Selling assets to pay for the quake

This morning's Press speculates about whether Christchurch might sell off some of the town's corporate assets to help pay for reconstruction. It isn't ruled out by earthquake recovery legislation, so the folks who like to be paranoid about privatization think there's a secret agenda.

Under what conditions is it optimal to sell off assets post quake? It depends a whole lot on whether the city is credit constrained, whether the city has better inside knowledge on the likely path of recovery, what information people might draw from asset sales about that knowledge, and whether it made sense for the city to own the facilities in the first place.

If the city is not credit constrained, then the earthquake is largely irrelevant. Recall that the best argument for Council ownership isn't whether the asset returns a positive financial return on investment but rather that difficulties in contracting for particular kinds of service delivery combined with differential incentives across private and public ownership may make public ownership sometimes optimal. It may be simpler for the Council to own the local power lines company Orion than for it to attempt rate of return or other forms of pricing regulation on the natural monopoly utility.

If the set of assets held ex ante by Council were optimally held by Council, then the main driver of post quake divestiture, absent credit constraints, is if Council's costs of ownership increased with the earthquake relative to the private sector's costs of ownership. The earthquake could plausibly have just made it a lot harder for Council to keep on top of its varying interests and so divesting itself of some assets that require more time and attention than Council's now able to give could make sense. I don't know which if any of Council's assets would fall into this category.

A second reason for divestiture would be if Council expected a faster depreciation of those assets than the private sector expects. If Council thinks land values will plummet, selling off land before that happens would make sense. But if everyone reads into a Council asset sale that Council has inside knowledge that things are worse than folks expect, and if there's uncertainty about outcomes, and if expectations about outcomes drives selection among multiple potential post-quake equilibria, then Council could do better by holding off on those sales or by making complementary investments that serve as countersignalling.

That changes where Council is credit constrained. If borrowing for the rebuilding becomes relatively expensive, selling off some assets that had ex ante been best owned by Council could make sense. The losses from a slightly less efficient ownership structure would be smaller than the increased borrowing costs otherwise incurred.

But all that's predicated on Council's holdings being ex ante efficient. Here's the list, according to the Press:

Christchurch City Holdings Ltd (CCHL) is the commercial and investment arm of the Christchurch City Council. CCHL manages the ratepayers' investment in these seven fully or partly-owned council-controlled trading organisations: Orion New Zealand Ltd – 89.3 per cent shareholding. Christchurch International Airport Ltd – 75 per cent. Lyttelton Port Company Ltd – 78.9 per cent. Christchurch City Networks Ltd (trading as Enable Networks) – 100 per cent. Red Bus Ltd – 100 per cent. City Care Ltd – 100 per cent. Selwyn Plantation Board Ltd – 39.3 per cent.

They seem to have left out VBase, which I'm pretty sure is Council owned.

There's room to argue about whether Council needs to own the bus company. As they've already facility in place for different companies to bid for routes, the efficiency gains from privatization are limited, but so too are the contracting costs for outsourcing. Seems a reasonable candidate for sale. I can't see any particular reason why Council should own the Port at Lyttelton. Facilities there had seemed on the decline prior to the earthquake; insurance-funded reconstruction could put the Port into a really good position for sale. Selling off some assets that were at best questionably owned by Council makes more sense than earthquake levies.

Update: See Roger Kerr's summary of positive privatization outcomes elsewhere in New Zealand.

Maintaining Bank Independence

When the Prime Minister starts musing about which way interest rates should go, or might go, folks who care about central bank independence should worry. Bloggers and journalists can carp about bank policy all they like, but they're not in a position to renew the Governor's job. Jawboning about which way interest rates should go can be seen as a signal about what's necessary for a Governor's appointment to be renewed. And so Members of Parliament, and especially the Prime Minister, really ought to know better.

