Afternoon roundup

The worthies from the tabs:

• Kate MacNamara tracks down all the Covid funds that wound up diverted into the road use subsidy. $1.3b and counting. 


• A reminder that it can be easiest to innovate by leaving academia. 


• Messy claims that the UK sugar tax reduced obesity. Looks like green jellybeans. 


• People keep telling me cancel culture isn't real. And yet I keep seeing stories like this.


• Great to see that the sponsored refugee regime has been working out. Genuine good news. Let's hope it expands. 


• Treasury's hiring a Director, Economic Systems, meant to have a significant leadership role in macro and growth. Nothing in the job requires an economics degree. I hope that properly qualified economists do apply, and that good applications drive out bad. 


• Men on Tinder are not intimidated by highly educated women. 


• Markups and inflation. How markups move can tell you whether you're dealing with a supply-side or demand-side issue. Price Theory is great. 


• Bill English's 2005 Chapman Lecture. Some issues are timeless. 
• Helen Dale on the Return of the Pagans.


• Tap Yellowstone for basically limitless power. But it would cost on the order of $3.5 trillion to build. Not huge when compared to overall annual energy spend in the US, depending on marginal cost of running the thing and whether it could generate low-cost hydrogen for vehicle fleets. But it is a very big number.


• I would love to know how much Council time and effort went into this mess. A developer wanted to turn a ruin of a former dairy into housing. Council didn't want her to. They eventually relented and let her build, on condition that the houses have wooden window frames. What incredible value Council added here. Kudos. They should all be very proud. Especially the resource consent team leader who argued that the developer should have first tried putting up a fish and chip shop or a laundromat. 

Knowing what works

Every bit of this piece by Steven Hamilton makes me ache for what we lost when Bill English's investment approach was thrown out with the change in government. 

But I do have one idea I think could raise our productivity, economic growth, and living standards – all within the confines of this incremental system. And that is, simply, to figure out which policies actually work.

This may come as a shock but, in many areas, we have no idea. 

Read the whole thing. Tons of good stuff that goes beyond data and analytics. A lot of it applies here too:

So, in the first instance, we need more academics to work on Australian policy questions. Which is tough because the incentives are currently geared towards the US, which at least in economics is the centre of the academic world. (An attendee at a US talk I once gave asked: “Who gives a f$%# about Australia?” )

If we want academics to work on Australian policy questions, we need to adjust the incentives. There are many ways to do so, but we could start with root-and-branch reform of the way the Australian Research Council functions. And specific government departments could directly incentivise creation of the evidence of interest to them.

Prime Minister English?

If outgoing Prime Minister John Key has any influence over the choices, and if Bill English wants the job, I expect English will succeed Key as Prime Minister and Steven Joyce will move to the Finance portfolio.

More than anybody else in government, as best I've been able to tell, Bill English thinks in terms of incentives and institutions. He sees the long game in changing structures to get better policy outcomes. And I have only ever heard him talk about that long game in terms of policy outcomes, not politics.

As Finance Minister, English's vision was clear. He wants government spending to be effective. This isn't bean-counting stuff, it's about wanting that outcomes actually improve because of policy and spending decisions. And he wants the institutions to be in place to provide the incentives for that to happen.

English's enthusiasm for Statistics New Zealand's Integrated Data Infrastructure was built on using it to figure out where government spending is working to improve outcomes, where it isn't, and setting up the mechanisms so we can distinguish between those. I remember his visit to Canterbury University beseeching us to use the IDI to help him figure out where the government does well, and where it could improve.

At the Victoria University School of Government awards ceremony a couple of weeks ago, English also highlighted the importance of institutions. He there, and this is my paraphrase, said that policy graduates need to think beyond the shift from inputs and outputs to outcomes, although that's important too, but rather towards the incentives that lead to those outcomes, and the institutions that shape the incentives. He noted that he has a lot more time for "these are the institutional features leading to bad policy leading to bad outcomes" thinking than for "here are bad outcomes, change this policy to get better outcomes".

