Afternoon roundup

The tabs!

• “Is it unfair on everybody else that has paid for that road and doesn't use it? I mean, this equity stuff's bollocks, this is about traffic. ...Consultation’s bollocks as well.” Mayor Brown ain't wrong.
• Predictions that Labour and Te Pati Maori will strike a deal where TPM seeks only the electorate votes in Maori districts and Labour seeks only the party vote in those districts. Biggest question is why MMP has avoided these kinds of rorts so far. They're the obvious play. 
• Good time to be a liquidator.
• 35 kilograms seems like a lot of cocaine to seize in one go for a country of 5m people. Are there reasonable measures of demand elasticity? One could perhaps work out the size of the market based on price movement. If the price doesn't move much, either the market is huge or suppliers are able to quickly plug even a 35kg hole. If it moves a lot and stays high for a long time, less so.
• My normal drill on carbon forests and biodiversity is that if you want more biodiversity, don't screw up the ETS accounting - use a separate policy instrument. But if this is right, then biodiverse forests sequester more carbon. And if it also applies to NZ forests, then making sure the settings accurately reflected sequestration would encourage greater biodiversity. 
• Don't envy Shane Reti this hospital pass. The health system is not in good shape. 
• Works in Progress on Upzoning NZ
• Maybe post-prison half-way houses should be next door to judges' primary residences. Skin in the game and all that.
• NZ needs a dedicated agency whose only task is infectious disease. Indeed.
• Andrew Norton on Australian attempts to centrally plan higher ed.
• Why We Need Taiwan.
• Mercatus on cutting zoning down to size. Tons of good stuff in here on problems with single-family zoning. 
• Good News! New Zealand is at less of a competitive disadvantage relative to Australia! Bad news: it's because they dropped by more than we did.

Assorted updates

Blogging has been light. These are the bits I've missed telling you about.

• Matt Burgess, Oliver Hartwich, Bryce Wilkinson and I had a short podcast on the government's proposed feebate scheme. It's an incoherent mess given that it's running up against an ETS with a binding cap. 
• I had a chat with RNZ's The Panel on congestion charging on Friday. I'd had a column in the Dom Post on it a bit earlier. 
• My column at Newsroom last week went through the changes coming for local councils when water utilities get stripped from them and amalgamated into new entities. 
• My column in our Insights newsletter looked at the government's sclerotic approach to border management. Better, safer, and even cheaper testing options for border workers are available, and they aren't being used. 
• I had a chat with Newshub about America's Cup funding, and how the government should politely wish Team New Zealand all the best in its coming race, wherever in the world that might well wind up being. 
• And I had a chat with Josh Gans about the Covid response and some of the worrying numbers on risks with border openings. 
• Motu had a panel session on some minimum wage work by Dean Hyslop and Dave Maré; Bill Rosenberg and I were discussants. Their paper is here. I expect I'll be referring to it often. 

Self-recommending. Meaning, I'm in them, and I'm recommending them. Likely not in the better way that Tyler Cowen uses the term. 

Congestion charging and getting Wellington moving

Parliament is considering submissions on allowing congestion charging in Auckland. I think it's a great idea. And it could help more broadly. 

Our submission is here. We suggest that the government should just go ahead with the system recommended in the Report on it, but that we have a few potential improvements for the longer term.

First up, the only purpose of congestion charges should be alleviating congestion. Set the charges to maximise traffic throughput and nothing else. But if the money winds up in the transport budget or elsewhere, there will always be temptation to mess around with the charges to achieve other ends. 

At the same time, the system as proposed has discounts for low-income drivers on Community Services Cards. Equity issues are real but you don't muck around with prices to solve an ability-to-pay money. Instead, you should just give people money. 

Put the two together and you can solve both problems at once. Take the money collected under a congestion charge and rebate it back to drivers in a way that's invariant to whether they're driving on- or off-peak. Lots of ways of doing it. The only critical feature is that the transfers are lump-sum with respect to on-peak driving. It's likely to wind up being a progressive transfer but if doesn't wind up being progressive, provide higher payments to users who have Community Services Cards. Simple. You've solved the equity issue by giving lower-income people money while not messing up incentives provided by congestion charging. 

