## Wednesday 31 October 2018

### Excise to reduce road crash costs?

I often like to borrow Ed Stringham's analogy between harmful alcohol use and speeding. We don't use petrol excise to try to deter speeding, we use road patrols and traffic cameras. Does it really make sense to use alcohol excise to go after problem drinkers?

Linda Cobiac, Anja Mizdrak and Nick Wilson argue the case for an alcohol excise hike to prevent car crashes. The article is not linked in any of the news stories on it, but I think it's this one. Those without institutional subscriptions can find it on SciHub. The study was funded by the Health Research Council, so it's not like you didn't already pay for it.

Before we get to the new work, let's get some context. The old BERL study, using 2005/6 figures, claimed about \$700 million in road crash costs. Now that study had a lot of problems, including double counting. And it counted a pile of costs falling only on the drinkers themselves which would have to be weighed against benefits in a better analysis. But let's leave all that to one side and call it the maximum implausible estimate of the social costs of alcohol-related car crashes in NZ in that year.

Since then, alcohol-related road crash injuries and fatalities have dropped by about 20%. So a current maximum implausible figure should be about 20% lower, but CPI adjusted. Taking those together, a current value would be \$685m (I used a 2005-2015 CPI adjustment after reducing the 2005 costs by 20% to reflect the drop in the crash numbers). This is rough-and-ready rather than precise, but should be in the ballpark if you wanted an update from the old figure. Cobiac et al's work is baselined to 2011. The maximum implausible figure for 2011 would be \$777 million.

Cobiac et al argue for a 15 cent (\$0.15) per standard drink increase in excise. A cheap bottle of wine has about 8 standard drinks and sells for \$8. So a standard drink at the lower end, current-excise-inclusive, costs about \$1. They're then arguing for about a 15% increase in prices at the lower end.

Their modelling work says this would reduce social costs by about \$240 million, plus QALY savings that would bump that up to about \$280 million.

But recall that the maximum implausible estimate of road crash costs for 2011 is about \$777m.

Does it seem plausible that a 15% increase in the price of alcohol at the lower end of the cost scale would reduce the social costs of road accidents by about 30%? Either they have a much higher overall cost estimate for road crashes (and recall that BERL's was implausibly high), or something strange in the modelling.

Unfortunately, I cannot find the online supplemental materials where details on the elasticity figures used are meant to be hiding. The main paper explains the main method, but doesn't have the elasticity figures used.

The modelling work they describe first estimates the effects of an excise increase on consumption. They do not report whether they use lower price elasticity estimates for the binge and heavier drinkers they take as the population likely to drink drive; I expect the supplementary tables would have more detail.

But they then scale up all consumption "to account for survey under-reporting". Basically, survey measures don't line up with sales figures - less is reported by survey respondents than gets reported in the tax data. Some of that will be under-reporting, but some of it will be that New Zealand gets a ton of tourists, and tourists are going to drink while here but don't show up in the alcohol use or household expenditure surveys.

After getting an estimated effect of excise on consumption, which will overstate things if they haven't used a lower elasticity for binge drinkers, they then estimate the effect of lower consumption on drink driving:
Modelling health effects of changes in alcohol consumption

From the change in alcohol consumption, we determined the change in risk of motor vehicle and motorcycle road deaths and injuries using a population impact fraction approach (online supplementary text S1). In these calculations, we applied dose–response relative risk curves for high-risk (binge) drinkers.19 These relative risks were adjusted to reflect the proportion of the day spent at increased risk, using a function that predicts exposure time based on estimated rates of alcohol clearance by the liver.5

To model the future health impact of alcohol consumption changes in the New Zealand population, we used multistate life-table modelling methods used previously to model the health impacts of alcohol taxes in Australia20 and Denmark,21 and previously adapted in New Zealand for modelling health impacts of tobacco taxes.22 In these analyses, we focused on modelling the impact of changes in alcohol intake on motor vehicle and motor cycle road transport injuries.
So they use that to go from a modelled reduction in binge drinking to a modelled reduction in motor vehicle accidents. The modelled reduction in costs comes out of that modelled reduction in accidents. But at the end of that chain of modelled links, they wind up claiming an implausibly large reduction in road accident costs from a 15% increase in the cost of cheaper alcohol.

