Monday 30 November 2020

Afternoon Roundup

Egads the browser tabs. Enough! I haven't shut down the computer in a week in hopes of giving each of these its proper due; time to give up and move on. 

The worthies that each deserved a proper post:

Building Pressure

Capacity constraints are building in the construction sector. Some of it is weird supply-chain issues with the global pandemic; some of it is a substantial building boom here and worker and material shortages. 

The Herald goes through it, noting some promising SNZ data:

Stats NZ has been highlighting strong building activity lately.

In the year ended September 2020, 37,725 new dwellings were consented, up 3.5 per cent from the previous year. Auckland alone had consents issued for 15,470 residences, up 5.7 per cent.

This month, Stats NZ said that for the first time, the monthly value of building consents issued in Auckland exceeded $1b and accounted for about 44 per cent of the national total of $2.4b.

Auckland makes up about one-third of New Zealand's population, it noted.

"This is the first time a region has issued more than $1b worth of building consents in a single month, with more than $700m coming from residential projects," acting construction statistics manager Bryan Downes said on November 2.

"This reflects both the rising volumes of building consents and higher construction costs," Downes said.

The sector running at full-speed is still nowhere fast enough to address the shortage though. 

My column from Newsroom, last week

If Parliament had a pressure gauge, the needle would be redlining. That pressure risks venting through policies to target the symptoms of the current shortage while worsening the real problem.

The Prime Minister highlights government schemes like Welcome Home Loans and the First Home Loan grant that support people buying their first home. She also pointed how hard it is for new buyers face in building a deposit for a first home. It would be rather surprising if Ministries have not been asked to give her some policy options to assist those buyers.

But programmes that subsidise home buyers, when housing supply is constrained, will mainly boost the price of existing homes. They won’t get new housing built. If real estate auctions are a game of musical chairs with more buyers than available seats, giving bidders more money only increases prices.

Boosting housing demand through subsidies to buyers, when construction cannot keep up with demand, might look helpful but is actually making things worse.

The Government has other unhelpful ways to vent political pressure.

The Green Party has proposed wealth taxes; Bernard Hickey proposes land taxes. But it is difficult to see how new taxes get more houses built.

The current shortage combined with house price inflation benefits landlords, making rent control policies more attractive. But those policies can make investment in new apartments and townhouses even more fraught. In the immortal words of Swedish economist Assar Lindbeck, rent control is “the most efficient technique presently known to destroy a city – except for bombing.”

And policies to help tenants while supply is tightly constrained – like rental warrants of fitness – risk doing harm over the longer term.

The real problem is hard to solve in a hurry, which is a problem when you’re in a pressure-cooker.

Meanwhile, Ardern today blames the housing shortage on Kiwis not liking Capital Gains taxes. 


Tuesday 17 November 2020

AFR on the RBNZ

Harsh stuff from Grant Wilson at the Australian Financial Review ($):

Even with the RBNZ flagging macro-prudential tightening next year, via the reimposition of loan-to-value ratios, house prices are now a de facto constraint on monetary policy.

The "least regrets" formulation also assumes that the RBNZ’s approach to unconventional monetary policy, which was first articulated back in 2018, holds up.

While we agree that the first round of LSAP, in conjunction with other measures announced in March and April, was highly effective in lowering the local term structure of interest rates, the jury otherwise remains out.

We highlight (again) that the RBNZ’s expectation of LSAP imparting downward pressure on the NZD via the portfolio balance channel is in doubt.

In contrast to their pass-through model, non-resident holders of local bonds have not sold to the RBNZ.

Their percentage of ownership has fallen sharply this year (from 47 per cent to 30 per cent at end September), but the stock of holdings has remained steady, in a range of NZ$35 billion to NZ$40 billion.

Speaking plainly

Beyond these substantive points, there is the RBNZ’s communication strategy.

Back in May we noted that Governor Orr is known for speaking plainly, including his questionable comment that direct government financing was "achievable", and that there is "no right and wrong".

Assistant Governor Hawkesby managed to top this in mid-October, saying that preparations for negative rates were "not a game of bluff".

Perhaps not. But certainly the RBNZ over-represented its hand (in poker terms).

The result was seen on Wednesday, with the local money market strip abruptly repricing higher (and from negative to positive yields), by fully 30 basis points.

Then on Thursday, Hawkesby made perhaps the most asinine comment we have a seen from a central banker this year, in suggesting that the repricing was due to sell-side banks revising their forecasts, rather than the RBNZ’s decision.

As any intraday chart will illustrate, this was a daft thing to say. It belongs in the domain of alternative facts.

Journey ahead

Looking ahead, the RBNZ has its work cut out. It will need all the institutional credibility it can muster in tapering the LSAP program and in cooling the increasingly parabolic housing market.

Rather than continuing to emphasis the downside, the RBNZ would be well advised to contemplate the upside.

This includes the tourism sector, where Australians comprised nearly half of international visitor arrivals prior to COVID-19.

The RBNZ does not need to be the hero of the hour. It just needs to do its job.

I'm not a macro guy, and I'm certainly not one who watches the mechanics of these markets. 

It seems obvious that the Bank's policies have had the consequence of inflating house prices. If the supply side were less constrained, Bank easing would help fund more construction. The Governor is certainly right that the supply side needs addressing. Monetary policy needs mates, as they say. But given the constraint, it would be nice to think that the Bank views what is happening in housing prices as an unfortunate consequence to be mitigated.