John Key has been awful on this front. Maybe it's his background as a currency trader, but he just can't seem to stop himself from musing about what effect things are likely to have on RBNZ interest rate decisions. When he does, Matt Nolan over at TVHE gets mad. I get annoyed. So do David Farrar at Kiwiblog and Rob Hosking at the National Business Review. That seems to be about it. It's rare that anybody reporting on the PM's interest rate musings notes that he really really shouldn't be doing that. It's happened so often, that I've damn near given up on it. Matt still jumps up and down occasionally. The latest one, which I'd missed as I was still busy being an earthquake refugee:

A drop to the official cash rate -- after Treasury figures showing the massive cost to the economy of Christchurch's quake -- would be useful, Prime Minister John Key says.

Mr Key was asked this morning if the figures would make a reduction in the official cash rate this week inevitable.

"That's a matter for the Reserve Bank governor and it's for him alone to decide what happens on Thursday," he told Breakfast on TV One.

"But certainly the markets have factored in a likely cut in the official cash rate. You've got to say lower interest rates probably help the country, but that ultimately is a matter for the governor."

Mr Key said he was not attempting to influence the process but was stating facts.

"The question was would it be helpful, well low interest rates help."

If your boss tells the media that it would be helpful for the company if you did X, but it's really up to you, you might think that you kinda hafta do X if you want to keep you job. The Policy Targets Agreement gives RBNZ a bit of wiggle room around its inflation target:

4.b In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.

It wouldn't be crazy to see Key's media statements as instructing the Bank about whether they'd be given a pass for leaning on 4.b and perhaps punished if they didn't.

The New Zealand Prime Minister makes statements that could easily be read as pressuring the Reserve Bank ahead of an interest rate decision, and nobody much cares that this puts central bank independence in jeopardy. And those who do care have largely given up.

Now turn to Canada.

Jack Layton is the leader of the New Democratic Party of Canada. What the NDP thinks about anything, at least at the federal level, usually counts for about as much as what I think about anything - about nil. But in the most exciting election since '93, the NDP has surged up while the Tories and Grits focused on bashing each other. They're now a reasonably close second to the Tories. Amazing. Here's what Layton said about interest rates late last week.

Challenging the role of the fiercely independent Bank of Canada -- and stepping into territory where politicians rarely venture -- Layton said the Bank of Canada should hold off on raising interest rates because doing so may slow job creation and too many Canadians are already unemployed.

The Canadian economics Twittersphere jumped. @StephenGordon, @KevinMilligan, @MikePMoffatt and @andrew_leach weren't pleased. Neither were journalists Andrew Coyne and Terence Corcoran. Stephen Gordon's piece hit EconomyLab at the Globe and Mail.

The Bank’s mandate from the federal government is to keep inflation at around 2 per cent a year. Extremely low interest rates are appropriate during recessions, but when the economy returns to capacity -- as the Bank expects it will with the next 18 months -- then they become inflationary. By ordering the Bank to set aside its judgment and to let inflation increase beyond its target, the government would be in effect abandoning a policy that had provided the low and stable rates of inflation -- as well as the low and stable interest rates -- that we have seen over the past twenty years.

It took fifteen years and two recessions -- both of which were more severe than the one we just had -- to get inflation under control last time. That’s not an experience we want to repeat.

As I was writing this, another story appeared, suggesting that Mr Layton was merely expressing an opinion about the appropriate path of interest rates, and not considering the possibility of ordering the Bank of Canada to keep interest rates low. Later, an e-mail from NDP headquarters assured that "New Democrats are committed to the independence of the Bank." I greet these clarifications with no small amount of relief.

Perhaps the most important lesson to be learned here is that Prime Ministers -- and those who would be credible candidates for becoming Prime Minister -- should be extremely circumspect when discussing monetary policy. Twenty years of hard-won credibility is not something to be tossed aside so lightly.

Read those last two paragraphs again. Canada's a strange place. Academic economists note the dangers of a Party Leader who's still unlikely to form the next government mouthing off about interest rates and enough folks get worried that the candidate backs down before Gordon can even finish writing his piece for EconomyLab.