As tech progresses and the costs of electronic road user charging systems come down, things start getting more interesting for the longer term. First, recall that diesel vehicles don't pay excise into the Land Transport Fund - they pay road user charges based on mileage. Flip petrol vehicles onto that system too, abolishing petrol excise (which would also solve the problem of that lots of non-road petrol uses get taxed for road use - marine fuel in particular). Get everyone onto the kinds of electronic RUC systems that the trucking companies use. The better ones are GPS enabled. The costs of those will keep coming down.

Once you have that, you can start varying road user charges across different roads if some roads are more expensive to maintain - or if the charges are part of a road tolling system for roads financed that way. 

A better future system could then:

• Use congestion charging to maximise throughput on existing roads, rebating charges back to road users through the same accounts they use to pay their congestion charges anyway;
• Use the information provided by congestion charges to inform whether new transport investments make sense. If it takes a $20 charge to clear congestion on the Auckland Harbour Bridge or the Mt Vic Tunnel, that's a pretty good case for building more capacity. If it only takes a $0.20 charge, it would be stupid to build a new tunnel or a second harbour crossing.
• The data from the congestion charge combined with GPS-enabled RUC systems would then allow for simple tolling of new roads. So if road users have demonstrated a willingness to pay $20/pop to get across the bridge at peak times (say), someone putting in a new crossing could bank on there being real willingness to pay. They could then put up a bond backed by the revenues generated by crossing. Which is how the Harbour Bridge got financed in the first place - a bond paid off by tolls. I'm not proposing anything new here or anything new to NZ. It's a big part of NZ's abandoned history of How To Get Things Built. The data from congestion charging would help in demonstrating whether the investment would be worthwhile, and the electronic charging system would make it easier to collect the tolls. That's it. But it's an important 'it'. Right now, it's neverending fights between the "let's put roads everywhere" people and the "oh roads are stupid never build them it'll just cause more induced demand and their cost-benefit cases never stack up" people. Congestion charging would help demonstrate whether new investments are worthwhile, and shoot down ones that aren't. 

There are obvious implications for Let's Get Wellington Moving - which Treasury listed as a risk in the last budget. Congestion charging would ease demand back, fixing a lot of the problem. And it would provide the information necessary for better decisions about things like second Mt Vic tunnels.

Congestion charging

In this week's column in the Fairfax papers, I look at the case for congestion charging.

The same kind of technology that lets commercial trucks handle road user charges painlessly could be installed on petrol vehicles. Petrol excise would go away, with road user charges taking their place to collect the same amount of money for the land transport fund.

Carbon charges on petrol would, of course, remain.

The purpose of a congestion charge would not be to fund new roads, or road expansions, or public transport, or anything else. The purpose of a congestion charge would be to get rid of the hassle and time and frustration cost that each of us bears when stuck in traffic, and to replace it with a monetary charge instead that would allow traffic to flow freely.

If you'd like an analogy, think about the old Soviet Union. Prices were officially very low in the government's stores, but everyone had to sit in queues for hours if they wanted to be able to buy toilet paper. That's how we run our roads: the government's set price for getting onto the road is zero, but you have to queue.

Ideally, congestion charging would be revenue-neutral. Road user charges would fund the roads, but congestion charges' only job is to alleviate congestion. The government could take every dollar collected in congestion charges, net of the cost of running the system, and give every person in the country an equal payment out of the collected funds.

Letting prices work can solve a lot of problems. It can also then make additional investments in roads rather less necessary. Traffic engineers like building roads to handle times of peak use. Charges that spread that traffic load more evenly over the day mean that you don't need to invest as much in increasing capacity in the first place.

Even better, the collected congestion charges can start to tell you when it does make sense to increase capacity – to twin Wellington's Mt Vic tunnel, for example, or to turn some of the chokepoint traffic circles on Johns Road in Christchurch into offramps and flyovers. If collected congestion charges around the chokepoint signal that people really put a lot of value on getting across town, that starts making the case for increasing capacity.

If instead we see that the congestion charge needed to for traffic to flow freely around the chokepoint at peak hours is rather low, then the economics of fixes like a second tunnel are likely rather poor.

It's hard to tell which is true until we start pricing congestion.

Like carbon prices, congestion prices are one of those things where the economic merits are obvious, but the politics in getting there are hard. Heck, Mark Blaug explained the case for them in a public lecture at Canterbury more than a decade ago.