I don't think the Bank should be blamed for having gloomy forecasts earlier in the year. Erring on that side seemed a lot less bad than what could have happened instead, and everything then looked horrible. Being unintentionally contractionary when the velocity of money plummets isn't good. 

Despite everything the Bank has pushed on, inflation expectations over the next two years seem firmly planted in the 1-2% range. If pushing the throttle to the floor keeps the speedo constant, is it because the engine's broken, because you're in the wrong gear, or because you're driving up the Otira Viaduct and Friedman's thermostat is running?* If it's the former, you might want to check into what's going on. A broken engine spraying oil all over the housing market without moving the speedo otherwise isn't the greatest. If it's the latter, shifting into neutral before cresting risks rolling downhill. And if it's because you're in the wrong gear, running a QE policy rather than implementing negative interest rates, well, I'm not enough of macro guy to know.

I do wonder whether there's anything the Bank could be doing to mitigate flow-through into asset prices though. 

* For those unfamiliar with Friedman's thermostat, here's a bit from Nick Rowe from the link:

And it bugs me even more that econometricians spend their time doing loads of really fancy stuff that I can't understand when so many of them don't seem to understand Milton Friedman's thermostat. Which they really need to understand.

If the driver is doing his job right, and correctly adjusting the gas pedal to the hills, you should find zero correlation between gas pedal and speed, and zero correlation between hills and speed. Any fluctuations in speed should be uncorrelated with anything the driver can see. They are the driver's forecast errors, because he can't see gusts of headwinds coming. And if you do find a correlation between gas pedal and speed, that correlation could go either way. A driver who over-estimates the power of his engine, or who under-estimates the effects of hills, will create a correlation between gas pedal and speed with the "wrong" sign. He presses the gas pedal down going uphill, but not enough, and the speed drops.

How could the passenger figure out if the gas pedal affected the speed of the car? Here's a couple of ideas:

1. Watch what happens on a really steep uphill bit of road. Watch what happens when the driver puts the pedal to the metal, and holds it there. Does the car slow down? If so, ironically, that confirms the theory that pressing down on the gas pedal causes the car to speed up! Because it means the driver knows he needs to press it down further to prevent the speed dropping, but can't. It's the exception that proves the rule. (Just in case it isn't obvious, that's a metaphor for the zero lower bound on nominal interest rates.)

2. Ask the driver. If the driver says that pressing the gas pedal down makes the car go faster, and if the driver says he wants to go at a constant 100kms/hr, and if you see the car going a roughly constant 100kms/hr, then you figure the driver is probably right. Even more so if you ask him to slow the car to 80kms/hr, and he says "OK", and then the car does slow to a roughly constant 80kms/hr. If the driver were wrong about the relation between gas pedal and speed, he wouldn't be able to do that, and it wouldn't happen, except by sheer fluke. (Just in case it isn't obvious, that's a metaphor for inflation targeting.)

3. Find a total idiot driver, who doesn't understand the relation between gas pedals and speed, and who makes random jabs at the gas pedal that you know for certain are uncorrelated to hills or anything else that might affect the car's speed, and then do a multivariate regression of speed on gas and hills. But you had better be damned sure you know those jabs at the gas pedal really are random, and uncorrelated with hills and stuff. Which means this can only work if you are certain that you know more about what is and is not a hill than the driver does. Or you are certain he's pressing the gas pedal according to the music playing on the radio. Or something that definitely isn't a hill. Are you really really sure your instrument isn't a hill, or correlated with hills? And if so, why doesn't the driver know this, and why does he jab at the gas pedal in time with that instrument? You had better have a very good answer to those questions. And no, Granger-Sims causality does not answer those questions, or even try to.

Monday 16 November 2020

Fixing Covid leave

My column in today's Dom Post:

New Zealand’s Covid-19 Leave Support Scheme took a page from Singapore’s book, but needs a few tweaks to really be effective. The scheme compensates employers, including the self-employed, if they need to self-isolate and cannot work from home.

It provides excellent coverage for workers who have been required to self-isolate because they have Covid or because they have been told to self-isolate as a close contact of a case.

It covers you if your child has been told to self-isolate and you need to provide support.

And, for a few workers in a few critical health sectors, it also provides coverage while waiting on a test result.

All of that is laudable.

But if you’re a hospitality worker, or a retail clerk, or a bus driver, you will not be eligible if you’ve developed symptoms, gone to a mobile testing station, and are waiting on results. The pernicious calculus remains. Are your symptoms really that bad? How many sick days do you have left? How annoyed is the manager going to be if you need to stay home for a couple of days?

The Covid-19 leave scheme should be updated to avoid those kinds of problems. Really, it should never have had those holes in coverage in the first place.

I think it makes rather more sense than doubling the number of sick days. Or added to a doubling of the number of sick days if they really wanted to double the number of sick days. But the case around changes in sick leave entitlements should hang on non-Covid matters, with specific Covid-leave to deal with what's in front of us.  

Saturday 14 November 2020

Boiling credits

The price of carbon dioxide emissions in the ETS is $35/tonne. The scheme has a binding cap. If you buy a tonne of credit and then refuse to use it, you have reduced New Zealand's net emissions by one tonne. Somebody, somewhere, will not be able to buy that tonne. That person or company will emit less. 

