Afternoon roundup

The afternoon's closing of the browser tabs:

• Tons of port workers have been avoiding getting vaccinated. In principle this should have been simple: have public health nurses drive out to the sites and administer it. But it's not been compulsory, antivax stuff has been influential among those workers, and they're probably (and rightly) pissed off with the regular nasal swab test requirements that could have been replaced by saliva testing over seven months ago - which would feed into a strong 'not gonna do whatcha told me' attitude. More results are out on the effectiveness of the Illinois protocol saliva tests - the one that the government doesn't want to use. And, just for fun, a plague ship berthed at Taranaki, where port worker vaccination rates are low. Let's hope we keep getting lucky, despite tapdancing on landmines. Looks now like only 11 of 98 border workers involved in this one had any vaccine. 


• Bernard Hickey has a chat with me and Oliver about Oliver's column last week. The prior link is to his column; the podcast is here. Our Insights newsletter column, reprinted in the Stuff papers, called on the government to extend residence to everyone who has been here with us since last year's March/April lockdowns - as a way of rectifying some of the harm that our immigration system has imposed since then. Oliver, Matt and I chatted about it here as well. 


• We'll be getting proof-of-vaccination that can work as a vaccine passport, but so far only intended for use in international travel. If Covid is ever here circulating, I will be happy to pay a premium to exclusively attend establishments requiring proof-of-vaccination for entry. 


• Damian Grant has a superb column on corporate social responsibility. 


• Union leader Matt McCarten on the merits of not banning speech. I agree with him. 


• The Taxpayers Union points to some odd-looking public health grants. This stuff wouldn't bug me so much if they were also putting appropriate funding into classical public health - contagious disease, vaccination promotion, the usual kinds of stuff that you might expect in the context of a global pandemic. But I could only see two grants in the whole set that seemed to have anything to do with the pandemic, and a third on measles. Just under $900k to try to get an assessment tool gauging barriers to vaccination and $1.2m looking at mucosal delivery for vaccines (not specifically to Covid, but in general). Both of those seem like really good ideas. They're also putting $1.16m toward waning measles immunity - good! But they're also putting $1.2m toward research on alcohol warning labels. It feels like infectious disease is still the poor cousin of whatever public health has more recently turned into. 


• Donal summarizes the Competition conference that was on in Wellington this past weekend. I missed it; these things usually cost an arm-and-a-leg, presumably due to cartel activity by conference organisers in preventing other conferences from emerging. Plus, I was in Christchurch Friday and Saturday teaching Canterbury's MBA students about the Emissions Trading Scheme. The session on three waters regulation would have been excellent.

Simpsons' paradoxes and GDP per hour worked

Bernard Hickey's been on a bit of a tear about GDP per hour worked and employment rates.

So NZ created 179k jobs in the last 2 yrs, but unemployment actually rose 1k to 128k. Jobs soaked up by net migration & more >65 yrs working

— Bernard Hickey (@bernardchickey) November 2, 2016

NZ actually worse since 2012. Flat real gdp per hour worked. We're just pumping more low wage workers in the economy and working more hours. pic.twitter.com/9uKE0UV1vR

— Bernard Hickey (@bernardchickey) November 2, 2016

There's another potentially relevant chart.

And, one more:

I wonder what GDP per hour worked would look like if we could isolate out demographic changes. 

At the same time as the recent flatlining in GDP per hour worked, we've had substantial numbers of beneficiaries moving out of benefit and into work. The first of my charts has number of people on benefit over the period. The proportion of working-age people on benefits was 12.1% in 2011. It is now 9.8%. Average productivity among those moving off of benefits will likely be rather lower than average productivity among other workers. But while that would worsen average productivity or GDP per hour worked, it won't worsen anyone else's productivity unless they're making other workers less productive just by being there. 

