Afternoon roundup

The worthies, as I try to stop Chrome from crashing and crashing and crashing...

• The 9th Edition of Cato's Handbook for Policymakers is up. The things that can happen in bigger countries with much larger thinktanks...
• Simply amazing. A Korean provincial government backed the bonds for building Legoland Korea. Then an incoming provincial government wanted to change the terms. And the entire Korean bond market exploded. Remember kids: using the government's balance sheet to back bonds and bring down interest costs doesn't reduce the real cost. It just shifts risk onto the government's books. And sometimes that all goes ridiculously badly. 
• Some parts of NZ policy are frustrating because obvious ways of fixing things are ignored. Other parts are frustrating because they seem to be unfixable. Consider the current messes in immigration policy. 
• The folk economics of housing is folked up. "As Larry Summer said, "There are idiots. Look around.""
• It is illegal to access the updated vaccines in New Zealand and the government is ignoring advice around masks. 
• One potential conclusion from the latest from Arthur Grimes: allow unlimited inbound migration of happy people.
• Environmentalists oppose NZ biofuel mandates. Biofuel mandates never make sense, but they especially don't make sense when the sector's covered by an ETS with a binding cap. 
• Piles of detail on fights over consenting on the Waiau River.
• Government just doesn't seem all that good at managing pay structures. Also, if the government wants more nurses, requiring unpaid hospital placements like this as part of the training for new nurses might not be helping. 
• Matt Levine's rollercoaster ride through FTX.

Grimes on the Reserve Bank

Former Reserve Bank Chairman Arthur Grimes is blunt about the Reserve Bank:

But Professor Arthur Grimes, a former Reserve Bank chairman, said there was “not much” Robertson could do as it was the Reserve Bank’s job to control inflation.

“They're completely to blame for allowing this to happen … They’ve been incompetent, they’ve been really incompetent,” he said of the bank.

Grimes, who invented the innovative practice of “inflation targetting” as chief economist at the Reserve Bank in the late ’80s, said there were global factors driving inflation, such as the cost of energy and food. But the problem was now also domestic.

He pointed to the increased inflation of domestic goods and services, which stood at 6.3% for the year to June. This was the highest such rate since it was first recorded in 2000.

“If we’re getting 7% domestic inflation now, and rents going up, and if wages start going up a lot, then it could become quite entrenched above 3%. And that’s when the Reserve Bank really has to cause more pain to bring it down,” Grimes said.

...“This is going to be a real problem. It really is a choice now between wage earners suffering by not getting 7% wage increases, or, if they do get 7% wage increases, it’s just gonna keep on pushing up future inflation. So it's just going to be a mess, whichever way it goes.”

Grimes said with better management, New Zealand could’ve had inflation akin to Switzerland, at 2.9%, or Japan, at 2.1%.

He said the Reserve Bank had “misread the conditions” of the Covid-19 pandemic and in the past three years, it had loosened monetary policy too much, causing a massive increase in asset prices, and cut the official cash rate “more than they should have".

There had been a system in place to control inflation at between 1% and 3%, he said, but the Government “completely mucked that up” by expanding the Reserve Bank’s mandate to not only target inflation, but maximum stable employment, in 2018.

It had seemed obvious, at least by May 2020, that we were dealing with an RBC shock with potential flow-on consequences for demand. That we weren't heading for double-digit inflation was obvious later that year. 

It took a long time for monetary policy to reverse. And now inflation is 7.3% if we ignore the government juking CPI with a petrol excise holiday. It's more like 7.8% if we look through that. 

Afternoon roundup

If I'm lucky, this will close a third of the browser tabs.