They claim that their results are robust to different assumptions about elasticities of consumption with respect to price, but all that meant was that, in the absence of NZ estimates, they first applied UK estimates and then applied Australian estimates. It doesn't say how robust their figures are to different assumptions about the relative elasticities of binge and regular drinkers.

Anyway - colour me more than a little bit sceptical. If I were looking for best-buys for reducing drink driving, I'd be looking hard at South Dakota's 24/7 and Hawaii's HOPE programmes.

For a fun alternative way of approaching the problem, here's Robert McClelland and John Iselin of the Urban Institute and Brookings Institution's Tax Policy Center. They use a synthetic control method to estimate the effects of two large excise increases in Illinois. The synthetic control method looks for states whose consumption patterns were a lot like Illinois's patterns prior to the tax change, then use the combination of those states to build a synthetic version of Illinois - what consumption in Illinois would have looked like absent the tax change. The effect of the tax is then estimated against that counterfactual. They find a temporary reduction in accidents in counties that don't border other states, but even that washes away pretty quickly. There'll be other studies that find reductions in accident rates, but I kinda like this synthetic control method for establishing a counterfactual.

## Tuesday 30 October 2018

### Correcting corrective taxes

Over at the NBR, I have a look at the Tax Working Group's advice around excise (\$). The advice, and the documents in support of it, aren't bad. They do miss a trick when it comes to tobacco excise though:
The main health risks of smoking are from combustion. Does it make sense to apply the excise levied on smoked tobacco to reduced harm products? Excise is slightly lower for tobacco products other than cigarettes but still seems excessive for reduced-harm products that do not involve combustion.

A 10-gram package of snus selling for \$18, containing 15 sachets, would draw \$10.33 in excise if the 10-gram weight is an accurate measure of the taxable weight – about \$0.69 per sachet. Excise is more than 130% of the cost of the base product. The excise content of the cost of a HEETS stick is lower than the excise content of a cigarette but mostly because HEETS contain less tobacco.

It does not help encourage people to switch to less harmful alternatives when those less harmful alternatives draw substantial excise levies.
I argue for a low/no excise category for noncombusted tobacco.

I had a minor quibble around their treatment of alcohol. The TWG Secretariat's background paper cites others claiming that alcohol excise may be progressive because richer people spend more on alcohol. But excise will be a bigger fraction of the purchase price of alcohol purchased by poorer people if people buy fancier alcohol when they're richer. The percentages here now come from very out of date HES findings. But the excise figures are current.
The secretariat noted that poorer households spend only 1.9% of their income on alcohol and richer households spend 2.8% of their income on alcohol. But if the poor household mostly bought \$15 cask wine and the richer household mostly bought \$30 bottles of wine, the poorer household would be spending 0.74% of its income on alcohol excise while the richer household would be spending only 0.21% of its income on excise.
An ungated copy of the piece will be up at the Initiative's website in due course.

Those interested in snus as alternative to smoking might check out NZ Snus. None of their products would be recommended for non-smokers, but this curious non-smoker who tried one of their stronger products particularly suggests not trying the stronger variants unless you're used to getting a lot of nicotine.

## Thursday 25 October 2018

### Afternoon roundup

Posting has been light as other deadlines press. But I have accumulated too many browser tabs. Here are some worthies:
• Colby Cosh on the case for using prices to reduce carbon emissions.
Is there really absolutely nothing you can do, even if you’re quite lower-middle-class, to create energy savings in your life? You never go to the fried chicken place across town instead of the one on the next block? Are you sure you need to own a pickup for one home reno project or a bit of landscaping every three years? Have you even looked into smart thermostats or checked your window seals? Invested in a Snuggie? Taken the old incandescent Christmas lights off the hot tub?

The real problem is that you can’t ask these questions — even hypothetically, or even just to point out that every single household might ask hundreds of them — without sounding like an obnoxious schoolmaster. A carbon tax is social engineering — it is just an optimum, consciously designed, maximally market-friendly way of going about it. Any economist will add the implied caveat that all taxes are social engineering, and other taxes are engineering society in dumb or bad ways. A “carbon tax” is meant, for better or worse, to discourage the emission of free carbon. “Income tax,” which discourages honest work, starts to look pretty ridiculous when you follow the logic just a few inches further. But those are always the hardest inches to cross in the face of a policy novelty.

