Friday 19 January 2018

A Treasury without opportunity costs

Sometimes, I hear the criticism that the Treasury’s focus on living standards implies a lack of focus on the fundamentals.  That what we should do is train our sights on the basics: sound public finances, value for money, stable macroeconomic frameworks, and robust microeconomic analysis.

I both agree and disagree with this sentiment.

I wholeheartedly agree that those fundamentals remain critical, for both New Zealand and the Treasury.  As I’ve said before, it remains a fundamental truth that successful economies need, among other things, a stable and sustainable macroeconomic framework, sound monetary policy that delivers stable and predictable prices, a prudent fiscal policy and debt that’s under control.  For a small economy such as ours, fiscal control is critical and rumours of its death have been greatly exaggerated (and I’m happy to nominate any of my Public Sector Chief Executive colleagues as a reference on this point!).

I disagree that these fundamentals are all that we ought to focus on.  The fundamentals are necessary but they’re not sufficient.

Good public policy needs a wide-angle lens and, at its heart, the LSF is about what we mean by ‘value’.
Emphasis added.

One of the fundamental lessons of economics is the concept of opportunity costs. If you want to start a large body of work in a new area, you either need to staff up to do it, or stop doing other stuff to make room for the new project. This should be obvious to anybody whose boss has ever said "Oh, could you also do this by the end of next week?" The correct answer is almost always "Sure, but here's a list of the three other things I was going to get done - which should I push out to do this new thing?"

Hiring a pile of non-economists to do living standards stuff has an opportunity cost for rigorous analysis on other margins.

Case in point, Treasury's Regulatory Impact Statement on the policy banning foreigners from buying houses in New Zealand.

The problem definition section, required in establishing exactly what problem is out there that the policy is meant to solve, is to the point.
This proposal seeks to implement the Government's 100 day commitment to "ban overseas speculators from buying existing houses." 
What a marvel of problem definition! Empowered by the Living Standards Agenda, Treasury will soon be able to move on to even more concise definitions of New Zealand's pressing problems, like "The Government wants to do something about foreigners", or perhaps even "A Minister heard something on the radio that made him angry."

Section B's Summary of impacts is at least as stunning. It notes that costs will fall on regulated parties, the Overseas Investment Office, and third party agents involved in property transactions. Ignored are the costs falling on owners of New Zealand property who might like the opportunity to sell to a broader range of buyers. But those kinds of effects only matter in old-style cost-benefit assessment and not in the new Hexagon of Happiness, Pentagon of Pleasures, Dodecahedron of Delight - or whatever the latest variation of it now might be. In a world where more economists were available at Treasury to hit this stuff, maybe these things could be more rigorous.

I shouldn't be too harsh on Treasury here - they can't do much rigorous work on stuff that parties commit to in a 100-day-plan. An alternative and plausible reading of that problem definition is "We see absolutely no problem here that we can specify so we're just going to say the government made us do it."

But I'd have far preferred that Treasury instead work backward to the real problem Labour was trying to solve around housing shortages, then in the RIS note that banning foreigners is a dumb solution relative to plausible alternatives like getting on with the infrastructure financing changes that Phil Twyford's supported. I guess it's always a balance between pandering and providing free and frank advice. But if it's always the teaspoon of sugar and never the medicine, there'll be problems.

Anyway, I'll expect more of this kind of thing if, in the real world, there are opportunity costs to Treasury shifting away from the fundamentals.
Treasury has apologised for an error which could see fewer children projected to be lifted out of poverty as a result of Government families packages.

It's not yet clear whether heads will roll over the coding error, but officials have confirmed that child poverty reductions were over-estimated when the previous National Government delivered its Budget in May last year and the error appears to have carried through to affect the current Government.

It is understood one of Prime Minister Jacinda Ardern's first big speeches of the year would include a child poverty focus, but the Treasury blunder will likely throw early plans into doubt with the Government unable to be certain of its figures.

The exact number of children expected to be lifted out of poverty is not likely to be known until the end of February.
Again - really don't want to be too hard on Treasury for the coding error - it's hard not to get the occasional screw up in this stuff. Lumley's take is good. [Update: So's this at RNZ] But it points to the problem of opportunity cost. Getting the fundamentals right isn't easy. The more they're pushed to run Living Standards stuff, the more likely we'll get screw-ups on what I'd thought was more fundamental. And the more annoyed I am about how hard Treasury pushed to be stuck in this spot.

I chatted a bit with a Newshub reporter on this stuff yesterday afternoon.

Postscript: National's carrying on during the election campaign about the number of kids its tax change would lift out of poverty bugged me. At least some of it was an effect of finally inflation-adjusting the tax brackets. If inflation-adjusting the bottom tax brackets brings kids out of poverty, then it has to be the case that failing to adjust them in the prior years drove those same kids into poverty.

You can imagine a particularly stupid political ratchet where governments don't inflation-adjust tax brackets, more households hit a disposable income measure of household poverty because inflation pushes up the amount of tax they pay, and then every government in its third term announces an inflation adjustment that brings those same households back above the defined income line. Everybody celebrates the magnanimity of the government that saved those children from poverty while ignoring that failure to annually adjust the damned thresholds is what caused those kids to have fallen below the line in the first place.

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