Friday, 17 March 2023

Fringe Benefit Follies

I like the Fringe Benefit Tax.

Other places wind up in all kinds of nonsense by putting tax-preference on things if they're employer provided. It's one reason health care is messier than it should be in the US.

And New Zealand also used to have a similar problem in the era of very high income tax rates and very nice tax-free employer-provided cars. 

Tax reforms in the 80s tidied all that up. If the employer provided you with something valuable, the employer would be liable for paying tax on it as though the employer had paid you salary. 

And what exceptions there have been, as best I'm aware, have been where things get just too messy. 

Employer-provided car parks can be messy.

Suppose you have a commercial office tower with a parking level. You lease out floors to different companies. Some of the leases come with car parks; some don't. Whether you work the price of the carpark directly into the lease charge or as a separate line-item doesn't much matter. Some tenants will put a lot more value on a space than other tenants; you might want to keep things a bit opaque just to be able to better bargain on those margins. 

If a company gives one of those parking spaces to an employee, what's its value for FBT purposes? Tough to say. If you require that the commercial building put separate line items for parking so that you can make it FBTable, all the tenants with car parks will want a higher rate for their floor space lease and a lowballed car park space. Sorting it out would not be simple. What would IRD do: force each commercial building to auction off the spaces among tenants each year? If it's a small building, you're likely to hit collusion issues. 

And what do you do about spaces in places where the market clearing price is plausibly zero? 

Anyway - not straightforward. You could do something like a deemed-value charge on it. It would be a bit messy because a space right in your building might be more valuable than one you'd have to walk some distance to access, but spaces in commercial buildings can also have a lot of disamenities that make them less valuable than others - they're spaces in buildings not designed to be parking garages and so they're even worse to navigate than commercial car parks. 

So far, it's all been in the too-hard basket. I generally expect that when IRD declines to tax something, it's because it's actually hard rather than because they don't like taking peoples' money. 

And at least in principle, the FBT-exemption for employer-provided car parks creates a distortion. Imagine someone who's close to indifferent between driving in to work and taking the bus. If they have to pay for the bus out of after-tax income, but get to pay for the parking spot out of before-tax income (through a bargain with the employer that they'll have a slightly lower salary than otherwise and have a car park), that worker might choose to drive rather than take the bus just because of the tax advantage provided to parking. 

It never seemed likely to be that big of a distortion. In places where parking isn't scarce, the cost of a carpark is so close to zero that it can't matter. In places where parking is scarce, are there really that many people who receive an employer-provided car park? Among those, are there many who would have forgone a company-provided car park if they had to take a bigger salary cut to get one? What's the real effect at the margin here?

The government passed legislation this week exempting a pile of driving-substitutes from FBT. Employer-provided transit passes, e-scooters, scooters, bikes and e-bikes will all be FBT-exempt.

That feels like a fairly substantial inframarginal transfer. How many people use transit to get to work as compared to having an employer-provided car-park in places where car parks are scarce? How many people who walk to work would like to have an e-bike or e-scooter for recreational purposes and will claim that it's for getting to work? 

Remember that the higher-end e-bikes and e-scooters aren't cheap. An employer-provided one will come at a hefty tax discount for higher-earners. And where employer-provided parking is naturally limited by the number of spaces that can be found in a crowded downtown, pretty much anyone on a higher salary who'd be keen on an e-bike could enjoy the discount. 

Suppose you're on the 39% tax rate. An $11,500 e-bike contains $1,500 in GST. You have to purchase it out of after-tax income. So you have to earn an extra $18,850, at the margin, to get the $11,500 to pay for the e-bike. But your employer could give you the same e-bike for $10,000, assuming that the employer can wipe the GST as a business expense (while charging GST on the firm's final output). 

The legislation has provision for setting maximum allowable costs or for setting requirements on the FBT-exempt vehicles. Depending on how this gets set, I'd expect a whole lot of recreational e-bikes purchased for higher-earning employees rather than cash raises - regardless of whether the things get used in commuting. Who's going to monitor? 

And remember that the distortion is greatest for those on the highest incomes. They'll have strongest incentive to request e-bikes out of before-tax earnings. 

It all has me wondering whether it's better to use some deemed rate for employer provided parking, and ditch the new subsidies for employer-provided bikes. 

Or maybe we should get FBT-exemptions for shoes for those who walk to work. I've worn out a hell of a lot of shoes going up and down the Kaiwharawhara bridle path to make the trek into town. 

Thursday, 16 March 2023

Richard Meade on banking and competition

Prudential regulation requires banks to hold more capital than they would otherwise like to, so that there's less risk of default and less risk that the bank imposes bailout risk. 

New Zealand does not have deposit insurance, but some are of the view that there's an implicit guarantee of at least some sort - that the government would not let depositors be too badly hurt. The open-banking resolution mechanism would impose haircuts on depositors if there were still a shortfall after unsecured creditors and equity were burned through, and I don't think anybody really knows how big a haircut might prove politically intolerable. In that view, deposit insurance then just winds up requiring up-front payment for the insurance they're probably already getting for free. 

In any case, high capital requirements mean that banks have to hold a lot of capital; they have to compete for that capital against other potential uses of it. So you'll wind up with high nominal reported profits. And politicians will then point to high profit levels as reason for windfall taxes and the like, while ignoring return on equity. 

Those big numbers generate political demand to do things. And so it seems near-certain that the Minister of Commerce is going to ask ComCom to run a market study on the banks.