Every time the government does something through regulation or other spending that costs more than $35/tonne to abate emissions, it is forgoing the opportunity to do even more good by buying credits and running them through the shredder. 

The waste documented in Marc Daadler's story is just infuriating.

Cleaner boilers in government buildings have a 20 year lifespan, a cost of $80m, and an annual emission reduction of 26,000 tonnes. Assume a zero discount rate, that's 520,000 tonnes abated at $80m, or $153.8 per tonne. The same amount of money put toward buying and scrapping carbon emission rights would have stopped 2.29 million tonnes of emissions, if the move didn't push carbon prices up much from the current $35/tonne.

But it gets even worse. Remember that the ETS exists. If the government isn't buying ETS credits to run boilers, somebody else buys those credits instead. Actual emission reductions aren't 520,000, they're zero because somebody else increases their emissions by 520,000 tonnes, using up the now-available credits.

The story notes that other process heat reductions cost $110/tonne, in shifting to biomass from fossil fuels, or $250/tonne, in shifting to electric. Both are much much higher than the current ETS price. 

I simply don't get why journalists on this beat aren't comparing the cost of a measure, and what it achieved, with what could have been achieved by buying and retiring ETS credits. 

Friday 13 November 2020

Rationing scarce MIQ spaces

Imagine yourself in the place of the MBIE boffin tasked with deciding which application for a scarce MIQ space is most deserving or most needed.

The job isn't easy.

The government keeps a small number of spaces in MIQ for getting critical workers in. But somebody has to decide which workers are most critical. Applicants fill in forms to make their case, but that won't help a pile. Every applicant will have incentive to present the most sympathetic case possible, and whoever is assessing the cases has to figure out how much overstatement is present in any of them.

Think only about agriculture for a moment. 

I can easily sympathise with the horticulture folks who are looking at just horrible losses because they can't get workers in through MIQ to do the picking. 

There are lots of calls for them to just pay more, but it can easily be the case that differences in worker productivity at wages paid, combined with fairly elastic demand for the picked product, mean that the growers really don't have space to move. If paying what it would take to get Kiwis to move out to where the crops are and pick them would exceed the value of the picked crop, it makes more sense to let it rot in the field. 

Should the expert zucchini picker from Thailand get the next space?

Or should it go instead to experts in driving the specialised equipment used in silage harvesting? Seven Sharp covered it last month, suggesting that certification in driving the rigs is a five-year process. I've watched the video, and honestly it doesn't look that much different than the old Gleaner L2 we ran decades ago. Hydrostatic drive, rear wheel steering, pick-up header, more controls (and steering!) on the joystick than the L2 had but the basic concepts are the same. I'd imagine that, in a pinch, any retired farmer could do it if they had basic familiarity with other harvesters. Heck, I'd even like to imagine that I could do it if I watched an expert driving around for a few rounds then had the expert supervise me for a few rounds - even though Dad never let me drive the Gleaner and instead had me in the dusty dusty grain trucks as opposed to the lovely air-conditioned cab of the L2. I'd watch the tutorial, note the autopilot button (no tractor I've ever driven had autopilot!), and have at.

But I could really really easily be wrong, and those machines are worth a lot of money. Some of the fields here have crazy hillsides and hazards that might really really need an expert, especially if they're often running a straight-cut header rather than just a pick-up reel.  

How is it that some desk-jockey in Wellington has to decide whether it's more pressing to get a harvester-driver in, or a horticulture worker, or an engineer? Some applications sound more plausible, but Wellington desk jockeys like me aren't expert in any of it even if we drove tractors when we were kids. We don't have the knowledge necessary to make the call and we can't acquire the knowledge necessary to make the call. Who should get the next spot will depend on a big mix of how expensive it is to get a local trained up to do the job, how urgent it is, the value at risk if the job doesn't get done or gets done to a lower standard, and piles of other considerations that would be hard to credibly convey to somebody at a desk in Wellington.  

The shadow price of MIQ spaces has to be in at least the tens of thousands of dollars, and much higher than that in cases that would be inframarginal in any sane world but are still knocked by by MBIE bureaucrats. We hear of cases of projects running in the tens and hundreds of millions that are held up because the relevant MBIE officials figure that engineers are all perfect substitutes for each other and that a specialist from overseas could be perfectly replaced by a local who doesn't know the kit. To me those engineering cases sound more plausible than that a retired farmer couldn't train up to drive newer harvesting equipment, but that's just a reckon on my part. I can't know for sure. And neither can the MBIE decider.  

The only real way of knowing which uses are highest value for a fixed number of scarce spaces would be to auction the spaces held for overseas workers. The companies that would have the hardest time finding a local to do the job and with the most value at stake would outbid the others. 

I really doubt that someone who might pick zucchinis would get the next space, but fair enough if so. The point of an auction system is to discover the most valuable ways of allocating scarce spaces. 

And if you don't like that money then picks winners, consider that the alternative saves piles of spaces for stupid boat races because Ministers think that subsidised boat races are more important than any other business purpose or family need. The alternative to letting those benefitting from the spaces decide it amongst themselves through an auction is leaving it with people with less knowledge and worse incentives. Imagine if we tried dealing with housing scarcity in Auckland by abolishing house auctions and letting the Ministry of Housing evaluate applications to buy houses. They'd have given half the houses in Auckland to the boat race people by now, and another quarter to anyone involved in horse racing. 

