Friday, 20 May 2022

Budget 2022

I have a hard time seeing how Budget 2022 is consistent with the new fiscal rules.

In shifting from a net debt target to a net debt ceiling, they added a requirement that budgets normally provide surpluses. It's the old Keynesean fiscal macro kind of idea: run small surpluses in normal times to build up padding for large deficits in bad times.

And it has the same political economy problem that this kind of thing has always had. Government prefers to ratchet up spending. The old net debt target helped to constrain against that. The new debt ceiling won't, until we hit it. 

So Treasury warned that the new setup required greater focus on fiscal discipline to make sure that dollars provide value for money. A "things must at least pass CBA" rule could take the place of a net debt target in preventing budgets from blowing out.

And yet.

We get hundreds of millions for cash for clunkers and piles of other climate initiatives and subsidies to corporates targeting emissions already covered by the ETS cap. 

We get an extension of the road user subsidy which makes no kind of sense. 

Instead of inflation-indexing the tax thresholds, the government gives a handout to lower-income households equivalent to the extra tax that was stolen from them through inflation pushing about $5000 in earnings from the 10.5% band into the 17.5% band - and packaged as government largesse rather than compensation for a small bit of the accumulated inflation theft. 

Government is running a substantial deficit while the economy is overheated. There's a strong positive output gap. Even on old Keynesean approaches, you're not supposed to do that. 

And think about some of the other ratchets that they've now set up.

They've adjusted one benefit setting that has been a bugbear for child poverty advocates for a long time. If you're on a sole parent benefit, child support payments from the non-custodial parent mean your benefit is clawed back. 

Why would they do that? Sounds mean right? 

The idea underlying it is that the government wants to target support, as much as possible, to those who don't have other means of support. So say that one uninsured parent dies in a car wreck and the other parent, who wasn't in the labour force before, winds up in a hard spot. The government wants to provide more support for that child than for a child where there's additional support coming in from a non-custodial parent. 

So they claw back some government support in the case where the non-custodial parent is able to provide support. That means government can afford to provide a higher baseline level of assistance, before clawbacks.

Now there can be arguments around administrative messes - if the government is not good at enforcing child support payments, or about ensuring that those payments get reported, then the system can encourage informal payments, or discourage all child support payments.

But in-principle, the setup isn't crazy. It at least tries to make sure that more money goes to kids in worse situations when there's a fixed pool of money available for support. And even if your political position is that that pool should be doubled or tripled, you would still do better with that kind of targeting if you wanted to make sure that the money went to where need was greatest.

They got rid of that.

So what's the predictable effect in a couple of years? A John Campbell special that will highlight the grave disparities facing sole parents who have no support as compared to those sole parents who receive child support payments? Is it fair that the kid whose parent died, or whose non-custodial parent has no income, has such worse circumstances than the kid whose non-custodial parent provides a lot of support? And then we run the ratchet again. Someone will recommend supplementary payments where there isn't that support, which will require monitoring and abatement when there is support, and then complaints about how that system runs and demands that the supplementary payments go to all parents, and we get to play the cycle again. 

The Dom wanted a short piece from me yesterday afternoon. I didn't attend the embargo this year, but pulled this together shortly after the embargo lifted. I hit on some of this. 

I wonder if there's anyone left in Treasury who would regret the new fiscal rules or whether all of that cohort left a decade ago. They should regret the new fiscal rules. The only real problem the rules work to solve is ensuring that debt targets don't unduly hinder infrastructure spending that does pass cost-benefit - and that problem would better have been solved through revenue bonds financed from fees or charges on the beneficiaries of the infrastructure, and separated from Council and Crown main balance sheets. 

Thursday, 19 May 2022

Dangerous Misinformation from the New Zealand Ministry of Health

I'm working from home for the next wee while.

Today, someone came into our office who'd just completed seven days of Covid isolation. 

I asked whether he'd cleared a negative rapid antigen test.

He said he hadn't taken one. And, shocked to hear that he could still be infectious, he went off to get a test - which came out positive.

The Ministry of Health guidelines say only to isolate for seven days and that no test is required. Indeed, the Ministry of Health says that a positive test after seven days can be ignored

You can end your self-isolation after 7 days

If you are still sick, stay home until you are well and for 24 hours after you no longer have symptoms. 

You do not need to wait for an official message to leave isolation. You may receive a text message confirming your isolation period has ended.

Your Household Contacts can complete their isolation at the same time as you, as long as their Day 7 test was negative and they have no new or worsening symptoms. If their tests are positive, they need to begin 7 days of isolation as someone with COVID-19.

You do not need a negative test result

You do not need a negative RAT result to return to work or school. If you did take a RAT, the result would likely show as positive but that does not mean you are infectious.

I drove home rather than stick around, and I'm not going back for a while. I'm the only one who wears a mask at the office, and everyone else will be a close contact. I err on the cautious side. Fortunately, our office respects a diversity of risk-tolerances and is happy to accommodate my working from home. 

Last year, when RATs were first coming in, the Ministry had been looking at using them as a way of clearing people after a period of infectiousness rather than as primary diagnostic. While they're far less accurate at the start of infections, and especially with Omicron, they're decent at clearing people after a period of infectiousness.

And I'd remembered actual-expert Anne Wyllie having said that this was not a crazy way at all of using RATs. 

So I asked Wyllie what she made of the Ministry's advice. Perhaps some new research had come out that I'd missed; I asked what she might point to. 

She replied:


Yale's expert on Covid testing, who had just cycled home with a giant novelty cheque for getting a well-deserved prize for her work on Covid testing, describes the Ministry of Health's advice on return-to-work/school as "dangerous misinformation." 

We have gotten ourselves into a bad spot here.

For two years, everyone trained themselves to just do whatever Bloomfield said. And that was basically good enough at a population level. But now what MoH says is taken as "must dos" for schools and places of employment rather than dangerously misleading lower-bounds on what should be done. 

It would be great if any of the various research groups funded to study misinformation ever turned their eye to Ashley Bloomfield. He provides a fair bit of it. 