As Prime Minister, English would be in a better, and worse, position to promote and execute that vision. On the plus side, he will be better placed to make the changes necessary. I expect he might take a harder line in Cabinet if RISes fail to meet the necessary standard, and ultimately bureau willingness to supply those depends on bad ones being batted back by Cabinet. And there are tweaks that could make IDI work better.

But on the downside, he'll need Treasury working well for in order to implement the investment approach, and he wouldn't be the Minister to which Treasury reports any longer. That will matter too.

Planning externalities

The Finance Minister's speech to the Victoria University Business and Investment Club last week was excellent. I was not in attendance, but the text is now available online.

After running through a litany of areas where the application of market signals through policy reform improved outcomes - from agriculture to energy, he turns to housing. He walks through how urban planning regulations have jacked up housing costs, delayed new construction, worsened housing price cycles, hurt economic growth, driven inequality and cost the government plenty in state housing and accommodation supplements.

So these are the reasons why the Government pays attention to the housing market and issues stemming from poor planning.

For those among you who are economists, I would go so far as to say that while the justification for planning is to deal with externalities, what has actually happened is that planning in New Zealand has become the externality.

It has become a welfare-reducing activity.

And as with other externalities, such as pollution, the Government has a role to intervene, working with councils to manage the externality.

We're starting to get analysis that shows planning’s costs.

Too often the discussion about how our cities are planned is couched in vague terms of general good. "A world-class city." "Quality urban design." "A liveable, walkable city."

Those are all desirable, achievable objectives. But we need to understand the costs of achieving them so that we can make the trade-offs transparent.

I love it when people rediscover Tullock's 1998 argument that policy itself generates external costs that are underappreciated - which was of course simply an extension of his 1962 work with Buchanan on external costs and decision-making costs in The Calculus of Consent.

And it gets better:

As we get more information about what actually happens, often we find planning doesn’t achieve what people think it is achieving.

Planners and councils have a very difficult job in planning our urban areas.

Cities are incredibly complex systems. They are the product of millions of individual choices.

The idea that a small group of people could understand what choices we're making is asking too much of them.

Not because they are in any way incapable. But because the task is overwhelming.

The Auckland Unitary Plan is 3,000 pages long.

It's trying to regulate everything from the size of bedrooms to biodiversity in the Waitakere Ranges. No one person could possibly understand all the trade-offs in that plan.

Which means many of its effects will be certainly be unintended.

Planners can’t know everything – so of course they can’t be perfect in making trade-offs on our behalf.

Successful planning requires an understanding of its own limitations.

And then we come to the meat:

The funding base for councils is increasingly people on low fixed incomes. That is a product of an ageing population.

So you can understand why councils are under pressure not to expand if they think an expanding city is going to push up rates for existing ratepayers.

Councils need clear funding models so that development worth having can occur and future homeowners and current renters who might want to buy are taken into account.

So that's a brief overview of how important it is that housing is regulated in a way that enables flexible supply, and I hope some indication of the progress we're making.

That progress is necessarily slow, because these issues are complex.

If we better understand the economics of what is happening we can make better choices about housing regulation.

And that depends on one of the most important parts of public policy, which is the institutional arrangements by which those decisions are made.

That means looking at the incentives confronting an individual sitting in a council when making a decision about whether to allow a new subdivision.

We need to understand the incentives councils are reacting to.

Next month the Productivity Commission will produce a further report on the regulation of land supply. It will be another input into further, ongoing improvements in this area.

And we are seeing new thinking on a range of issues affecting housing, including from councils.

Often politicians are accused of being focused on the short term. That’s one of the reasons this issue has never been dealt with properly in the past.

The Government is taking a long term view.

All of the things I've talked about today will take 10 to 15 years to sort out.

So it’s important that a broad group of people understand our single-biggest asset class – the most-important asset most of us will own – how is valued, how it is regulated, and how it can contribute to our general welfare.

The New Zealand Initiative's report on policy trial zones, coupled with improved council financial arrangements to strengthen incentives, will be coming out 19 October.

I hope to see you at the report launch.

Ultra Vires?

Michael Reddell, ex-RBNZ economist, has wondered whether the RBNZ's LVR rules really fit within its financial stability mandate. I had a piece in the NBR last month wondering the same thing.

