Thursday 27 October 2022


Newshub did a roundup on OCR and inflation after the latest Stats release had inflation higher than expectations. 

Robert MacCulloch is disappointed the piece didn't mention monetary policy. 

For what it's worth, here's the full comment I'd sent through to them - they didn't pick up the monetary bit at the start, alas. They'd asked about whether the Bank should be doing stuff beyond OCR, so I spent a bit more time on that. But I opened with monetary because, well, duh.  

“Inflation is the result of too much money chasing after too few goods and services. The global response to the pandemic involved substantial monetary easing, while the pandemic made it more difficult for firms to supply goods and services. Reserve banks internationally failed to update their policies quickly enough. Today’s inflation figures are the result of errors made a year or more ago in inflation forecasting and monetary policy. And the consequences of current tightening will be felt perhaps a year from now. 

In normal times, interest rates are central banks’ main tool for inflation targeting. If the Bank expects that, a year from now, too much money will be chasing after too few goods, raising the interest rate reduces demand across the board. Investment projects, whether in construction or otherwise, that made sense at lower interest rates make less sense at higher interest rates. Increasing interest rates means the Bank does not have to pick and choose where to try to reduce demand, which would be terribly fraught. 

The pandemic involved a few non-traditional monetary responses. The Reserve Bank engaged in substantial quantitative easing, meaning it purchased lots of bonds using new money. It also provided a subsidised loan facility to the banks through the Funding for Lending programme. It makes little sense to be increasing the cost of borrowing through the official cash rate while continuing to facilitate bank borrowing through the Funding for Lending programme. It is scheduled to end in December.

The Reserve Bank is now in a rather difficult spot. It is not crazy to expect global recession in the next year through the combination of global monetary tightening and the effects of the war in Ukraine. Energy prices in Europe all on their own are likely to spark recession there. A central bank expecting global recession would not normally want to be tightening monetary conditions. 

But both inflation and inflation expectations have been becoming unhinged. Earlier this month, the Reserve Bank released the results of a survey undertaken as part of its Remit Review. Less than 5% of respondents said they were “extremely confident” that the Reserve Bank would get inflation back within its target range by 2024. About 20% of respondents were “somewhat confident”. And about sixty to seventy percent of respondents were either “not at all confident” or “a little confident”. 

It means that the Bank not only has to fight inflation but also has to fight to restore confidence in its commitment and ability to achieve its target. A Bank with stronger inflation-fighting credibility could afford a more cautious approach in response to global uncertainty. 

The government could make the Reserve Bank’s difficult job easier by moving more quickly to balanced budgets, and ceasing spending programmes like Enviro-Jobs that had been initiated mainly as make-work in 2020. It is exceptionally unhelpful for the government to fund make-work programmes when private employers are starved for staff. 

The government could also consider signalling, clearly, that the next Governor of the Reserve Bank, to be appointed next year, will be strongly committed to the Bank’s inflation target rather than continuing to divert the Bank into areas far from its core business.”

I'd also suggested a couple times last week, on RNZ's morning report, and in my slot on Nights, that Adrian Orr should not be reappointed and that Minister Robertson should, quickly, very clearly signal that Orr's successor will take a far more traditional view of the role of a Reserve Bank. 

Oxfam misrepresenting inequality, again

The simplest explanation is probably the correct one. Oxfam writes dodgy reports on inequality because it works. Dodgy reports yield sensationalistic headlines, which drive donations to Oxfam.

You may remember Oxfam for annual dodgy reports on wealth inequality that typically try to tally up how many billion people have net wealth of less than a top handful of people. As Tim Harford pointed out years ago, his friend's daughter, who just received her first fifty-cent piece, had higher net wealth than about two billion people who have negative or no net wealth. Anyone finishing university with student debt, and who hasn't been gifted a pile of wealth by their parents, will be listed as having less net worth than a subsistence farmer in whatever most-destitute place you want to pick. Why? None of the figures count the value of the degree. It's all nonsense. 

Noah Smith fisked it over at Bloomberg in 2019; I've had a running series on these things too. Oxfam's numbers are designed to mislead. 

And journalists keep getting suckered by them. How can Oxfam help but be a bunch of humbugs when so many people want to believe things that are not true? Tom Hunt turned Oxfam's 2019 numbers into a front page story in the Dom, without any thinking through whether the numbers make any sense. It was quickly apparent that the main action for NZ was in currency movements, and that Oxfam's source, the Credit Suisse report, showed declining wealth inequality in NZ in any case.

But zero NZ journalists bother to check. Because it's Oxfam right? Don't they do good things abroad? Why would they lie, consistently, about the statistics?  

Earlier this year, Oxfam put up another one claiming huge increases in global poverty. Noah Smith went through it fairly comprehensively. Bottom line, Oxfam was just inventing huge numbers. And then Noah reminded everybody that "Oxfam is a serial repeat offender of dodgy statistics". 

So. When I saw a Newshub headline on a new Oxfam report claiming New Zealand's tax system is ranked 136th in the world in reducing inequality, I groaned. Not again. I hoped that nobody else was going to pick it up. The number was surely so obviously stupid that nobody other than Newshub might run with it. 