Morning roundup

The computer begs to be rebooted. But the tabs...

  • There's an underlying demand-side problem to misinformation. You can't con an honest man...

  • Some days, I love our Environment Minister. Here's David Parker giving Auckland Council a deserved slap for nonsense around character designations. People who want to protect character are "entitled to do that in respect to their own property. But in other parts of their suburb, there will be areas where more intensive housing will and should be built." EXACTLY!! If only central government would fix the incentives that encourage councils to do this...

  • New Zealand regime around medicinal cannabis remains a broken mess. I think it was allowed to fall into disrepair on expectation that legalisation would be coming and make it redundant. It has to be very frustrating for anyone who needs cannabis as treatment, and anyone who wants to supply it. The Newsroom column is gated today, but I think will ungate tomorrow if you pull out the /pro from the link. In addition to all the other problems, medicinal cannabis suppliers have a tough time finding banking or insurance. 

  • Kate MacNamara keeps digging on the messes around Covid testing regulation. Just impossibly frustrating. You can use a LAMP test to meet the testing requirements to fly to NZ. It's way more accurate than a RAT. But they're banned in NZ. If you try begging permission to use one here just to give some added assurance before going to visit a vulnerable relative, the Government just doesn't answer. Vogons would give the MoH an award for being more Vogon than anything they'd ever come up with. 

  • One problem for all the "let's base policy on happiness" people at Treasury and elsewhere: the measures are crap and you can't do anything with them. Here's Bond & Lang, JPE 2019:
    "The necessary conditions for nonparametric identification are strong and unlikely to ever be satisfied. Standard parametric approaches cannot identify this ranking unless the variances are exactly equal. If not, ordered probit findings can be reversed by lognormal transformations. For nine prominent happiness research areas, conditions for nonparametric identification are rejected and standard parametric results are reversed using plausible transformations."
    If you can just run a plausible transformation on the dependent variable to reverse a result, you've got another degree of freedom to justify whatever policy you'd wanted to rationalise. 

  • National Party leader Chris Luxon says he doesn't like corporate welfare in the climate response. Good! But the ETS revenues are hypothecated. Does he support putting them back into general revenues? Or, better, would he support a carbon dividend? I like National's emphasis on an ETS led approach, but that's harder if you don't rebate ETS revenues back to households. If he's not going to, he should promise to end the hypothecation that's let Robertson have a slush fund. 

  • Princeton no longer supports academic freedom.

  • Regulatory regimes can embed fragility against shocks. NZ building materials supply, US baby formula...
Ok. I think I can reboot now. 

Tuesday, 17 May 2022

Cash for Clunkers with New Zealand Characteristics

Monday's column in the Stuff papers went through America's failed experiment with Cash for Clunkers, anticipating that the government was about to announce our own version. 

A snippet:

As an economic stimulus, it failed. Rather than encouraging a lot of new car purchases, the programme mainly subsidised purchases that would have happened anyway. Some households brought forward a new car purchase by a few months to get the subsidy; others had already planned on purchasing a car during that period.

In other words, it was a very expensive way of getting people to slightly change the timing of a new car purchase. It did not otherwise succeed as a stimulus – it had no effect on employment or other indicators.

And because it only really shifted the timing of new car purchases, it was not particularly effective as support for the car industry.

But it also failed as an environmental programme, unless cost really is no object. People did buy more fuel-efficient vehicles, but the programme was far less effective than a carbon tax in encouraging emission reductions. Every ton of carbon dioxide avoided cost between $106 and $335 in 2009 US dollars – or between $245 and $772 per tonne in current New Zealand dollars.

On a related topic, Tom Puller-Strecker has a bit of a whip-round on the waterbed effect; I'm quoted in it. As refresher: this is the effect where a regulation targeting things inside the ETS cap just frees up credits for others to purchase instead, so has no effect on net emissions.

I do better sending in emailed comments rather than bits on the phone that are transcribed correctly, but could have been worded better. Ah well. 

I wouldn't have viewed it as a 'concession' to say that if your basic model of the world is that future governments will renege on cutting the ETS cap in line with getting to Net Zero, then policies that cost more than the current ETS price could make sense. It's the main sane reason for preferring those measures. 

Similarly, Crampton says the best argument against the waterbed objection to emissions reductions measures that sit outside the ETS is “a political one”.

“If you believe that future governments will lack the commitment to maintain the reductions in the cap and you want to ‘lock things in now’ to force changes, then you would want to use regulatory moves even if they are far more costly than just working through the ETS.”

That sounds like an important concession?

It does.

But Crampton argues that a better option than “a bunch of clunky regulatory interventions” to shore up confidence in the ETS would be a bipartisan agreement on the total quantity of net emissions that the Government and Opposition would be willing to allow between now and 2050.

Arguably that might be a bit like setting a 5-year-old a total quota of screen time to see them through until they were 16.

Crampton also believes that if the Government followed the example of Canada and gave the money it received from selling carbon credits back to the public, then that would improve the popularity of the ETS and in turn might make people more confident its targets would stick.

Some Associate Prof of Finance at Otago has at me in the piece as well. 

It’s a heated debate.

Diaz-Rainey sees the waterbed argument against targeted emissions-reduction policies as “a way of trying to kick things into the long grass”, arguing that impressive cuts to emissions in the United Kingdom would not have been achieved through an emissions trading scheme alone.

Those who oppose such policies should take “a hard look at themselves”, he says.

“Given what's going on in the world and looking at what is happening again in Brisbane at the moment, it's scary. We really don't have time to play these games.”

Not fair, Crampton suggests.

“One of the biggest mistakes in Wellington is viewing that the degree to which one cares about something is best reflected in the amount of money you want to spend on it, or the amount of regulatory effort you want to put into it.

“That is a very poor measure of caring. The best measure of caring is effectiveness. Climate change is too big to try to approach it through radically inefficient measures,” he says.

