses the earned profits to achieve iwi social objectives. Keeping a clean line between the two forces a harder line on asset management. The report notes a bias toward property investment which puts some risk into the portfolio.

And whoever at  Ngāi Tahu negotiated the relativity payments is a genius.
Over the last 10 years, Ngāi Tahu has nearly tripled its asset base, from $561m in 2006 to $1,504m in 2016. With little debt, Ngāi Tahu’s net worth has grown significantly over this period. 2016 was no exception, with the asset base increasing by 12% and net worth increasing by 11%. Ngāi Tahu has received numerous relativity payments from the Crown over the period, with payments in 2013, 2014 and 2015 of $69m, $13m and $29m respectively.

Tuesday 13 December 2016

Solvable problems

The world has plenty of hard unsolveable problems. It's irritating when easy to solve problems fail to be solved, although they too may point to a broader difficult problem.

Item the first: New Zealand's great walks are, well, great, and very popular with tourists. But they're losing millions of dollars per year, meaning that taxpayers are shelling out to provide tourists with great walks at discount prices. And nobody wants to increase charges for locals. The solution seems obvious: charge tourists more than you charge locals, unless something really weird is going on and we're already on the inelastic part of the tourists' demand curve.

Item the second: Christchurch Council wants to encourage water-saving. They have meters on the properties already, but they're not charging residential users based on consumption. If that's because the efficiency gains from metering and charging are small relative to the costs of reading the meters, fair enough. But if it's because people are worried about poor households not being able to afford water, that's a totally solved problem. It bugs me when people jump to that one. Totally solved, and obviously solveable were it not already totally solved. Just think.

Finally, Andrew Little doesn't want to raise the age of eligibility for NZ Superannuation because some manual labourers may not be physically able to work past the age of 65. But wouldn't the obvious solution to that problem be to introduce a new disability benefit for those over the age of 65, unable to work, and not yet eligible for NZ Super if the age went up? That isn't necessarily my preferred solution to NZ Super overall, but it seems a blindingly obvious solution to the stated objection to raising the age of eligibility.

On all of these, it seems like folks hit a "but here's a problem" issue and stop thinking when they should instead be wondering about how to solve the imagined roadblock. Inertia is powerful, and encountering a plausible-sounding reason for doing nothing lets people not fix problems.*

Inertia's a bigger and harder problem.

* If you've dealt with the public sector, how often have you heard "Oh, but privacy considerations..."

Monday 12 December 2016

Quiet achiever or quite an unachiever?

Roger Partridge and I took on Key's legacy in last week's Initiative newsletter. He highlighted the highlights; I hit on the disappointments. Had either of us written a single piece, we'd likely have incorporated a fair bit of what the other said.

Here's a snippet from Roger:
Against this background, the Key years have been remarkable. Stable government itself has been an achievement. A simple comparison with Australia will suffice: during Key’s time as prime minster he has witnessed four leadership changes across the Tasman. Steady-as-she-goes may have been bad for our media, but it undoubtedly contributed to New Zealand’s rising business confidence, and to long term investment and growth.

The government’s fiscal discipline has also been impressive: not just by resisting the spending affliction that gripped others, but by quickly returning the government’s accounts to surplus – and healthy ones too. Again, the contrast with Australia is stark. While Bill English can take much of the credit for this achievement, it is Key who granted him the licence to be prudent.

Key’s was also a reforming government. After the Fourth Labour government, it was perhaps New Zealand’s most radical in the post-war era. The GST for income tax swap, welfare reforms (the likes of which might have brought down another government), the investment approach to social services; labour market reform, partial-privatisation, reforms in education, including national standards and charter schools: these may have occurred incrementally, but together they comprise a prodigious package of reform.
And me:
Blaming coalition partners let National have its cake and eat it too. Home-owning voters got rich off the back of National’s failure to fix the planning apparatus, and National got to jawbone about reform without ever doing anything about it. The renting victims are poorer, less likely to vote, and are more likely to vote Labour anyway. 

Auckland’s housing crisis was a sin of omission. Post-quake Christchurch was a sin of commission. 