Wednesday 11 November 2020

Afternoon roundup

 The afternoon's worthies on the closing of the browser tabs for a system update:

  • This mess has been a long time coming. There are piles of small rural water schemes that largely supply stock water. The government has been trying to figure out how to apply water quality standards to that sector where the number of people on those water supplies is tiny, where treating huge volumes of water intended for stock is just stupid, but where government and councils worry that cost-effective solutions could leave them legally liable if anything goes wrong. You'd think there'd be some way of letting households on those schemes install their own UV filtration on a caveat emptor basis. Three cheers for the Local Democracy Reporting fund that helps this kind of journalism. 

  • Getting a tenant who terrorises the neighbours evicted apparently takes long enough that the neighbours have all gotten security cameras installed, there have been multiple police calls, and finally the tenant breaking into the neighbour's house at night. It's great that the Tenancy Tribunal granted the immediate eviction, but you've got to wonder about a process that takes all that to get there. I wonder what things would look like if landlords, including state housing providers, could evict a problem tenant on having letters requesting it from a supermajority of neighbours. 

  • The Ministry of Health does not like to comply with the Official Information Act. Just read through this mess. Some journalists wanted to be able to map out vaccination rates by neighbourhood. The data exists. It wouldn't have been hard for the Ministry to aggregate it up from meshblock to neighbourhood if it wanted to confidentialise, but nothing really enforces the Official Information Act. 

  • I am still angry about an old Circa Theatre play that cast developers as moustachioed villains, and NIMBYs as heroes. Continuing to try to get housing built in a housing crisis, despite the best efforts of the politically powerful, is heroic. So three cheers to Ian Cassels, and brickbats for everyone else trying to stop Shelly Bay.

  • The RBNZ is again talking about LVRs. House prices are terrible, and RBNZ policy is exacerbating things because of the existing supply constraints. But Michael Reddell's critiques the last time through remain pertinent. Is there really a plausible financial stability / prudential regulation basis for the rules? They never made much sense to me on that basis, or at least the case for them hadn't seemed to have been made. I could kinda see how they might make sense if the Bank were targeting not just CPI but also wanting to pull the peaks down on asset price inflation. 

  • Jack Vowles starts parsing the numbers on party switching in the NZ election. For every voter National lost to ACT, it lost about 2 to Labour. And Labour pulled in a pile of votes from people who hadn't voted in the prior election. One bit relevant to some speculation:
    There has been speculation that many of those switching from National to Labour did so to keep the Green Party out of a coalition and thus prevent any possibility of a wealth tax being introduced. When asked the reason for their vote, five people who switched from National to Labour did mention the wealth tax and the need to keep the Green Party out of government. For only three of these was this the major reason for their vote shift; and these people form a small minority of the 500 National to Labour switchers in the sample. In their responses to another question in the survey, two thirds of those 500 switchers indicated they were actually in favour of a wealth tax. 

Tuesday 10 November 2020

In search of Arrow-Debreu worlds: housing futures

My Newsroom column this week wishes that New Zealand had Case-Shiller markets. 

The relevant bit (Update: now ungated here):

House prices have been ramping up with lower interest rates, perhaps in expectation that the new Government will not enable sufficiently more construction for some time.

If an investor expects house prices to drop, owners of rental properties can reduce their exposure, but otherwise it’s a hard market to short.

Similarly, those wishing to build up enough funds for a house rely on KiwiSaver portfolios that may bear little relationship to the cost of housing.

What’s missing are markets like the US “Case-Shiller” indices. These track house prices across major US metropolitan markets (Canada also has a version). Traders at the Chicago Mercantile Exchange then buy and sell contracts based on the performance of the index.

Saving to buy a house in San Francisco? Buy futures contracts on the index tracking San Francisco house prices. The value of an investment tracks the cost of housing in a desired location. Live in San Francisco and feel dangerously overexposed to an overvalued market? Short the transaction instead.

These kinds of markets let people buy little bits of exposure to the property market in ways a KiwiSaver portfolio generally does not. The value of an investment may fluctuate in dollar terms, but it will move in parallel with the cost of the cute little cottage next to the waterfront.

None of that helps solve New Zealand’s housing shortage – at least not directly.

But it might provide an indirect benefit. It could help in figuring out if policy changes are likely to enable more housing. Suppose the Government tweaks infrastructure financing – or urban planning, or council incentives or new building – and promises more housing within the next few years. If investors found the plan credible, the price of futures contracts on the housing indices would be an early signal.

Letting potential buyers put a toe into the market by buying futures contracts on house prices in a desired area could help them save for that cottage. And it would make their walks through neighbourhoods where house prices outpace some of the best stock-pickers’ portfolios just a bit less vertigo-inducing.

I would love to be able to short housing. 

It isn't so much that I'm expecting a price collapse, but rather that I'm among those who are terrifyingly exposed to housing. Buying a house in Wellington, unless you're on a lot higher income than we are, means a huge portion of your household wealth will be tied up in a house in an earthquake zone. Insurance might fix your house after The Big One, but there's reasonable odds that the city substantially shrinks, and that house prices in the city collapse.

What can you do? You can't insure against that kind of loss. Borrowing against your house to buy other assets doesn't help much because there's no jingle-mail in New Zealand: you can't just hand the bank the keys to a house that's underwater on a mortgage. You still have to pay off the full amount, even if the house is worthless. 