This is basic maths. The government issues X credits. A policy reducing demand within the covered sector means fewer bids for credits from that sector, which means the next bidder in line gets them instead. 

And while government can decide to reduce the cap even more to offset that effect, it could do so even without the policies - which would be more cost-effective than using the policies unless there's a darned good reason to think that the specific policy abates emissions at lower cost than the going carbon price. 

Where government really likes running populist messes like Cash-for-Clunkers, or corporate welfare like paying companies to buy boilers that were already cost-effective for the company to buy on their own, there needs to be a decent bar for rigour in these things. 

Afternoon roundup

So many tabs across so many windows. A selection:

Stupid government tricks: supply chain rigidities edition

America has a big shortage of baby formula. 

Simplest explanation: piles of regulatory and procurement decisions worked to make it effectively impossible to shift supply chains in response to shocks, and one of their larger manufacturers suffered a shock. 

In the midst of the shortage, Department of Homeland Security is seizing baby formula like it's cocaine. 

NZ could laugh at stupid US Government tricks, but Customs here is seizing Covid tests that are good enough to be used to get you into the country, but not considered good enough for use here. 

And NZ's current plasterboard shortage comes down to the exact same kind of mess: protectionist regulatory constraints that combine to make it impossible to import and use plasterboard. so the system is highly fragile to shocks. 

Thursday, 12 May 2022

Mystery solved?

Over at Newsroom, AUT lecturer William Cheung wonders why Kiwis don't seem to worry much about flood risks when buying a house.

Similarly, a few years ago, Arthur Grimes found that the Christchurch earthquakes meant that properties in Wellington subject to liquefaction traded at a discount for a couple of years, and then that risk stopped being noticed.

Maybe I'm nuts, but there seems a pretty simple explanation.

  1. The Earthquake Commission covers damages from natural disaster events. The EQC cap is high enough to cover most stuff that isn't going to be a major structural issue. 
  2. EQC premiums vary with the sum insured, not with underlying risk. The EQC premium will be the same for a $2m house that sits underneath a cliff that's ready to collapse, a $2m house that's right beside a flood-prone river, a $2m house in Petone that'll get wrecked by the combination of tsunami and liquefaction in any real earthquake, or a $2m weatherboard house in the safest part of Karori. 
  3. Commercial insurers could very reasonably fear that the government would slice them in two with breadknives if they charged premiums that reflected actual risk in places like Petone. That whole model starts to fall apart the second some new entrant comes in and decides only to insure safe places at lower premiums. But there are regulatory barriers to entry that can result in low-risk places being overcharged and high-risk places being undercharged, and less competitive pressure than there might be in getting finer risk gradations. 
If that's all right then there's no mystery at all. 

If you live in a flood-prone place, you'll deal with the hassles of being flooded, and maybe people who haven't experienced dealing with insurers in a really bad event affecting lots of properties underrate just how much they should be trying to avoid that. 

But insurance in those places is at a hefty discount relative to the real risk, and if you set policy to subsidise living in risky places, expect that people will do so and that property prices won't much reflect that risk. 

Wednesday, 11 May 2022

Chats with Plunket

I had a decent chat with Sean Plunket yesterday morning over at The Platform. I'm going to have to start checking their daily podcast list; I'd missed Richard Meade's bit there on the rumoured Cash for Clunkers scheme

I've embedded the video below. 

They'd asked me to come in and talk about income tax rates and fairness; I'd prepped a bit around what inflation-adjusting the tax thresholds would look like - also the topic of my column this week over at Newsroom. I'd there suggested hooking the tax thresholds to percentiles in the wage-and-salary distribution, but keying it to either CPI or HLPI would be fine too.

The chat with Plunket wound up hitting a far broader range of things, from immigration to congestion charging. I'd managed to forget that I'd written a submission on Auckland's proposed congestion charging.

Hadn't realised going in it was video rather than just audio; might have worn a prettier mask for video. But I'm indoors, so I'm masked. 

Fun times. My 4pm yesterday, which I'd asked to have at an outdoor beer/coffee spot because I'm Covid-averse, got punted to Zoom because he'd gotten Covid. If he'd been infected a little bit later, we'd have had the meeting before he'd tested himself. It's worth being careful out there. If you make a habit of being unmasked in risky places, your likelihood of catching Covid's got to be approaching 1 - or higher given potential for repeat infection.

Fortunately for me, I've already sunk the costs of others' disapprobation for my idiosyncrasies, making being the only masked person at Wellington Treasury events no more uncomfortable than being one of the few who still think supply and demand are important. 

Tuesday, 10 May 2022

Cash for CluNZkers

The US Cash for Clunkers programme was a mistake. Intended as stimulus programme for the auto industry, it failed

Almost all of the effect was a bringing forward of purchases that would have happened anyway, so the effect was very short-lived. 

It also failed as an environmental programme. Looking only at the CO2 reductions, the cost-per-ton was $106-$335, USD, 2009. Inflation, exchange rate, tons to tonnes: that's $245-$772/tonne in current NZD. Or between three and ten times the going price of carbon abatement in the ETS.

The US didn't and doesn't have an ETS, so the scheme could reduce net emissions - albeit at very high cost. NZ has an ETS, transport is in the covered sector, and there's no domestic auto industry to stimulate even if you wanted to, so a cash-for-clunkers scheme here would be especially stupid. 

Richard Meade had a chat with Sean Plunket over on The Platform yesterday

Sean had got wind of that a cash-for-cluNZkers scheme is here in the offing, and could be announced at the budget. 

It'll be fun to see how the legislation handles this one, and whether they even try putting a cost-per-tonne on it. 

Whoever drafted the leg will have to have lots of things to think about. On a few short chats with others on it:

Could I buy a clunker now, expecting a voucher that's worth more than the cost of the car? Should the legislation anticipate that and restrict the voucher to cars purchased at least a year ago? 

Sounds like it'll be means-tested: only poorer households can do it. But they can on-sell any EV they buy to a higher income household right? And that higher-income household might help them front the rest of the cost? 