The second of my charts has employment rates sorted by age cohort. Recall that the employment rate is the number of employed people divided by the population in that cohort - it isn't the inverse of the unemployment rate. You can have rising employment rates and rising unemployment rates if people are being drawn into the labour force who were previously not seeking work. 

I've dropped out prime age workers, which have been much flatter, so you can see the compositional changes in the tails. The youngest workers are least productive. They hugely dropped out of the labour market with the changes to the youth minimum wage, but that decline's since reversed a bit. There's been a long trend growth in hours worked among older workers, but typical wage patterns over the lifecycle have wages flattening out from the early 50s or thereabouts. Big increases in employment rates among cohorts with lower than average productivity, or at points in the life cycle where wage profiles (and presumably productivity) flatten out, will both flatten or worsen GDP per hour worked. 

And, obviously, net migration's increased over the last few years. New workers getting settled in New Zealand might take a bit to find their feet as well, while still being better off than they were before.

The classic Simpson's Paradox shows how you can have a declining average measure for a group despite improving average measures for each cohort within the group if changes in the proportions of the overall group coming from the different cohorts change. 

So suppose that you have a classroom with 5 Canadians and 10 Kiwis. The Canadians all get 70% on their tests this year and the Kiwis all get 90%. Average is 83%. Next year, there are 10 Canadians and 5 Kiwis. The Canadians all get 75% and the Kiwis all get 95%. The group average drops to 82%. Every cohort has improved by five points, but the average performance looks bad. 

And so I wonder what the GDP per hour worked figures would look like isolating for these compositional changes.

Note too the strength of the employment rate. Only four years in the series back to '86 had higher employment rates: 2005-2008. 

Pricey golf courses

Bernard Hickey trawled through 269 pages of Auckland Council reports to find this gem, reported in this morning's Hive News:

Elsewhere, Auckland Council released 269 pages of reports by Cameron and Partners and EY on Friday on alternative financing sources, including an estimate that its golf courses are worth NZ$2.1 billion if they were put to other uses, including for housing. The report estimates just four of the courses -- Remuera, Pupuke, Takapuna and Chamberlain Park -- are worth NZ$1.4 billion, but have a rateable land value of just NZ$47 million.

Remuera, for example, only pays rent to the Council of NZ$130,000 per year, yet EY estimated the fair market ground rental at NZ$16 million a year.

"This represents a significant subsidisation to private interests and raises questions about whether at least parts of this asset – the land the golf course occupies – could be considered for higher value uses," EY wrote.

The Cameron Partners report looked at Auckland's debt limit. Auckland is constrained by a 250% debt-to-revenue ratio limit. While they've about a billion dollars in additional capacity to take on debt, nobody wants to be right at the binding limit.

And so if Auckland's to use debt to help fund infrastructure in a growing city, how can they do it? The report discusses options for asset recycling: selling off, in whole or part, some of Council's assets. The report says Council owns $506 million in commercial parking buildings. Releasing 5% of Auckland's parks and reserves for use as housing could bring $2.25 billion. Auckland's golf courses are valued at $61 million for accounting purposes but the top four alone would be worth $1.4 billion as housing.

The report also highlights Council's failure to think hard about the opportunity cost of its asset ownership, failures in its cost of capital analysis, and political incentives preventing divesting of assets owned at the Ward level where returns flow to the general Council budget.

The nonsense around use of Council-owned land is one reason I like the idea of applying a land tax to Council and Crown-owned land. Council would pay the Crown based on a proper valuation of Council's land assets, and the Crown would pay a similar tax back to Councils. Councils seem to have a very hard time thinking about the opportunity cost of their asset holdings; turning some of those opportunity costs into annual on-budget expenditures could sharpen thinking.

Thanks to Bernard Hickey for the pointer. If you haven't subscribed to his Hive News yet, and are interested in NZ policy, you should.