Over at The Conversation, Richard Meade raises a few points that need to be kept in mind:

  • The OCR sets a coordination point for pricing that could be considered price-fixing in other sectors; 
  • RBNZ's cheap wholesale funding during the worst part of Covid reduced the risk of meltdowns while preserving bank profitability;
  • RBNZ restrictions on entry, aimed at ensuring financial stability, also prevent competition.
He concludes with a few questions:
First, are growing bank profits due to banks acting anti-competitively, the Reserve Bank fighting inflation and preserving financial stability, or both?

Second, if bank profits are indeed excessive and due to anti-competitive behaviour, are there measures the commission could recommend and practically implement that would improve outcomes?

Finally, if bank profits are excessive, and at least partly due to the Reserve Bank doing its job, would interventions by the commission to improve competition worsen financial stability or frustrate the fight against inflation?

Answering these questions will need both the commission and the Reserve Bank to have serious conversations about how competition policy and banking regulation can be made to work together to achieve better outcomes for both bank customers and the wider economy. Little would be gained by improving bank competition if that reduces financial stability or worsens inflation.

I still think that a market study focused on barriers to entry, including account portability, could do some good. 

And I still think that that will not be what the Minister of Commerce asks for. I expect instead that the Minister wants show-trials of bank executives during the election campaign, during which they can be harangued just as the supermarket CEs were during that market study, with any report coming after the election. That kind of market study would focus on interest rate margins, mortgage interest rates and the like. 

The point would be to make it easier for the government to blame the banks, rather than bad government policy, for poor outcomes during the election - while trusting that ComCom wouldn't issue any final report until after the election. 

And the risk would be a whipping up of appetites for very bad policy and rash promises during an election campaign. The draft supermarkets report was poorly done, and created an anchor point for populist expectations - and for legislation.

If I'm right, I hope that ComCom is able to push back on any weak terms of reference and propose something that could add value rather than do harm. 

And for a bit more on New Zealand's monetary policy mess, Bryce Wilkinson's report, out today, is a must-read. 

Wednesday, 15 March 2023

Failing to clear

Every quarter, the government auctions off a batch of ETS carbon credits. Every tonne emitted in the covered sector has to be covered by an ETS credit. 

This quarter's auction failed to sell any units as the confidential reserve price was not reached. They'll roll this quarter's volume into next quarter's auction. 

We don't know what the confidential reserve price is, but spot NZUs last traded on the secondary market at $67.50. Futures contracts have prices increasing to $86 by April 2027. 

Carbon prices dropped considerably this year; they had reliably been running between $80 and $85/tonne for the second half of last year.

So what's up, other than that the bid that would have cleared the market was obviously below the reserve?

Candidate explanations:

  1. The market is no longer credible and that's why nobody's buying any. I've seen that one advanced on twitter. But if that story were true, the spot price wouldn't be at $67.50. 
  2. Large traders were trying to game the market and thought the confidential reserve price was lower than it actually was. It's potentially possible. I note that the spot price rose from $67.50 to $68.00 while I was typing (and the April 2027 price jumped to $88.95 from $86). Could be that some traders who were disappointed at the government auction have emissions that they need to cover. 
  3. Overall government policy becoming less credible. Government has abandoned a pile of really dumb policies in the climate space, but it's also done other dumb stuff like respond to a petrol excise increase with a very long-lasting subsidy for road use. That, in combination with maintaining a low price ceiling for the cost-containment reserve, might have people wondering about overall commitment to net zero. Which would have to reduce willingness to pay. But futures prices still looking a lot higher than current prices. 
  4. Price floor set back when carbon prices were in the $80+ range, and not adjusted down with the drop in carbon prices. 
Perhaps some combination of 2, 3 and 4? In that case we should expect spot prices to lift as those without sufficient reserves and who'd been banking on getting NZU at auction this quarter scramble for units to meet surrender obligations that fall before the next quarter?

I still think National and Labour should agree on the quantum of unbacked NZU that the government should be allowed to auction or allocate between now and 2050. Set that in stone, and write into future NZU contracts so that if government issues more unbacked credits than that amount, holders of existing units can sue. 

Set a carbon dividend out of ETS revenues to make higher prices more politically credible.

Then ditch the current price cap. Replace it with a price cap that follows the volume-weighted average price of carbon in carbon markets that the Climate Change Commission considers credible.

When and if the price cap is triggered, if no better way of backing units at that cap is available, government should buy and retire credits from the cheapest credible international market. It would make money on the deal - they're selling at the weighted average price and buying at cheapest price. Take the difference and stick it into the carbon dividend. Along with any excess dividends the government earns from its stake in the gentailers if high carbon prices feed through into high power prices. 

Problem solved really. And especially if you make sure that the ETS recognises credible CCS and direct air capture solutions as they come though. 

However, the pressure of necessity will be low at this auction. 

Those who have to settle emissions must file accounts in March and hand over NZUs in May. 

It is unlikely any liable parties would have left themselves exposed at this point and probably have a stockpile already. Many would also have taken forward cover fearing higher prices and will be sitting on a loss-making position now. 

As a result, traders may be willing to take a risk and test the market and the confidential reserve price at this week’s auction and even the following, even if just to push the price lower.  

However, they could be unlikely to do so for the entire year. 

In the longer term, the Ministry for the Environment’s recent forecasts of NZU supply predict a decreasing supply and an increasing demand over the coming years.

Afternoon roundup

It's been a while since last posting. The tabs...