The government allowed Gerry Brownlee to play SimCity with CERA and the CCDU, ignoring the property rights of downtown owners, causing destructive regime uncertainty in which owners simply could not tell what they were allowed to do, and failing to deal with substantial emerging problems in EQC assessments that kept costs to government down but ignored the terms of homeowners’ insurance agreements. We are lucky that Christchurch, Waimakiriri and Selwyn were not forced into a supercity before the earthquakes.

Think back to National’s campaign of 2008. They railed against Clark’s nanny-state. But can we see the massive increase in health and safety compliance costs as anything but a continuation of that regime? And what of the anti-money laundering regulations that had no reasonable cost-benefit assessment? Because of those rules, I could not even bet on iPredict that English would succeed Key.

Meanwhile, productivity continues to stagnate and superannuation’s long-term costs loom. 

Failing to follow the rest of the world’s descent into madness is good. The bar should be set higher for a country that has bigger aspirations than that.
Like Grandpa Simpson said of whether FDR beat Superman by a furlong...

Friday 9 December 2016

The Gibson Critique - sugar tax

Waikato's Professor John Gibson last week delivered at Motu what has to be the most devastating critique of the empirical estimates on sugar tax effects that I've yet seen. Gibson's slides are here.

Minister of Health Jonathan Coleman has been holding off on sugar taxes, saying that he needed to hold on the results of a couple of forthcoming studies, one of which is Gibson's. Julie Anne Genter and the Greens have been arguing that his opposition relies on one industry-linked report; I'm not sure how they missed Gibson's work, as I've pointed Julie to it many, many, many times. 

Gibson's presentation at Motu goes beyond what I'd seen him present at the Ministry of Health a few months ago, and which we cited in Jenesa's report The Health of the State

He walks slowly through the problems of demand elasticity estimation where there can be consumer response on the quality as well as quantity dimension when all you have is household expenditure data. Price variation on the quality dimension is huge. If you infer consumption by how much people spend, but people respond to price changes by downshifting in quality, you will overestimate the price elasticity of demand. And even more so if people stockpile when things are on sale for later consumption. He shows how Deaton's method of inferring price elasticity by restrictive assumptions on cross-brand shifting fails. 

Here's Gibson on the Mexico studies:
He later shows that hardly any of the existing papers out there deal reasonably with quality substitution, and that there are other substantial problems out there.

But the more interesting part comes at the end, where Gibson contrasts how economists read a literature and how public health people do. 

Sugar tax advocates in New Zealand need to stop pretending this work isn't going on. Gibson's final report isn't due out in a while. The sugar tax people can't continue claiming that all the opposition to sugar taxes is somehow motivated by Big Sugar. There are serious empirical issues in the literature and I have pretty big doubts that any of the sugar tax proponents have been able to wrap their heads around those issues. 

3 strikes, redux

We still don't know what effect New Zealand's 3-strikes law has had on recidivism.

Graeme Edgeler had undertaken a bit of ocular least squares last year; I'd commented on it here. It then looked like the number of second strikes had dropped, although the conclusion was still tentative. It turns out that the data Graeme was using wasn't as comparable across the two time periods as he had thought, and so he retracted his post. I've updated my post as consequence.

In theory, the law should be effective and at lower cost than American alternatives, for the reasons I laid out here. The American version gets rid of marginal deterrence by having the same hefty penalty across broad categories of offending, so you may expect a severity shift in offending among third-strike offences. New Zealand sets things on the third strike to the maximum penalty for the offence, without parole, unless it would be manifestly unjust to impose the penalty without parole, so proportionality across offence categories is maintained. 

Judges so far seem to be undermining Parliament's intent in the legislation. The two second-strike cases that have come up involving murder, where judges are to impose the maximum sentence without parole unless the 'without parole' provision were manifestly unjust, have both had the non-parole period waived as being manifestly unjust; the only third strike offence so far has also used the 'manifestly unjust' provision for waiving of the without-parole condition. Radio New Zealand reports on the three cases here

It would not take many more uses of that provision before offenders expected that judges had no intention of following Parliament's intent, and so deterrence would be lost. Maybe each of the three cases so far really are the exceptions that Parliament intended have this kind of exception. But say that the provision were intended for 10% of cases. The odds that the only three to come up all happened to be manifestly unjust are one in a thousand. Is it more likely that we are seeing the one-in-a-thousand sequence, or that the judges have little intention of following Parliament's intent?  