Here, maybe a half dozen of us tops care that the Prime Minister leans on the RBNZ - certainly not enough of us to get any traction on the issue.

It's encouraging that Canada's NDP, after some backtracking, seems to show more sense on monetary policy than New Zealand's Labour Party. Fortunately, Labour has less chance of getting anywhere near the Treasury benches this year than has Canada's NDP.

Too strong a signal

Criminals, especially those in gangs, get tattooed. There's always a risk that a gang member will sell out: rat out all his colleagues to the police in exchange for clemency, go into hiding, and take a job in the formal economy. If you get a facial tattoo letting everyone see you're a member of the Mongrel Mob, you've credibly displayed your commitment to the gang by ruling out options in the legitimate sector. That's about the strongest signal. But other hard-to-hide tattoos work as well.

Other tattoos work to signal your achievements to others who can decipher the code. The coded messages tell other gang members how many rivals you've killed, but aren't sufficient basis for police prosecution.

Unless you're a complete idiot. HT: LemmusLemmus

Inked on the pudgy chest of a young Pico Rivera gangster who had been picked up and released on a minor offense was the scene of a 2004 liquor store slaying that had stumped Lloyd for more than four years.

Each key detail was right there: the Christmas lights that lined the roof of the liquor store where 23-year-old John Juarez was gunned down, the direction his body fell, the bowed street lamp across the way and the street sign — all under the chilling banner of RIVERA KILLS, a reference to the gang Rivera-13.

As if to seal the deal, below the collarbone of the gang member known by the alias "Chopper" was a miniature helicopter raining down bullets on the scene.

Lloyd's discovery of the tattoo in 2008 launched a bizarre investigation that soon led to Anthony Garcia's arrest for the shooting. Then sheriff's detectives, posing as gang members, began talking to Garcia, 25, in his holding cell. They got a confession that this week led to a first-degree murder conviction in a killing investigators had once all but given up hope of solving.

...

Investigators don't believe Garcia's elaborate tattoo was a rash decision. Photos from several bookings over the years show the mural on his chest evolving as he added details to the tattooed murder scene — until one day Lloyd saw them as a whole and something clicked.

That's even dumber than sending out a Tweet about a crime you've committed while debating and voting for legislation that increases the penalties for the crime you've committed; in the latter case, you could at least expect that police would be reluctant to pursue things.

Appreciating little bits of freedom

It's good to stop every now and then to appreciate things.

We take for granted in Christchurch that you can run a few chickens in the back yard and sell the eggs. Our back neighbours have a few chooks; folks the next block over sometimes have a sign out advertising surplus eggs for sale.

In lots of cities in the States, you'd be fined for keeping chickens. Here's Christchurch's very sensible alternative:

While you can keep poultry / birds on your residential property, if you can't control your rooster's crowing at unreasonable times (prior to 7am), it will need to be removed from your property.

In Canada, you'd likely be in trouble with the egg marketing monopoly for selling the eggs even if you were in a place that allowed backyard chickens.

We've no plans to keep chickens. But I like that our neighbours have that freedom.

Business schools

Economics departments usually sit uneasily in business schools. Here's one reason why:

Paul M. Mason does not give his business students the same exams he gave 10 or 15 years ago. "Not many of them would pass," he says.

Mr. Mason, who teaches economics at the University of North Florida, believes his students are just as intelligent as they've always been. But many of them don't read their textbooks, or do much of anything else that their parents would have called studying. "We used to complain that K-12 schools didn't hold students to high standards," he says with a sigh. "And here we are doing the same thing ourselves."

...

Business majors spend less time preparing for class than do students in any other broad field, according to the most recent National Survey of Student Engagement: Nearly half of seniors majoring in business say they spend fewer than 11 hours a week studying outside class. In their new book, Academically Adrift: Limited Learning on College Campuses, the sociologists Richard Arum and Josipa Roksa report that on a national test of writing and reasoning skills, business majors had the weakest gains during the first two years of college. And when business students take the GMAT, the entry examination for M.B.A. programs, they score lower than do students in every other major.