Housing supply curves don't have to be vertical

I like Bernard Hickey's concluding paragraph in this weekend's column. After explaining how changes in Chinese controls on outbound overseas investment could spark greater interest in Auckland property, he writes:

A look across the Tasman suggests the flood of money coming from China could be put to good use if it is funnelled into new housing developments, in particular apartments off the plan. Australian developer Lend Lease sold 581 apartments off the plan for its latest Darling Harbour project in five hours on one weekend last month, including more than a third to overseas buyers. It sold A$600 million of property at a rate of A$2 million a minute.

If Auckland and the Government could only convince Aucklanders to allow the building of more overseas-funded apartments near the CBD then it might have a smidgen of a hope of filling that shortage of 60,000 homes. They would cost NZ$30 billion to build so that NZ$16 billion of overseas investment could come in very handy indeed, if it was directed into new homes rather than existing homes. 

The problem isn't a lack of capital - there's plenty around. Or a lack of capacity to put up buildings - that's determined by longer term expectations about whether you can make a go of starting up a construction company, expanding an existing one, or getting into trades. There can be current constraints, but those are an equilibrium that could shift if we again allowed new construction.

The barrier is instead where and whether Council allows new construction to take place. And that's a function of whether Council has strong enough incentive to overrule the NIMBYs under the current RMA processes and local government financing regimes.

Every time a NIMBY cries, an angel gets stuck in an overcrowded house.

Fat taxes, food subsidies

Geoff Simmons is right that we oughtn't mess with New Zealand's clean GST system in pursuit of healthy eating initiatives that aren't likely to do much good. But I'll focus on the part where I disagree. He writes:

For the same cost as removing GST, every family could be given $5 for each child to spend on fruit and veges every week. This would make a much more sizeable difference to the food bill of the poor, not to mention their health.

But ultimately there is only so far that the "health-by-stealth" approach can go. Subsidising good food is certainly the most politically acceptable place to start, but it won't do the job alone.

Energy-dense, micronutrient poor food will continue to get relatively cheaper, and so the subsidy bill will have to grow to keep pace. Meanwhile, the health bill for obesity and diabetes will continue to grow.

The only way to arrest this shift is through a whole raft of other measures, the most unpopular of which will be taxing foods on the basis of the energy they contain.

After all, the biggest threat to our health now is no longer smoking, it is that we eat too much. This will no doubt raise even more fervent opposition than my mother faced at my 5th birthday party.

However, such strong actions will be the only way to deal with our biological programming to eat ourselves to death.

Astronomical excise taxes are now normal for cigarettes, and have played a huge part in getting smoking rates down in this country. A similar approach with fatty and sugary food is only a matter of time.

Where to start? First, I still don't get where the market failure is that justifies government intervention in individual diets. Bernard Hickey tweeted a potential one:

Do buyers of cheap fatty/sugary food have perfect information on the long term health costs? Is that info reflected in cost?

Nobody has perfect information about anything. So here's a short list of reasons why the information failure argument fails:

1. Information-based intervention in this kind of consumption behaviour doesn't really make sense unless information problems are greater here than elsewhere;
2. If information is the problem, interventions subsidizing information are a more direct solution;
3. It's unclear that people are choosing to eat tasty fatty things because they're ignorant about long term health consequences; it's at least as plausible that they're just weighing current consumption and making rational decisions trading off health against consumption benefits. This is consistent with the existing literature that providing health information and calorie counts has negligible effects on consumer choice

Geoff seems to be pointing to the fiscal externality argument for intervention. But most of these health-related fiscal externalities are just a transfer; further, the more efficient solution to any technological externality induced by cost-shifting would be setting actuarily fair health insurance premiums.

I'll agree with Simmons that pretty invasive measures would be needed to change behaviour; I'm just failing to see any good (by which I mean market failure) reason for them. I'll also agree with Simmons that such measures may only be a matter of time, though we may have different views on the normative aspects of the prediction.

And everything that Seamus said about GST on food also applies....