• Pattrick Smellie reminds us how New Zealand's ban on Taranaki oil exploration can wind up increasing emissions globally:
The oil and gas ban is proving to be a two-edged sword politically, particularly since no matter how often Woods denies it, the evidence is strong that the ban is more likely to increase than decrease global emissions of greenhouse gases.

Especially questionable has been her claim that the vast quantities of methanol currently made from natural gas in New Zealand won't end up being produced in China, using higher-emitting coal because of China's emissions trading scheme.

As climate change policy expert Christina Hood told the Environmental Defence Society's recent business and climate change conference in Auckland, the Chinese ETS is not really an ETS yet and currently only applies to the electricity sector.
Our submission on the ban is here.

• Former NZ Ambassador to Beijing John McKinnon's speech on New Zealand's relationship with China is excellent. Recommended reading.
China is also now, what is was only potentially in 1972, a great power. The fabric of international society is woven by the ability of the international rule of law to constrain the interests of large powers such as China. This means that New Zealand, as a country which invests in and benefits from the international rule of law, has expectations of China, as it does of other great powers. That they will comport themselves appropriately, especially towards those who have less power than themselves. That is the true mark of greatness. It is pleasing to see how China has responded to these expectations, such as through its policies on climate change, and its championing of the multilateral trading system. New Zealand, along with many other countries, will be represented at China’s international import expo, to be held in Shanghai in November, and marking the 40th anniversary of reform and opening up. There are many areas where New Zealand welcomes China’s voice and can and does work with it in international forums.

• Susan St John is entirely correct about the need to better sort out residence issues with NZ Superannuation. The government is currently considering legislation that would require people to be resident longer in New Zealand to have access to the New Zealand Superannuation scheme. St John reminds us that we also need better treatment of the private retirement plans of those who bring their 401(k) with them to New Zealand.

• New Zealand's copyright industry is trying on a push for extending the duration of copyright and messing with our current ISP notification regime for infringement; I don't wish them luck.

• Net migration has slowed. This shouldn't be surprising. Migrants are only somewhat sticky; a lot of them leave a few years after arriving. That means that net migration figures will always look stronger than they should during upswings in inbound numbers, and weaker than they should during downturns in inbound numbers. Current year net migration is a function of current year inflows and lagged departures from prior year inflows. Net migration was always going to flatten off unless inbound figures continued to grow. As soon as inbound figures level off, then the outflows from prior year waves catch up. I'd be surprised if the anti-migrant tone of the last election campaign, combined with increased restrictions on those here without a residence visa (can't buy a house), hadn't amplified this.

• Some folks are complaining that Christchurch might have 'too many' houses now. What a terrible problem to have! We should be thanking Selwyn and Waimakiriri for allowing growth and solving Christchurch's post-quake housing crisis. And for those who don't like the sprawling suburbs - perhaps the Crown could consider selling off some of its downtown land holdings using a descending bid auction to find out what the value of that land really is. It's felt like unwillingness to realise losses against inflated downtown land values has been a hold-up there, but I'm not close enough to it to really know.

## Thursday 11 October 2018

### A pretty lame OIA response

Back in September, the Ministry of Health's Chief Science Adviser produced some rather shoddy advice on the effects of sugar taxes.

Asked by the Prime Minister to provide advice on the effects of sugar taxes, Dr John Potter provided two pages of unreferenced bullet points, none of which mentioned the comprehensive literature review commissioned by the Ministry and released by the Ministry only a few days before Potter's list of bullet points.

So I OIAed the Ministry to find out what was up with that. Here's what I asked them.
Dear Ministry of Health,

I would like to know more about the process around your Chief Science Advisor’s advice to the Prime Minister regarding sugar taxes, a two-page list of bullet points dated 16 February 2018 and released recently to the New Zealand Herald.