Seems we're not alone.

In a briefing for Secretary to the Treasury Gabriel Makhlouf, officials said they agreed with the Reserve Bank that a pick-up on the Auckland housing market "could potentially pose a threat to financial stability" in the coming years.

"However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ's mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices."

The comments appear to suggest the Reserve Bank is being warned that it may be overstepping its role over financial stability, a claim made in recent months by Michael Reddell, a senior adviser to the bank who was made redundant earlier this year.

Reddell said the Reserve Bank's own stress tests released in late 2014 showed the major trading banks could withstand a 50 per cent house price fall in Auckland and 13 per cent unemployment without breaching capital requirements. Some could even continue to pay dividends in that scenario. Nevertheless the Reserve Bank had imposed lending restrictions requiring larger deposits on the ground that rising prices were a risk to financial stability, something Reddell claims the bank had not laid out an argument for.

"What they haven't done is make a compelling case that there's a threat to financial stability of the New Zealand financial system," Reddell said.

Reddell hit the topic again at last night's LEANZ meeting. He blogs on it here - his full talk is worth reading. Jenny Ruth at The NBR (gated) has more.

Meanwhile, the Finance Minister reminds the Reserve Bank that they're meant to keep inflation between 1 and 3 percent; they've been running a bit low.

Mr English’s criticism of Reserve Bank governor Graeme Wheeler’s conduct of monetary policy is a major departure from the government’s customary respect for the central bank’s independence.

“He’s been out of the zone for years now, below the midpoint for quite some time,” Mr English told the Bloomberg news service late last week.

“He’s meant to be following the Policy Targets Agreement,” Mr English said.
The PTA, an agreement between the finance minister and the central bank’s governor, requires the governor to keep inflation between 1% and 3% and to aim for 2% over the medium term.

“That’s the bit I look at and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not,” Mr English said.

That's pretty blunt.

Central Bank independence means independence to choose the appropriate methods, among those they're legislatively empowered to use, to achieve the inflation outcomes they're contracted to produce and to maintain financial stability.

It does not hurt central bank independence to remind them that there are targets they have to achieve. I don't like it when Finance Ministers and Prime Ministers speculate about the appropriate path for interest rates. But they have to hold the Governor to the targets. I think that failed in 2005/6 when Cullen let Bollard run too hot for too long. But I am a bit surprised that English's comments came after Wheeler started cutting interest rates, rather than a few months ago.

English gets it

Here's Finance Minister Bill English on housing supply:

"After the election, there's a Resource Management amendment bill that standardises a lot of the planning processes. That could be quite a step forward. We'd like to do a lot more intensive look at the incentives on councils and council officers and the way they make decisions that restrict the availability of land -- the political pressures to restrict densification within cities (which are) pretty strong here in Auckland, and the interaction with infrastructure."

English said the Government and councils needed to better understand why some Councils, such as Waimakariri and Selwyn in Christchurch, were keener to build infrastructure for new housing than others, such as Auckland.

If development isn't in a Council's financial interest, or if the incentives are so weak that a bit of NIMBY pressure can make the difference, then don't expect Councils to allow more development.

Bit of English

NZ Finance Minister Bill English is awesome. I love every last bit of this.

"With respect to so-called urban sprawl, I think that's a nonsense. If you're against urban sprawl and that means lower to middle income Kiwis can't buy a house and you can't build an apartment in the middle of Auckland for less than NZ$600,000, then that's too high a price to pay. And if it means driving up house prices in a way that wrecks the economy then that's too high a price to pay," he said.

"Funnily enough the people who are most worried about urban sprawl live in the middle of the city. They don't get to see it. How much time to they really spend out the end of the Western motorway or Botany? None actually. They think you should be able to walk to the countryside. Well...welcome to Gore. If you're really mad, that's where you should go. But they don't. They stay in Auckland Central," he said to laughter from the audience.

"What's actually happened is that the local authorities were keen for a denser city, but the inhabitants weren't, so they've jettisoned a fair bit of the densification aspect," he said.