Opportunities lost

Every time Don Brash steps out to say something, I weep for what could have been in 2005. Then I remember that he'd have been as much constrained as anyone else in office and outcomes wouldn't have been quite as cool as I'd have hoped. But here he is taking on Bernard Hickey's odd claim, critiqued here Saturday, that the difference between the dividend rate paid by SOEs and the government's borrowing rate is sufficient reason not to privatize:

Bernard, I see you're suggesting that it is a “line-ball” call whether it makes sense for the government to sell stakes in some of the SOEs because the government is getting a dividend yield of 7.6% on its investment in the energy companies but can borrow at 5.5%. I’m not sure I understand what you were saying, but if I do understand it, I certainly disagree with you! Leaving aside the fact that of course the government would expect to get a higher return from a risk asset than it pays on a debt instrument, you seem to be assuming that the government would sell the shareholdings for the net asset backing of the shares. Why on earth would it do that?

The risky asset bit is what I'd focused on because I go after low-hanging fruit.

You say that you are not for or against privatisation in principle. I’m unambiguously in favour of it. I can see absolutely no reason for government to own commercial operations except perhaps where there are overwhelming policy arguments – Transpower, as the ultimate natural monopoly, is a good example of a company I would not privatise, and Radio New Zealand is another (important for cultural reasons having nothing to do with economics).

I see John Key’s announcement has a step in the right direction, but a very timid one. Why on earth would government want to own a majority share in three competing power generators? Government doesn’t produce the food we eat, or the clothes we wear, or (most of) the houses we live in. Why should they own three of the five generators? The New Zealand government is now one of the very few which seems to believe that they should continue to own trading operations. The NSW Labor Government has just privatised its power companies, and the Queensland Labour Government has just sold its rail system.

By the way, when the 2025 Taskforce argued for privatizing the SOEs in its latest report, we quite explicitly said that reducing debt should not be the primary driver (as it had been, arguably, with the privatisations of the late eighties) given that current debt levels, though rising strongly, are not yet at a critical level. We argued in favour of privatisation on the grounds that that was important in order to expose some of the largest corporates in the country to the opportunities and disciplines in the private sector. (Note the reference to Nokia above.) We just couldn’t see any reasons whatsoever for retaining them in government ownership.

Hit the whole thread for his back and forth with Hickey. It's towards the end of the comments thread; best just to search on "Brash".

I think Hickey's wrong on this one, but N is high enough for bloggers that the occasional foul tip oughtn't be too damning (Crampton says in fear of the next time he screws something up!)

Welcoming our Googly overlords

Folks in New Zealand have been beating up on Google a bit lately. And it makes me sad. Google gives so very very much and asks so little. Can't we just enjoy our surplus and stop the whinging?

First, there was the Google Street View cars that sniffed out wireless modems as it went. Know what? Anybody can do that. They've been able to do that since wireless routers first came around. If you don't have minimal wireless security on your router, which you ought to have given how terribly low the Kiwi data caps are (I'm on a 20GB traffic plan, and that's pretty high as far as NZ goes), then you're basically inviting anybody walking by with a decent cell phone to listen in on all of your internet traffic and maybe to start downloading movies on your bandwidth. You might want to fix that instead of whining about Google.

Second, the tax thing. Bernard Hickey in particular has been rabid on this one. Google earns advertising revenue in New Zealand but pays little tax here. A quotable Hickey quote:

Google is a tapeworm in the Internet that is destroying local media and widening our trade deficit.

He later suggested that Google's underpayment of tax relative to its NZ advertising revenues could drive future generations offshore. I confess confusion here: it sounds like "Step 1: Punish Google. Step 2: ???? Step 3: Your kids don't migrate overseas to higher paying jobs."

New Zealand's biggest problem isn't a Google-related tax shortfall: it's fixed costs and the absence of agglomeration effects. Even if we set tax and every other policy perfectly, I'd call even odds that we'd still be falling behind other countries because we're tiny and separated from even our closest neighbour by a 3 hour flight. Our biggest city has about a million people. If agglomeration matters as much as we're starting to think it matters, then our best policy move may well be a large and sustained increase in immigration. Given that current policy kicks people out of the country whenever there's a recession, it seems unlikely that we'll get any substantial increase in immigration in the medium term.