I would like to know the following:
1. Did any request from Sir Peter Gluckman’s office for that advice run through the Ministry of Health? If it did, please provide any documentation around it.
2. Did Chief Science Advisor John Potter’s reply to Sir Peter’s office, addressed to the Prime Minister, run through any quality assurance process at the Ministry of Health? If so, please provide any documentation produced as part of that quality assurance process.
3. At what point did the Ministry of Health become aware that Dr Potter was producing this advice for the Prime Minister? How did it become aware that this advice was being produced?
4. Please provide any documentation, including but not limited to internal emails, meeting notes, and recollections of relevant officials [particularly the economics team at the Ministry], of any discussions within the Ministry of Health about:
1. The quality of John Potter’s advice;
2. That advice’s consistency with prior Ministry advice regarding sugar taxes;
3. The process by which this advice was requested and produced.
5. Does the Ministry of Health view it as appropriate that advice was provided to the Prime Minister on sugar taxes by the Ministry of Health’s Chief Science Advisor with no reference whatsoever to the work that the Ministry had received from NZIER in August 2017 and that the Ministry had released under the Official Information Act only 17 days prior to Potter’s note? Is this the kind of thing that the Ministry views as good practice and process? If not, what processes if any has the Ministry undertaken to ensure that advice produced by its Chief Science Advisor goes through any kind of quality assurance process?
The Ministry waited until today, the deadline for the request, to release the following. I will transcribe it below and then copy the image of it. It is absurdly lame.
I can advise that the request for advice was made directly to Professor Potter by the Prime Minister's Chief Science Advisor. Professor Potter prepared a succinct summary note in response. It was not intended as a stocktake of all available evidence.

The Ministry of Health became aware of Professor Potter's note on 20 August 2018 when the Department of the Prime Minister and Cabinet consulted us about its release under the Act. I have identified one email chain in scope of this part of your request. This is enclosed, with some material redacted under section 9(2)(a) of the Act to protect the privacy of natural persons.

At the time, officials recall that Professor Potter's note drew different conclusions about the benefits of taxing sugar-sweetened beverages from the study undertaken by NZIER. This is not unexpected as taxing sugar-sweetened beverages is a contested area. The Ministry welcomes debate on these types of complex health issues, including the interpretation of evidence and best practice.

The role of the Chief Science Advisor is to provide independent comment and advice on matters related to the health and disability sector. The Ministry supports Professor Potter providing information and advice to a range of stakeholders in keeping with his role as Chief Science Advisor.

You have the right (etc Ombudsman boilerplate)....
So.

The first the Ministry knew about Potter's note was when it was being released under OIA. MoH noticed that it varied from the advice the Ministry commissioned. But if the Chief Science Advisor chooses to ignore that report and produce a one-sided, distorted view of things for the Prime Minister's consumption, they seem cool with that.

How completely lame. Not sure why it took until the OIA deadline to produce this, but at least I got it.

The other attachment was an email trail of 15 August from DPMC to MOH noting the OIA request of Mr Nick Jones for "Copies of any report or advice received by the Office of the Prime Minister's Chief Science Advisor, or the advisor them self, on a tax on sugar or sugary beverages." DPMC ran it by MoH to check if anything further should be withheld, and then by Prof Potter on 20 August. There's no point in copying it here as it adds nothing, but I'm happy to forward it on if anybody wants it.

I'm pretty sure that Potter would have seen the NZIER report before producing his bullet points, but I have another OIA request in now to confirm that.

## Wednesday 10 October 2018

### Scholarships for the wealthy

Kirsty Johnston reports that half of university scholarships go to students from higher decile schools.

This isn't particularly surprising - far more kids from richer neighbourhoods wind up going to university, so they'll be more likely to get scholarships.

But there is more than just that:
Aorere College Head of Careers Mary Kerrigan said she had tried to raise the scholarship issue with Auckland University after extremely bright students at her school - including the Dux - failed to get scholarships two years in a row.

She said they were denied despite having significant financial issues, which was unfair.

She also complained about the criteria, which placed a large weighting on extra-curricular activities.

"For many students from low decile schools, being able to participate in multiple extra-curricular activities is challenging due to a lack of finances and time as many are working part time to help support their families or have additional home responsibilities," she said.

In an email, she was told by Vice-Chancellor Stuart McCutcheon the scholarships were not just about equity - they were also about attracting very able students to the university.

"I find that very disturbing, especially in light of the fact that there is a growing gap between the rich and the poor," Kerrigan said.
There are a lot of intertwined problems here. But one of them is that NCEA doesn't make it exactly easy to identify promising students at lower decile schools. If there were some way of identifying the students who were likely to do well at university and provide scholarships to kids from poorer families who were likely otherwise to miss out on university, that could do some good.

Susan Dynarski is an economist, Professor of Public Policy, Education and Economics at the University of Michigan, and co-director of the University's Education Policy Initiative. If you think she's part of the Vast Right Wing Conspiracy, check out her Twitter feed.