But then the Herald ran it. And the interview kept conflating wealth inequality and income inequality and making weird claims about the need for a wealth tax when that wouldn't even move the Oxfam measure, which only counts income, consumption, and company tax. 

So I had to go through it. 

You can read it at Newsroom. The data for it is here - the Google sheet pastes in the Oxfam tables, the OECD tables, then runs the comparative rankings. 

The points should be obvious to readers here:

  • Looking at any tax in isolation is a mistake; Oxfam complaining about GST being regressive is 1) wrong; 2) stupid because it's part of a progressive tax system. 
  • Looking at tax in isolation of transfers is even stupider. Imagine two countries. One runs fifty different income tax schedules depending on your household circumstances. The other runs one income tax schedule and then transfer programmes that depend on your household circumstances. You can design the two to yield identical results. But if you rank countries by tax system on its own, you'll wind up saying stupid things. 
  • The OECD data has NZ middling of 37 countries when assessed on tax and transfer. We start with low(ish) market income inequality and we wind up with middling after-tax-and-transfer income inequality. Take the difference as a percentage and NZ's tax and transfer system is 18th of 27. Middling. Like should be obvious to anybody who's ever looked at this freaking data. 
  • Any ranking of the inequality-reducing powers of tax systems that puts the US ahead of Sweden, and Costa Rica ahead of either us or the Swedes - how can you believe anything in the report if you see that? What's wrong with you? In the OECD data, Costa Rica starts with the highest market inequality among OECD-ranked countries, and still has the highest income inequality after tax and transfer, and has the system that does the least to reduce income inequality regardless of whether you measure it as a Gini-point difference or as a percentage reduction in the initial Gini measure. And Oxfam had Costa Rica ranked more than a hundred places above New Zealand. Even if you don't know anything about Costa Rica - how could you miss that they've ranked the US ahead of Sweden? Don't American and Kiwi social democrats constantly yearn to be more like Sweden? Think about it for half a second. 
Oxfam reports are like those email scams that put in deliberate typos and grammatical errors so that only the most credulous people believe them, so they don't have to waste time with people who'll wise up part-way through. 

But then I have to waste time going through them, because people still for whatever reason still trust newspapers.

Maybe the coming "let's ban disinformation" thing will ban Oxfam reports so I won't have to do this anymore. 

Tuesday 25 October 2022

Afternoon roundup

A closing of some of the browser tabs:

Friday 21 October 2022

Abandoning spectrum auctions

It feels a bit like moving into the dark ages.

Coase 1959 started explaining the merits of allocating radio spectrum by auction.

And then...

New Zealand’s 1984 elections put the Labour Party in control of Parliament after it had been out of power for a decade. At the time, New Zealand’s economy was suffering, and Labour chose to use privatization and deregulation as tools to improve economic performance. An early step in this process was to separate the post office into three entities—a state-owned telephone company, a state-owned postal company, and a spectrum regulator. Before that, the post office, a major spectrum user, had also been the spectrum regulator.

The government did not stop with this separation of functions. In 1987, the government stated that it intended to end the telephone monopoly, and in 1988, it commissioned a study by John Fountain, an economist at the University of Canterbury, to review the literature on the economics of spectrum management (Fountain 1988). The first two articles addressed in Fountain’s review were Coase’s (1959, 1962) articles. The report was not directly an analytic or advocacy piece; nevertheless, it did clearly communicate the view that economic mechanisms for spectrum management were feasible and promised significant benefits.

New Zealand pioneered it! There were some early issues, and they learned a fair bit about spectrum auctions along the way. And others followed.

But now the government's abandoned them for winner-picking giveaways.

The Government has abandoned plans to auction radio spectrum.

Instead, it will directly allocate the 5G-friendly to telcos for a 20-year term - on the proviso that they make commitments to better address mobile calling and broadband gaps in rural and small-town NZ.

The move means Communications Minister David Clark has gone for public good over a windfall for Crown coffers that could have run to hundreds of millions, based on previous spectrum auctions.

Clark says the arrangement means more people will get better mobile coverage more quickly, and in more places.

The better approach would have been to auction off the spectrum, then set an RFP for services that the government considers to be valuable but that are not commercially viable. 

Do it that way and the least-cost provider of the RFP services winds up being the one to do that stuff, and the highest-value users of spectrum are the ones to buy it. Bundling them together will only find the right mix by accident. 

The giveaway to incumbents could be worth hundreds of millions. 

Sense of scale

You'd think a half-decent test for policy would just be to stop and ask whether anybody would be willing to take the benefit of the policy, rather than just the per capita cash equivalent.

RNZ reports:

The government has revealed major changes to the way people will pay for public transport across the country.

Minister of Transport Michael Wood announced a $1.3 billion public transport single payment system in Auckland today.

The signing of the National Ticketing Solution contract with supplier Cubic means New Zealanders will soon be able to use a single payment system across all public transport networks.

People will be able to pay for bus, train and ferry trips using contactless credit or debit cards, Apple Pay and Google Pay.

New Zealand has 5.1 million people. Split $1.3 billion 5.1 million ways and you've got about $250. 

Is there anybody who would rather have the ability to use the same transit card anywhere in New Zealand (as well as Google Play and stuff), rather than $250 and just continuing to use Snapper or whatever in the place where they live, and throw a few bucks on a throwaway transit card when traveling?