Tuesday, 28 February 2023

Tilting at bank profits

RBNZ Chief Economist Paul Conway wants a ComCom market study into banking. He's worried about 'profiteering'.

But this is the first time the Reserve Bank, which is statutorily tasked with regulating banks, has stepped in so explicitly. It's been warning of "profiteering" in some sectors during the cost of living crisis and in the aftermath of Cyclone Gabrielle, and singled out the widening gap between mortgage and term deposit rates.

"It's a very legitimate thing for the central bank to be concerned about and to be keeping an eye on," Conway says. "It's a general warning across the New Zealand economy that now is not the time for profiteering. Now is actually the time to start paying the price, for climate change and, in this instance, for the cyclone."

Commerce Minister Dr Duncan Webb says no decisions have yet been made about the focus of the next market study. "However, I am focused on using the tool to ensure markets operate fairly for consumers," he tells Newsroom. "I am particularly interested in improving markets where the greatest long term gains can be made for ordinary New Zealanders."

I've also thought a market study into banking, and insurance, could be well warranted - but with a very different focus.

I've worried that barriers to entry look awfully high and that we may be missing out on innovations happening overseas as consequence. 

Last year I'd urged that ComCom change how it does market studies. Rather than a giant draft study that tries, and inevitably fails, to estimate weighted cost of capital and potential excess returns, start with a desk-based analysis of barriers to entry. 

Because whatever you wind up doing will depend on barriers to entry anyway.

Suppose that you really strongly believe that there are high excess profits in whatever sector. If you're right, what's stopping anyone from coming in and eating away at those profits? Remember that profits are a signal that tells other to enter. If they aren't entering, is it because you're wrong about your guess on excess profits? Or is it because there are regulatory, legislative, or other barriers preventing entry? 

When ComCom thought there were excess profits in supermarkets, and I was yelling about barriers to entry, some folks argued for KiwiGrocer as cartel-busting parallel to KiwiBank. But now we're talking about banks, and KiwiBank's already there as KiwiBank. And for whatever reason, it seems far less profitable than other banks. Surely that should give some pause.

Now banks wouldn't be the first place I'd be aiming a market study: medical services really should be first in line. But barriers to entry in banking and insurance are obvious things to look at. 

But man it's a worry if the RBNZ is wanting the thing aimed at 'profiteering'. If that's the kind of advice the Minister's getting, then expect a request for a very different market study. Instead of looking at barriers to entry, it'll be more like the Supermarkets draft study - where they raked the CEs over the coals for weeks and tied up supermarket exec teams for months in inquiries. 

If that's the request that ComCom winds up getting, then it's a test of ComCom. 

Do they indulge the Minister's preference for a highly politicised and populist bash on the banks in an election year? Or do they do the work that actually needs doing: checking whether barriers to entry, including the nonsense that RBNZ layers on top of the industry, and CCCFA regs, make for less competition than would be desirable?

Heck, RBNZ is undertaking an investigation into whether it should make it even harder for foreign banks to operate here. And Paul Conway's pointing fingers at banks for profiteering.

Jonathan has a few bits from me in his piece. It'll ungate tomorrow if you pull the /pro from the URL. But the bit including my quotes is here:

Dr Eric Crampton, chief economist at the NZ Initiative think tank, says the appropriate use of a market study would be to ascertain what barriers there are to new entrants to this country's banking market. 

New Zealand has been a slow follower on structural changes like open banking, and such easy wins as account number portability. When phone number portability was introduced in this country's cellphone market, it played a critical role in breaking apart the Telecom-Clear duopoly.

It's expected bank account portability would make it easier for bank customers to move their money (or their debt) to more a competitive bank.

What all this means is it can be difficult for a new player to get a toehold in banking here, Crampton says. "In groceries, the Commerce Commission found zoning and consenting proved substantial barriers preventing entry. In building materials, the commission’s draft study pointed to substantial barriers to using foreign-sourced building materials. In both cases, easing barriers to entry would improve competition," Crampton says.

"If the Commerce Minister told the commission to look at barriers to entry in banking, or in insurance, that could be worthwhile. The combination of barriers to entry and regulatory measures like the Credit Contracts and Consumer Finance Act may have had substantial detrimental effects on competition.

"If so, it would be great to document the barriers, their effects, and how those barriers could be eased. Is New Zealand seeing the same innovations in FinTech and InsuranceTech as are being seen overseas? Could a foreign online financial service provider easily enter the New Zealand market, or would it be impossibly hard given our scale? What are the effects on consumers?

"But I would greatly worry that, in an election year, a minister could be tempted to send the commission off on more populist tilts against the banks," he says. "Sending the commission off to interrogate the banks about interest rates and mortgage rates would be politically tempting and help divert attention from the prior government failures that led to rising rates. I would also hope that the commission would push back against proposed studies that would shed a lot more political heat than provide actual light."

It would be exceptionally disappointing if ComCom got put to populist electoral purpose this year.  

Morning roundup

The morning's worthies, as I try to trim the tabs...

Monday, 27 February 2023

Daft idea of the day

Without anyone planning it, Paris gets fed. And so does Auckland.

Not good enough for some people. 

There's demand for a national food strategy. 

It seems completely unnecessary. And ludicrous. 

If you think that poor people cannot afford nice things, there are a couple useful things you can do. Most substantially, finally fixing housing would bring down living costs. But if that didn't solve things entirely, giving poor people money lets them decide what to do with it - without screwing up the rest of the food system. 