While Canterbury's economics department is in the College of Business and Economics, we award degrees in each of Arts, Sciences and Commerce; we sit in all three Faculties. Most of our majoring students complete the Bachelor of Commerce. I tend to pitch my courses towards those students coming in via the Arts pathway, partially because most of my colleagues don't and partially because it suits me.

As we move down the path towards AACSB membership, I wonder how many of our Econ students will flip from Commerce to Arts, substituting mandatory courses in management and information systems for electives across political sciences, history, philosophy and psychology.

A forthcoming report from the Carnegie Foundation for the Advancement of Teaching praises 10 American colleges of business as models for integrating the liberal arts and practical training.

One of the objects of praise is business-oriented Babson College. Its president, Leonard A. Schlesinger, says that concrete business skills tend to expire in five years or so, as technology and organizations change. History and philosophy, on the other hand, provide the kind of contextual knowledge and reasoning skills that are indispensable for business students.

"If we didn't provide that kind of timeless knowledge to our students, we would be providing a seriously inadequate education," Mr. Schlesinger says. At the same time, Babson requires an ambitious practicum experience. In groups of 30, first-year students plan and create small businesses, with real money at stake. Last spring's businesses sold flip-flops, speakers, and chocolates. Any profits at the end of the year are donated to charity.

The biggest obstacles are student fears that employers put less value on an Arts degree than a Commerce degree, and that the degree now effectively has to be chosen before the student sets foot on campus; the mandatory courses for Commerce students are mostly completed in first year, after which the marginal costs of switching to an Arts or Science degree are high. But as for employers:

According to national [Note: US. Your mileage may vary for NZ] surveys, they want to hire 22-year-olds who can write coherently, think creatively, and analyze quantitative data. They're perfectly happy to hire English or biology majors. Most Ivy League universities and elite liberal-arts colleges, in fact, don't even offer undergraduate business majors.

Back in 1980, J. David Hunger, the St. Benedict/Saint John's fellow, wrote a monograph about the travails of undergraduate business education. He has never quite resolved his ambivalent feelings about the field. "At some times in my life," he says, "I've argued that we don't really need a business major."

There could be a nice market niche for an Australasian business school that followed the less travelled path.

...and on the Right

I've been wrong on every turn on the ACT contracts on iPredict, but through some decent arbitrage plays was able to limit my losses to about $21 in total.* My crystal ball is very dim; discount things as you like.

Don Brash as incoming ACT Party leader will face the same strategic problem that ACT has faced for rather a long time. If they're a strong force on the economic right but cement themselves into social conservatism, they only have bargaining power with a future National government to the extent that they can commit to bringing down a National government, or preventing one's creation, in favour of a Labour-led alternative. National's policies would have to be very far from economic liberalism before that threat became credible.

ACT's best hope is if National wants to have a scapegoat for sensible but unpopular economic policies. But blame the coalition partner only gets you so far, as Key knows. Were Key inclined to break campaign promises and blame the coalition partner, ACT would have been happy to help out in the first term. Were Key even inclined to support the reversal of legislation that National opposed and that National did not rule out changing during its campaign, like the youth minimum wage, he could just have supported Douglas's youth minimum wage bill and blamed ACT for it. The minor party that can't plausibly flip to the other side has constrained bargaining power. They'll get more with more seats, but I'm unconvinced that an ACT party with 10 seats would have much more bargaining power with National than the Green party with 10 seats has with Labour. Or, rather, let me put it another way: I'm unconvinced that they'll get policy concessions beyond those that National would likely have enacted anyway had ACT died. Regardless of ACT's existence, National was going to have to start on the serious work of fixing the structural deficit in its second term. It's been laying the groundwork preparing folks for it. The counterfactual matters.