• A damning indictment of the state of medical research, in the British Med J, from its former editor. "We have now reached a point where those doing systematic reviews must start by assuming that a study is fraudulent until they can have some evidence to the contrary."
• Jon Brewer is trying to make the MIQ booking system work. It is deeply broken. I hope he gets somewhere. It needs to be fixed. 
• It is difficult to take a hard line on covid testing results being a few minutes past the deadline when they aren't even bothering to check most folks' records. Chalk this one up as part of the problem in efficient punishment. Even if it weren't the case that the probability of being caught matters more than the fine if caught for otherwise expected-value-equivalent bundles, governments have a tough time imposing boiling in oil punishments in those cases. 
• I wonder whether Georgina Campbell also gets hatemail from the heritage people. Great podcast from her with RNZ on Wellington's heritage encumbrances.
• This is among the silliest arguments I've seen in the past wee while. There are serious issues with after-housing-cost incomes - agree! That can impinge on food budgets - agree! We need to solve the problem by setting a national food policy ensuring that food doesn't get exported if anyone is hungry - WTF? If you've got a housing shortage, a national food policy ain't where you should be looking for solutions. 
• We can't expand MIQ because we don't have enough nurses. But the government is refusing to process immigration applications by nurses and doctors who are already here. While the food policy proposal is silly, I doubt it's going to get anywhere. This is existing policy that is just nuts. 
• The government didn't bother ordering Pfizer vaccines until this past January. It is hard to explain how we wound up in that spot. 
• Me, at Newsroom, arguing that we should flip heritage protection from an off-budget regulatory imposition to an on-budget subsidy. Geoff Bertram disagrees with me in comments, increasing my confidence in the argument. 
• Related, on heritage, they're still fighting over the Adelaide Hotel. It's earthquake prone, too expensive to fix relative to its value, and it's all in the courts. 
• Adult entertainment establishments decrease sex crime by 13% per police precinct one week after the opening. 
• Renting sucks. That's what happens when there are too few places for rent relative to the number of people who want to rent. Building more would be nice. 
• Grimes, Reddell and McDermott on inflation targeting and house prices. 
• I loved this from Jo Moir in Newsroom's newsletter. On the vaccines mess where we can't build capacity to deliver vaccines without having vaccines but we can't actually order vaccines unless we have the capacity to deliver them: "The whole thing is a dizzying circle of very little sense and not dissimilar to the idea of waiting to build a house until the pipes are in place while the pipes won't be laid until the house is finished. Confused? Me too."

Doughnuts

Arthur Grimes goes through some of the problems in Kate Raworth's doughnut framework in a podcast with her over at Newsroom. 

I remember a review of some other book, ages back, that went along the lines of "what's true in it isn't new, and what's new in it isn't true."

Michael Cameron over at Waikato Uni reaches a similar conclusion.

This book is partly a critique of current economic thinking, and partly some of Raworth's ideas on a new model for economics. Any critique of economics hits the zeitgeist right between the eyes, and so this book got a lot of press when it was released in 2017 (e.g. see here), and again in New Zealand earlier this year when Kate Raworth visited the Treasury.

However, I found the book to be quite unbalanced and full of lazy writing. Raworth is a great fan of metaphors and stories, but to my taste they were overdone. Moreover, large chunks of the book were unnecessary in order to make the central argument. The first couple of chapters essentially create a strawman of economics, which Raworth can then set alight. The economics she describes, with GDP growth as its core and only goal, is not an economics I recognise. Her argument is valid in many places, but she doesn't contribute anything new in pointing out that decision-makers are not purely rational. In her desperation to make us believe that economics and economic teaching is not fit for purpose, she far over-sells her argument.

It depresses me when Wellington bureaucrats, with minimal training in economics, see imprimatur from Raworth having given a talk at Treasury, and take the book as some kind of overturning of economics.

Listen to Arthur on it. Economists are fans of economic growth because economic growth tends to correlate with all of the things we really do care about. And we favour making sure that external costs are appropriately incorporated: carbon taxes or an ETS; appropriate water charging frameworks and the like. The worry for me is that when folks take Raworth too seriously, the become complaisant about the merits of economic growth, and what we give up if we don't fret our current low productivity growth rates or the growth costs of other policies.

A few weeks ago, James Shaw tweeted:

“Researchers say that 7% of global GDP is likely to vanish by the end of the century unless ‘action is taken.’ Japan, India and *New Zealand* lose 10% of their income.” -- ScienceDaily https://t.co/HXDXn31Nph

— James Shaw (@jamespeshaw) August 21, 2019

It's good to worry about this.