Here's her column in the New York Times last year on the importance of standardised testing to help bright kids from poor families get into university. America has two standardised tests for college admission: the SAT and the ACT. Michigan made the ACT mandatory in 2007. The proportion of poor kids taking the ACT was sharpest, since richer kids were taking it anyway. And their college entrance went up as well. Lots of poorer kids get missed by the system in the absence of standardised testing. And it's a fairly cost-effective way of getting those kids into university:
Universal exams cannot, by themselves, close gaps between poor and rich students in college attendance. But in Michigan, it has produced small increases, especially at four-year colleges and particularly among disadvantaged students. The story is similar in Maine, Illinois and Colorado.

Professor Hyman calculates that at a cost of less than \$50 per student, a universal testing program is one of the least expensive ways to increase college attendance. Further, if the SAT or ACT replaces the standardized test that states require in public schools, it need not take up any additional instructional time, a key concern of testing opponents.
...
Universal testing has been shown to reduce racial, ethnic and income disparities. The Broward County school district in Florida started screening second graders for admission to a gifted program, instead of relying on teacher referrals. The universal program tripled the number of black and Hispanic children identified as gifted.

Evidence shows that if talented low-income students are mentored and coached, they are more likely to go to college, especially to a selective one. But we have to find them first. Universal free testing will help put more smart disadvantaged students on the radar of schools, mentors and advocacy groups that can help them.
Standardised testing, combined with means-tested scholarships for high-performers from poorer families, can be a great idea. Improving performance in lower decile schools will matter too though. Rather than passing out money to all university students through interest-free loans and zero-fee policies, redirect those resources to improving instruction and tertiary preparation at secondary school and to supporting promising lower income students

## Tuesday 9 October 2018

### Doing less good than we could - carbon edition

New Zealand has an emissions trading scheme. It isn't perfect. But for the sectors covered by the ETS, including transport, best policy for reducing carbon dioxide emissions is fairly simple: buy and retire credits.

The government simply cannot know whether the cheapest way of reducing CO2 emissions is by getting the least efficient cars off the road; having people switch to electric cars; planting trees; improving methane capture at landfill - or something else entirely.

So stories like this are a bit depressing:
As well as looking to revamp the Government's car fleet, there are number of other options Shaw is considering.

These include exploring the idea of increasing tail pipe emission standards – something the Productivity Commission recommended in a recent report.

"We're also examining the Productivity Commission's proposal for a feebates scheme – which lowers the upfront cost of EVs and makes them competitive with internal combustion engine cars."

This would mean highly emitting combustion vehicles would be penalised by having to pay higher registration fees.

Shaw has also been exploring the idea of exempting EVs from fringe benefit tax – a tax paid on most non-cash benefits provided to employees.

He is hoping to be able to announce the full work programme in a month or so – "then different components of that programme will drop through over the next 18 months".
Cars that use more fuel already pay more for the related carbon dioxide emissions because petrol is in the ETS. Tailpipe emission standards for CO2 then wind up imposing disproportionately higher costs on the owners of older vehicles that are less fuel efficient. If CO2 emissions are proportionate to fuel use, somebody driving an old Toyota Estima van that uses (say) twice as much fuel per kilometre as somebody driving a more fuel efficient car, then the Estima driver's already paying twice as much in ETS charges. Emission standards that are binding would pull older affordable cars off the market, hurting poorer families that rely on them for transport. And higher rego fees for high-emitting vehicles would have similar effect.

But it's dumber than that. If the government makes it more expensive to own a car that has high emissions, but not more expensive to use a car that has high emissions, then that encourages more relatively more intensive use of the more inefficient cars. If the ETS charge on petrol went up, that would discourage the use of the most-emitting vehicles. The registration fee is a fixed cost of owning the car, no matter how many kilometres you drive. The ETS component of petrol prices is proportionate to use.

FBT exemptions would bring back the stupidity of the early 80s, where companies had incentive to provide higher earning employees with in-kind benefits instead of cash. I suppose it would be one way of addressing measured inequality though - if the cars then don't get counted as income, it would knock top-earners' reported earnings down a bit and make inequality look lower, just as it did in the 80s before the FBT reforms.