Fixed costs kill us. And guess what? Google works to kill fixed costs. Kiwis can share their videos with the world, for free, on Google's YouTube, can blog for free on Google's Blogger platform, can chat with the world on Google Voice (ok, this one's mostly inframarginal given Skype). I'm running some collaborative projects using Google Docs. I find New Zealand suppliers of goods and services using Google. How many international tourists come here because Google has made it so much simpler to plan an international vacation? Before, you'd have had to have gone to a travel agent. Now, a combination of Google Maps and Google searches lets you do it yourself at lower cost and greater confidence in the quality of your results. Google brings New Zealand closer to the rest of the world. And folks want to complain about that they're paying less in tax than they could be? We ought to be giving Google a medal for giving us all so many free services. Would any reasonable estimate of the aggregate consumer surplus created by Google in New Zealand come up with a figure less than hundreds of dollars per capita?

If anything's going to be driving future New Zealanders overseas, it's the opportunity to benefit from the reduction of fixed costs in larger markets. And I think Google's working to lessen that, although the general equilibrium results could be tough to parse out: while it's making New Zealand better, it's also making New York better. If it's making New York better faster than it's making New Zealand better, then the net effect works against us. But that certainly doesn't make the case for policies punishing Google for being active in New Zealand.

I, for one, continue to welcome our Google overlords. And I thank them for hosting this blog, without charge and without advertising, for the last year and a half.

Trendy economics

Bernard Hickey, one of New Zealand's top business journalists, has flipped to the trendy side - how orthodox economics is all wrong, we need capital controls, and so on. Matt Nolan provides a rather thorough critique here.

I'd add one overarching point to Matt's, which isn't original to me but does apply. The case for markets never lay in their perfection but rather in the relative imperfection of alternatives. I'm teaching intermediate micro this semester. We go through the welfare theorems, and they're beautiful. We know that they don't apply generally. However, it's really hard to improve on the imperfection of markets. Both markets and policies are imperfect instruments. Markets fail relative to blackboards, but regulatory solutions often fail relative to the real world market alternative.

Hickey's patchwork of proposals gives a small chance of improving short term outcomes but with longer term risks for the overall economy. Nolan, linked above, highlights most of the risks. Here's one I find worrying:

The NZ Super Fund [the government's "lock-box", invested in broad markets] is already making great strides to lift its proportion of New Zealand investments from its current 20 per cent to the 40 per cent recently mandated by the Finance Minister Bill English.

What's wrong with making it more than 60 per cent? Do we really believe all the modern portfolio theories about global capital markets and investment returns over the long run? I've certainly lost the faith and would much rather the money was invested here than in some US dollar denominated asset that's about to be devalued sharply.

KiwiSaver [a tax preferred individual retirements savings vehicle] funds should also be subject to a government mandate to invest locally. Just over 40 per cent of the NZ$5.5 billion invested in KiwiSaver has been invested overseas.

It should also be closer to 60 per cent. It may not be easy or cheap for fund managers to find investments here. But that's what they're being paid for isn't it? The real danger with KiwiSaver is we force more savings to fix a local capital shortage and the majority is simply shipped offshore because it seems easier and cheaper to do it.

If there is ever going to be a move to compulsion then there has to be a quid pro quo for that effective public subsidy to the funds management industry: keep it local.

Because he personally has lost faith in modern portfolio theory, he wants to force all of us to invest locally. Yeah, things have been rough for the last few years. But the proposal here seems pretty worrying.