But it's also worth understanding what 7% of global GDP is, at the end of the century. If annual economic growth rates were just 0.09 percentage points lower every year over the next eighty years, that's a 7% difference in GDP at the end of the line. So if economic growth were 1.91% instead of 2% over that period, GDP would be 7% lower at the end of eighty years. Growth compounds; small differences in any year add up to big differences down the track.

How often do we throw away fractions of a point of GDP growth, reasoning them to be small, and taking Raworth's kind of rhetoric too seriously - and not considering the long term consequences?

Migrant acceptance

Arthur Grimes' latest column at Newsroom covers migration and wellbeing. 

The happiest countries in the world tend to be quite affluent but also tend to have strong social support programmes. In 2018, the ten happiest countries according to the Gallup Poll were (in order): Finland, Norway, Denmark, Iceland, Switzerland, Netherlands, Canada, New Zealand, Sweden and Australia. Thus New Zealand, at 8th, is (despite our grumbles) a great place to live.

Often migrants come from poorer, and less happy countries. The process of moving to happy countries (e.g. in Northern Europe, Canada and Australasia) leads to a significant boost in their welfare.

Indeed the top ten ranking countries for average happiness of migrants (i.e. of the foreign born) is almost the same as for overall happiness: Finland, Denmark, Norway, Iceland, New Zealand, Australia, Canada, Sweden, Switzerland, Mexico (Netherlands slips fractionally to 11th). Note that New Zealand rises to 5th in the ranking of happiness of migrants.

An important factor for explaining migrant wellbeing in their new country is the local attitudes of the domestic population towards migrants. The report finds that countries which are highly accepting towards migrants tend to have both greater migrant happiness and greater happiness for the domestically-born population.

This aspect is one in which New Zealand scores particularly highly. According to the Gallup Poll data, Iceland and New Zealand are neck-in-neck at the top of the most accepting countries for migrants. Intriguingly, acceptance of migrants is not strongly related to country incomes: the next five places after New Zealand in the acceptance stakes are Rwanda, Canada, Sierra Leone, Mali and Australia. (People in Eastern European countries are particularly unaccepting of migrants. Of the eleven countries who are, on average, least accepting towards migrants, ten are in Eastern Europe; the other is Israel).

He links through to the underlying data, from the 2018 World Happiness report. That report constructed a migrant acceptance index:

In reaction to the migrant crisis that swept Europe in 2015 and the backlash against migrants that accompanied it, Gallup developed a Migrant Acceptance Index (MAI) designed to gauge people’s personal acceptance of migrants not just in Europe, but throughout the rest of the world.

Gallup’s Migrant Acceptance Index is based on three questions that ask respondents about migrants in increasing level of proximity to them. Respondents are asked whether the following situations are “good things” or “bad things”: immigrants living in their country, an immigrant becoming their neighbor and immigrants marrying into their families.

“A good thing” response is worth three points in the index calculation, a volunteered response of “it depends” or “don’t know” is worth one point, and “a bad thing” is worth zero points. We considered volunteered responses such as “it depends” because in some countries, who these migrants are may factor more heavily into whether they are accepted. The index is a sum of the points across the three questions, with a maximum possible score of 9.0 (all three are good things) and a minimum possible score of zero (all three are bad things). The higher the score, the more accepting the population is of migrants. 

Polled Kiwis gave the second highest average score in the world: 8.25, just 0.01 points below Iceland's 8.26. The survey questions were asked in 2016 and 2017.

Michael Reddell's post earlier this week on immigration suggested that policy allowing reasonably liberal immigration represents an 'elite' ideology.

It may.

But if it does, it's an elite ideology that appears very broadly shared - at least in the Gallup data.

Auckland SimCity

Some reports make you want to find a city planner and beat it with a heavy muddy stick.

Arthur Grimes and Ian Mitchell's latest MOTU report is the latest. They demonstrate just how badly Auckland Council has wrecked housing affordability. Stupid "it was a good idea at the time" rules compound on one another to make it impossible for developers to innovate in providing affordable housing.

Read the whole thing. But Table Two has the main effects.

Every one of these things would have seemed like a good idea to somebody at the time, but nobody stopped to think about the cost.