And so any future empirical study might expect a rise in strikeable offences from 2017 onwards, as judicial credibility diminished - barring changes in sentencing practice that change expectations.

UPDATE: In comments below, Andrew Geddis notes it's been five second-strike murders, and that the judges deemed applying Parliament's intended sentence in all cases would be manifestly unjust. I doubt that's an accident. 

Tuesday 6 December 2016

Prime Minister English?

If outgoing Prime Minister John Key has any influence over the choices, and if Bill English wants the job, I expect English will succeed Key as Prime Minister and Steven Joyce will move to the Finance portfolio.

More than anybody else in government, as best I've been able to tell, Bill English thinks in terms of incentives and institutions. He sees the long game in changing structures to get better policy outcomes. And I have only ever heard him talk about that long game in terms of policy outcomes, not politics.

As Finance Minister, English's vision was clear. He wants government spending to be effective. This isn't bean-counting stuff, it's about wanting that outcomes actually improve because of policy and spending decisions. And he wants the institutions to be in place to provide the incentives for that to happen.

English's enthusiasm for Statistics New Zealand's Integrated Data Infrastructure was built on using it to figure out where government spending is working to improve outcomes, where it isn't, and setting up the mechanisms so we can distinguish between those. I remember his visit to Canterbury University beseeching us to use the IDI to help him figure out where the government does well, and where it could improve.

At the Victoria University School of Government awards ceremony a couple of weeks ago, English also highlighted the importance of institutions. He there, and this is my paraphrase, said that policy graduates need to think beyond the shift from inputs and outputs to outcomes, although that's important too, but rather towards the incentives that lead to those outcomes, and the institutions that shape the incentives. He noted that he has a lot more time for "these are the institutional features leading to bad policy leading to bad outcomes" thinking than for "here are bad outcomes, change this policy to get better outcomes".

As Prime Minister, English would be in a better, and worse, position to promote and execute that vision. On the plus side, he will be better placed to make the changes necessary. I expect he might take a harder line in Cabinet if RISes fail to meet the necessary standard, and ultimately bureau willingness to supply those depends on bad ones being batted back by Cabinet. And there are tweaks that could make IDI work better.

But on the downside, he'll need Treasury working well for in order to implement the investment approach, and he wouldn't be the Minister to which Treasury reports any longer. That will matter too.

Monday 5 December 2016

Housing solutions

Paavo Monkkonen has a few solutions to California's housing affordability problem.
First, California’s current Housing Element framework should be strengthened. It gives cities goals for new affordable housing but is now an almost symbolic exercise. Cities that fail to meet their targets should face fines or legal action, while cities that meet or exceed targets should be rewarded through infrastructure funding or other means. In addition, the state should reform the way it determines regional housing needs. The current system relies on population estimates, which underestimate the need in high-cost areas flush with jobs, amenities and public services. Vacancy rates or an affordability index would be more accurate and have a greater impact on affordability.

Second, the state must encourage a more diverse group of residents to take part in the planning process. Planners must actively seek meaningful input from families, low-income renters, young people and those unable to attend public meetings. If outreach is too cumbersome, cities should consider cutting off input that unduly benefits small groups. For example, neighborhood councils could be eliminated, as was recently done in Seattle.

Third, some planning decisions should be moved from the local to metropolitan or state levels since housing and labor markets operate beyond city limits. Where neighborhood opposition is a persistent roadblock, developers could be granted “by right” approval for projects that meet existing rules, exempting them from some reviews and public input. California’s density bonus law – which grants developers additional density in exchange for a share of affordable units – is an important example of this kind of approval. The state might expand the types of projects that are eligible.
Council incentives and infrastructure financing are at the heart of the problem here too. I've liked the idea of having a national default plan that takes effect if housing costs are more than five times median income. Do what you want locally so long as housing remains affordable. Turn unaffordable for too long, and allowed density in every spot is automatically doubled, everyone has by-right permission to build up to three stories, and urban growth boundaries are wiped out.