Just look at this mess. 

This has been the state of the country's food system since the Covid-19 pandemic began, and experts are calling for a national food plan to help increase food security.

So what is a national food plan?

A national food plan is a policy that would guide food-related decisions and actions in the country.

It is an approach to understanding and addressing issues within food systems and a plan for making decisions around food.

Who would make the national food plan?

Iain Lees-Galloway of Aotearoa Food Rescue Alliance (AFRA) said ideally a food plan would be developed by all stakeholders including producers, manufacturers, retailers, food rescue and relief organisations, welfare organisations, environmental organisations, and others.

“They can bring all the various interests together and have the power to see it implemented,” he said.

It would then be led by the Government.

"Increasing food security and reducing food waste should be just as important as growing the value of our food industry. A food plan could set out that vision and present a roadmap for how we could get there,” he said.

Chief executive of Eat New Zealand, Angela Clifford, said ideally the plan would embrace treaty obligations and reflect te ao Māori.

“It should be co-designed by all participants in the food system including farmers, fishers and eaters. It should be run by a collaboration between government, industry and community.”

Go back and count the buzzwords. Then go back and tell me if you can figure out what precisely they're proposing. The buzzword-to-actual-content ratio is infinite. Not a good sign. 

I'm just glad it's being proposed now rather than last year.

A year ago, Ardern would have appointed Rob Campbell to Chair the thing before anyone had worked out details.

Now, the Hipkins-led government's trying to get rid of some of the costly unworkable stuff Ardern loaded them with and won't be keen to take on new nonsense. 

But how much would setting this up cost taxpayers?

This really depended on the final design of the plan, Clifford said.

“The real question is the cost of not implementing a plan. The current situation leaves us hungry, unwell and ecologically diminished. That’s its true cost.

“All it takes is government will and re-alignment towards our domestic food system. Given it’s an election year I would fully expect political parties to have a food security plan as part of their offering to voters. Hungry people do not make happy citizens.”

All it takes is government will, people. And clicking its heels together three times while wishing really really hard.  

A case for Film Commission funding

Film subsidies aimed at boosting economic activity are a mistake. That stuff just doesn't work.

But if you're trying to subsidise more stories and content about a small country at the far end of the world, well, they can be effective for that.

And I have a proposal for one. 

A decade ago, Henderson's fight with IRD, which eventually saw him win and buy the building that IRD leased, was turned into a movie. With some help from the Film Commission. If you haven't seen it, it's great fun.

A digger driver owed $6 million by his local council after an epic 18-year fight for justice has asked the High Court to sell the local authority’s offices after it missed a critical deadline for paying the court-ordered sum.

Read the whole thing. It's great! Or, rather, horrible. 

Daisley explained: “The deal was, I take the charging order off if they pay the money. They paid a portion of what’s owed. They reneged on the payment, so the charging order stayed.”

Daisley - who has previously described the council as “absolute low-life mongrel bastards” - said his lawyers had now asked the High Court to act on the charging order and to sell the council headquarters.

Where did it all start? Council lied to Daisley repeatedly about the consent on his site for quarrying. He wound up having to sell the site.  

Daisley and the council’s dispute goes back to 2004, when he bought a property in rural Northland on which there was a working quarry that had been mined for decades.

Early the next year, Daisley was hit with an order from the council to stop quarrying without a resource consent - an order that was followed by other abatement notices, rejection of his application for a resource consent and then, in 2009, enforcement proceedings in the Environment Court.

His inability to work the quarry and deal with enforcement action led to financial difficulties, forcing him to sell the land.

Then, in 2009, a lawyer hired to defend the enforcement action visited the council offices and carried out an archive search of the property record, revealing a consent from the 1980s that was still valid and did not limit what could be taken from the quarry.

Justice Kit Toogood KC, who heard the case, found that every time Daisley asked the council about “the existence of a resource consent, the council denied that a resource consent existed and insisted that Mr Daisley’s quarrying was unlawful”.

Daisley told the Herald the discovery didn’t end his problems - in May 2011, the new owner was granted permission to mine the quarry, even though the council persisted with its enforcement action against him until July 2011.

Toogood found in Daisley’s favour and ruled that the council was “guilty of misfeasance in public office through recklessly misinforming Mr Daisley and others about the existence of the consent and in failing to take steps to make amends after the consent was found”.

It sounds like small town nonsense where Council just hated Daisley and wanted someone else running the site. I hope that Damien Grant gets appointed liquidator of Council assets so that Daisley can get his due. It would make a wonderful movie.  

Friday, 24 February 2023

Entrance tests for MPs?

Over at Newsroom, Marc Daalder suggests that some kinds of stupid are disqualifying for potential MPs. 

I just think he doesn't go nearly far enough.

Daalder takes aim at a bunch of weird beliefs that Maureen Pugh has expressed. Doesn't get climate change despite clear scientific consensus. Weird on pharmaceuticals and alternative medicines. 

Both of those are well out of line with scientific consensus.

But if we abandon the idea that crazy and ignorant people also need to be represented in Parliament and start setting entry tests on this stuff, well, I have a few proposals. 

First up, any MP that can't pass intermediate micro isn't qualified. Give a basic tax incidence question, see if they follow the consensus of economists. If they don't, kick them out. Same if they think rent control is a good idea - there's a very clear expert consensus on this one. 