Tuesday 18 October 2022

A confusion of National Policy Statements

When Alice tried to recite one of her lessons while down the rabbit-hole in Wonderland, she thought only a few words had come out wrong. The Caterpillar corrected her bluntly: “It is wrong from beginning to end.”

By contrast, the Cabinet Paper on the National Policy Statement protecting sensitive soils is not wrong from beginning to end.

Paragraphs 90, 91 and 92 contain sound advice from Treasury.

Otherwise, the paper has a few problems.

From my 2019 column on the then-draft National Policy Statement on Highly Productive Land.

Treasury's advice on the NPS was appropriately scathing. The CBA in support of it was incompetently produced. There was no market failure to be solved by the policy. The policy was wrong from beginning to end. 

Even within the constraint of "Voters are just terribly, terribly mistaken so we have to be seen to be doing something to prevent building houses, which are scarce, on agricultural land, which is not," the policy fails. It could have chosen to protect only the top two land use categories, covering about 5% of the country's land (urban land is about 1%). Instead it added in LUC3 land - piles of paddocks mainly - and in so doing locked up another 10% of the country against housing. 

I was curious about Treasury's advice on the revised NPS. They provided it last week, so it formed this week's column for the Stuff papers. Treasury still sees the policy as too restrictive, backed by far too weak of analysis, and as conflicting with the National Policy Statement on Urban Development.

The OIA documents from Treasury are here

Bottom line?

Treasury Recommendation: Do not support, defer until the paper includes robust analysis of the costs and benefits of the policy choice to include or exclude LUC 3 land from the default definition of HPL under the NPS-HPL. This could also include recommendations for improved implementation of the NPS-UD. 

And they warned that the CBA MPI had commissioned is still too shonky to rely on.

There's still a potential way through the mess. The coming Resource Management legislation could direct that priority be given to housing in the National Planning Framework. It'll take fairly sharp direction: councils looking for excuses to obstruct housing development will find plenty of them in NPS-HPL. 

Friday 14 October 2022

Testing times

Remember late 2021 and early 2022 when there were ... problems ... in getting RATs and when the government was requisitioning them?

Chris Bishop had been asking about one company's attempt to get RATs into the country

407 (2022). Chris Bishop to the Associate Minister of Health (08 Feb 2022): Regarding the rapid antigen tests from Kudu Spectrum for the "Orient Gene RAT", did Kudu Spectrum send a letter to the Government regarding rapid antigen tests in January 2022, if so, on what date was that letter received, who received the letter (by job title, if appropriate), and what did it say?

Hon Dr Ayesha Verrall (Associate Minister of Health) replied: I am advised the Ministry of Health has no record of receiving a letter from Kudu Spectrum in January 2022. However, two emails were received from Kudu Spectrum, on 4 and 12 January 2022. These emails related to Kudu Spectrum’s application for approval of the Orient Gene rapid antigen test which was subsequently authorised by the Director-General of Health on 20 January 2022.

This is also my response to Written Parliamentary Question 581 (2022).

He followed up with an OIA request for those emails and has passed it along. I'll copy it all below here, followed by the cover letter response.

Kudu Spectrum was trying to import Orient Gene Covid-19 RATs. They're ubiquitous now, but Medsafe was being Medsafe and slow. 

Emails into MoH weren't being dealt with properly or noticed. 

Kudu's first email, of 4 January, to Michelle Perera at MoH and to Ian Town, Chief Science Advisor at MoH, and to a redacted person, were initially ignored. It was summer. 

Kudu followed up on 12 January, noting they'd received no answer, and that they'd be seeking legal advice if they didn't get an answer - they wanted to bring in the tests because there were shortages of RATs and lots of businesses wanted them. 

On 13 January they were told that it was unlawful to import the tests until Medsafe got around to stamping the forms, which was expected to happen within two weeks. 

Lest we forget how crazy that period was. 

I've munged the email addresses of individuals in the correspondence chains here that they not be hassled because of the OIA release. 

Thursday 13 October 2022

Refereeing in public health journals

Refereeing in public health journals always seemed a bit iffy.

A few years back I'd noted a case where the NZ Med Journal published a piece with 9 co-authors on drinking in pregnancy, none of whom noticed that 3 authors at Superu had done a better job with the same data only a few years before. None of the authors noticed. The editor of the NZ Med Journal didn't notice. The referees are supposed to be subject experts who watch their area; none of them noticed. 

The paper's authors eventually put up a note acknowledging the existence of the prior Superu work. And, ever classy, when their note (published in NZMJ as a separate piece) refers to their own prior work, they cite it; when they mention the Superu paper, it's as an inline URL that citation metrics scrapers might not catch. 

And of course they went for the "our attention has been drawn" framing rather than pointing to any of my posts on it, which might risk pointing out that some economist knew the lit in their area better than anyone who was involved in the writing or publication of their original article.  

Rehashing that now because I noticed a tweet by Clive Bates, who's expert in vaping. 

Zvi Herzig, Clive Bates, and Peter Hajek provided a post-publication review of some work on vaping harms by the Otago public health folks. They found a pile of issues that the authors, referees, and editors over at BMC Public Health missed. 