Again: The NZ SuperFund basically exists to help government top up its superannuation payments when the pay-as-you-go part from taxes comes up short relative to obligations. We have nowhere near a fully funded government pension system. When are tax revenues likely to be in significant shortfall relative to pension obligations? During domestic recession. When are domestic portfolio returns likely to be at their worst? During domestic recessions. So we'd have to liquidate assets at the bottom of the market. Now, maybe we'd be able to get by with divesting only the foreign part of the portfolio during a domestic recession and save the domestic part for a more solid ongoing stream of payments. But given how heavily exposed the NZ government is to domestic risk, I'd have thought having next to no domestic assets in the NZ SuperFund would be optimal.

If KiwiSaver were compelled to invest locally, I'd exit KiwiSaver: my domestic exposure through housing is far too great a part of my overall portfolio. The tax advantage of KiwiSaver isn't worth taking on additional domestic risk for lower overall returns. But Hickey wouldn't allow that. He sees a domestic investment mandate as being compensation for compulsion. I suppose it depends whether you weigh at all the interests of the folks whose money's being taken.

NZ-US free trade: roundup

New Zealand's in negotiations with the US for a "Trans-Pacific Partnership" free trade area.

The US Dairy lobby has thirty senators complaining of New Zealand's "anti-competitive practices". Never mind that New Zealand has close to the freest market in the world for dairy products. Rather, it's Fonterra's largish size that has them worried.

Fonterra reminds the Americans that while Fonterra is big in traded milk, it's relatively small in total milk production:

American lobbyists complaining about the potential for a Trans-Pacific Partnership (TPP) trade treaty to give New Zealand greater access to the United States domestic dairy market have been urged by Fonterra to look at the issue in context.

"The US dairy industry is by far the largest among the TPP countries, producing approximately 70 percent of the milk in the TPP region, while New Zealand produces a little over 13 percent," Kelvin Wickham, Fonterra's managing director of global trade, told NZPA.

Lance Wiggs laments the strong language used by some on the NZ side complaining of anti-trade American practices; Bernard Hickey reckons NZ has been too meek.

Hickey goes further today, reiterating prior warnings that any trade deal with the US is likely to exclude dairy but include a pile of copyright nonsense.

For most countries, a free trade deal gives them a chance to kill a bunch of their own protectionist policies that are popular with voters: "We had to stop bashing ourselves in the head with the hammer if we wanted the other guy to do the same; it isn't so much that we don't like bashing ourselves in the head, but it's more important to stop the other guy from doing it because his mess occasionally splatters on us." But New Zealand stopped bashing itself in the head rather some time ago.

I'd be surprised if whatever deal went through actually wound up much constraining the Americans against continuing with dairy protectionism: dispute resolution under these agreements is long, arduous and expensive. Was the new bit of dairy protectionist legislation really the kind of thing prohibited under the TPP? Let's spend 20 years in the courts sorting it out (whaddya gonna do about it, put a tariff on US imports? You and I both know it won't hurt us 'cause we're big and you're tiny). But the copyright provisions would be enforced pretty vigilantly with retaliatory trade action: the MPAA doesn't think your ISPs are spending quite enough monitoring their subscribers; get them in line or we'll stop taking your dairy.

Says Hickey:

These FTAs are never about free trade from an American point of view. They are about creating another opportunity to strong-arm smaller countries into granting trade concessions to large American businesses. A much fairer, cleaner and freer option is proper reform of trade rules and tariffs through the World Trade Organisation. America and Europe have blocked reforms there because they would upset their apple carts of huge subsidies for farmers paid for by taxpayers and consumers through higher taxes and higher prices.

John Key is right to say a TPP without agriculture (and dairy in particular) is unacceptable. He should be prepared to walk away if the Americans try too hard to monster us in these talks.

Not so sweet

You only have to ask the Australian sugar farmers about the Australian FTA with America to find out how good that was. American sugar interests blocked sugar from the deal. American drug companies tried to shut down Australia’s version of Pharmac.

Australia’s exporters have hardly benefited from the deal.

I'm also skeptical. Worth giving it a try, but also worth remembering that no deal is better than many deals that could emerge when enforceability is factored in.