Next, rules on genetic modification. Clear scientific consensus that GM crops are safe. The rules against them do a lot of harm. We'd kick out most of the Green Party on this one, if any were left after the rent control question. And that could be fine. They'd be replaced by pro-science greens. Don't you like science? It would be better, right?

How about any MP who thinks that stadium and film subsidies provide net benefits? Both are in clear violation of the scientific consensus. We can retrospectively kick John Key out of Parliament. He loved stadium subsidies. 

Kick out of Parliament, and out of the bureaus, anyone who demonstrates through their policy advocacy that they really really do not understand how an ETS with a binding cap works. 

I really love this, so long as I get to be the one setting the science tests. Could be great fun. Might be risky if I'm not the one setting the tests though. 

Breaking the internet

Google News is getting pared back in Canada in response to Canadian legislation that would force platforms to pay news platforms for links.

Remember that one of the founding principles of the web, right at the start, is that linking is free. People can put up paywalls if they want. They can set robots.txt to block indexing. But you can't charge somebody just for linking to you.

Canadian media platforms, like failing New Zealand media platforms, want to put a link tax on platforms.

So they're getting fewer links to Canadian news. At least as a test, so the platform's ready if Canada passes the legislation. 
The company said Wednesday that it is temporarily limiting access to news content for under four per cent of its Canadian users as it assesses possible responses to the bill. The change applies to its ubiquitous search engine as well as the Discover feature on Android devices, which carries news and sports stories.

I still think this is extortion. And the right response to an extortionist is not to pay. 

Me on this stuff from 2021... 

Thursday, 23 February 2023

Afternoon roundup

Oh the tabs. 

Chatting immigration

I'd yesterday talked immigration with the Herald's Damien Venuto for their Front Page podcast series.

I mentioned or alluded to a few papers. You can find them here. 

Paying for cyclones

Step back in time with me. Six months ago or thereabouts, there was a lot of discussion about the size of the tax cut in the coming budget. Or, rather, the long-overdue inflation adjustment to the tax brackets. Tax bracket creep has been enormous since the brackets were last adjusted over a decade ago. It would be a cut in taxes relative to the large inflation tax increases that otherwise would continue to bake in.

What seemed most likely, at least to me, was that Labour would undo some of the bracket creep in the lower bands, perhaps taking things back to where they were in 2020 before the Big Inflation. But they would hold the 39% rate at $180k. And I expected that National would criticise them for not taking it all the way back to 2017 (ignoring the more minor bracket creep that they allowed to happen after 2011). And I hoped very much that National would pressure for indexing the bands going forward so that this sort of thing wouldn't keep happening. And in some best of all possible worlds, there'd be agreement to index the tax thresholds so the adjustments happen automatically (5% chance?).

Remember that the forecast path for tax revenues was based on no adjustment. It always has to take current policy as being the forward policy. That path continued to have a lot of inflation-driven tax increases built into it. Remember that this isn't just "well, everyone pays 7% more in tax but everything costs the government more". It's that people get pushed into higher marginal tax brackets, resulting in tax increases that outpace inflation - and considerably if you let them accumulate.

This substantial tax increase since 2011 was not voted for by anyone. It was not legislated. It had no democratic deliberation. It just happened, and especially from 2020 when RBNZ went off the hook.

And it will keep happening in the absence of changes.

Flip to the spending side.

As of six months ago, government was only slowly retrenching from continued ludicrous levels of 'Covid' spend. Government issued tons of debt to deal with Covid, and spent it very liberally on non-Covid things. It added to inflationary pressures that the Reserve Bank has to lean against. 

So where did that leave us? A Labour-led government seemed most likely to want to entrench a higher ongoing government-spend proportion of GDP. They'd package a minor inflation adjustment to the indices as a tax cut but maintain things at a level well beyond 2017. They'd cut some of the more ridiculous Covid spend and present a reasonable path back to surpluses but at a higher level of government spend and tax relative to the overall economy. And that's fair enough so long as there's long-term balanced budgets. 

Now what does this have to do with cyclones?

Let's remember standard drill. Here's what I said after the Christchurch earthquakes. And it's the same thing that Paul Krugman said about other similar spend. This is mainline econ stuff. I'll pull-quote Krugman again:
Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts.

But wait: even more important, the government can borrow (or, in principle, lend, if it pays off all its debt). So it should balance its budget in present discounted value terms, not year by year. This means that the tradeoffs should include future spending and taxes as well as this year’s spending and taxes. And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters. [emphasis added]
This is the case against temporary levies and surcharges. Unless a government is debt constrained, you want to spread the cost over time. And you want to cover that cost through a combination of higher taxes than you otherwise would have had and lower spending on other stuff than you otherwise would have had

So if it had been the case that Labour was going to inflation-adjust brackets back to 2020, indexing them only going forward would be a tax increase relative to the path we would have had. If it had been the case that Labour was going to have locked in a permanent increase in the relative size of government on non-cyclone stuff, then a reallocation from whatever that stuff would have been toward cyclone is a spending cut. 

The case for an actual tax increase looks awfully weak given the massive increase in real government takings in the leadup to the cyclone. Thomas Coughlan pointed to the numbers yesterday. Core Crown revenues increased from 27.5% of GDP in 2017 to 30.2% of GDP in 2022. 

Core Crown revenues will have to be above the levels we'd had in the mid-2010s for a while - there's Covid debt to pay off. 