If there were a Wellington Case-Shiller market, you could construct a rolling short. Short the futures market, take the cash now, invest it in other stuff, cover the short later by shorting the next period's market. In effect you'd be able to extract equity from your house without taking on a mortgage, losing the upside of some capital gains, but hedging against falls in the local housing market. If the earthquake hit and collapsed house prices, covering the short would be way cheap. 

There are broader benefits to having signals about market expectations of future relative scarcity. If the government touts some big policy as being The Solution, and futures prices don't move, well, maybe the market's wrong or maybe the policy won't work. 

It could be that NZ just isn't big enough for there to be much liquidity in those markets. Maybe I reason too much from introspection. But if I were currently trying to save for a house, the gulf between house price appreciation and Kiwisaver returns would be driving me nuts. Saving in part by buying the house price index would mean that those savings wouldn't lose value relative to the housing market. 

And from where I am now, I'd like to own less house. Like, if somebody wanted to pay me to buy a third of the upside of any capital gains in my house and taking the same third of any potential capital losses (me paying no rent but them paying no maintenance/rates), giving me a wad of cash that I could invest in things that wouldn't go foom in a Wellington earthquake, well, contracting costs might be a substantial issue but I'd be open to it in principle. Past me would be very keen to pay current me for some exposure to housing, and current me would be happy to sell to past me. Surely there are others out there now who are where I was when we were saving for a house. It feels like the kind of market that should be able to exist, at least if there were enough folks around who think about these things in similar ways. 

Monday 9 November 2020

Things that don't make sense when you have an ETS

RNZ reports on the potential effects of the ban on coal in industrial heating.

Fonterra supported the ban. Smaller industrial users didn't:

Horticulture New Zealand said in its submission that the consultation document did not appear to consider impacts of the proposals on greenhouse-grown crops.

It said phasing out existing coal boilers used for space heating of greenhouses would be "devastating" to indoor vegetable crop production.

Barnes said food production in New Zealand could be dramatically affected.

"If things move too fast we could end up seeing some of our members go out of business before they're able to implement new alternatives, which would mean you would be getting potentially more imports and less locally produced product, particularly in the South Island."

We have an Emissions Trading Scheme with a binding cap. Industrial process heat is covered. Every lump of coal that's burned in the covered sector has to buy an emission credit. If that credit doesn't get purchased to cover the emissions from an industrial heating plant, it'll get purchased instead by someone else for some other bit of emission. The binding cap binds. 

If it happens to be the case that the lowest cost way of stopping the next bit of carbon emissions is in industrial process heat, then those will be the uses that stop as the binding cap binds and emission prices go up. At best, the ban gets you the same outcome that the ETS would give you. But there's no particular reason to believe that those plants are the cheapest spots for reducing carbon emissions. The ban in that alternative case just means forcing higher-cost ways of abating emissions.

Saturday 7 November 2020

Tax burdens and the proposed new tax rates

Susan Edmunds at Stuff asked me what effect Labour's proposed new tax rate on earnings above $180k might have on the usual "people in the top x% pay y% of all income tax" figures.

The actual answer is complicated. Some on those kinds of incomes can just reduce their wage income and keep income within a company structure, where it would hit a lower tax rate until earnings might be dispersed. 

But Labour had had estimates of that the new tax rate would earn $550m per year from the top 2% of earners. If we take the total income tax paid by those on >$150k per year, add the $550m from those above $180k, you can ballpark it. 

Using 2019 figures, the top 3% of earners on $150k+ paid 23.5% of all income tax. Adding the expected revenues from the new tax rate would increase that to 24.7%.

I don't think that's any material difference. 

So my notes back to Susan included this bit that she used:

“Income tax is only one part of the Government’s overall tax take, though. GST, company tax and excise all also matter. Focusing on income tax alone would then overstate the proportion of overall revenues paid by the highest-earners.

“On the other hand, the Government provides many income transfers, some of which are targeted by income, some of which are universal.”

He said data from 2010 showed the bottom 40 per cent of households each received about $20,000 more in services than they paid in taxes, while the top 10 per cent of households paid about $50,000 more in tax than they received in services and transfers.

Crampton said lower-income people had been more heavily affected by Covid-19 job losses, which could skew the tax bill even further to higher incomes.

But he said some higher earners would also restructure their affairs to make the most of lower company and trust tax rates, to reduce their overall tax bills when facing a new, higher rate. Most companies are taxed at a flat rate of 28 per cent.

It would be great to get an update of those 2010 Policy Quarterly figures; it would be a big job to do it though. 

For my sins in being helpful when a reporter called asking for an update on a commonly-used figure: 

I think it's pretty funny. Running a simple calc when a journalist calls asking for an update on a basic number, well, if that's raising an alarm, I'm not quite sure how I'd characterize my more normal ways of raising alarms. 

When I'm trying to raise some kind of alarm about something, it isn't that hard to tell. I'll be jumping up and down about it on Twitter, putting out press releases, and writing reports or short policy notes. 

I'd not bothered running the calculation before because I'd never seen it as being all that important. 

I had seen misperceptions of the effects of the Greens' proposed wealth tax as being important. 

My raising the alarm about stuff tends more to look like this:

One economist claims the Greens' wealth tax will hit more Kiwis than the Party thinks.