If you have a university-aged kid, could you strike a deal with that kid's household? Like, buy the kid the clunker now, let her turn it in for the voucher, loan the kid the rest of the money for the car (or top up a zero percent student loan), and have occasional use of the car that would, for convenience, be regularly parked at your house? It could quickly undo all the effort at means testing, and policing could be interesting. 

It'll also be fun to watch the price of used cars, and of EVs, given supply chain issues. 

Oh - and remember - because the ETS has a binding cap, the scheme achieves precisely nothing for emission reduction. The only thing that cuts net emissions covered by the cap is a reduction in the cap. The regulations aren't necessary to cut the cap, and cutting the cap is sufficient to reduce net emissions - and presumably does so for a fraction of the cost of a Cash-for-CluNZkers scheme. 

It just keeps getting stupider. 

A starter for 8 on the ETS

Keiron Greenhalgh of Net-Zero Business Daily news asked for my wishlist for the Emissions Reduction Plan. 

I provided a starter-for-eight. 

In some ideal world, the ERP would:

  1. Redo the price cap mechanism. Rather than set a nominal price, the price cap would be based on the volume-weighted average price of carbon in the set of international carbon cap-and-trade markets that the Climate Commission and EPA consider to be credible. NZU issued at the price cap would be backed immediately by the purchase and retiring of credits from credible systems abroad, unless the government had more cost-effective ways of immediately backing credits. 
  2. Set the total volume of unbacked NZU that the government is prepared to issue from now to 2050, with all auctioned or allocated credits being drawn from that pool. That makes the ETS’s binding cap also intertemporally binding. 
  3. Remove the quantity restriction on backed NZU issued at the price cap. The volume will be self-limiting because if NZ ever bids up prices in international markets, the price cap just goes up. This mechanism ensures that NZ abatement efforts find something a lot closer to global first-bests in emission reductions. 
  4. Rather than ban permanent forests from the ETS, reduce the total volume of unbacked NZU that the government might put into the pool in (2). Carbon accounting has to be clean, and not make arbitrary decisions not to count some forms of sequestration just because the government doesn’t like other consequences. Other consequences should be dealt with using additional non-ETS tools directly targeted at the undesired effect.
  5. Commit to rigorous cost-per-tonne accounting for any measures taken outside of the ETS targeting GHG emissions. It is easy to inadvertently set policies costing 10x to 100x the going ETS price to mitigate emissions. We can’t afford to do that. The problem is too big. We’ll bankrupt ourselves trying to get to Net Zero if we pursue methods of getting there that either are offset by the binding cap on the ETS or are just spectacularly cost-ineffective.
  6. Take all of the NZU raised at by the government at ETS auction, plus any money the government earns at the price cap under the proposed mechanism (if the cap is an average price, and the government buys at the lowest price, every trade at the price cap makes money), plus any excess dividends that the government receives from its share in the electricity retailers whenever carbon prices are high and feed through into power prices, and announce a carbon dividend. Rebate all the government ETS revenues back to households and tell households that the money is there to help them to effect their own transition to a higher carbon-cost world. The dividend not only mitigates the medium-term distributional consequences of higher carbon prices, but also by doing so provides political insulation for the system against rising carbon prices.
  7. Forbid local councils against considering emissions covered by the ETS when making zoning and consenting decisions. The government’s housing supply agenda requires a lot of building that councils are very reluctant to allow. Government has set two substantial pieces of legislation removing council discretion to block housing, but carbon will be a new way of doing that – if government isn’t careful. Councils have a huge job in planning for adaptation, and in planning for the changes that will come in demand for services and infrastructure with rising ETS prices. It should not attempt to redo the work that the Climate Commission and the ETS are already doing. 
  8. Take up the Productivity Commission’s recommendation to revisit NZ’s rules around genetic engineering, which are currently blocking some of the most promising ways of reducing agricultural emissions. Set a sunset on all current rules around GE such that the existing system is simply abandoned if a new one is not put in place in the next three years. 
Kieron's piece focused on the ProdComm biotech aspect; figured I'd hoist the rest of it up here so it's all in one place. 

Obviously, agriculture also needs to face a carbon price. And that's coming too, one way or another. 

Update: I need to add a 9th item. 

9. Some people get very worked up about whether an emissions credit is surrendered within one carbon budget period or the next carbon budget period. It all seems ridiculous. The climate prefers, if anything, that emissions don't happen until later because CO2 accumulates. Stockpiled NZU are emissions deferred. It would be strictly worse if all of those units were used in the year in which they were purchased, rather than being held as hedge against future carbon costs, because there would then be more carbon in the atmosphere for longer. And so we hear calls for regulations that would actually impede the climate response in order to meet arbitrary year boundaries on credit surrender. Just stop this. Decide how many NZU the government is willing to issue between now and 2050, while remembering that there is a stockpile that can be surrendered along the way too. I don't care what the number is. Draw a straight-line from now to net zero, take the integral under the curve, call that the number. Or make it convex, concave, whatever. I do not care. Remember how I re-jigged the price cap? It'll mean we can't go too wrong. You get some fixed total. That's all that matters. Then drop all the arbitrary fixed-window budgets. If government releases credits to auction next year, or allocates them to industry, it draws from that fixed pool. Fix the Net Zero leg to be consistent with this. Better to fix the legislation to enable the ETS to work better than to thwart the ETS to be consistent with dumb features of the legislation. 

Oh, and a 10th item:

10. If an additional regulatory mechanism can be rigorously demonstrated to provide emission reductions at lower cost-per-tonne than the ETS price, and the numbers are all sound, then that's fine. Hell, that should be the gold-standard right? Don't do anything that costs more than doing stuff through the ETS, but if you find some strange case where the regulation would be more cost-effective, fill your boots! Just make sure that the numbers actually stack up and aren't complete nonsense like the numbers backing EV subsidies. You can't just wish-up benefits or assume away costs. Treasury would have to be crazy careful in vetting this stuff. Remember the analysis on the feebate scheme, and how hard it was for Treasury to try and knock back nonsense claims from the Ministry of Transport? 