And it isn't like electric cars aren't already subsidised: they do not pay for any of the road maintenance and construction costs that are covered by road user charging or petrol excise. Light diesels pay \$68 per 1000 kilometres in RUC; electrics really should be covered by the same scheme.

If the government instead simply bought back ETS credits and retired them, the cost of carbon dioxide emissions would go up for all sectors covered by the ETS. Owners of inefficient cars would drive them a bit less as petrol prices went up and would be more likely to choose a more efficient vehicle when buying their next car. But people in every other sector would also weigh up carbon costs and make adjustments.

The general principle: if you have an ETS and want to reduce emissions within the sectors covered by the ETS, just buy back and retire credits.

## Thursday 4 October 2018

### Roger's tasty sheep

A few years ago, Peter Singer said eating New Zealand lamb was defensible - even for an animal-rights utilitarian. The animals live a joyful life, have one bad day at the end, and graze on land that wouldn't be suitable for grains anyway.
"I think that there is a defensible argument for saying that if the purchase of Canterbury lamb is a necessary condition for lambs to have what is for 99% of their existence a really good life and even the bad days are not like a day of being tortured for 24 hours... I do think that that ... would be a defensible diet."
Roger Beattie's gotten rid of the 'one bad day at the end' part. His lambs aren't mustered and hauled to the works; they're shot on-paddock.
Away out on the south side of Banks Peninsula, where the wind gives the tussocks a permanent bend and the next stop is Antarctica, a group of small dark sheep move slowly up a hill.

They graze, but also lift their heads and test the air, wary of some presence they can't yet fathom.

Suddenly a shot rings out, and the half-grown lamb loitering on the edge of the group drops to the ground. The rest scatter, helter-skelter, up and down the slope, as two men come loping down.

The men sling the animal between them and start toiling back up the hill.

The sheep are Pitt Island wild sheep, or pihepe, as the farmers, Roger and Nicki Beattie, have named them.

This lamb will become part of the latest venture by the entrepreneurial couple; Wyld lamb.

Grown sustainably and ethically without chemicals in a wild environment, the sheep are then served up in some of the best restaurants in the country.

The lambs are shot, rather than go through the stress of a muster, and a trip to the freezing works which makes them all the tastier.

And with pihepes there is no drenching, no dipping, no vaccinations, no penicillin.

"They have a very happy, wild, carefree life until bang, they are on the dinner table. There isn't a less stressful or more organic, ethical system for producing meat than that," Roger Beattie says.
Read the whole thing...

## Wednesday 3 October 2018

### Five dollar prize

I've been absolutely loving Tyler Mahan Coe's podcast series on the history of country music and the country music business. Every story is fascinating.

A lot of the stories aren't good for the kids. But I played the one about the Louvin Brothers (nee Loudermilk) for them. I paused it after this bit to see if they could figure out what was going on. Can you?
Charlie Loudermilk and his big brother, Ira, hated every day of picking cotton except one. That was the day Colonel Loudermilk took the three oldest kids out to the field, right at sunup, and showed them all a \$5 bill. He said whoever picked the most cotton that day would get to have the money. \$5 might as well have been \$500 to these kids; they hit the cotton rows at top speed. They’d have spent the entire day in the field anyway but the idea of that \$5 bill had them too busy to think about the aches and pains of picking cotton as fast as they could. At the end of the day, Charlie had picked the most. He was shorter than the other two, an advantage when it comes to picking cotton. Charlie got the money and then all the kids got a lesson in how dumb their father wasn’t.
Eleanor's first guess was that the kids all worked so hard put together that it was worth more to their dad than the \$5. Good guess - she got the intuition of the all-pay auction.

But that wasn't it at all. Could the kids' extra effort on that one day, combined, be worth \$5? In the 1930s?

The real reason is also the reason that I've loved the idea of outcome-based contracts with NGOs for service delivery.

And here it is.
Colonel said, now that he knew how much cotton they could pick in a day with the proper motivation, they’d better pick that much every day or they’d get a different type of motivation come sunset.
For the low low price of \$5, across the set of them, the kids had revealed their production function.

A big part of Ministries' information advantage over Ministers is that, even if they don't really know their own production functions, they've got a better idea about them than the Minister does. That information can let them bundle up packages of things the Minister cares about with things the Ministry cares about and put them up as a combined bundle - that's the old Niskanen argument with Breton and Wintrobe.