The Greens say the tax, which has become a hot issue in the final week of the election, would only affect the top six per cent of the population.

However, New Zealand Initiative economist Eric Crampton told Heather du Plessis-Allan the real number's closer to 20 per cent.

He says right now, about 20 per cent of retirees would be subject to it.

And he expects future generations will also build wealth over their lifetime, reaching a peak after retirement.

"We need to be thinking not just about who is currently subject to the wealth tax, but who can we expect to be subject to the wealth tax."
But the Greens’ numbers have their own problems. To go through those, we need a brief detour through basic wealth dynamics. It is a problem plaguing every iteration of wealth inequality surveys using static comparisons to make claims about what proportion of wealth is held by which proportion of people.

Wealth builds over time, and that matters for every question about wealth measurement.

Most people start life with little wealth. Taking on student loans to earn a higher income later on means beginning adulthood with a heavy net debt position, as education does not contribute to measured wealth on Statistics New Zealand’s balance sheets. As graduates move into employment, they begin paying down their student loan debt while (hopefully) building up savings. If they buy a house, they take on debt that has an offsetting and appreciating asset. Otherwise, they build up retirement savings.

Individual net wealth peaks shortly after retirement. Retirees then draw on those savings.

A cross-sectional snapshot of the country will reveal a lot of people with net debt, a lot of people with few net assets, and a few people with a lot of net assets. That, and the failure to account for the effects of New Zealand Superannuation, can make wealth distributions look more unequal than they really are.

Even if every Kiwi followed exactly the same wealth trajectory, beginning with net debt and ending with the same retirement net worth, simple differences in ages would mean that a small proportion would be wealthy at any given time.

The Greens argue that only 6 percent of Kiwis would be subject to their wealth tax. But that seemed almost certainly to be based on a misleading cross-sectional snapshot. A reasonable proportion of today’s youth would be subject to the tax as they reach retirement. After prodding their representatives on Twitter more than a few times if they had checked what proportion of retirees might be subject to the tax, I decided to ask Statistics New Zealand instead.

I asked Stats to go back through the 2018 Net Worth Survey and sort net wealth holdings by age.

Without any sorting by age, the 2018 survey suggested 8 percent of individuals held net wealth in excess of $1m – so that was already rather higher than the 6 percent suggested by the Greens.

And, as expected, there was a severe age skew in the data. While only 1.5 percent of those aged 15-44 held a $1m in net assets, that proportion rose steadily for older age groups. Just over 18 percent of those aged 60-64 reported more than $1m in net assets, along with just under 18 percent of 65-year-olds. Wealth peaks among those aged 66-69 which means 21.8 percent of retirees would be liable for the wealth tax.

I'm not exactly subtle when I'm actually raising an alarm about something. I tend to get a bit excited and go on about it. 

Friday 6 November 2020

Far from the frontier

Richard Harris spent a bit of time going through firm-level panel data on NZ firms, looking at the productivity frontier here and the distance to the global frontier.

Here's the upshot:

The most important conclusion from this study is that while there is some evidence of a failure of productivity-enhancing technologies to diffuse from firms operating at the national productivity frontier, the major problem is failure of productivity-enhancing technologies to diffuse from firms operating at the global productivity frontier. New Zealand’s major problem is that frontier firms are underperforming because of their characteristics (e.g. small and lacking international connections) while productivity is overall adversely affected by a lack of competition, which generally creates barriers to exiting and insufficient reallocation of market shares from lower- to higher-productivity firms. In terms of the policy response needed in New Zealand, Andrews et al. (2015, p. 93) note that ‘innovations at the global frontier do not immediately or inevitably diffuse to all firms ... frontier innovations often need to be adapted to national circumstances’. However, to increase the likelihood of diffusion from the global frontier, there is a need for a sufficient level of global connections via trade, FDI, participation in global value chains and the international mobility of skilled labour. New Zealand does not do well on any of these factors. In addition to improving the trajectory of firms at the national frontier (towards the global frontier), there is also the need to ensure greater resource reallocation towards more productive firms. As Andrews et al. (op. cit., p. 97) argue: 

If small firms are (on average) old, this might reflect barriers to post-entry growth and weak market selection mechanisms ... A key message is that creative destruction and up-or-out dynamics are central: entry matters but what happens next is crucial – all else equal, young firms should grow rapidly or exit (i.e. “up-or-out”) but not linger and become small-old firms. 

With respect to New Zealand, there does appear to be clear evidence that here are higher exit barriers (except for frontier firms where the wrong firms, with higher productivity, were exiting 2001–16) due in part to a lack of competition associated with an over emphasis on producing for small domestic markets.

One particularly depressing bit: the data from his study ended in 2016. Over the fifteen years covered, "only mining saw a substantive upward trend in the frontier." 

Which part of mining? 

"In mining, being located in the rest of the lower North Island provides a nearly 11% greater probability (cet. par.) of belonging to the frontier in this sector (reflecting the gas and oil sector that is predominantly located in the Taranaki region." 

Tarankai's oil and gas industry was speeding ahead of the rest of the sector, and ahead of every other sector. 

Of course, that kind of behaviour cannot long be tolerated around here. 

Thursday 5 November 2020

Renting sucks

 Leigh-Marama McLachlan notes one of the bizarre things about renting in New Zealand.

Landlords here do 3-monthly inspections, and they can be rather a bit more invasive than anything you'd be used to if you've lived in North America.