Monday, 9 May 2022

Strawmanning the ETS

When I see something I think is stupid, if I'm not being too intemperate, I try to ask myself, "What is the least stupid argument that could have led to this view?" Steelmanning an argument, rather than strawmanning it, just makes more sense.

It could be that the person making the argument is saying something subtler than it sounds like. Or it could be that the person heard the conclusion from someone smarter than himself, never understood the argument, but there is a logic that the prior person had that can be rediscovered.

Max Rashbrooke really doesn't do this when it comes to the Emissions Trading Scheme.

His latest piece on the ETS misrepresents how the ETS works, and my outfit's position on it. 

Let's go through. 

If the price of petrol continues to soar, will you be able to seamlessly shift to taking the bus instead? On such questions hangs the fate of the climate change fight.

Outright deniers having been banished to the fringes, the debate now turns on how best to reach net zero by 2050.

And while most observers believe a wide range of tools will be needed, a rearguard effort is being fought by those who would deploy just one lone policy: putting a price on carbon.

If, the argument runs, everyone has to pay a price for their carbon pollution – $100 a tonne, say – they will automatically cut their emissions. And, knowing their options far better than Beehive bureaucrats, they will find the cheapest method possible.

So far so good, except that he's insinuating that those wanting to rely on carbon prices are secret climate change deniers.

One bit to watch for: no supporter of the ETS has some magic price figure in their head. They don't have to. A carbon tax requires picking the right price. The right price, for economists, for a carbon tax, is the price that matches the marginal social cost of the emission. It isn't the price that forces everyone to stop doing one particular thing. Put the price on carbon, so that if someone does the thing that causes the emission, they've weighed the social cost of the emission in their own calculus - or at least are providing potential compensation for that cost. 

An ETS does not require picking the right price. It does require that every tonne of emissions within the covered sector is backed by the surrender of a credit. Our ETS does that. Net emissions in any year cannot exceed the sum of the credits that the government issues that year (those auctioned plus those allocated to industrial users), plus the units purchased in prior years but not yet surrendered. The price winds up being an outcome. "Getting the price right" should just mean that the ETS market works well, that the credits are credible, and the system is binding. Whatever price emerges from that process is the right price. 

I'll tweak that a bit later when coming to linkages to international markets, but let's keep it simple for now. 

Let's continue. 

Such views are a throwback to 1980s-style market fundamentalism, which held that almost all problems can be solved by individuals buying and selling things. It is a largely discredited dogma.

Yet the old cry of “just get the prices right” still echoes in some corridors.

The New Zealand Initiative think-tank, scion of the 1980s right-wing icon the Business Roundtable, recently published a report accusing the Government of committing “fraud” simply by promoting other climate policies, like enhancing public transport.

It's gotten a bit worse. It is odd to call either a carbon tax or an ETS market fundamentalism. Either one is a hefty government intervention with implications across the entire span of the economy. 

And again, with an ETS, as compared to a carbon tax, there's no right price. The price emerges. Whatever price emerges is the right price. Don't like that price? Cut the cap faster and the price will be higher. But if the price winds up being higher than in other places that take carbon seriously, you've likely mucked something up - and a linkage to international markets is probably going to be needed. 

We've critiqued government policies that aim to reduce net emissions within the covered sector. Enhancing public transport, if done to reduce net emissions, will not work. But rising carbon prices will change demand for modes of transport - and lots of other things as well. If a council's best forecast is that residents are going to want a whole lot more public transit as consequence of those rising prices, then council absolutely should be factoring that into their planning. 

I've regularly described this as the difference between pushing on a rope and pulling on it. If you push on it to try to reduce emissions, it won't work. But if higher prices are pulling the rope, and councils are seeing that translate into changing expected demand for transport and other services, then council should accommodate it the same way they would other changes in residents' demand. 

The report’s author, Matt Burgess, now works for National leader Christopher Luxon. Which creates problems for the party.

Last month, its climate change spokesperson, Scott Simpson, had to publicly disavow the Burgess report, saying it “does not reflect the National Party’s view”.

Think-tankers can think all they like; Simpson has to get elected by a public that wants governments to actually do something on climate, not just attach price labels.

The Burgess report, though, is backed by ACT, which could help form the next government. Right-wing lobbyists the Taxpayers’ Union, and some of Simpson’s colleagues, take market-fundamentalist lines. So it matters that these ideas are out there – and wrong.

That carbon prices should take the lead isn't some radical libertarian plot. Economists across the spectrum support letting prices lead. We polled NZ's top economists on it - and they span a range. They agreed. Just under 84% said that tightening the ETS cap is a less expensive way of cutting emissions than a collection of policies targeting emissions already covered by the ETS.

I wrote up the results for the Dom

So either you can claim that the likes of Alan Bollard, Arthur Grimes, Gary Hawke, and Gail Pacheko are market-fundamentalists, which is obviously nonsense, or you're misleading your readers by insinuating that only 'market fundamentalists' take this position. 

There are, for starters, changes that individuals and businesses simply cannot achieve. Only the government can make the investments in the national grid needed to enable more renewable energy.

Many price signals get lost in transmission.

If driving becomes costlier, but there are no decent walking, cycling or public-transport options, people won’t switch.

None of this is contrary to our position. 

Well except the bit he gets just straight wrong. 

The straight-wrong bit is that if by 'national grid' he means Transpower, that's an SOE that makes investments on a commercial basis facing regulated prices. If he means that plus the local lines companies, the latter have a big ownership mix but they make their own investment decisions and recoup costs using regulated fees on users. And if he takes the broadest view, to include generators, investment in generation is driven by commercial incentives. And that clean electricity market structure has resulted in a very high proportion of renewables - without subsidy. 

But his bigger mistake is in setting up a chicken-and-egg argument against us. I have regularly argued that if some other real market failure comes in, then policies targeting that failure directly can make sense. And I have regularly argued that councils should be weighing rising carbon prices into their transport planning. There is no gotcha here, just misrepresentation. 

