Afternoon roundup

Sure doesn't take long for the tabs to pile up after summer break.

Some worthies:

• CPI y/y now at 4.7%, q/q 0.5%. Remember that the y/y figures will be comparing current CPI, where fuel has full excise, with Dec quarter 2022, when fuel had a substantial excise discount. Treasury had figured that removing excise had meant something like a half percentage point effect on y/y CPI figures when Labour put in the discount; should be roughly the same in reverse currently. So y/y is overstated relative to actual inflation. It's still over the top of the target band. But the quarterly result is encouraging: annualising 0.5% gets you a titch over 2%. 
• While talking about CPI, remember that normal drill has annual inflation adjustments to tobacco excise from the accumulated prior-year inflation. And that would feed through into the subsequent year CPI figures. RNZ says the government may pause the CPI increases to tobacco excise. If you think that tobacco excise is set at a level commensurate with social cost, then you'd want the real value of excise to not be affected by inflation. If you, like me, think that excise is multiples of actual social cost while incredibly punitive for lower-income smoking households, then you'd be happy with holding it and happier with reducing it explicitly. 
• The Government Economics Network is surveying government-employed economists and non-economists about what training they might be needing. I think they need a lot more background in what the mainstream consensus actually is, rather than a pile of heterodox conference keynotes. There's an important place for heterodox thinking: in the academic economics departments, which then sort out which bits have to be incorporated into the academic mainstream. 
• GEN's survey of Ministry chief economists was interesting though. They note difficulty in matching market rates for economists, which can't be good for the quality of economic policy advice. I liked this bit: "Economics is not the only area where the prize for being good at something is to be promoted to another job with less of the thing one was promoted for and more meetings. Nevertheless, respondents said that this seemed to be more apparent in economics than general policy roles."
• Farmers Weekly on some of the issues for NZ with the pirates/terrorists having closed the Red Sea. BusinessDesk notes a $1600/container surcharge because of it. That NZ has sent six (6) NZDF staff to help reopen that route has melted some peoples' brains. 
• Walking around town, I notice a whole lot of leaks that were around before we left on summer holiday are still there, some worsening. The one on Tinakore Road outside the daycare is going to wreck the road where it's been bubbling out for months. Wellington Water is also not proving itself particularly competent: a pressure valve installation led to a new leak, repeatedly reported by residents, culminating in an explosion with trees knocked over and footpath wrecked. Wellington's power lines are owned by a private company; they're fine....
• I hadn't seen this before. App that traces out how people commute to and from various suburbs, from Census 2018. 
• We live in an age of wonders.
• I endorse every one of the City for People's recommendations for the Wellington district plan. Would go further, but each of these is good. 

Morning roundup

The morning's worthies:

• NZ alcohol policy basically gives a veto over licensing to the Medical Officer of Health and to the Police. Sucks when you get a prohibitionist in charge of either. And why are so many NZ prohibitionists named Palmer anyway?
• Josh Gans on copyright status of AI-created works. 
• Grimes set up an AI trained on her own work. It tweets. Grimes notes, "The degree to which this bot has mastered my internal monologue is terrifying to me"
• Michael Reddell on RBNZ forecasting. I think it's a damned shame we didn't get NGDP markets for NZ; Simon Bridges murdering iPredict may have cost us considerably. Thanks again Simon. 
• A reminder that it was Don Lavoie who coined the term "knowledge problem" for Hayek's fundamental insight, not Hayek himself. Even if you think you're familiar with the term, please read this. 
• Immigration NZ continues to be an absolute mess. It's only partially the bureaucracy's fault. They'll have had whipsawing policy directives from the Ministers. First it's clamp down and don't process visas because Labour hates immigrants. Then the inevitable bad consequences from blocking migration, so they get told to stick every employer into the high-trust accredited employer visa programme to speed up processing - which pushes actually trustworthy employers into the same queue with a bunch that really really aren't. And the inevitable consequence of that. Absolute mess. Herald, Stuff. The Stuff piece is particularly good. 
• RBNZ figures that migration might now be reducing inflationary pressure rather than adding to it - easing labour supply bottlenecks.
• In today's edition of "China is actually a more stable and reliable trade partner than the US," Trump promises 10% across-the-board tariffs if elected. Shouldn't US foreign policy aim at encouraging deeper trade links with the US and reduced reliance on China?
• Action on Smoking and Health is getting fed up with BS coming from Health Coalition Aotearoa.

Service exports and the NZ current account

I've never worried much about current account balances. If you have a flexible exchange rate, it sorts itself out. 

But my excellent colleague Bryce Wilkinson points to one of the reasons for the current large current account deficit.

Just look at this.