"So if Auckland wants to grow now, it has to grow out because you don't want it to grow up. Now that's a fair choice, but please don't stop it from growing out as well, otherwise we'll get another few years of 15% house price growth and you get a real mess when it crashes," he said, adding the special housing areas agreed under the Housing Accord with the Auckland Council "do spread the city because the planning rules don't let you do anything else."

"We're indifferent as a government as to whether you grow up or out. But you said don't grow up, so we expect to help you grow out."

English said people making planning decisions in Auckland, Wellington and Christchurch needed to understand they were making decisions about New Zealand's largest asset class, where the decisions they make affect the whole economy, not just your neighbourhood.

"Of course there's tension there, but we are pretty determined to turn ourselves into an affordable housing market," he said.

"There's no obvious reason why little old New Zealand should be one of the most expensive housing markets in the developed world. It really puts pressure on our households. It's one of the reasons why we have interest free student loans, working for families, subsidised early childhood care and savings are low," he said.

High mortgage costs were a reason why the Government provided payments supplementing incomes costing billions, "and a lot of that is driven by planning decisions in this city."

When land use regulations are all messed up, everything else gets screwed up too.

Oz economist Leith van Onselen's right:

@EricCrampton @bernardchickey You are very lucky to have someone of the calibre of English. Runs rings around Australia's clowns.
— Leith van Onselen (@leithvo) February 27, 2014

But while he pines for sound people on the Australian right, I wish that the New Zealand left could match the Australians. Here's Australian Council of Trade Unions economist Matt Cowgill on housing in Australia:

There's a trade-off at play here, one that can't be wished away or ignored. With a growing population, you can't restrict rising density in established suburbs, prevent sprawl on the urban fringes, and prevent housing from being unaffordable. Pick two out of the three. The urge to preserve historic neighbourhoods, the desire the conserve all the green bits around our cities, and the wish to maintain affordable housing are all noble impulses with which I sympathise. But, again, we can't have them all.

Which is pretty much the same thing that Bill English said. Sound economics, left or right, is on the same page on this stuff. Stupid land use regs hurt poor people while benefiting middle and upper class homeowners.

Here in NZ, we're stuck with the Council of Trade Unions' Helen Kelly.

Bill English, in the speech linked above, talked about selling off some of the Housing New Zealand stock of housing so that they could better match social housing to locational needs. It makes no sense to have a Housing NZ house in an expensive part of town when selling it off could fund social housing for three families instead. Here's English:

"In housing and other areas we will continue recycling taxpayer assets to free up money for reinvestment in areas where there is genuine demand," he said.

Later in the questions and answer session with the audience, he expanded on the plans.

"We actually don't need to own all those houses to help those people who need help,"he said, referring to the Government's partnership with the likes of the Salvation Army, the New Zealand Housing Foundation and IHC's Idea Services.

English said the Goverment wanted to assess a family's need for housing in an area close to jobs and schools, which was difficult to do with its existing stock of 60,000 to 70,000 houses. "You've got to stick them in a house that's empty," he said.

"That will mean growing the non-Housing Corp social sector and redeveloping the Housing Corp assets."

English said there were big tracts of Auckland such as Mt Roskill and Tamaki where "there's endless potential for supplying medium housing to the Auckland housing market if we redevelop those areas."

"But our top priority is to meet the needs of the people in the houses first, and then redevelop what we don't need in order to supply the market better, and there could be a lot of that happen."

Here's how Helen Kelly responded.

Govt planning 2 sell off up to 1/3 of State Housing stock 2 private sector. Adding 2 the housing crisis. They wld sell their grandmothers.
— Helen Kelly (@helenkellyCTU) February 27, 2014

Pure partisan idiocy. Why oh Why is the NZ left so freaking dumb?

Progressivity

Finance Minister Bill English has noted that, since the top marginal tax rate on high income earners dropped to 33 percent, the proportion of total income taxes paid by top-earners has increased. Kiwiblog and The NBR have pointed to this as evidence of increased progressivity by those socialist National Party folks; some on Twitter have argued that English was disingenuous because he ignored the rise in the GST that accompanied the drop in income tax.