Ditto if carbon pricing makes an EV cheaper over its lifetime, but families can’t afford the upfront cost. Hence the need for cycleways and clean-car discounts.

The market-fundamentalist view is also short-sighted.

There are lots of outfits that provide financing for cars. There's a whole industry association for the non-bank businesses that provide financing for cars, whether directly or through dealers. The only possible problem would hit those with really bad credit. But car loans are easier than personal loans - the lender can always repossess the thing. Plus there are lease options. 

There is no market failure here. If the lifetime cost of the EV is lower, which it still isn't, then the sum of the monthly loan/lease payments plus running costs should be lower than the sum of the same for an internal combustion vehicle. And the time value of money isn't a market failure either. 

Decades ago, solar and wind power were expensive, and shunned by market-fundamentalist politicians. Others, fortunately, understood that if government invests in something, its massive purchasing power can help create a market, allowing firms to rapidly drive down costs through learning-by-doing.

There's a potentially defensible argument that US and European subsidies drove some tech-forcing innovation. Is there any reasonable argument holding that the NZ govt has any kind of scale to bend that curve? No. The only spot where it starts being plausible is in ag biotech research, if NZ were to let other countries pick up the tech to use as well. That could plausibly bend global curves. Except that research is largely banned in NZ because of ongoing regulations around biotech.  

Prices today are not the same as prices tomorrow. Those past state investments lie behind the now-plummeting price of wind and solar.

Another problem: since the carbon price increases gradually, it doesn’t always deter bad decisions now.

Firms invest in polluting technologies while they are still cheap; when the price rises, they must either abandon their stranded assets, or become powerful lobbyists for a high-pollution status quo.

There are carbon futures markets. You can check the prices, several years ahead, right now. A carbon credit for 2027 is currently trading at $93. Making an investment in something that will still be around and using carbon in 2027? You should be betting on a $93 carbon price in that year, and very likely continuing to rise thereafter. 

Does Rashbrooke really think that Wellington bureaucrats can better plan investments for firms than they can themselves? Firms weigh this stuff up. They don't want to waste shareholder money. 

You might as well claim, in the 1980s, "Oh, companies are all stupid because they haven't factored in peak oil and that they won't have any oil to buy in 2005 so we need a bureaucracy to make better decisions for them." 

It's their own money that's at risk. 

Part of the problem is that companies making very bottom-line based decisions on low-carbon tech then go on a greenwashing campaign, cloaking themselves in moral virtue about it, when really it was just way too expensive to keep using higher carbon tech. And then some people conclude that nobody is making investment in lower-carbon tech unless they're part of some enlightened few, and that regulation is needed for the rest. 

Politically, too, emissions pricing alone is a losing strategy. The public feels the pain in higher prices, but sees no immediate gain. Politicians fare better if they can point to positive investments like improved public transport or job-rich green-energy schemes.

I agree with Rashbrooke here: the public feels the pain in higher prices, but sees no immediate gain. That is precisely why we have argued, ad nauseum, for a carbon dividend that rebates government ETS revenues back to households. Most households are then made better off by rising carbon prices. But Rashbrooke forgets that.  

Such emission cuts might diminish the pressure on other parts of the economy to decarbonise – but if so, the government can simply reduce the number of carbon “permits” it issues to industry. It is plain wrong to say that policies beyond carbon pricing will achieve nothing.

It isn't the other policies that reduce net emissions, it's the reduction in the number of permits issued, whether as industrial allocations or at auction. The other policies are certainly not sufficient to reduce emissions; if you do it without cutting the cap, you only achieve a reallocation in where emissions happen. And they aren't necessary either: you can cut the cap without doing the other policies. 

Policies beyond carbon pricing, targeting emissions in the covered sector, cannot do anything about net emissions unless coupled with a tighter cap - which could be done regardless of the policy.   

Of course, as Burgess points out, one cheap way to meet our climate targets would be to forget about reducing the carbon we emit and simply plant more trees to suck it out of the atmosphere. But the required afforestation of another 1.5 million hectares of farmland would be politically untenable.

There is no guarantee the carbon would stay captured – what if the forests all burnt down, or were harvested with no replacement? Betting the farm on forestry, as it were, would be an unfathomable risk.

The ETS isn't that stupid. 

If a forest burns down, the owner doesn't have to immediately surrender credits. Instead, the owner of a post-1989 burned forest receives no credits until the forest has regrown to match the carbon lost in the fire. That bit of burn-and-grow is net zero over that time horizon. Then it starts earning credits again. 

If there's risk, it would be if a forest's owner declaring itself bankrupt after a fire AND the land could not be economically replanted even if the land value were zero on sale after bankruptcy (the new owner would have to regrow the forest before any new credits could be earned, or presumably face surrender obligations). IF that's a risk, government could require insurance against that risk or bonding. 

Now that could still mean problems in whether emissions fall within particular five-year budgets, but so much the worse for the reliance on five-year budgets. Better to update the legislation to be consistent with a well-working ETS than to break the ETS to fit the legislation. 

I don't get why people throw their hands up and say we have to abandon the ETS because of problems that have obvious solutions. 

Rashbrooke suggests that increasing levels of forestry might hit political walls. We don't disagree. I've argued that this really is a local land-use planning issue rather than an issue for the ETS though. If a local council wants to put restrictions against forestry conversions in response to local pressure, and ideally with compensation for the affected owners, that's where that kind of action should be happening.

And the beautiful thing with an ETS is it just automatically re-routes. Suppose that local councils started talking about putting in these kinds of restrictions. The futures price in the ETS should start rising in response, then rise more once the restrictions come in. Higher ETS prices then mean that gross emission reductions that previously weren't cost-effective become cost-effective, and maybe new sequestration techniques come in. The pathway really doesn't matter. The cap on net emissions still binds, emission reductions still happen. 

Forcing things through higher-cost channels does make it more urgent that we get a carbon dividend though. 