Service exports, as percent of GDP, dropped to levels we haven't seen since the 70s. 

Borders closed in 2020 - for good reason.

Mid 2020, the Universities had decent plans for running their own quarantine facilities - or at least ones that could be built on. Government said no. International student numbers collapsed. Before Covid, we had around 120,000 international students. In 2022, less than 15,000. [Note that those numbers won't just be university though.]

Every course taught to an international student is the export of a service. International students paid ridiculously high fees that cross-subsidise domestic students and research. And contribute to the export of service figures that feed into the current account numbers. 

We put up a proposal for scaling MIQ. Shift MoH/MBIE from running the system to setting and enforcing standards, and let the system scale up. There was incredible opportunity. We could have been *the* place where students still had in-person lectures. And where professionals able to work remotely could move, work, live freely, get paid by their home-country employers while contributing to the economy here. 

Government said no.

International tourism ended. Every dollar spent by an international tourist was the export of a service. 

Anyway, just a bit of backstory on why the current account numbers are as they are. 

Morning Roundup

The tabs...

• Australia considering changes in governance at the Reserve Bank, including setting a Monetary Policy Committee. Hope that they avoid the errors NZ made around unqualified Board members and ruling out monetary policy expertise on the Monetary Policy Committee.
• Regulations shifting toward open banking are coming. It seems in-principle a good idea.
• Vic Uni's Martien Lubberink with some cautions about attempts to tax bank profits.
• The government's delaying biofuel mandates. That's great, but better would be abolishing them. When tech and carbon prices make them a cost-effective way of mitigating emissions, fuel companies will pick them up to avoid paying for carbon permits. National says it would scrap any mandate - good!
• Jem Traylen at BusinessDesk points to a path through on Three Waters; includes a bit from me on revenue bonds. 
• Canada playing silly buggers with tariff-rate quotas under CPTPP to freeze out NZ dairy. It's going to arbitration. 
• Oliver Hartwich on collapsing education results. 
• Michael Reddell on RBNZ Governor appointments. Bottom line: better to find a Governor that has respect from all the main parties rather than either a short-term extension or reappointing the one who hasn't got it. 
• Geoff Mortlock on Orr's reappointment.
• Immigration NZ's computer systems remain a mess so the backlog in visa approvals gets worse. If that can't be fixed in a hurry, why not just ditch the rule banning non-residents from buying houses so that living here as a non-resident is less bad?

Island logistics

I'm a bit curious about logistics over on the Islands now.

RNZ writes:

Ten containers of watermelons were scheduled to be shipped to New Zealand on 5 December.

However, the trucking companies assigned to transport the melons to the wharf in Tongatapu did not arrive to the growers' farms to pick up the produce, as RNZ Pacific Correspondent Kalafi Moala explained.

"The government, in particular the Ministry of Agriculture had organised for the trucks to come pick up the melons and so the fact that it didn't happen over the weekend, the responsibility falls back on them," he said.

Why is the Ministry of Agriculture responsible for organising freight logistics there?

If a grower contracts with a trucking company for critical deliveries like this, I'd have expected penalty clauses for failures. I have no clue what to expect when the Tongan government is intermediary.

Protecting the Canadian Dairy Cartel

Canada might not be playing fair under the CPTPP. 

Here's Farmer's Weekly:

In the two years since the agreement came into force low-tariff and tariff-free quota created to open their markets to more imports of dairy products have gone largely unfilled.

Canada has been the worst offender, with just 12% of quota for dairy imports from CPTPP countries filled last year and just 4% so far this year.

In Japan just 40% of dairy quotas have been filled while fill rates have also disappointed in Mexico.

Dairy Companies Association of NZ executive director Kimberly Crewther said administrative foot-dragging by the three countries’ governments, along with President Donald Trump’s withdrawal of the United States from the agreement in 2017, meant the $96m of annual gains predicted for the industry once CPTPP was fully implemented now looked unachievable.

Not a particular surprise that the Canadian government would pull whatever tricks it could to support the dairy cartel.

The Ministry of Foreign Affairs and Trade was aware of the problem and raised it with Canadian, Mexican and Japanese counterparts and was due to do so again at an online meeting of CPTPP officials last week.

Crewther said it was disappointing but not unusual for countries to use quota administration to protect local industries from the increase in imported competition that followed free trade agreements.

“The agreement of new access in FTAs is great but it is the implementation around that access that is really crucial to whether it is usable or not.”

In the case of Canada up to 85% of quota was allocated to local processors who sourced subsidised raw milk from the country’s farmers and tended not to import dearer foreign dairy products.

Only 10% was for importers, who were also prevented from getting their hands on quota allocated to local processors but not used.