It's worth thinking about why things are like this. The knee-jerk reaction is to want to ban it; I'm more interested in why this happens. Banning symptoms tends not to fix problems. 

Some potential explanations:
  1. New Zealand houses are of worse quality than those overseas. Without constant vigilance, they turn to mold and rot. Owners have incentive to monitor and make those investments; renters do not.
    1. This could be part of it, but does that really require visits every three months? And while checking that vacuuming and the like is done might be a way of getting a signal on tenant type and whether less noticeable things are being done, it does seem more than a little over the top. Couldn't a landlord do better by easing back the intrusiveness as they get a better sense of tenant type?
  2. Perhaps it's harder to evict a problem tenant in NZ, so running processes that are guaranteed to provide a pretext if needed can have value.
    1. Again, perhaps part of it, but still seems to be overkill.
  3. Insurers require regular inspection of rental properties
    1. Sure, but nothing requires that the inspections be crazy over-the-top, right?
    2. And this just pushes the problem back a level: why do insurers require this?
  4. More small-time landlords here, so each investment property is likely to be a much larger fraction of the landlord's wealth.
    1. If you're a shareholder in a firm that owns hundreds of rental properties, that firm will exercise due diligence over all of them but any tenancy-gone-wrong is hardly world-ending. If you own one rental property that is a substantial part of your wealth, a tenancy-gone-wrong can be a catastrophe.
    2. While I find this plausible, it doesn't explain why insurers would require it as part of landlord cover. The insurers would be diversified, and they still demand it, so there has to be something else going on as well.
  5. Property management companies expect to be sued by the owner if they're not hyper-vigilant and something goes wrong, so they go over-the-top.
    1. Much of this remains question-begging: why don't they then strike better contracts with the owners? Why would owners prefer contracts like this to ones that might let them charge tenants a bit more in money rent rather than in hassle-rent?
The fundamental underlying problem I think is still the massive shortage of housing. 

In a housing shortage, landlords can extract higher rents. And in a rental rationing equilibrium, that won't just be on money rents. 

Were we in a land of plenty, landlords would have to compete harder to get tenants. An insurer that didn't require 3-monthly inspections would outcompete others because landlords who wanted decent tenants would want to offer something that felt less like prison cell inspections. You could still have problems with (4), but worse landlords would be competed out, and those landlords would do better by selling their properties to those who could rent them out more efficiently. 

Wednesday 4 November 2020

Peter Pinter and central banking

Neil Gaiman had an excellent short story, published back in 1989, imagining some of the dangers of a determined bargain-seeker. Peter Pinter just couldn't refuse a good deal. And when he found that the assassin he'd hired offered bulk rates that didn't just reduce the per-person cost for a large contract but also the total cost, well, who could say no?

The story was made into a short film.

"We only had to be asked, Mr Pinter. We always have to be asked."

In our Friday Insights newsletter, I used our third column to think about the dystopias that can emerge where an ambitious central bank and SuperFund find that money is free. That last line from Gaiman was in my head when I was writing it. 

It all finally started coming together in the 2021 Budget. The pieces existed before it, but nobody had put them together. When they did, Pax Zealandia followed.

Borrowing to invest in the New Zealand SuperFund was nothing new. But while money was cheap, the Government hadn’t seriously leveraged up to make stock market plays. Bernard Hickey screamed from the sidelines that the Government should borrow far more. But even his thinking was blinkered by prevailing orthodoxies.

And SuperFund investments were previously used, in limited ways, to advance Government objectives. During the Christchurch Call, the fund had coordinated with other investment vehicles. But ambitions remained too limited.

Once the Government realised that borrowing was effectively free, that debt-to-GDP ratios were pass̩ and that it could exercise ownership rights through the SuperFund to advance state aims Рwell, things started getting interesting. The Government could print and borrow near-infinite money, put it into the SuperFund and buy all the things.

The world’s airlines were dirt cheap. A controlling interest in every publicly-traded international carrier was chump-change. It cost less than $40 billion, or about 12% of GDP. The Government’s high-value tourism policy was the end of economy-class tourist fares to New Zealand.

The US dairy compacts always lobbied against free trade deals. Buying them out simplified an agreement with President Biden. But the second American Civil War made the trade deal futile.

Gross debt-to-GDP really blew out on buying Google, but net debt-to-GDP was fine. A substantial asset offset the debt. Legions of Kiwi censors suppressed unkind search results, and the world was a happier place.

That led to a series of leveraged state takeovers ushering in the new and better global order we all now enjoy. The SuperFund bought whole countries. After installing Kiwi administrators and fixing the worst of those countries’ problems, it sold them back to the residents at a profit. Turkey was the first after its regime imploded. But others were snapped up, including the salvageable bits of the former United States.

The exact moment it started is a small ironic footnote in the history books. Some columnist teased the Government that if it was such a great idea to borrow more than half a percent of GDP in a pandemic to make leveraged plays on the stock markets, then borrowing 50% could be even better. And, for once, the Government listened.

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Doesn't take long for folks to take bad ideas too seriously these days though.  Here's Brian Gaynor in BusinessDesk on Saturday, in an article titled "Spending huge to save us all", with one idea that's apparently been making the rounds:

The Reserve Bank could merge with the NZ Superannuation Fund, which was run by Adrian Orr before he moved to the central bank. This would be an innovative move in unprecedented times with a Reserve Bank/NZ Super Fund merger having much more going for it than the Orr connection. The two organisations are Crown-owned; NZ Super has no debt while the Reserve Bank is highly leveraged. With the current Reserve Bank Governor in the driving seat, the merged group could be incredibly innovative.