• Height limits appeal to NIMBYs, maintain viewsheds (the notion that there's infinite value in being able to see some mountain in Auckland from some point on the Harbour Bridge), and appeal to idiotic planners who reckon nobody would want to live that high up anyway.*
• Floor to ceiling height limits appeal to planners who think that it's not fair that poor people's apartments would have low ceilings; they ignore that tenants could otherwise choose between higher ceilings and higher rents and lower ceilings and lower rents. Some people prefer the cash in hand; planners imagine this stuff's costless.
• Minimum balcony area regs appeal to planners' sense of aesthetics; they ignore the cost and cannot imagine that others might prefer the cash.
• Delay is costless to planners, who imagine the costs of a poor (ie, not what they like) design to be huge because buildings last a long time. 

Grimes writes:

In some cases, developers felt that they may even face additional challenges gaining planning consent if their proposal includes innovative solutions that are not typically included in other developments. Specifically, developers considered that being innovative in order to reduce cost heightens the risk and uncertainty when trying to obtain a consent, both in terms of the time required to work through the consenting process and the ultimate outcome in terms of the number of dwellings. Developers commented that urban designers do not like small uniform dwellings which are easy to produce and which reduce costs.

He also specifically cites Grey Lynn people as part of the problem around NIMBY activism.

While I broadly support Nick Smith's look at how the RMA might be fixed so it stops enabling this kind of Council ridiculousness, I doubt it goes far enough. Underpinning all of this is that Councils have zero current incentive not to behave this way. The RMA was never intended to enable this kind of mess; planners used it to set rigid district plans and to fob off blame for lengthy processes. If Councils instead had better incentives, so that growth were in their interest instead of just NIMBY-appeasement, we'd have better outcomes. 

New Zealand is the 7th least affordable place in the world to live. Bad urban planning takes a good chunk of the blame.

Update: See also:

• RMA Changes and Council Incentives
• Costs, Benefits, and apartments

* I'm not exaggerating. That was one of the reasons behind Christchurch CBD height limits. Never mind that it's developers' money on the line if they're the ones wrong about what customers might want. 

Insulation

I didn't know that the government commissioned work on the effectiveness of its Clean Heat programme which provided subsidised insulation. Arthur Grimes reports in the latest MOTU update that they matched treatment homes with a set of comparable control homes and ran difference-in-difference estimation on the effects. He writes:

The energy study showed that insulation treatment caused a statistically significant, but small (0.7%-1.0%) fall in metered energy consumption. The small drop in energy use is consistent with an economic model in which energy efficiencies were obtained from the insulation so that the effective price of heating fell, in turn resulting in increased consumption of heat (i.e. a warmer house). Greatest energy savings were experienced in cool areas. Measured energy use was shown to increase slightly with the installation of clean heat installation (no data were available on nonmetered energy use).

So free insulation will not help reduce energy demand: people respond to the reduced cost of heating by consuming more of it. This is worth knowing as some parties think that improved insulation is a substitute for greater generation capacity.

Health outcomes improved consequent to better heating. The MOTU reports found a 3.9:1 benefit-to-cost ratio, but that 71% of total benefits were from reduced mortality. As a public health intervention to reduce mortality, this could be fine. But it is hard to make a market failure case for the subsidy scheme.

Imagine two possible policies. Policy A gives cash to households and lets them choose whether to insulate their house with it; they're also given a pamphlet listing all of the benefits of insulation including increased life expectancy. Maybe it also has a nice narrative about how nice it is being in a warm house. There are lots of suggestions about how the money should be used for insulation, but it leaves the choice up to the household. Policy B gives a voucher for home insulation that can only be used for home insulation. If in the Policy A world households choose things other than insulation, can we really say that the the insulation subsidy programme passes cost-benefit analysis relative to the "give money to poorer households" programme? I don't think so.

Sure sure, there are other benefits where you could make a case: reduced hospitalisation and the like. But if 71% of the benefits were reduced mortality (ie reduced losses in VSL), then the benefit to cost ratio without the VSL gains drops to 1.131:1. And if people would demonstrate that they value other things by more than the VSL gains, it's hard for me to see the case for Policy B over Policy A.

Note: I've read only Grimes's summary and not the underlying work.