Canada’s chronic underutilisation of its CPTPP import quotas was reinforced by its Milk Class 7 milk payments system, which subsidised prices paid to local farmers and undercut imports and has long been a bugbear of the NZ industry and other exporters.

GST import threshold - a few principles

Since the government is looking set to lower the threshold for GST application at the border, or at least will be releasing a discussion paper on it next week, a few principles to keep in mind:

• Were it possible to collect GST at the border seamlessly and at low cost, it should be applied at the border.
• There are two classes of losses that obtain where GST is not collected at the border on lower valued imports. 
• First, we have allocative inefficiency where slightly too many goods are imported relative to a first best. The 15% GST-based price difference may induce some extra imports at the margin, and this is inefficient.
• Second, we have effects on the overall tax base. This is separate from the allocative efficiency issue. Suppose that each and every import currently undertaken is one that would also have happened if GST were applied at the border and that there is zero distortion. There remains erosion of the tax base in that world - the government is less able to rely on consumption taxes and consequently has to rely more heavily on other, potentially less efficient, taxes. The deadweight costs of having to rely on less efficient taxes will also here matter. 
• That said, one thing that absolutely and emphatically does not matter is effects on the domestic company tax base or domestic income taxes. It potentially matters for thinking about fiscal incidence, but not for efficiency. Think of import leakages through online shopping here no differently than we think about import leakages when we buy cars that are built abroad. We do not, and should not, complain about lost company tax revenue where there isn't a domestic car manufacturing industry in New Zealand. Resources that would otherwise have been used making cars instead are put to other and better uses. Similarly, resources that would be put to use in domestic retail can be put to other better uses when consumers can more efficiently engage in direct-to-consumer imports from abroad. To count effects on domestic company tax base is to adopt mercantalism. 
• In assessing where the threshold should be, we need, in the first instance, to think about the effects on efficiency. And that will depend entirely on how you set up the collection mechanism. If you can collect GST at the border in a way that imposes no greater cost than collecting GST on domestic purchases, then there's no allocative inefficiency tradeoff to be made and the optimal threshold is $0. As soon as the collection mechanism is costly, you start having tradeoffs. And recall that these costs are not just the costs on Customs or IRD for running the system: it's also the hassles that some systems would impose on those wishing to buy goods from abroad. When I say costs, it's inclusive of all of that. What's the tradeoff?
• If the import threshold is set at some arbitrarily high level, you will induce way too much importation of high value, low shipping cost goods relative to a first best. That's an allocative inefficiency. 
• If the import threshold is set at $0 and there are fixed costs in collecting GST at the border - say a fixed processing charge, or hassles for consumers, or hassles for foreign shippers, you will deter a lot of efficient imports. 
• As you increase the threshold from $0, the allocative inefficiency from the fixed collection cost starts being trumped by the allocative inefficiency from too much higher valued import. At that point, you stop and set the threshold. What's the right threshold? I do not know, but it is endogenous to your collection mechanism.

And so we come to the absolute importance of picking a non-stupid, non-wishful-thinking GST collection mechanism.

Here are some things I believe count as wishful thinking. 

• That foreign suppliers other than the very large ones would have any interest in registering with IRD to pay tax on goods shipped to New Zealand.
• That foreign suppliers other than the very large ones, and perhaps not even the very large ones, would have any interest in putting a tax stamp on boxes being shipped to New Zealand indicating to Customs that tax had been paid on those shipments. 
• That you can run this through the credit card companies, when the credit card companies cannot tell whether a good purchased abroad on a NZ credit card was for consumption in NZ or for consumption abroad.
• That New Zealand shoppers would not bear any cost worth mentioning if their goods were held up at customs for days while waiting for them to get a note from Customs advising that the goods were there waiting for tax payment. 

Now I understand that there is talk about some big international agreement where shippers would register with some central agency and that outfit would make it relatively easy for those suppliers to ship goods to any foreign country. To the extent that that is successful, that counts against my first point. But consider too how many American retailers are already unwilling to ship goods abroad because of the hassles - that's why YouShop exists. That problem will not get better if we start thinking that foreign retailers are going to be happy to incur hassles in order to ship on to tiny tiny New Zealand.

Recall that there are a few classes of benefit from being able to access direct-to-consumer imports. Consumers doing the purchasing benefit from lower prices. Consumers continuing to purchase from domestic retailers very likely benefit from lower prices that come when domestic retailers have to compete with foreign websites. And, consumers get access to a broader range of niche goods that are not otherwise available in small markets. That last bit would be killed by proposals requiring foreign niche sellers to figure out how to get tax stamps to put on their packages. They'll just stop shipping the couple hundred items a year they might each ship to New Zealand. 