Sunday 4 December 2016

The greatest superhero of them all

I look forward to future episodes of this one, in which The Utilitarian (ΣU) gets in a big fight with The Utilitarian (Max median(U)) and The Utilitarian (Max U-bar) about just what they should be doing.

ΣU: Stop what you're doing! He clearly prefers being alive to your killing him, and his existence is a net addition to total utility (unlike that criminal from before)!

Maximize average: Nobody will even notice that he's gone, and he just barely prefers being alive anyway - thanks to you. What the hell did you do to increase the birth rate by so much anyway? 

ΣU: Zapped all the contraceptive plants. People enjoy life less because of less sex, but the addition of more people is clearly worth it. You were too busy stealing from people to give to the utility monster to notice (and I didn't mind that either). 

Median U: I noticed...

Saturday 3 December 2016

Guaranteed Employment for Lawyers

Our excellent Research Fellow Dr Rachel Hodder warns about potential legal nightmares in the government's proposed pay equity framework.
Last week, the government announced that it would accept the Joint Working Group’s recommendations, which will allow employees to take pay equity disputes directly to their employers.

These changes were motivated by the landmark ruling in the TerraNova case where it was ruled that female-dominant aged care work has been historically undervalued due to gender discrimination. This has opened the door for a flood of similar claims to be made in other female-dominant industries.

The intentions of the changes are laudable but good intentions do not always make good policy. Overseas experience with similar pay equity laws is a good reason to be concerned.

There is little evidence that similar laws have reduced gender pay gaps. Adjusting pay in undervalued female-dominant industries is a blunt tool compared with adjusting pay for individual undervalued female employees in any industry.

Ironically, some studies have demonstrated that pay equity laws have widened the pay gap. Making employers pay more in whole industries reduces the number of jobs available, pushing many women into lower paid work.

A review of similar pay equity laws in Ontario is discouraging. The costs of administering the system ate up much of the available compensation change.

Establishing plans for compensation systems was much easier said than done. These costs were disproportionately felt by small employers where often the administrative costs were more than the recognised pay differences.

Difficult in practiceDisputes turned into a litigation nightmare. Rules to determine what counted as equivalent work seemed simple on paper but were difficult to evaluate in practice.

This led to endless disagreements about what male-dominant industries could be considered as relevant comparators. The main winners of the laws were consultants and lawyers, not women.

One would hope the government has been advised on the likely problems the new laws could encounter based on overseas experience.
It would be very interesting to know just how much warning Treasury or the ministries provided about the difficulties encountered in Ontario, and likely difficulties here. One should be especially careful about the quality of advice in areas where there is a lot of wishful thinking, and a lot of social sanction for even suggesting that outcomes might diverge from intentions.

Meanwhile, The Listener does not give us reason to hope for reasonableness:
The law change won’t be a magic wand. Comparing the relative value of different jobs in disparate industries was a contentious issue within the working party and threatens to be a sticking point in workplace negotiations. A suggestion by the New Zealand Educational Institute that pay rates for teacher aides be linked to those of Corrections officers, whose work entails risks not generally present in primary schools, isn’t a promising start.
The government hasn't drafted the legislation yet; I hope that the government gets some better advice around this stuff before it does.

Friday 2 December 2016

Tax and trade barriers

Trump's potential incoming Commerce guy, Wilbur Ross, has a bizarre take on sales taxes. And it might mean that New Zealand should rethink how we treat imports and exports in GST. 
Ross co-authored an economic policy paper that proposed renegotiating NAFTA and included a call for combating the use of foreign consumption taxes that render American-made goods less competitive. Trump echoed the paper’s views in campaign speeches.
The document argued that foreign countries offer a sales-tax rebate on their own goods shipped abroad, but then tax incoming products from the U.S., which does not have a value-added tax. The net effect, he said, is to invite U.S. companies to relocate.
“Like many countries, Mexico has shrewdly exploited the (value-added tax) backdoor tariff to further its competitive advantage,” Ross wrote in the 31-page paper, co-authored in September with University of California business professor Peter Navarro.
“It is thus not surprising that U.S. corporations want to move their factories offshore and then export their products back to the U.S.”
Canada's GST is a mess, but even then it's tough to see how the heck this works. If a US manufacturer makes things in the US and sells in the US, no GST applies because the US has no GST. If it exports to Canada, GST applies on sales in Canada. If the plant moves to Canada and sells in Canada, GST applies on sales in Canada, but not on exports to the US - exactly the same as if it were US-based.