Recall that when National proposed reducing all income tax rates and increasing the GST, they were attacked on two fronts. They weren't just critiqued for increasing reliance on the GST, which hits the poor more than a progressive income tax.* They were specifically critiqued for the drop in the top marginal tax rate. "Tax cuts for the rich." Let's look back to the history.

Here's NZ Herald's Audrey Young:

Prime Minister John Key yesterday defended bigger tax cuts for the wealthy, arguing that they already paid a big portion of tax.

Here's a Labour press release:

“The tax cuts are unfair; a third goes to the top five percent and fifteen percent goes to the top one percent. People in the middle and bottom will go backwards after inflation.

 “The upper income tax cuts are unaffordable.

 Here's Gordon Campbell:

As No Right Turn has calculated, the top 2% of earners will get 11.5% of the total income tax bounty, and that happens to be roughly the same amount as the government has had to borrow to finance the entire package. Literally, New Zealand is borrowing to provide tax cuts for its most wealthy citizens

I could go find more, but what's the point? Anybody who was paying attention knows that English and Key were critiqued not only for switching from income to consumption taxation but also for the substantial cut in the top marginal tax rate for folks on higher incomes. They saw it as a big giveaway to National's rich mates and reckoned it meant that the rich were paying much less income tax.

So it is hardly a swindle or disingenuous or dishonest for Bill English to point out that the richest tier of taxpayers are now, because of changes in the income tax system, paying a larger portion of aggregate income taxes.** While it is definitely true that the total tax burden matters far more than the income tax burden, where National previously was attacked specifically on the income tax part, it is eminently fair for them to point out that the fraction of net income taxes paid by rich households has gone up rather than down.

If I wanted to attack English's press release, here's where I'd instead be going.

1. We should be looking at a longer time series on proportion of income tax paid by top-earning individuals and top-earning households rather than just the comparison of pre-change and current figures. Top earners in the US took a much larger income hit from the financial crisis than did lower-income folks because a much larger part of their compensation bundle is tied to firm performance. They also then rebounded much more strongly post-crisis. You could easily get a big increase in the proportion of income tax paid by the wealthy in the current period as compared to the immediate post-crisis period simply via this effect. The base year then should have been set somewhere pre-crisis.
2. English, throughout, talks about the proportion of income taxes paid by high-earners. He doesn't say how much total income tax was paid by high-earners. It's possible that total income taxes dropped as part of the tax switch by enough that it's simultaneously true that high income earners pay more of it proportionately but pay less in income tax in an absolute sense. I do not know if this is true. It seems pretty unlikely, but it's possible. However, recall that progressivity isn't defined by how much a tax system hurts the rich, it's defined by the proportion of total taxes paid across different income cohorts. 
3. It would be better to accompany all of this with both the total tax paid by income decile across all forms of taxation, and with income-linked benefits including WFF. Gross and net tax both matter. A bar chart, by decile, with income, tax paid (all sources), and transfers received, would likely be best.
1. Further, it isn't immediately obvious why cash benefits like WFF count while in-kind benefits don't. Like tertiary education subsidies. 
4. The real scandal, to my mind, is the very high effective marginal tax rates faced even by those on zero net tax. The combination of abatement rates across some plausible combinations of benefits wind up resulting in effective marginal tax rates that utterly disincentivise work while resulting in no net tax paid - the worst of both worlds. Having a lot of households paying no tax at all can be fine if it's because you have a reasonable minimum earnings threshold or because you're running a clean negative income tax. But achieving it by taxing any earned income at close to 100% while handing over a benefit cheque isn't exactly something to be proud of.

Bottom line: I'm not sure that English has entirely proved his case against the critics of the 2010 tax cut, but I don't think he's wrong to put up evidence against that critique either.

* THIS DOES NOT MEAN THAT GST IS REGRESSIVE. GST is a flat tax; income tax is progressive. Net effects remain ambiguous.