Making the charge revenue neutral will be important in making the thing feasible. If people expect this to be a tax grab to fund all manner of new initiatives, they'll rightly balk. Using a congestion charge that way makes a hash of it. If you use the thing with revenue as an objective rather than a byproduct, you'll set the prices incorrectly. I like the idea of just giving everyone a cheque for their equal share of the collected net revenues.

At the same time, we do need better ways of funding roading infrastructure. And that's where Road User Charges could come in. If we have the transponders in place for congestion charging, we can use them to set different base prices for different roads. If it turns out that a second Mount Vic tunnel makes sense, which we'd quickly see if the congestion charge necessary to ease traffic around the tunnel were high, then you could fund the second tunnel with a dedicated charge on that route - that dedicated road-specific RUC could pay off the bond that funds the tunnel. And if it looks like there's no way that driver demand, as demonstrated by willingness to pay to use that route, would cover the cost - well, then digging would be a waste of money and shouldn't be done.

Road to tolling

Well, this one's disappointing. 

I'm used to hearing that we can't have road tolling on important routes because there aren't alternatives for commuters. I think that's nuts, but the argument goes that there has to be alternative transport paths to address equity issues for those who cannot afford the tolls. It's nuts because we allow pricing everywhere else, and try to solve equity issues through income redistribution. The toll can shift driving by time of day even if there aren't alternative routes.

But let's take it as given.

Here's the argument against having tolling on the coming Transmission Gully alternative to State Highway 1:

Transport Agency Director Emma Speight said an assessment showed a toll would likely see more drivers avoid the road in favour of the current coastal State Highway 1.

"That would compromise the safety, environmental and access benefits which the new road will deliver to drivers as well as for communities along the coastal route."

So we can't have a toll on a road if there aren't alternatives to the toll road, but we also cannot have tolls when there is an alternative to the toll road.

Afternoon roundup

The weekly closing of the browser tabs finds these gems:

• Joe Bennett's superb piece on David Warner and Australian cricket.
• My preferred solution to Easter trading bans is to abolish them while making Easter a stat holiday. Just ignoring dumb rules is at least as good though.
• Mike Munger and Russ Roberts chat about congestion charging.
• Liam Dann talks with Treasury about its Living Standards Framework, along with a few cautionary notes from me. 

This is what happens when you don't read Demsetz

Way too many policy arguments take the following form.

1. Markets in an ideal world are efficient.
2. Here is a potential deviation of the real world from blackboard conditions, so we're in a second-best.
3. Policy can ameliorate outcomes when there is a market failure. So, here's what we must do.

What's missing? Any evaluation of whether the policy cure is actually an improvement on the status quo. Some policies are like using tweezers to pull out an irritating splinter - great idea. Others would have you hack off the arm to avoid the splinter. 

Harold Demsetz very nicely made this point way back in 1969. He was there critiquing Arrow on information market failures, but the lesson is more general. It isn't enough to simply point out a potential market failure. Markets fail but policies don't automatically induce nirvanas. We need comparative institutional analysis to tell us which world sucks less: the world with a market failure that isn't addressed by policy, and the world in which a real-world policy involving actual tradeoffs comes in to try to solve it.

Today's lesson in "this is what happens when you don't read Demsetz" comes from Dean Baker over at Cato Unbound.

Baker's argument:

• In a first-best world, we would have proper congestion charging and the like;
• We don't have proper congestion charging;
• Taxicabs can increase congestion;
• Uber likely increases the number of cabs;
• Therefore we need a complicated regulatory structure for Uber imposing fees by time of day and location of service.

Baker also reckons that while Uber's drivers are contractors, not employees, and despite that those drivers like the flexibility, the drivers should be treated like employees for minimum wage and overtime purposes.

Some folks just hate the idea of voluntary transactions among consenting adults that don't route through the State somehow along the way. 

A couple things to note:

• It's eminently unclear that Uber increases congestion. In the longer term, it will reduce the amount of street space that need be devoted to parking, freeing up more road for driving. It will also reduce peoples' need to take a car for the day because of that one trip they need to make mid-day and instead let them commute in using the bus, then take an Uber for the part when they do need a car. 
• Using charges on Uber to solve congestion instead of broad-based congestion charging is nuts. Unless Uber is a very large proportion of cars on the road, having any effect on congestion using charges on Uber would have to involve just massive variability in ultimate Uber charges on consumers, which would deter any use of the service. I favour congestion charging, but implementing it on Uber only makes as much sense as imposing congestion charging only on blue cars. 