For example, you shouldn't compare the rates of some chemical's presence among smokers and users of other nicotine delivery systems without putting in a control group who don't use either.

First, the authors ignore background exposures (the ambient exposure experienced by non-users arising from the environment, food etc.), with the exception of an attempt to correct for acrolein exposures (discussed below). This is a serious error because most of the biomarkers measured are present in nonsmokers at significant levels.[7][8][9][10] Consider this illustration: if smokers have a level of a given chemical of 60 and ENDS users of 20, the authors would assert that exclusive ENDS use poses a third of risks of smoking. However, if non-smokers also have the level of 20 for the given biomarker, ENDS use poses no incremental risk at all. 

In fact, in the Jay[6] and Hatsukami[4] studies (comprising 11 of the 17 comparisons), abstinence and NRT arms show near-identical outcomes to those of their ENDS arms, yet this important finding is not reflected in the analysis.

They also note that a lot of people classed as exclusive ENDS users were in fact smokers, among other problems. There isn't carbon monoxide in vape, so if you're seeing high CO levels, you probably have somebody who's still smoking.  

Wilson, Summers, Ouakrim, Hoek, Edwards and Blakely wound up publishing a substantial correction, retracting their prior conclusion that vaping is about a third as harmful as smoking. 

Which is great and all. But while they grabbed the references that Herzig et al pointed them to in issuing their correction, they don't anywhere acknowledge Herzig et al's assistance. 

Bates, on twitter, points to the original referee reports over at BMC Public Health.

Wednesday 12 October 2022

Rail dysfunction

The state was warned repeatedly that its plans were too complex. SNCF, the French national railroad, was among bullet train operators from Europe and Japan that came to California in the early 2000s with hopes of getting a contract to help develop the system.

The company’s recommendations for a direct route out of Los Angeles and a focus on moving people between Los Angeles and San Francisco were cast aside, said Dan McNamara, a career project manager for SNCF.‌

The company‌ ‌pulled out in 2011.

“There were so many things that went wrong,” Mr. McNamara said. “SNCF was very angry. They told the state they were leaving for North Africa, which was less politically dysfunctional. They went to Morocco and helped them build a rail system.”

Morocco’s bullet train started service in 2018.

Politicians decided to route the thing to meet political constraints rather than engineering constraints. Then they decided to start building it in the middle, where there were no people, so you couldn't build one leg and build out from a working section.  

You can't outsource your way out of that kind of problem. You can ask experts who are skilled in delivery to come in and help, but if you make it impossible, it just won't work. 

In New Zealand's case, contracting in expert rail builders wouldn't be enough. You'd have to outsource the entire consenting and planning structure around it at the same time. 

Meanwhile, NZ's Rail and Maritime Transport Union says it's impossible for KiwiRail ever to be profitable

Rail and Maritime Transport Union (RMTU) general secretary Wayne Butson said it was “nuts” that KiwiRail was an SOE.  “If you have a look at the SOE Act, it’s very clear: it has to be an entity that’s able to make a profit. KiwiRail is not going to make a profit, not in my lifetime – and probably never, I would speculate.” 

If rail can't pay its way, it should be shutting down unprofitable services. But the roading network should also have to pay its own way, including a return on capital.

Tuesday 11 October 2022

Afternoon roundup

The afternoon's worthies:

Three waters and one mountain of debt

The government's proposed Three Waters reforms amount to shifting a mountain of financial risk onto central government's balance sheet. The entities will be aggressively leveraged, with a backstop Crown support guarantee that S&P views as critical in its ratings assessment. 

The government views distress scenarios as unlikely. 

But it is piling a ton of aggressively leveraged debt onto a globally-novel governance structure.

The pseudonymous Thomas Cranmer goes through it all over at Substack. 

And he also explains a bit of his background.

Before starting on a discussion of the proposed debt financing of Three Waters, I have a disclosure to make: whilst on Substack I am usually writing on topics that interest me based on my general knowledge and experience as a lawyer, in this instance I am writing as a lawyer who has practised as a leveraged finance and restructuring expert for 25+ years - starting in New Zealand at one of our leading law firms and then, for many years in the UK. I’ve acted for borrowers, banks, hedge funds and private equity sponsors putting these deals together and then restructuring them more times than I care to remember. The majority of these deals are in multiple jurisdictions including the US, Europe, MENA and Asia Pacific and cover all manner of sectors including utilities and privatised government assets. I failed at becoming an All Black or a writer so this is my bag.

These are simply my own independent views having reviewed the Department of Internal Affairs Information Memorandum on the debt financing (the Info Memo) and the Standard & Poors’ evaluation report (the S&P report). I have also reviewed the Castalia reports prepared for Communities 4 Local Democracy (C4LD) which first analyzes the proposed reforms, including the financing as it is currently proposed, and then suggests alternative structures.

He knows this stuff. 

He goes through debt restructurings at British water utilities that had been similarly leveraged.

He provides the warnings about heaping this mountain of debt onto untried foundations. 

And I expect that, if this all goes ahead, he'll be providing the "I told you so's." 

[Update: I'd noted some of the problem over at Newsroom a few weeks ago, but Cranmer is far more on top of the detail than I am. This really is his bag.]

Petrol excise holidays and emissions

The stupid petrol excise holiday also resulted in the transport sector bidding more ETS credits away from other sectors. 