We only had to be asked, Mr Robertson. We always have to be asked.  

Tuesday 3 November 2020

Managing the commons: DoC photography edition

It isn't hard to imagine that the Department of Conservation might have good reason to want to know whether a big film crew, for example, might be spending a few weeks trampling part of the Estate. There are places that might have endangered plants that need to be protected. Or nesting sites. 

But this seems a bit nuts. 

From the article:
A third of the country might be off-limits to camera-wielding media who don’t have an official escort or permission, if a Department of Conservation policy is rigorously enforced.

DoC introduced a mainstream media permit in November 2018, requiring media to get permission for filming, including taking photographs, on public conservation land. It’s been applied haphazardly since, and is only now being enforced.

(The department told New Zealand Geographic magazine a few weeks ago that journalists would need a permit, too, but it subsequently reversed that position.)

Media outlets have expressed surprise and disappointment at the requirement. In a letter to the department, the Media Freedom Committee called it “an unnecessary impediment to legitimate news-gathering activities on the conservation estate”.

Such a draconian requirement throws up weighty issues about the role of the media, and the ability of a Government department to restrict its access to public land when the public interest is at stake. It’s also worth considering how the policy might be wielded by over-zealous managers.

(An example might be DoC’s pursuit of a Japanese photographer last year for using his hobby photos in a self-published book.)

Two magazine editors express their desire to work with DoC, but have been left scratching their heads, wondering, in exasperation, what problem will be solved by the permits.
Mike Dickison weighs in:
Wikipedia consultant Mike Dickison wants to be constructive, and to have a good working relationship with the department. He’s just spent six weeks on the South Island’s West Coast, in the employ of the regional development agency, taking photos – including in national parks – and uploading them to Wikimedia Commons under an open licence, for any use.

(“Have I done a bad thing,” he asks, “by taking photos that the media can now use without anyone asking for a concession or permission?”)

Dickison says DoC’s concessions were created to stop people profiting off conservation land – “to stop businesses setting up, you know, hot dog stands in national parks”.

“And now we’re extending it to the activities of the media, who are doing no harm to the national parks. It puzzles me as to how this is justified.”

Why the hate for hotdog stands? I don't think I have ever been anywhere and thought "Man, I'm really glad that there isn't a hotdog stand here", but I have frequently wished that there were a hotdog stand.

The policy, as practiced, makes little sense. 

Monday 2 November 2020

Problems in credible commitment

If you can credibly commit to punishing, you won't have to do it. If you can't, then you'll have to, but you won't be able to, and that'll be a problem. 

A couple of weeks ago, Newsroom reported on problems in state housing. The state housing provider, Kainga Ora, has had to spend about $300k on security guards during Auckland's lockdown. Why? Because they don't know how to deal with part of the cross-section that shows up in state housing.

For the real reason, on top of a violent home invasion linked to the complex shortly after tenants moved in, an email trail in a follow-up official information request is more compelling: a dispute stretching months between neighbours and the agency over general behaviour - in particular, one tenant and her visitors.

And not just neighbours either. Other state tenants, looking for peace and quiet in pleasant new homes, were as upset as anyone by late night noise, rowdy visitors, partying, drunkenness, abusive behaviour, lockdown breaches and suspicions of criminal behaviour.

With the gate excuse quietly shoved aside, the corporation was more candid in its second attempt to explain the security presence at Asquith Ave: “Security guards have been deployed at this site to mitigate anti-social behaviour. The primary focus is to provide for the safety and security of vulnerable tenants.”

The email trail identified one “risk related” tenant among “many vulnerable” others and indicated problems had been drifting on for months.

Which begged the question asked by neighbours: why not move her, and any other irresponsible and anti-social tenants, and let the problems go with them?

It took until mid-September before Kainga Ora apparently decided enough was enough and the problem tenant was shifted – presumably to cause friction elsewhere. One suburb’s solution becomes another’s headache.

You'd think good behaviour would be part of the quid pro quo in being given a home by the state. 

If the state could credibly commit to excluding antisocial jerks from state housing, behaviour among some of those tenants would change. But the state cannot do so. The person who made the neighbours' lives miserable would have a made-to-be-compelling sob story to provide to newsmedia on being evicted with nowhere else to go. There would be demands that a house be found, especially if there were a child in the house. And so the state doesn't exclude.

I wonder whether an alternative mechanism might be helpful. You could imagine Kainga Ora setting the equivalent of a body corporate for residents in the development, and that governance body having the ability to evict a resident on secret ballot of neighbours. If someone were then so evicted, reporting on it would be different. Instead of getting sad stories from the person evicted, and a bureaucrat who can't say much because of privacy considerations, there'd have been some majority of neighbours who triggered the eviction. 

I'm not sure whether that could work either - there can presumably be all kinds of reprisal mechanisms and consequent difficulties in coordinating collective action. But the status quo holds a lot of vulnerable people hostage to the biggest jerks in the area. And it also helps ensure that state housing gets opposed by potential neighbours fearing that the state does a poor job in dealing with its problem tenants.