And without wider action on issues like transport, New Zealanders risk becoming stranded, left trying to drive petrol cars in a world that no longer exports either petrol or cars.

I don't know why government is better placed than individuals to weigh up the risk that petrol or diesel will cease to be a thing within the lifetime of a purchased automobile. I expect individuals to weigh that risk up sensibly, knowing they bear the downside cost of getting it wrong. It isn't that individuals are perfect at guessing this stuff, it's more that government has no particular advantage in it - unless they're trading on insider knowledge of that they will ban petrol or diesel rather than just let the ETS work. 

Of course prices can be a useful tool. But there is so much they can’t comprehend.

Encouraging cycling, for instance, cuts emissions – but also makes for happier and healthier people. Only by looking beyond carbon prices will we spy such opportunities.

This isn’t just a crisis: it’s also a chance, as Simpson puts it, to create “behavioural change in the way we live, do business, and exist as a society”.

It requires us to make collective decisions on collective investments – and not just force the choices onto isolated individuals grappling with a crude price instrument.

The point of net zero isn't inducing behavioural change in the way we live, do business, and exist as a society. The point of net zero is reducing carbon emissions to a net of zero, so we don't heat the planet by more than is already baked in. 

If there are other benefits from other things, like cycling, weigh that up on its own basis. If a council's residents want more cycleways, whether because of expected rising carbon costs, or just because they like cycling, and they judge the cost to be worthwhile, then councils should invest in cycleways. But selling things like cycleways on the basis of emission reductions, when emission reductions are only driven by reductions in the cap, isn't right.  

I have a bit of trouble steelmanning the kind of argument that Rashbrooke, and a lot of others, make. It just seems inconsistent with the basic maths of the ETS. The best version I've been able to come up with thus far is this:

The ETS is well and good but it requires that successive governments continue to be willing to tighten the cap to get us to Net Zero. There are political risks along the way, including changes in voter preferences.

Regulatory mandates might be a lot less cost-effective than the ETS, but they lock in a path that is harder to break. If we mandate, today, that companies and households take on a pile of investments that can only make sense in a $500/tonne carbon world, even though the current ETS price is less than a fifth of that, those become their own stranded assets and sunk costs. If a future government changes things, at least we've locked in a quantum of reductions for a while - even those those could be undone with further investments.

It is easier for a future government to renege on reductions in the cap than it is for a future government to undo the effects of regulatory edicts, even if those edicts are only in place for a few years.

I've never seen them put it this way; I don't know if this is what is underlying their thinking. It's the only consistent rationale for the underlying argument that I can understand that doesn't rely on impugning their motives. The alternative version is that they just want to force behavioural changes for aesthetic reasons, which seems a bit evil, and I at least try to come up with explanations that don't rely on the other side just being bad people.   

If the version I've put up is the underlying fear, then I think there's a better solution. Set a cap on the quantity of permits that the government is prepared to issue between now and 2050. Do it through cross-party consensus. And set a requirement that the government compensate the holders of existing credits, or of credit-generating facilities like forests, if the government debases NZU by just printing more unbacked credits. 

Oh - and I've not managed to come back to the link to international markets. 

It's pretty simple. 

Right now, when the ETS price hits a trigger value, the government first issues some additional NZU that are within the ETS budget, then it issues some units that have to be backed by reductions elsewhere - potentially even from offshore.

Re-jig this. 

Instead of having the price cap anchored in some nominal amount, have it track the volume-weighted carbon price in the set of ETS markets abroad that the Climate Commission declares to be credible. 

That price cap will be higher than the price here because it will be pulled by Europe.

At the price cap, the government would immediately back units by buying and retiring units in the cheapest market from the set of markets whose weighted average prices define the cap. The government need set no quantity restriction on this - the units are backed by reductions in emissions in those other markets. The price cap would be more politically credible because the government would make money at the cap rather than bearing risk - remember, the cap is a weighted average of prices, but the government would buy in the cheapest of the credible markets. 

There isn't a right price for carbon, but there can be a lot of wrong ones. If the carbon price in NZ, as the ETS cap tightens, winds up being higher than prices in Europe, that means we could do more to reduce net emissions by buying and shredding credits there, rather than doing more stuff here. If we care about doing the most we can to reduce net emissions, then a price above the going price elsewhere is a wrong price. 

Tax thresholds

The income tax thresholds haven't been touched since 2011, except for the addition of a 39% rate from $180,000 on 1 April 2021. 

I was a bit curious what the thresholds would look like if you indexed them for growth in wages over the period.

So I took the HLFS private ordinary-time average hourly wage series from SNZ and used that as an inflator. Whenever accumulated inflation warranted a $1000 step change in a threshold, I applied the step change. So the $14,000 threshold advances to $15,000 when it should be at $14,501, but stays there until it should be $15,499. 

I set it so these would only ratchet on 1 April each year. 

Anyway, it looks like this. 

The tax thresholds for 1 April 2022 would be:

$0 - $20,00010.5%
$20,001 - $69,00017.5%
$69,001 - $101,00030.0%
$101,001 - $188,00033%
$188,001 +39%

Treasury's calculator says the government would lose about $4.1b in revenue if it updated the tax bands to the ones above, but it warns that it's not reliable over such large changes - and the calculator doesn't include the 39% band. 

This way of inflating is pretty crude. A better one would track wage percentiles. 

If $14k was the nth percentile of the income distribution in 2011, what would be the number at the nth percentile now? 

If we held the percentiles constant, the tax bands would have been, for 2020/21:

BandRatePercentile at top of band
$0 - $25,00010.5%28th
$25,001 - $65,00017.5%68th
$65,001 - $90,00030.0%85th
$90,001 - $180,00033.0%98th
$180,001 +39%

Or another way of thinking about it. Keep the bands constant, as successive governments have, what happens to the percentile?
BandPercentile 2011/12Percentile 2020/21
$0 - $14,00028th19th
$14,001 - $48,00068th50th
$48,001 - $70,00085th73rd

I dropped the higher bands on this one because there was no bracket higher than $70k in 2011/12. But $180k is the 98th percentile in 2020/21. The 98th percentile in 2011/12 was $138,000.