So the whole thing is nuts.

But that's not a constraint on Trumpist economics. And so what should New Zealand think about this? We have a clean GST that's charged on a point-of-consumption basis: imports draw GST (barring the GST-free threshold for low-value imports), but exports are zero-rated.

If a Trump administration thinks that's a trade barrier, they're nuts - but their being nuts doesn't much matter. It can take the WTO a long time to slap back stupid things the Americans decide to do, and who knows whether Trump would agree to pay whatever penalties they'd impose anyway.

But there is a workaround that solves another problem at the same time.

Last year, Seamus found a beautiful solution to local retailer complaints about GST on imports. The retailers association gets real mad about the de minimus threshold for imports. In their view, it makes an unfair playing field. The 15% GST difference is absolutely trivial relative to the cost difference between local retail and direct-to-consumer imports in way too many cases for the de minimus threshold to be distorting things, but doing away with it would serve as a big barrier against imports because there's no clean way of applying at the border without wrecking direct-to-consumer imports.

Except for Seamus's solution.

Seamus reminded us of Lerner symmetry. A tax on imports (like GST) is identical to a tax on exports - they're both taxes on trade, effectively. Long run, imports match exports. So flipping from taxing imports to taxing exports causes a one-off drop in the exchange rate equivalent to the tax, but doesn't mess anything else up. And so he argued that New Zealand should shift to zero-rating imports, which are tough to police at the border anyway, and apply GST to exports. The price of all exports would go up by that 15%, but we face world prices: that means the value of the dollar drops. I'll quote Seamus in full here:
My proposal will not just deal with the distortion that purchases by consumers that are made directly from overseas through on-line retailing receive a favourable tax treatment relative to those that are processed through an importer. It will also deal with a larger distortion in the GST. As it currently stands, the GST applied to imports does not apply to purchases made by New Zealanders while travelling overseas, and similarly the zero-rating of exports does not apply to the sale of services to foreign tourists while in New Zealand. That is, the current GST regime favours overseas tourism by New Zealanders over other imports, and penalises the New Zealand tourism industry relative to other exports.

So here is my proposal: Completely exempt all imports from the GST, and at the same time stop zero-rating exports and require firms to charge GST on all sales, including those to foreigners. Retail New Zealand should be happy, they would no longer be treated in differently from overseas on-line sellers in their tax treatment in New Zealand. And firms selling both overseas and in New Zealand would be happy to no longer have to have separate out sales overseas and domestic sales when filing their tax returns.

This idea runs completely counter to our inner mercantilist instincts, but our instincts don’t cope well with general-equilibrium reasoning. In my experience the greatest eye-opening moment you can give students in economics—the sort of epiphany that has them changing instantly from “this is obviously wrong” to “this is obviously right” is the Lerner symmetry theorem,  which shows that an import tax is exactly equivalent to an export tax. The idea here is that a tax on exports or imports is really a tax on trade. In the long-run, the present value of exports has to equal the present value of imports, as they are just opposite sides of the equals sign in a budget constraint. A tax on exports is a tax on imports, as it shifts resources away from producing for overseas (with the consequent importing from overseas that that allows) to producing for local consumption. (I was told that, during the Muldoon era, Treasury, knowing that it could not pursuade Muldoon to reduce tarrifs encouraged him in his policy of export subsidies, knowing that the latter would counteract the former.)