The least bad way I've thus far seen for imposing GST on goods shipped into New Zealand is the one Bronwyn Howell proposed. The domestic leg of shipment in New Zealand has to collect the GST and can compete to find the best way of doing it. It still needs careful assessment and somebody has to talk with the shippers about feasibility, but I can see its working where other mechanisms wouldn't. It doesn't require wishful thinking about credit card companies' willingness or ability to come to the table, or about foreign suppliers caring enough about the NZ tiny market relative to the hassles the NZ government thinks they're willing to bear for the privilege of selling to us. 

But we still have to sort out better ways of handling the customs and biosecurity extra levies that would absolutely kill low value imports if they were levied at the same time as GST on low-value goods. And we have to figure out what the domestic shippers would charge customers for having to act as tax collectors. I do not know whether the Howell proposal passes cost-benefit, but it seems the one most likely to do so if any of them will. To the extent that domestic retailers lobby for mechanisms that are more costly to implement, you might wonder whether they are really trying to impose a trade barrier.

Fixed costs in small countries, again

The Productivity Commission explains New Zealand's high prices:

The overall messages from this analysis are:

• Modelling the determinants of non-tradables prices using the extended FG model works fairly well in general, and especially for a group of OECD-Eurostat countries. 

• This supports the hypotheses that: 

• Non-tradables prices are higher in association with higher values of capital and unskilled labour endowments, and trade deficits; 

• Non-tradables prices are lower in association with higher values of skilled labour, and population;  

• Tradable prices also tend to be higher where non-tradables prices are higher both because this raises the (non-tradable) input costs for tradables, and because high tradables prices are impacted by „trade impediments‟ and indirect taxes. 

• The model suggests NZ‟s relatively small population and high tradables prices tend to raise its non-tradables prices relative to other countries. NZ‟s lower than average capital endowments should serve to counter-act these high prices, but modestly. (NZ has the 28th highest ranked capital endowment, and 25th highest capital/labour ratio, out of 43 countries). 

• For labour endowments, taking a ratio of skilled labour (differences) to population (differences), NZ is ranked 29th out of the 43 OECD-Eurostat countries in this ratio, so that its relatively low skilled labour per capita also serves to raise its service prices.

• NZ's relatively high price of non-tradables is estimated to add around 40% to the domestic consumer price of tradables, compared to border or factory gate prices. This is also around the OECD-Eurostat average cost share. 

• However, after accounting for this 'cost share of non-tradables' contribution, NZ's tradables prices remain fairly high by international standards. A "good candidate" to explain this are the transaction costs associated with NZ‟s distance from markets. Though we have not examined direct evidence on this here, numerous other studies have suggested the importance of such factors; see, for example, McCann (2003, 2009). 

• Based on "adjusted" tradables prices that removes the "cost share of non-tradables" element, NZ's tradables prices are around 6th highest in the 43 country OECD-Eurostat sample – behind such countries as Iceland, Norway and Japan (see Figure 6). These are also countries relatively distant from many of their key markets. (For Japan at least, other protectionist measures may also be relevant). However, Australia is ranked 19th out of 43 countries in its adjusted tradables price, suggesting that to the extent that there are "disadvantages of distance", Australia manages partially to avoid or overcome these.

• As Figure 6 shows, NZ is like a number of other small countries with a high adjusted tradables prices (e.g. Cyprus, Malta, Denmark, Finland, Israel, in addition to the "small and distant" economies of Iceland and Norway). This suggests that size or other characteristics of domestic markets/populations may be important in ways not already accounted for by the FG model's variables.

Labour has been exercised lately by the high costs of an increasing population: new migrants come in and bid up the price of housing where housing supply cannot expand to meet increased demand. They might worry instead about the longer-term costs of being small if they block migration. We can't do much about distance. But we can get bigger.

Other points worth thinking about:

• Our relatively high cost of alcohol and tobacco is particularly noted by the Commission; this does run contrary to the usual story we're told about alcohol being too cheap in New Zealand.
• I wonder whether results would be affected much by taking PriceSpy import prices instead of domestic landed prices for some consumer goods. How much does PriceSpy, and related services, constrain domestic prices?
• Gemmell's prior work showed footwear and clothing to be expensive here. I note that footwear still here attracts a 10% tariff. We could fix part of our stupid-high-prices problem by getting rid of the tariff that helps make one of those price categories more expensive than it needs to be. Sir Roger tried back in 2010; National vetoed the change.

If you're Wellington-based, Norm Gemmell's talk on all of this starts in Lecture Theatre 3, Rutherford House, Victoria University, in about 2 minutes.

Update: See also Donal and Matt.