Note: the first percentile table here is updated to correct a cut-and-paste error.

UPDATE: All of the percentiles here from the IRD data are percentiles among wage and salary earners. The IRD dataset I'm using is only on wage and salary earnings. Excluded are:
  • NZ Super
  • Taxable welfare benefits
  • Student allowances
  • Earnings-related ACC payments
  • Shareholder employee salaries (since there was no PAYE deducted).
The main effect of indexing to earnings among wage and salary earners would be that those on benefits that do not ratchet upward with wage and salary earnings would see themselves on lower tax rates over time, if they earn enough in non-wage/salary benefits to cross a threshold. I don't know that that's a bad thing for benefits that aren't indexed. 

Friday, 6 May 2022

Afternoon roundup

The afternoon's worthies

Wednesday, 4 May 2022

The Wellness Regime

The excellent NZ series Creamerie imagined a future New Zealand in which the Wellness People had truly taken over. It was more than a little dystopic.

The Wellness People really have taken over policy though. Sadly, Treasury led the corruption here. And, as cancers do, it spread.

Wellington Council has, time and again, proven to be among the more incompetent of the country's councils. The water pipes keep breaking. The Mayor participates in protests against building housing, in the middle of a giant housing shortage. Let's Get Wellington Moving seems to be about everything other than enabling transport. They say it's about reducing transport emissions, but transport is in the ETS. It can't affect the country's greenhouse gas emissions. 

Wellington Council put up its own economic wellbeing strategy. Because of course it did. 

It's about as good as you'd expect. 

They want central government to provide more subsidies to the local film industry. Wellness demands it. I wonder whether Treasury could find a way of supporting film subsidies under its rather flexible Living Standards Framework. 

My column for the Dom this week. A bottom line:

Until Wellington is able to get things right in the core traditional areas of council responsibility, improving economic wellbeing is going to be a tough job.

I'd also put in a submission on the blasted thing.  

In summary, we submit:

  • Council should focus first on ensuring it is competently and cost-effectively delivering core council services before expanding into other policy areas that are more traditionally handled by central government;

  • Council must fundamentally reconsider how it thinks about carbon emissions. Urban emissions are covered by the Emissions Trading Scheme. Council action in seeking to limit local emissions may have no effect at all on national-level emissions. But Council has a critical role in facilitating its residents’ responses to rising carbon prices in the Emissions Trading Scheme;

  • Rather than lobby central government for measures like subsidies for the local film industry, it should lobby central government to provide Council with the tools it needs to enable urban growth. In particular, better infrastructure financing options would let Council do a lot to improve the whole city – but require central government’s assistance. Housing and the infrastructure required to support it are far too central to wellbeing to see so little attention in this plan.

Monday, 2 May 2022

Disutility bleg

We're all familiar with Nozick's utility monster - the counterexample that eats utilitarianism. 

If someone exists who will always get more utils out of the next dollar than anyone else, then utilitarianism winds up saying you have to keep feeding the monster. And you wind up in spots that obviously conflict with common sense intuitions. Sure, it doesn't seem possible that the utility monster can exist: surely maximum utility is bounded such that it's impossible. But the thought experiment seems damning against straight utilitarianism.

But what about a disutility monster: one for whom the next dollar always provides less utility than it would for any other person. Obviously, utilitarianism says not to waste money on the disutility monster. But would this kind of disutility monster by a problem for Rawlsean setups that demand that outcomes must be set to maximise the position of the worst-off? If you maximise the position of the worst off, and the disutility monster begins from a very low-utility position and is always terrible at turning transfers into utils, you have to wind up with everyone being alike in misery right? 

And aren't disutility monsters more plausible than utility monsters? It's easy to imagine miserable people who really can't be made much less miserable; it's hard to imagine unbounded positive utility. 

Cowen's first rule is that there's a literature on everything, but I've not found this version of a disutility monster written up - at least on a quick search. 

Hence the bleg. 

The testing ration has been increased!

Oh wow! The government is trialling an innovative new Covid testing system at the border! Just look at these news stories!

Here's Richard Harmon at Politik:


The Government is partnering with Air New Zealand to trial an innovative new COVID-19 testing solution that uses Loop-Mediated Isothermal Amplification (LAMP) technology, Associate Minister for COVID-19 Response Dr Ayesha Verrall announced yesterday. “As New Zealand reconnects with the world, we are exploring innovative COVID-19 testing technology to help keep people safe and minimise disruption as we welcome new visitors,” said Dr Ayesha Verrall.

“We are constantly monitoring the latest scientific advancements to maintain our successful COVID-19 response. Our Government is partnering with Air New Zealand to trial the ‘Lucia Check-It’ test kits. Using LAMP technology, the test has the potential to combine the speed of rapid antigen tests (RATs) with the accuracy of polymerase chain reaction (PCR) tests.

Here's The Spinoff's daily update:

Air NZ and the government also launched a trial of a new covid-19 test that could be used for border staff and international visitors. Known as a LAMP test, it combines the speed of RATs (rapid antigen tests) with the accuracy of PCR testing.

New! Surely that means that the ever-benevolent, ever-wise New Zealand Government is right at the cutting edge of covid testing technology, as it always has been. 

The test received FDA EUA in April 2021, over a year ago. We could have required it as condition of boarding flights to NZ for ages. The cost of the test could have sheeted back to travellers. The government then could have monitored whether this kind of serious test-to-travel requirement might have enabled shortened MIQ, home isolation with requirements to take a couple more LAMP tests along the way, or some mix of the two (MIQ for a few days, negative saliva PCR to exit, requirement to check in with a negative LAMP result 2-3 days later, just to be sure). Sir Ian Taylor argued, vocally, for this kind of thing.

But really the chocolate ration has been increased. All praise our benevolent masters. 

At least the RNZ interview this morning with Terry Taylor noted that the thing's been available for ages.