In a country with a floating exchange rate, the way that the Lerner equivalence theorem would play out if it were to adopt the change from levying the GST on imports to levying it on exports, would be through a depreciation of the currency by the amount of the GST. So sure exporters would have to put up their prices to foreigners in NZ dollars by 15%, but the goods would not seem to be more expensive to foreigners because of the 15% depreciation. Similarly, the 15% GST coming off imports would be offset by the depreciation. In general, therefore, there would be no change, but with a few exceptions. On-line purchases would become 15% more expensive in NZ dollars due to the depreciation with no offsetting change in taxes. Trips overseas would similarly become 15% more expensive, but at the same time, New Zealand would become a far cheaper place for foreigners to visit, again.
It's a clean solution for the online GST / import issue, but seemed politically difficult. If the incoming US administration thinks that zero-rated exports are some kind of trade distortion warranting sanction, though, we could flip to zero-rating imports and taxing exports. Ta-dah. Trump's inner mercantilist will love us for it, and we know it makes no difference. Like Seamus's example on Muldoon.

I thank @TrevorTombe for the pointer. He's a convert to Seamus's beautiful tax idea. You should be too.

Thursday 1 December 2016

Compensating organ donors

It is illegal to pay organ donors for their gift. Economists can easily explain the consequences: at a price of zero, you have a big shortage. This is particularly the case for live donors, where donors face real personal costs, both in the transplant process and in recuperation.

Chris Bishop's bill, which passed Third Reading in the House yesterday, will compensate live organ donors at 100% of their lost income, and makes sure they're not left out of pocket for costs.

Here's Chris's speech at third reading.

Kidney transplants save the government over $120k in dialysis costs, net of the cost of the transplant and ongoing care.

For a long time, we were stuck in the worst of all worlds on this one. People don't like the idea of trade in organs and money being involved, and so governments made it illegal to pay anybody anything for an organ. Well, except for the surgeon, the nurse, the orderly, the person who mops the floor, the people running the kitchen at the hospital, the people making the equipment for the transplants - all of them, well, their choices are by definition uncorruptable and totally not based on coercive money being involved. Just the person who might donate an organ. That person had to be protected from coercive cash - and the consequence of a mandatory price of zero was a massive shortage in donor organs.

Most of the time, economists would just take this as example of the stupid that happens when people can't think clearly about prices and exchange.

Al Roth instead saw it as a constraint to work around, and came up with matching donors as a way of making things suck less given the constraint that money can't be involved.

And Chris Bishop, in an excellent bit of policy entrepreneurialism, saw the opportunity to save lives by repackaging things. The New Zealand system will compensate donors for their lost income for up to 12 weeks of recuperation. Gary Becker had estimated that you'd get an infinitely elastic supply of organs at around the $15k/kidney mark in the US. Compensation at the median wage for 12 weeks is just over $10k. That doesn't get us quite as far as would be ideal, but it is a massive improvement on the system as it was.

I like to think that we helped a bit in this. I've been blogging on this topic for a while now, and have pointed out the Israeli compensation system. The last honours project I assigned at Canterbury was running the CBA on live organ transplant. Bob Reed took over supervision of Liz Prasad's project as I left for the Initiative, then Liz turned it into a Masters with me helping a bit in the supervision.

When Chris's bill was drawn from the ballot, we quickly turned Liz's thesis into a research note and submitted on the bill. We didn't get all the changes we'd there have wanted - I still really like the Israeli priority system - but it was good. Donor compensation was strengthened from 80% of lost wages to 100%, and I like to think that our showing that the government still saves money on the deal helped in that.

Chris did all the hard yards on this one though. He built phenomenal cross-party support for a proposal that routes around one of the stupider constraints we've had in the system, and gets us a heck of a long way towards better outcomes. Huge kudos to Chris.

And this should be a lesson for the American system as well. Stop talking about buying and selling organs, start talking about letting insurers compensate donors for their lost wages while in recuperation. It ain't perfect, but it's a big step towards a better world.

UPDATE: On prompting by Ilya Somin, I've checked through the US law. I thought it was banned in the US as valuable consideration, but compensation for lost wages is allowed for. And yet it still is a substantive barrier to donation in the US: while it's allowed, it isn't done. In that case, as the public system there does fund a lot of transplants through medicare, I expect they'd just need an administrative decision to provide that compensation.