But the forecast expenditure track in HYFU had core crown expenses rising from $126 billion in 2022 to $150 billion in 2027. Surely there's room for greater reprioritisation in there, combined with slightly smaller inflation adjustments to tax bands than we otherwise might have had. 

We're still using borrowed money to fund over a billion dollars in discounted road user charges - when there are piles of roads to fix. It's nuts to consider a deadweight-cost-ridden income tax increase when government is using general tax revenue (in the end - it's what pays off debt) to avoid charging road-users for the use of the roads. That subsidy induces a deadweight loss! You're putting thorns in the heart of Baby Pareto! Can't you hear him crying?

Anyway - bottom line:
  1. You spread the cost of this kind of thing over time with higher taxes than you otherwise would have had and less spending on other stuff than you would have had. You don't try to do it with a large temporary tax increase. Unless you're debt constrained. Maintaining low steady-state debt levels matters so that there's room to use debt for these kinds of shocks. 
  2. Views on counterfactual taxation and spending paths will really matter in deciding what's here appropriate. If you think that it is right and proper that government take 30% of GDP as Core Crown revenue forever for regular spend or some amount higher than that, then you'd want a higher tax path to accommodate this spend. But everyone was expecting that government was going to be reversing at least some of the inflation bracket creep. Have views on appropriate size of government changed, or is this opportunistic? Or we all just crazy to expect that there'd have been an inflation adjustment to the tax brackets in May?
  3. A smaller inflation adjustment to the tax thresholds really ought to be able to get the job done. Core crown revenue is about 2.5 percentage points higher, as fraction of GDP, than it was in 2017. If they can't use that increase to get this job done, you've gotta wonder how much work they're actually putting into reprioritising spend. 

Monday, 20 February 2023

Managed retreat - some basic principles

EDS has put up a lengthy paper on managed retreat.

I have an alternative, shorter proposal. Or at least a starter.
  1. People should be able to build where they want.

  2. Insurers should be able to set premiums to reflect risk. EQC could make that safer for private insurers by leading the way. They have decades of claims history. 

  3. Councils should reserve the right to discontinue services in places that are too expensive or difficult to maintain. In such cases they could offer existing residents a choice:

    1. Special ratings district that imposes a differential higher levy reflecting higher costs of providing council services in those areas, and a promise that there will be no cross-subsidies from safer places, reminding that that means that if their road washes out and they want it reinstated, the levy will have to go up;

    2. Setting of a special purpose local board that becomes the owner of local infrastructure, governed by its residents, and able to set its own levy on properties for service. Councils would need to sharply reduce rates for those properties to reflect that council is no longer providing those services.

  4. Ability to set those special purpose local boards should be extended more broadly, such that a group of farmers could set one to take on the debt that funds flood protection works and finances that debt through a levy on protected properties, on approval of those properties’ owners.

  5. EQC to recognise mitigation works when setting premiums. Private insurers would do similarly so long as that market is sufficiently competitive.

  6. Make damned sure that there aren’t regulatory barriers unduly hindering insurance entry, including provision of parametric insurance products.

  7. Land values in high-risk places no longer cross-subsidised by low-risk places would drop. If government worries about the equity implications of that, it could provide a one-off payment in compensation. Ideally it would set a cap on such compensation because it will disproportionately go to rich people living in unsafe places who have been cross-subsidised by poorer people living in safer places for ages. 
We find that the northern regions of both islands are the source of most claims, that only a handful of weather events caused a large proportion of EQC’s weather-related pay-outs, that the average property lodging a weather-related claim is located twice as close to the coast as the national average, and that properties with claims usually are cited on much steeper land than the typical property in New Zealand.

We also explore their relation between claims and socio-economic characteristics, finding that higher income neighbourhoods appear to be those most benefiting from the EQC coverage for weather events. 

The usual complaint about abolishing implicit subsidies is around equity issues. But normal equity considerations here run opposite to what you might have thought. It wouldn't stop those concerns from being raised as reason not to do this, but do look behind the curtain. 

Seems simple enough. No need for government or council to decide who's allowed to live where. If you want to live in a risky place at your own expense, that should be up to you. 

Wednesday, 15 February 2023

Large gatherings and Covid

I do love a good natural experiment. And this is a neat one
Social distancing is important to slow the community spread of infectious disease, but it creates enormous economic and social cost. Thus, it is important to quantify the benefits of different measures. We study the ban of mass gatherings, an intervention with comparably low cost. We exploit exogenous variation in the number of National Basketball Association and National Hockey League games, which arises due to the leagues' predetermined schedules, and the sudden suspension of the 2019–2020 seasons. We find that, among clusters of counties that are adjacent to sports venues, each additional mass gathering increased the cumulative number of COVID-19 deaths by 10.3%.

Some places had games scheduled between 1 March and 11 March, other places didn't. Play was suspended 12 March. So they compare places that happened to have scheduled games in early March with places that didn't. 

Tuesday, 14 February 2023

Tobacco maps

A little while back, the Ministry of Health put up some indicative maps of where licensed tobacco retailers might be allowed to operate.

The government has decided that rather than being available at some 6000 outlets, cigarettes will only be allowed at 600 outlets across the country.

Lots of things will enter into Ministry considerations of which outlets might be allowed to continue functioning, and which dairies might go bankrupt if they rely heavily on tobacco sales. 