Daalder notes that it amounts to about two hundred thousand tonnes of extra transport emissions. Government auctions about 5 million tonnes of credits per quarter, and that volume won't change with the excise holiday. 

So all that's then happened is a shift in where ETS credits have wound up, or potentially a slight increase in tree-planting as compared to the counterfactual. It won't and can't have affected net national emissions. The binding cap binds.

The excise holiday was still really stupid. But any increase in transport emissions means a reduction in net emissions elsewhere. 


Friday 7 October 2022

Information disclosure requirements

I was trying to fill in Wellington election papers. I remain a conscientious non-voter at central government level, but councils are more like local clubs. And Wellington is such a freaking mess. 

In most other areas where people make choices, there are all kinds of government regulations mandating information disclosure - even if there are plenty of easy sources of information.

When we bought our car, there was the compulsory sticker on fuel economy and running costs. But you hardly need that. A quick Google search will give you fuel economy comparisons between cars. 

Food has compulsory nutritional labelling and ingredients listing. 

You can't go out and buy insurance without getting a lengthy and tedious compulsory disclosure statement from your insurance advisor. Piles of compulsory climate disclosures are coming. 

So surely surely it would be dead simple to look up the voting records of incumbents. Wellington uses a ranked voting system. So I wanted to punish everyone who had voted for the convention centre, or the expensive library rebuild, or who had ever voted against housing (whether intensification or expansion), and reward those who'd done the opposite, while sticking new challengers between those. 

And similarly for Greater Wellington Regional Council. Punish everyone who voted for the draft Plan Change 1 on the Regional Spatial Plan that basically bans new subdivisions. 

But while government mandates tons of often-superfluous information disclosure in other sectors, it is impossible to tell how councillors voted on different issues unless you know when the vote happened, in which committee, and are happy to wade through council minutes to find it. 

A snippet from my column in the Herald this week:

But because no voter is particularly likely to change the outcome, few would spend the time and effort that would be required to gather the information needed to cast an informed ballot.

While it would be relatively simple for councils to set up and maintain websites tallying each vote, rather than burying them in impenetrable minutes, it has not happened.

Compulsory information disclosure is most warranted when the public interest in a better-informed decision is high but the private incentive to gather information is low.

Central government believes we need fuel economy stickers on car windows – despite the ease of finding the same information online. The case for requiring councils to provide basic information on councillors' votes is stronger than the case for fuel economy stickers on car windows, and it hasn't happened.

We can't be certain that making it easier for local voters to reward and punish incumbents based on their voting records would substantially improve turnout or improve local government outcomes.

But surely it's worth trying. Democracy depends on voters being able to "throw the bums out" when necessary, but that requires being able to tell who they are.

It should be a lot simpler.

One fun game in ranked-ballots. Clearly unfit people sometimes put their name in the hat. People who, if elected, might result in central government appointing a Commissioner instead. 

If you'd prefer a Commissioner rather than some set of candidates for mayor, ranking the unappointable person ahead of that set of people is basically a game of chicken with Central Government...

Sweet sweet rationality

My undergrad was double-honours economics and politics at one of the few places in the world where the economics department sat very far to the left of the politics department. Manitoba was a strange place in the 90s, and it sure wasn't as though a farm kid would have been able to do due diligence about it.

But there were still occasional oddities over in the pols honours seminars. A mature student in our political economy course, on the pols side, really liked to dismiss anything from economics with a slogan: "Economics assumes ceteris paribus, but ceteris is never paribus." I don't know if she just liked saying Latin things to sound clever, but she seemed to think it was a knock-down argument for just about anything in econ. 

It was nonsense in any case. Econ runs comparative statics to see what the isolated effects of a change might be, but then it runs general equilibrium models where everything can move. And comparative statics can be really really useful in tracing out first-order effects. It isn't that we assume that nothing else in the real world moves. 


The NZ Initiative, an economic rationalist think-tank, argues that all NZ needs is the Emissions Trading Scheme to spur action. Virtually no one apart from other economists, with their sweetly rational assumptions, believes that. People and industries need active spurs beyond a fluctuating carbon price to act.

Well, the ETS (as tweaked with the usual set of things we've argued for as improvement) is only enough for the covered sector, and we want a carbon dividend to go with it. But let's leave all that aside.

Within the covered sector, do conclusions about the merits of the ETS require a whole pile of strong assumptions about sweet sweet rationality?

It's pretty darned hard to see how. 

Here's my counterfactual scenario which looks nothing like actual-NZ, for sake of argument.

Most New Zealand businesses that don't need to compete in international markets satisfice. They aren't profit-maximising, but instead are kinda cruisy. 

They will make changes when it becomes really important to make changes, but competition in New Zealand is slack-as.

The Overseas Investment Office bans foreign companies from coming in and competing with Kiwi businesses. If they got OIO approval, they'd never get Council consent to set up premises that competed with local lazy well-to-dos who are buddies with everyone on Council anyway. And in lots of sectors, entrants would have to get around regulatory barriers that seem almost designed to protect cosy cruisy incumbents against competition.