This had been my biggest critique of Rodney Hide's leadership: in his estimation, ACT did best by proving themselves a safe and reliable partner for National - the loyal supporter that would receive its policy dues. Such was Hide's loyalty that he even backed Key against Roger Douglas's very sound critiques of government economic policy. All the effort and opprobrium of handling the Auckland Supercity campaign could be worth it if the Regulatory Responsibility Bill had gotten through. The unified opposition of the bureaucracy, Treasury, and the legal community to the bill suggests that there might be some problems with it as drafted, however worthy and necessary its intentions are. And I'd bet that that will yet kill it in committee. In which case the last term's not really come to much - supporting National through a bunch of nonsense to no policy benefit.

I had rather strongly misread Brash's play. I'd thought that his push for the ACT leadership was designed as an offer to be refused: lots of negotiations through the media and teasing them with that he'd commissioned some polling that would be available a fortnight after he launched his attack on Hide - it looked more to me like somebody trying to make sure that everyone had seen that he'd given it a go than like someone who really wanted the job. Seems I was very wrong.

I'd thought that Brash wanted the pretence of having sought the ACT leadership before launching his own vehicle that was free of some of the ACT baggage and to which the more liberal side of ACT might have fled. Then, he could have launched an economically right wing party free of the social conservatism that's been far too dominant in ACT over the last few years. A few key socially liberal policies like easing up on the drug war and eliminating asset forfeiture could have had a truly liberal party in a spot where it could credibly join up with the Greens to make civil liberty demands in a coalition with Labour. Then, post election, the new liberal party could put up a small set of "must do" and "mustn't dos" as condition of coalition with either National or Labour/Green. In that kind of position, a liberal party could keep Labour from doing anything too horrid on the economic front while promoting civil liberties, or keep National from doing anything too awful on civil liberties while promoting sound economic policy. I think the numbers are there that would back that kind of liberal party, but it couldn't easily happen if ACT were still in play.

In hindsight, it was entirely wishful thinking. I should have paid more attention to the talk of John Banks being onside for whatever play Brash was making; Banks is not an obvious first choice as a partner in a liberal party. But I'd never paid any attention to the former Auckland mayor and didn't realize the significance of his entry. In today's interview with Kathryn Ryan, Banks talks about being able to implement conservative policies (check 17:18, which is followed by an awfully embarrassing ebullience about the upcoming royal nuptials). I really hope he's only thinking about economics. But it'll be interesting to see where Brash takes the party. Campaigning on a straight platform of "Implement the 2020 Taskforce's Recommendations" would be great. But if they also wind up working to stomp on what's likely to come from the Law Commission's review of the Misuse of Drugs Act, they'll have done more harm than good.

A Brash-led ACT will do much better in the polls. iPredict's contracts on ACT returning to Parliament stopped being pulled downwards with the drop in the price of the contract on Hide's keeping Epsom and started being pulled up by the contract on Brash leading ACT. I was shorting the "At least one ACT MP to be elected to next Parliament" contract a few weeks ago when it was around the 50 cent mark; it's now closer to $0.90. ACT's projected share of the Party Vote has gone up to 7.5% from 3; National's has dropped from around the 46% range to about 45%. National's probability of winning the next election is back around the 85% range - about where it was trading when it looked more likely that ACT would fold and ACT voters would go back to National. The market says National's chances of forming government are little affected by the change in ACT leadership but that ACT's survival is greatly enhanced. And so Rodney Hide did the right thing by ACT, and very graciously, in standing aside.

* My losses, though they could have been worse were it not for some timely noticing that the sum of bids on contracts spanning particular spaces often summed to more than one (for example, Brash was hardly going to both form a new party AND run ACT, now, was he?):

• Closed stocks
  • $12 on Hide keeping his seat in Epsom
• In the running
  • $3 on Hide losing his position as ACT leader
  • $23 on ACT returning to Parliament
  • $12 on Brash becoming ACT leader
• But against these are $29 gain on whether a new party would be formed on the right

Keynes versus Hayek, Round II

I'm blown away by the production quality on this one. Check it in HD on full screen.
Massive kudos to the production team. See how many faces you recognize among the reporters at the end.

WATCH