Update: a reader points out that Uber surge pricing is already a form of congestion charging. It's a good point.

Housing daily: LVR, NIMBYs, and congestion charging

The RBNZ will soon announce its Loan-to-Value rules. Matt Nolan makes a few reasonable points (all my paraphrasing):

• If the policy is targeted at financial stability, then it has to bite on high-leverage first home loans as those are the most likely to wind up in positions of default. 
• I'm still a bit sceptical here as the OBR rules mean that the banks have to burn their equity holders and unsecured creditors before touching depositors if they make a bunch of really risky loans: I'm just not convinced that the banks here are really imposing systematic risk by allowing highly leveraged loans. But maybe the RBNZ has insider information suggesting that the government is way more likely than anybody thinks to start stomping on Councils' NIMBY regs currently preventing new building and so property prices are set for an unexpected fall.
• Further, the choice of "speed limit" will matter. Suppose we've had a road with no speed limit and we're promised one will soon be implemented to stop speeding-related risks. If they then announce a highway speed limit of 100 or 110 kph, that's all fine. If they announce a highway speed limit of 25 kph, not so much. I don't know what fraction of normal-conditions first home loans would be blocked under the new rules, so I don't know whether we're setting a 100 or 25 kph speed limit.
• Politicians mucking about with what the RBNZ is proposing risks undermining the whole purpose of the thing.
• I expect here that Matt's alluding to some of John Key's comments suggesting that first-home buyers be exempted.
• Politicians seem to see LVR as a way of fixing housing affordability; it's not well-suited to that end. 

  At the moment political parties want to loosen financial conditions for home owners, and introduce all sorts of schemes that will get capitalised into house prices.  Instead, the politicians should be looking at it as a distributional issue – it isn’t about giving young households cheap large houses that only exist in fantasy, it is about being realistic about any intergenerational distribution issues that we believe exist due to the inherent “cause” of the current “bubble” or a broader “misalignment” – this has to be relative to what we think is “fair” around the distribution of lifetime resources.  We can’t just “pop” a bubble, but if we understand the causes we can deal with the distributional issues associated with it.  Looking at supply side constraints (which both parties are) makes sense – good to see that.

  But what about the near term?  Worst case scenario, one-off tax all property, given money to group who is “hard done by” – if you aren’t willing to do that, you are faking your belief in a distribution issue. 

  Indeed.
• Matt's sick of Gen X / Gen Y whinging about house prices and wanting transfers. 

I agree with Matt that most of the demand side schemes are horribly misguided. But current housing policy prevents substantial expansion of current supply, inducing large regulatory transfers to those who bought houses when supply was less constrained. In a world where supply could expand (both with increased density and expansion in the suburbs), we wouldn't get the kinds of price run-ups now being experienced in Auckland. Matt's right that more people, and especially young mobile people, should rent rather than buy.

What we really need to figure out are policies that pay off the losers while expanding supply. We have something of a transitional gains trap in housing policy. Current homeowners do get some direct benefits from regulations preventing both them and their neighbours from developing: NIMBY is NIMBY for a reason. But another large effect is that the NIMBY regs keep up house prices as a whole. Sufficiently expansionary housing policy would impose capital losses on homeowners. And we tend not to have easy ways of implementing those kinds of policy changes without compensating those adversely affected so that we can move towards the more efficient equilibrium.

And so I was really disappointed to hear Gerry Brownlee on the radio this morning. One thing that could help Auckland move toward expanding on the fringes would be allowing the use of congestion charging to both internalise the consequent externalities and to help defray the costs of any new roading necessary to service the new communities. It's the kind of policy that compensates the losers (at the margin) while taxing the winners (at the margin). Gerry Brownlee on Radio New Zealand this morning suggested that Auckland wouldn't be allowed to implement congestion charging. Gerry should remember that it's socialists, not free-marketers, that usually recommend that scarce resources be allocated by queuing rather than by prices. If Auckland's willing to move toward sensible road pricing, and they're blocked by central government, we're in rather a bad spot.