All of it means competition is slack-as. Remember when Ikea tried to enter to break up cosiness in furniture retail? And the furniture retailers convinced Auckland Council that Ikea would be too popular so it would be a traffic issue so no consent should be issued and furniture retailer slack-rents should be protected? And how Ikea then didn't even bother setting up in Christchurch after the quakes when there was plenty of land near the airport and everybody was rebuilding? That, across almost everything, almost always. We now have one (1) Costco for 5.1 million people; let us all celebrate our benevolent government for this tiny tiny morsel of newly-allowed competition. Hooray.

In the US, if a business is cruisy and has moats against competition, it doesn't matter as much. There are sharks who will swoop in, buy the company, replace the management, and transform x-inefficiency slack-rents into profits. But if you run securities legislation just-so, you can make sure that hostile takeovers are just too hard. Securities legislation can also ensure that companies have incentive to stay private rather than be listed. 

Because government stifles competition, and because the market is small, talented managers flee the country for places where the vigour of competition plus larger market size means they are far more handsomely rewarded. And we're left with crappier managers who could barely respond to incentives if they wanted to. They just haven't the ability to do it: neither the drive, nor the capacity. Not the ones who are left and who age their way into senior positions while being competitive on the margins that drive appointment rather than the ones that drive profitability. 

Government only auctions a set volume of carbon credits each year in the covered sector.

Suppose that a business, Company X, has a coal-fired boiler that has a decade of life left in it, at which point it's due for replacement. The timing was all set when the thing was purchased, and they put a notification in Outlook reminding them "Look at boiler replacement options in 2030 so we can have a new one in place in 2032." They won't think about replacing that boiler until the Outlook notification pings, because they're slack-as, unless their running costs have absolutely gone through the roof.

Carbon prices have quadrupled since they bought the boiler and set that Outlook notification. And they're expected to double again before that notification pings. When it comes time to replace the boiler, they'll go with a low-carbon option. Given rising carbon prices, it would make sense for them to scrap that boiler today and put in a new one: they'd save money, even though there's life left in the current boiler. 

But they have tons of slack: x-inefficiency everywhere. So they're not going to even think about it until the notification pings, unless they're hitting real problems due to input costs. They have other priorities, and not enough talented managers to handle everything that might make sense in a more competitive environment. 

And suppose most businesses are like this. 

Just suppose that's the case. It certainly isn't; it looks nothing like the New Zealand we all know and love. [There is actually a hell of a lot more going on in decarbonisation than anybody notices, do check out some of the case studies that Energy Resources Aotearoa points to here.]

We're just here trying to give Pattrick the strongest possible case. 

We've made sure, in this little toy verbal model, that nobody is running differential equations in their heads and optimising that way. Not that standard models require that anyway, it's just a stupid caricature of how economists think about rationality. But let's rule it out explicitly. 

Does the ETS fail to work?

Company X buys more carbon credits than it would if it were optimising rather than satisficing. They use more coal for longer than would make sense on a profit-max basis. That pushes up demand for carbon credits in the ETS. The government only auctions off so-many credits. Net emissions are determined by the number of ETS credits auctioned or allocated by government. 

So prices go up.

Prices going up does two things. 

Some folks will try to generate credits through forestry, because trees can suck up carbon very cost-effectively at current ETS prices. But remember: they're slack-as too. They'll also be slow to respond, and will mainly be spurred to do so if they were already at a decision point about land use because some other Outlook notification pinged. But we do get more trees. More carbon credits are then available, but each one of these credits is backed by a tonne of emission removals by trees. Net emissions remain the quantum set by the ETS cap. 

At the same time, there isn't just Company X around. There are lots of other ones. Outlook notifications will be pinging on all kinds of decisions around investments where carbon prices affect long-term costs. 

ETS prices are higher than they would be if Company X had been profit-maximising. Some companies whose notifications aren't pinging will hit trigger points where rising carbon prices force an out-of-sequence decision even if they hadn't wanted to think about it. And on all of the Outlook notifications that are pinging, there won't just be catch-up where firms invest in things that they maybe should have done a year or two ago. There will also be some overinvestment in low-carbon tech by firms who are pulled into making their shift ahead of when they might have, if Company X and others like it hadn't pushed up demand for credits. 

And the quantum of net emissions remains determined by the number of credits issued and allocated by the government. 

All that's then happened is that the cost of adapting to rising carbon prices has risen relative to a first-best profit-maximising world. We get some firms flipping tech later than they would in a first-best world, and potentially some flipping earlier too. That sort of thing affects cost, but not quantity. And it also means that the least irrational firms do best: by being sharp and watching for points at which they should flip, they get a cost advantage over their lazier competitors. 

You can even imagine a limit case where there's no rationality at all around carbon investment decisions and they're all just random. A sequence of bad random decision-draws leads to bankruptcy. Lucky companies make the right investments and don't have to purchase as many expensive carbon credits; unlucky ones make horrible decisions and then either have to purchase far more expensive carbon credits than they might have, or are unable to afford them and go bankrupt. The costs of adjusting to higher carbon prices, in that world, will be very high.

But net emissions are still determined by the number of credits auctioned and allocated by the government. 

The simplest way of thinking about all of this is a game of musical chairs. Ten people circle nine chairs. When the music stops, they could have an auction to decide who misses out, or they could all scramble around to see who finds a chair. An auction, with everyone bidding well, makes sure that the one sitting out is the one who least wants to keep playing. But even if they're all just scrambling around, with many of them utterly confused about what a chair even is, there are still only nine chairs and one person will wind up without one. Anyone not sitting on a chair when the music starts again is out of the game. 

Regulation targeting the covered sector will not affect the quantum of net emissions. If it targets and cost-effectively eases a real additional market failure, it can reduce the cost of reducing net emissions. 

But if you're trying to pull something like EECA's GIDI Fund and encourage companies to bring forward investments in low carbon tech, it just can't reduce net emissions. If EECA has gotten things right, it's encouraged a company to make the flip at a time that makes sense, before the notification pings. It doesn't solve any particular market failure, but it might reduce some x-inefficiency losses. 

And you may have noticed something. We've made an assumption about the bureaus' abilities to spot these opportunities. We assumed at the outset that companies are really slack. If we assume that companies are all stupid and lazy, and that the bureaucrats know better, we've put something of a thumb on the scales. 

Harold Demsetz should be whispering in your ear here, warning you that you need a comparative institutional analysis that has realistic businesses and realistic bureaucracies. You can't just assume that businesses are lazy and need to be prodded by things other than rising carbon prices and then conclude that benevolent and wise officials will make the right calls. The officials we have are ones who'll call it a big win for the climate if they've gotten a company to bring forward a carbon-related investment by a year at the cost of that business pushing back other projects. Surely that should give us pause. 

If you're going to assume that bureaucrats are better motivated and more rational about getting businesses to do what's profitable than those businesses are themselves, because business in NZ is slack, think for a minute about who sets, enforces, and fails to change the sets of rules that result in any business slackness in that purely hypothetical world. 

The best objection I can think of to my position here is that high carbon prices make it harder for the government to reduce the cap more quickly. And that view isn't crazy. But holding that view, without simultaneously arguing for a carbon dividend so that the median voter wants prices to rise faster over the next several years, doesn't seem like clear thinking. It seems like motivated reasoning designed to justify interventions that somebody wants for reasons other than GHG reductions. And it should also be accompanied by a strong requirement that any regs prove themselves to be cost-effective relative to ETS prices. We don't have that either. 

Wednesday 5 October 2022

Reader mailbag: the tricky maths of being inclusive

A loyal reader sends through a bit of math checking one of the standard bits of boilerplate on policy reports around climate change and adaptation strategies. 

I've seen the claim all over the place too. It's one of those things that feels like it was never meant to be taken literally, while simultaneously hinting that it should be taken literally. 

What does disproportionately even mean? If it isn't pinned down before someone goes in to try to make sense of it, it'll turn into a motte-and-bailey thing. 

My reader writes [with minor edits from me to anchor links]:

The tricky maths of being inclusive 

Adapt and thrive: Building a climate-resilient New Zealand – New Zealand's first national adaptation plan was published on 3 August 2022, and released on their website.

The webpage contains the extraordinary claim that:[1]

No two communities will experience climate change in the same way. Communities that are less able to adapt and disproportionately affected by climate change – including Māori, Pacific people and ethnic communities, low-income groups, disabled and older people, women, children and youth, and rural communities – are considered throughout this plan.

Why do I say this claim is extraordinary? Well, leaving aside the fact that the report does not contain any data to back it up, the claim is all but impossible mathematically.

Exploring further:

First, we need a scale on which the effect is measured. In the context of climate change adaptation, let’s call this scale expected adaption costs (A). This scale starts at zero (no expected costs), with positive values representing larger expected costs.

Second, to say that a group (G) is “disproportionately affected” the average A (Ā) for individuals in G has to be different from the average effect on individuals in the population (P) from which the group is drawn. I will use G to mean all people in the communities listed in the claim.

Third, the plan asserts that the communities G will be more adversely affected than others, i.e. ĀG > ĀP.

Fourth, let’s define another group R, consisting of everyone else, i.e. those in P who are not in G. Simple maths tells us that ĀR < ĀP < ĀG. That is, the average effect for R has to be less than the population average. This means that R is also “disproportionally affected”, just in the opposite direction from the effect on G.

If G had a small number of members relative to P, then in most situations ĀR would be roughly equal to ĀP.[2] In that case we could ignore the disproportional effect on R for practical purposes. But what about a situation in which most of the population is in G? In that case, the advantageous effect on those in R must be of a significantly greater magnitude than the adverse effect on those in G.

Let’s make a rough stab at working out the numbers in P, G and R. I’ll call them p, g and r.

Using the 2018 census data in NZ.Stat,[3] p = 4,699,755 (usually resident population count).[4]

The NZ.Stat standard breakdown by personal income, ethnic group, age and sex gives us a first estimate of r.[5] If I use total personal income below $30,000 as the “low-income groups” criteria, and age below 30 years as the “children and youth” criteria[6],  age 65 years and above  as the “older people” criteria, and everything other than “NZ European” and “New Zealander” as the “Māori, Pacific people and ethnic communities” criteria, then I get a first estimate of r = 582,210 (i.e. 12.39% of p).

But some of those people live in “rural communities”. The NZ.Stat subnational population estimates[7] for June 2018 allow us to estimate the proportion of males aged 30-64 that live in rural areas: 12.63%. This allows us to refine the estimate of r = 582,210 * (1 - 0.1263) = 508,677 (i.e. 10.89% of p).

But some of those people are disabled. The NZ.Stat disability tables for 2006[8] allow us to estimate the proportion of males aged 30-64 with “European” ethnicity that have a disability: 16.93%. So, my further-refined estimate of r = 508,677 * (1 – 0.1693) = 422,558 (i.e. 8.991% of p).

The claim doesn’t come with definitions, so I’ve had to make some assumptions. Further, the data on which I’ve made these estimates does not exactly line up with those assumptions. In particular, I’ve excluded people aged 25-29, which will bias the estimate downwards. And I can’t rule out some interactions between the variables I couldn’t control for when estimating the proportions in rural communities and with a disability.

Accordingly, I‘ll call the final estimate of 9% “about 10%”. So, the claim of disproportionate (adverse) effect applies to about 90% of the population. And, following the maths outlined above, the required disproportionate (advantageous) effect has to be around 10 times stronger.

Is this realistic? We’re talking about average effects here. Seeing as R is made up of middle-aged males with no recorded ethnicity, a middle-to-high income, living in an urban area, and without a disability, you’d think they were disproportionately more likely to own a home and to live near the coast. At least some of R are in the firing line for rather large climate-adaption costs. To maintain the group average for R, those coastal homeowners will need to be balanced out by others facing an even stronger advantageous effect. This will most likely require a subset of R to be facing negative climate-adaption costs – i.e. receiving a net positive benefit from climate change. This seems inimical to the Secretary for the Environment’s opening message in the report:

New Zealanders are already feeling the impacts of climate change… More change will come, and impacts will increase, disrupting nature and society, affecting people’s health and wellbeing and damaging livelihoods.

To conclude, the report makes a very strong claim of where climate-change adaptation costs will fall, which is mathematically implausible, perhaps impossible. The report contains no data to back up the claim, and the reasoning behind it is scant. Did the report go through a quality-assurance process? If so, why wasn’t this issue picked up? Are there other clangers in the report? Should readers trust anything it says?

[1] This claim, or a close analogue, is also made in the report’s text, but is less clearly stated.

[2] The exception would be if the effect on G was extreme.

[4] NZ.Stat: Age and sex by ethnic group (grouped total response), for census usually resident population counts, 2006, 2013, and 2018 Censuses (urban rural areas).

[5] NZ.Stat: Total personal income, work and labour force status, and ethnic group (grouped total responses) by age group and sex, for the census usually resident population count aged 15 years and over, 2013 and 2018 Censuses (RC, TA, DHB).

[6] The standard NZ definition for “youth” is < 25 years. See, e.g. Unfortunately, the age categories available in NZ.Stat don’t align nicely.

[7] NZ.Stat:

Subnational population estimates (urban rural), by age and sex, at 30 June 1996-2021 (2021 boundaries)

[8] NZ.Stat: Disability status by place of residence, age group, sex and ethnic group, 2006 

Afternoon roundup

Minor notes on the closing of the browser tabs:

Sunday 2 October 2022

Economists Panel

The Financial Services Council ran a panel session last week with a few Chief Economists from different sectors: property, investment, banking, and policy. 

I was the policy guy.

The session's now online for those keen.

Rob Stock wrote up one part of the discussion. Jack Tame asked the panel how much unemployment would have to rise to get inflation back under control. 

I didn't like the question's framing. Unemployment will rise regardless of what RBNZ does, short of increasing inflation at an accelerating rate. But I'd gone on at too much length on prior questions and didn't want to spend a ton of time on it. I probably should have, because Stock reported it as though economists want unemployment to rise. That ain't it, or at least it shouldn't be. 

I just said that hardship would be hard to avoid from where we are. That's obviously not an endorsement of hardship. Where we are sucks. 

But I went through the problem in more depth over at Newsroom.

And here we start seeing what maximum sustainable employment means. Employment levels, during this early phase, are not sustainable unless inflation continues to increase. In the same way that you or I might buy more of anything we like when it’s on sale, and more than we would normally purchase, firms want to hire more workers than they otherwise would when inflation pushes real wages down.

It isn’t sustainable in a very obvious sense: labour demand is only as high as it is because prices for firms’ outputs rose more quickly than wages. But firms are competing for workers and want more of them when wages are low relative to the prices they can receive for their products. That competition pushes workers’ wages up.

Once wages catch up, then labour is no longer on sale. Companies that had wanted to do lots of hiring when workers were effectively on special stop wanting to staff up and some even contract. Employment rates go down again – even if the Reserve Bank has done nothing to tighten monetary policy.

And that’s the spot the Reserve Bank has gotten us into. Monetary policy errors driven by incorrect forecasts back in 2020, followed by failures in correcting the errors quickly enough, mean we now have an awful mess to get out of. All paths out are painful.

I absolutely do not envy RBNZ right now. Forecasting a year out, given the mess in Europe, will be far from simple.  

On a better note: it's always fun to talk with the vendors at these kinds of conferences. There were maybe four different companies offering their different AML-KYC solutions. They can now onboard customers through those processes at less than five dollars a pop. KYC compliance wouldn't have to murder iPredict today.