** I haven't checked his numbers, but can't imagine that Treasury would have this wrong.

Thursday updates

Blogging has been light; I spent the last two days catching up with folks in Wellington and attending the National Drug Policy Summit run by the New Zealand Drug Foundation, about which I'll blog properly later. A few bits of interest in the meantime:

• Westpac notes that LVR limits can have short term effects on house price inflation, but only short-term effects.
  • Duh
  • There are sensible justifications for this kind of policy based on prudential regulation and avoiding any situations where banks take on too risky a loan portfolio and downside risk winds up being borne by the government. Justifications based on curbing house price increases don't make any sense to me, whether or not it's the RBNZ comms team or the Governor making them. In that sense, it's no damning of the policy that it only has transitory effects on house prices. But it still reinforces the NZ econ blogosphere's "it's just dumb trying to justify LVR on the basis of house prices being too high." consensus position.


• Scott Sumner praises Finance Minister Bill English. Agreed. Some credit could go to Minister English's truly excellent economics adviser as well. 


• The New Zealand Police have decided that despite GCSB's having acted illegally in the DotCom surveillance, they will not press charges because there was no intent to act illegally. But:

  Intent to break the law is not an element of the charge of illegally intercepting private communications.
  — Graeme Edgeler (@GraemeEdgeler) August 29, 2013

  The government, through the new GCSB and TICS legislation, is giving us an expansion of GCSB's scope with increased nominal oversight, but no expectation that GCSB would ever be prosecuted for doing anything that was in fact illegal. Lovely. Big slow clap here for everyone involved. Meanwhile, here's Ars Technica on some of this mess.


• The insurers here argue for something sensible, and something for which I've argued before: have EQC effectively cover a large excess in case of natural disasters, and otherwise stay out of the darned way.

So endeth the closing of the browser tabs, so closeth the day.

Update: note that Edgeler also argues that lack of intent to break the law could be a decent reason not to go ahead with prosecution in this kind of case and reminds us that criminal penalties are not the only form of accountability. That's all true; I hope that everyone who has illegally been spied upon knows that it has happened so that they can launch civil suits.

Housing, with a bit of English

Deputy Prime Minister and Finance Minister Hon. Bill English weighs in on New Zealand's housing affordability problem in the latest edition of Demographia's international housing affordability survey.

He writes:

In its response to the Productivity Commission, the Government agreed with the Commission’s analysis that supply side factors explain the deterioration in New Zealand’s housing affordability. The Government’s response to the Commission’s report concentrated on land supply, infrastructure provision, costs and delays due to regulatory processes, and improving construction sector productivity.

Housing affordability is complex in the detail – governments intervene in many ways – but is conceptually simple. It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses. It simply takes too long to make new land available for development.

We may be seeing the beginning of a repeat of the mid-2000s demand shock. As interest rates stay below historic norms, expectations are shifting that these rates are here to stay. As a result, demand for real assets has increased, observed in booming equities markets in 2012. Demand for real estate is also increasing, with the median house price in Auckland recently exceeding the highs of 2007.

Costs of other housing inputs contribute to New Zealand’s affordability problem. Building materials cost more in New Zealand than neighbouring Australia. The structure of infrastructure financing, and the timing levies are to be paid, raises the market price for housing. Appeals under the Resource Management Act, New Zealand’s land use regulation, can hold up developments and city planning for a decade or more in some cases. Time is money because development is risky.
...

From the Government’s perspective, worsening housing affordability creates a number of problems. Fiscal pressures increase because financial assistance for housing is tied to its market price. Home ownership provides financial security and a form of savings and lowers dependence on public assistance later in life. Worsening affordability increases demands for direct intervention through rent controls and public housing. We are aware of the results of these sorts of interventions overseas and must avoid them.

New Zealand is not alone in its housing affordability problem and there seems to be increasing awareness around the world that the planning pendulum may have swung too far. Land use regulations and intrusive development rules have consequences.

The first step is admitting we have a problem. And I expect that English has a rather good idea of the things that need to be done. But many of them are outside his portfolio, and more of them wouldn't make Councils happy.

It is especially heartening to see English providing this statement as foreward to Hugh Pavletich's survey. Hugh has been the country's most tireless campaigner for fixing the regulatory mess that keeps housing prices up; he's also been a strong and public critic of Christchurch Council rules that have stultified post-earthquake development. This year's report puts Christchurch as worse than Los Angeles, San Diego, and Adelaide but better than Abbotsford, BC or the London ex-urbs.

File this under "Good Omens".