Getting NGOs on outcome-based contracts can reveal information about the true lowest cost production functions, and let the Minister hold the bureaus to doing it no worse than that, just like the Colonel could then do with Charlie and Ira.

The Ministries, having a few folks more cunning than the Loudermilk kids, have done a good job making sure that outcome-based contracts don't get anywhere. I'm not sure it's an accident that there's no particular capacity in the public sector for writing the contracts properly, or that the bureaucracy managed to let the first attempt at social impact bonds die.

Back to our dinner table, I can't remember what the kids' second guess was about the \$5 contest after Eleanor's guess of the all-pay auction. But Ira got it on their third guess - that Dad would know, forever, how much work the kids could really do if they were trying hard. And that might be more expensive than the \$5 prize.

I didn't ask them what the kids' best response to that should have been. I'm happy if they do draw out the general implications, but I don't want to deliberately screw up the tendering system I'm running with them for the chores.

But do go listen to the podcasts. Fantastic history of 20th century America, the music business, how the Opry worked... on that last one, I can imagine a chapter of an industrial organisation textbook written around it. Great stuff. Start at the start of Season 1 and work your way through.

## Tuesday 2 October 2018

### Mayors for localism

"Each year there's legislation that still gets passed down to us whether in food safety or parts of the RMA [Resource Management Act] … and no money comes with it," said the Ruapehu District mayor, Don Cameron.

"Ratepayers are expected to pay for every single piece of legislation that comes from central Government. There's always been that tension and it's built to a point now … most local governments, to put it mildly, have had a gutsful."
He includes a few bits from me. I'd clarify one part: I'd noted a few ways of changing the incentives for local councils, including the Initiative's older recommendation of punting the GST revenue from new construction back to Councils. He quotes this as GST from infrastructure expenditure; I suppose that could work too, so long as it were neutral across whether the spend were from Council or private outfits.

I prefer the mechanism in our Special Economic Zones report where Councils would get a cut of the tax revenues that central government receives from a Council that facilitates growth. That version is then neutral across the things Councils might do to encourage growth; the GST on new construction one was from an earlier Initiative report focused on getting around the bottlenecks in housings.

## Monday 1 October 2018

### Stupid Avatar

I hated the idea of Avatar enough that I didn't want to pay to see it at cinema. The snippets I've caught on TV haven't changed my mind about it.

But it looks like I'll be paying for it for as long as the subsidy-milking franchise is willing to keep on going.

Remember the old days of agricultural subsidies where farmers took money to produce stuff like mutton that people didn't much want to eat?

Matt Nippert goes through a bit more of the film subsidy madness.
The government has abandoned plans to rein in ballooning subsides for Hollywood, citing film industry opposition and the threat of lawsuits from the producers of James Cameron's Avatar films.

The Weekend Herald reported in June these payments - that sees studios get cash payments of up to 25 per cent of their local spending on productions - had totalled \$575 million since 2010, prompting Economic Development Minister David Parker to announce he was looking at ways to cap or limit the escalating costs to taxpayers.

But yesterday Parker, speaking from Australia, said following consultations with industry around the viability of their business - and thousands of accompanying jobs - without subsidies, and legal advice over a 2013 deal signed with Avatar producers, said cuts or changes to the subsidy scheme were now off the table.

"We're not proposing to introduce a cap. We accept that the subsides are necessary, and we accept there's a benefit to the country," he said.
Yuck.
Parker said the costs to government from that deal would be significant. The 2013 agreement suggests the Avatar films will cost a minimum of \$500m, of which a quarter - or \$125m - will be paid by government.

Actual spending on the films - and the accompanying subsidy - is likely to substantially exceed this minimum as two films are already in production with the prospect of two more in the pipeline. The first Avatar film cost \$360m to produce in 2009, and Hobbit trilogy of films, also filmed in Wellington under the subsidy scheme, ended up costing a total just over \$1b.

Parker sheeted this exposure, potentially hundreds of millions of dollars to the taxpayer, back to the previous National government.
Is there really no way of getting out of this mess?

We've gotten ourselves into a particularly stupid equilibrium where we're throwing tons of money at the film industry so that NZ film school grads will be able to get jobs, and we're subsidising training the next crop of hostages to the film subsidies.

New Zealand is too small to be able to afford a lot of this kind of stupid.