They write:
If there are too many applicants in one area, the following criteria could be useful to distinguish between retail applications (Appendix 3 provides further detail). These criteria may be defined in Regulations.
  • Business related criteria: criteria like security, sales systems and training, could be used to rank applicants. For example, in terms of sales systems, the business needs to have considered factors such as their supply chain – ensuring that they will have the right amount of stock to service demand. We propose that detailed proposals would be acceptable within an application, to avoid retailers’ incurring costs prior to approval of an application.
  • Proximity and location: certain criteria may relate to the location of the retail premise or specific community needs. For example, distance from schools or sports grounds may be relevant.  Communities may feel that there are areas where it is less appropriate for smoked tobacco retail premises to operate (such as near schools or marae). Additionally, ensuring that the premises are spread across each area may be important.
  • A history of compliance with the Smokefree Environments and Regulated Products Act, by the applicant (the entity or individual) and any responsible people over the previous 5 years may be relevant.
  • The nature of the business may be relevant – for example, retail premises selling alcohol, convenience goods and/or groceries might rank lower on this criterion while stores only selling smoked tobacco products may score higher, because we are of the view that selling tobacco products alongside everyday grocery items normalises these products.
  • A ‘specialist outlet’ category could allow for a certain number of retail premises specialising in smoked tobacco products that are not cigarettes (eg, cigars) to score higher.
The Director-General may weight the criteria or give them an equal consideration. We are interested in feedback about what criteria is of most importance, or least importance

Proximity to schools is a fun one. It reminds me of a map that City Beautiful had put up last year. They were looking at the proximity rules for vape shops, when the Asthma Foundation was trying to ban them within a kilometre of schools. 

On this map of Auckland, every green dot is a school. Every circle draws a one-kilometre radius around a school. And the orange bits? Those are the only places that are outside of the circles and that are zoned for shops. 

So if the government took a hard line on proximity to schools, well, there aren't many places in Auckland where one could run a shop. And in small towns, it'll be tough to find somewhere that's farther than a kilometre from the school. 

Monday, 13 February 2023

Afternoon roundup

The worthies from the tabs:

Revisionist Uber histories

Uber drivers have initiated collective bargaining in NZ.

BusinessDesk reports on it, along with a bit of revisionist history from the union:

"Uber muscled into our country in 2014 without a second thought about employment law or the rights of the people working for them, and drivers are long overdue some agency in their lives."

Recall that Uber 'muscled in' on NZ's archaic taxicab regulations, not on our labour laws. Before Uber, drivers had had to sign up with one of the small number of companies providing 24-hour dispatch. Not exactly a scenario that's friendly to drivers. 

Remember too that Uber has to compete for driver-partners with other ride-share companies, and with existing cab companies. 

Bill Rama, an Uber driver and First Union delegate, said drivers were paid on average less than the minimum wage, and only for about 50% of the hours they work. He said the company also took no responsibility for the safety of its drivers or its passengers.

We've had an incredibly overheated labour market. Does it seem likely that Uber's forcing people into sub-minimum-wage work? 

Here's MBIE's job vacancy index for unskilled work.

If Uber was able to keep driver-partners through the 2021-22 period when the thing was hotter than it had ever been, doesn't that kinda suggest that those drivers weren't being exploited?

Thursday, 9 February 2023

Insufficient biofuels

This is closer to right than most pronouncements on it but it's still deeply wrong.
Climate Change Minister James Shaw said he supported the move, and he and Woods had now been tasked with quickly finding a way to fill the big hole in the budget.
“This is why we have a carbon budget right, is to say, when we make these choices, actually, we've got to plug the gap somewhere else,” he said.
"The most straightforward thing that we could do is to tighten up the ETS [emissions trading scheme] unit supply, so you simply take it out that way. But there may be other policy interventions that we could make as well.”
A biofuel mandate is neither necessary nor sufficient for a reduction in net national emissions. 

If you ran the mandate without cutting the cap, you'd just shift where emissions happen. If you ran the mandate while cutting the cap, you would reduce net emissions while also shifting where emissions happen. But it's the cutting of the cap that's both necessary and sufficient, all on its own. A biofuels mandate just shifts the location of emissions, regardless of whether you cut the cap.

So yeah, Shaw's right that you could cut the cap to reduce emissions. But there's no 'hole' created in anything by cutting a biofuels mandate. Compared to a counterfactual in which we'd have had a mandate, we get a few more emissions in transport, a few fewer emissions everywhere else, and a lower overall cost of getting down to net zero. 

Any 'hole' from not having a biofuels mandate is like the hole you make in a T-1000 if you shoot it. The thing fills itself in all on its own. More emissions in transport? There'll have to be fewer emissions somewhere else. That's how the ETS works. 

Want to stop T-1000? You don't do it by shooting at transport, or shooting at power generation. You do it by cutting the cap steadily over time to hit net zero. 

Wednesday, 1 February 2023

Cost of living absurdities

Peaches come from a can.

They were put there by a man.

In some factory in Greece.

When they made their little way

out to brighten a Kiwi’s day,

they got hit with a 34% punitive anti-dumping duty.

Prime Minister Hipkins made the cost of living the government’s number one priority. So I checked which anti-dumping duties are still in place.

Anti-dumping duties rarely make sense. The theory is that a foreign company will sell here, below cost, for long enough to drive Kiwi competitors out of business, and then jack up prices. 

It’s more than a bit bonkers. Consider coated steel from Korea – a kind of steel used in roofing. From 1 January this year, imports from one Korean company were hit with a renewed 12.6% punitive tariff, and two other Korean companies are subject to smaller tariffs. 

Under anti-dumping theory, they were selling steel here below cost to drive the Kiwis out of the market, so they could profit when those Kiwi competitors went under. But a quick Google search finds 998 suppliers of the stuff across 55 countries. The 997 other suppliers would be the ones to benefit. 

And, of course, if it really were being sold here below cost, anyone, including Kiwi steel producers, could put up a shed and store tonnes of it for later resale. 

Inflation is high and the government says we’re in a cost-of-living crisis, with groceries and building materials front and centre. But those Korean companies’ roofing steel, along with galvanised wire from Malaysia and China, are hit with anti-dumping duties. So you’re protected from affordable building products. Doesn’t it warm your heart? Tariffs are love. 

And consider the peaches. Everyone loves canned peaches. The '90s band The Presidents of the United States of America even wrote a song about them. I ripped it off to lead this post. 

In May last year, the Government reimposed antidumping duties on preserved peaches from Spain. In December, they started investigating Chinese peaches. And the peaches from Greece? 34% duty

Meanwhile, the Commerce Commission’s been investigating why groceries and building materials are so expensive. And the government is subsidising petrol while taxing peaches. 

So I’ll end with another bit of theft from the Presidents. 

Government lingered last in line for brains

And the one that it got was sorta rotten and insane.

Tuesday, 17 January 2023

Contrasting Banks

Recall that the Reserve Bank of New Zealand's Monetary Policy Committee does not allow those with an ongoing research interest in macro/monetary from serving as external members of the committee. They've considered it a conflict of interest.

The Bank of Canada has appointed Prof Nicolas Vincent as an external deputy governor. 

Vincent will begin his two-year term in March, filling the void left by former deputy governor Timothy Lane, who retired in September. The Bank of Canada launched a search for an outsider to bring a different perspective to the Governing Council in August 2022, as the central bank confronts one of the most challenging economic environments it has ever faced.

Vincent “is an accomplished scholar and teacher, with deep expertise in macro and microeconomic research in areas such as inflation and price dispersion, firm dynamics, inequality, house prices and household finance,” governor Tiff Macklem said in a press release. “I have no doubt that his broad knowledge of monetary economics combined with his keen interest in public policy will be invaluable in helping the Bank navigate the policy challenges ahead.”

In this new role, Vincent is expected to bring his own perspectives to the policy making process, providing a check on groupthink as he’ll have no direct ties to the institution. He will be responsible for helping with monetary policy and financial system stability decisions, and will join other deputy governors in communicating the Bank of Canada’s consensus-based policy decisions.

Vincent will balance this role with his job as a professor of economics at the HEC Montreal, serving as deputy governor on a part-time basis. This wouldn’t be his first time in a policy focused role, as he started his career at Department of Finance in 2000 before becoming an assistant professor at the HEC.

The Bank of Canada's press release also highlights the value of deep expertise in relevant research areas.

The Board of Directors of the Bank of Canada today announced the appointment of Nicolas Vincent as the Bank’s new external, non-executive Deputy Governor for a term of two years, effective March 13, 2023. Mr. Vincent’s appointment, which is the result of an open external search process, fills the vacancy created by the departure of Timothy Lane in September 2022.

“I am delighted that Nicolas Vincent is joining the Bank’s Governing Council and I am looking forward to working with him,” said Governor Tiff Macklem. “He is an accomplished scholar and teacher, with deep expertise in macro and microeconomic research in areas such as inflation and price dispersion, firm dynamics, inequality, house prices and household finance. I have no doubt that his broad knowledge of monetary economics combined with his keen interest in public policy will be invaluable in helping the Bank navigate the policy challenges ahead.”

The Bank changed the fourth Deputy Governor position to an external, non-executive Deputy Governor role to bring diverse perspectives into its consensus-based policy-making process and to ensure the Bank’s executive team has a streamlined and effective distribution of management responsibility. In this role, Mr. Vincent will be a member the Bank’s Governing Council, which is responsible for decisions with respect to monetary policy and financial system stability. Alongside other members of Governing Council, he will also be responsible for communicating with Canadians about the Bank’s consensus-based policy decisions as well as its ongoing assessment of the outlook for the economy and inflation. In keeping with the nature of this role, Mr. Vincent will work with the Bank of Canada in a part-time capacity and will maintain his affiliation with HEC Montréal.

Mr. Vincent is a professor of economics in the Department of Applied Economics at HEC Montréal and co-chair of the Business Cycles and Financial Markets research theme at CIRANO (Centre interuniversitaire de recherche en analyse des organisations). He has been a visiting faculty member and researcher at numerous institutions, including Columbia Business School, INSEAD, the Banque de France and the Kellogg School of Management.

Born in Trois-Rivières, Quebec, Mr. Vincent received a Bachelor of Commerce degree in applied economics from HEC Montréal, a master’s degree in economics from Queen’s University and a PhD in economics from Northwestern University.

Wednesday, 11 January 2023

Circular hydrocarbons

Want to make hydrocarbons part of the circular economy? Terraform Industries has a whitepaper

Basic deal: use solar to power kit that sucks CO2 out of the atmosphere. It'll also pull some water out of the atmosphere while it's at it. Turn the water into hydrogen and oxygen. Then make CH4 (or any desired hydrocarbon) with oxygen and some surplus water as waste product. 

They're aiming at an all-up carbon sequestration cost of USD$43/T. 

Tuesday, 10 January 2023

Afternoon roundup

Easing back into the office after a summer break and already the tabs have multiplied.

Today's worthies: