Berg

I'm really really looking forward to hearing Chris Berg when he visits us in a couple of weeks. Come join us either in Wellington (29 June) or Auckland (30th).

Replicate, replicate, replicate

Scott Alexander warned we should beware the man of one study. There's a good reason for that: a lot of studies might not replicate. File drawer effects, p-hacking, honest errors and deliberate manipulation mean you ought to be somewhat sceptical of results from any one study.

My Canterbury colleague Bob Reed, along with Maren Duvendack and Richard Palmer-Jones, make the case for replication in the latest issue of Econ Journal Watch.

And I love that they open by citing Tullock.

In the post-World War II period, several scholars raised concerns about the quality of data and the validity of social and economic statistical analysis (Morgenstern 1950; Tullock 1959). Gordon Tullock was one of the first to draw attention to what is now commonly referred to as “the file drawer problem” (Rosenthal 1979): inconclusive findings are likely to be filed, while results that are statistically significant get published. Tullock also advocated replication: “The moral of these considerations would appear to be clear. The tradition of independent repetition of experiments should be transferred from physics and chemistry to the areas where it is now a rarity” (Tullock 1959, 593).

File drawer problems nest in file drawer problems though: confirmatory replications may be less likely to be published:

What can we learn from our analysis of replication studies? Most importantly, and perhaps not too surprisingly, the main takeaway is that, conditional on the replication having been published, there is a high rate of disconfirmation. Over the full set of replication studies, approximately two out of every three studies were unable to confirm the original findings. Another 12 percent disconfirmed at least one major finding of the original study, while confirming others (Mixed?). In other words, nearly 80 percent of replication studies have found major flaws in the original research.

Could this be an overestimate of the true rate of Type I errors in original studies? While the question is impossible to answer conclusively with our sample, there is some indication that this rate overstates the unreliability of original studies. The JAE is noteworthy in that it publishes many replications that consist of little more than the statement “we are able to reproduce the results,” as in Drukker and Guan 2003). This suggests that the JAE does not discriminate on the basis of whether the replication study confirms or disconfirms the original study. This contrasts with the American Economic Review, which has never published a replication that merely confirmed the original study. One may be tempted to take the JAE’s record as representative, and we see that the JAE’s rate of replications that disconfirm at least one major finding (that is, Negative? + Mixed?) is 65 percent (0.452+0.194). By any account, this is still a large number. It raises serious concerns about the reliability of published empirical research in economics. 

I wonder whether there's a bigger problem in that studies more likely to be thought suspect might be subject to replication; in that case, the 65% in the JAE would be an overestimate.

Regulatory disobedience?

If the state can award costs against the unsuccessful defendant, this just doesn't work:

[Charles] Murray’s proposal is less dramatic and more ingenious. The regulatory state has two related weaknesses, he explains: It relies on voluntary compliance, and its enforcement capabilities are far inferior to its expansive mandate. So he proposes a private legal defense fund — the “Madison Fund,” honoring the father of the Constitution — that businesses and citizens can rely on for representation against federal regulators. By engaging in expensive and time-consuming litigation on behalf of clients that refuse to comply with pointless rules, the fund drains the government’s enforcement resources and eventually undercuts its ambitions. The state can compel submission from an individual or company with the threat of ruinous legal proceedings, Murray writes, “but Goliath cannot afford to make good on that threat against hundreds of Davids.”

The result Murray foresees is a “no harm, no foul” system, in which violations that cause no disruptions or injuries go ignored by regulators, because punishing them is too troublesome. He also imagines the rise of “occupational defense funds” in which trade groups pool resources to serve as a sort of insurance against regulators. In the unlikely event of a federal inspection of a particular business establishment, such funds could cover the fines.

Who pays for all this? Pointing to the emergence of “many billion-dollar-plus private fortunes over the last three decades,” Murray suggests that the Madison Fund could get started “if just one wealthy American cared enough to contribute, say, a few hundred million dollars,” or if “a dozen wealthy Americans cared enough to share the initial costs among themselves.”

I don't know the relevant American legislation, but first move of any government against this kind of initiative would be to allow the judge to award legal costs against the unsuccessful regulatory civil disobedient. Regulatory enforcement becomes a profit centre for the government rather than costly, and the state then turns libertarian-minded donors into money pumps.

Charles Murray must have something in his book showing how this wouldn't happen.

HT: Kiwiblog

The Greens' New Leader

Congratulations to James Shaw on winning the election as the co-leader (male) of the Greens. These could be interesting times. What struck me was the contrast between the comments of continuing co-leader, Metiria Turei, and Shaw. According to this story, the policy area that Turei emphasised in her congratulations speech was child poverty. In contrast, according to this story, Shaw used his first speech to emphasise policies on climate change.

I am reminded of the Yes Prime Minister episode in which the Prime Minister referred to a candidate for a bishopric as wanting to turn the Church of England into some kind of religious movement. Apparently, Shaw wants to turn the Greens into some kind of environmentalist party.

If this is the case, then there is scope for the Greens to reposition themselves. Last year, I suggested that the Greens should seriously consider being a coalition partner for National in a "teal coalition". Many others (e.g. here) have suggested that New Zealand needs a new teal (or blue-green) party for environmentalists who are turned off by the red-green tinge of the Greens.

I see no value for environmentalists in splitting their concerns across two parties, neither of whom would have any influence with the dominant partner in a coalition, due to their having no credible alternative partner. Instead, I still believe that the Greens could have more influence if they became solely a green-green party. While this would run the risk of alienating that part of the current Greens activist base who are strongly anti-business, it would enable them to pick up support elsewhere. What I am suggesting is a party that would guarantee confidence and supply to National or Labour in return for concessions on key environmental issues, and would abstain in parliament on any non-enviornmental issue. Their position, to paraphrase President Lincoln's letter to Horace Greely, would be

If we could save the environment without freeing any market we would do it, and if we could save the environment by freeing all the markets we would do it; and if we could save it by feeing some and leaving others alone we would also do that. 

If Shaw can move the Greens in this direction, politics will become really interesting in New Zealand. Even without that, the interaction between the two co-leaders is going to be facinating to watch.

Dead capital: Council ownership edition

I've worried that perhaps Councils haven't fought back against the NIMBYs because they haven't quite enough skin in the game.

The basic model in my head has run as follows:

Councillors need to be re-elected. High preference intensity local NIMBYs get disproportionate weight because they're vocal and very likely to vote. And so things like Auckland's Unitary Plan unravel: local pressure pops up, local Councillors stand by their neighbourhoods, and Council has little incentive to push back.

Any new development that goes in does add to the ratings base, but the link to Council revenues is weak: absent other changes, an increase in the value of land in one place means a greater fraction of a fixed tax bill falls there with minute and diffused cuts elsewhere; the increase in the rateable base can allow the total budget to increase if Councils are discretionary budget maximisers, but the hassle costs involved in dealing with the NIMBYs just might not be worth the small increase in Council budget that could come from it.

Maybe allowing some site to be turned into low-rise apartments would allow Council to raise another $150k/year without increasing any other property owner's taxes, but is that really enough to be worth the years of town hall meetings with angry people all promising to throw out the local Councillor because of it?

If that's the issue, giving Council a bit more of a stake in development could help out. The NZ Initiative a while back proposed, for example, giving Council the GST on new construction activity. On a $20 million construction project, that would be a $3m kick encouraging Council to allow appropriate land use. Council then has a better reason to find solutions that compensate the NIMBYs at the margin while allowing development.

That's still the model that's in my head, but what are we to make of this kind of case?

Auckland Council owns massive vacant-lot car parking spaces in Tekapuna. They could transform the space, with parking built into whatever complex went up, if there were compelling public interest in having those parking spaces there. They'd then appropriate almost the entire surplus from the project: put it up to competitive tendering, take the money from the best proposed development, use the money for other projects that compensate the NIMBYs enough to make the deal go through.

Maybe the existing use - the weekend market - is just really really important to local residents. But what of all the other surface parking lots owned by Council? They could easily be turned to commercial or residential use, with a parking garage built into the facility if needed.

Perhaps the opportunity cost of the land just isn't considered by Council when setting priorities.

Rental rationing equilibria?

The only way I can make sense of Lee Suckling's renting experience in Auckland is that we're in a rental rationing equilibrium.

What does that mean?

In credit rationing models, too high an interest rate will only attract bad borrowers. When the lender can't tell enough about the borrower's creditworthiness, he'll ration credit: charge a bit less interest and give the loans to the most credible borrowers. Demand for loans will exceed supply at the going rate, but nobody does better by increasing interest rates to clear the market. Tyler and I discussed these models a while back; the implications for market efficiency aren't as clear-cut as you might think.

What does that have to do with the price of rental accommodation in Auckland?

First, note that it can be hard for landlords to evict bad tenants. Or, at least, lots of landlords believe that to be the case. Here is one recent horror story. Another another; the government has a hard time with it too. One property management company lists a best-case of a 7-week process to evict a tenant that has stopped paying rent.

Now here's Suckling's account:

At every viewing you'll be one of at least 20 people. You'll wait patiently outside, eyeing up the competition, then will line up like sheep, shoes off, ready to file in five-at-a-time.

The reality is never as good as what TradeMe presents - especially if the listing used overexposed real estate photos, complete with fisheye angles that make 50 square metres look like 80. If you're looking in a city-fringe suburb, you will be met with grottiness. Auckland landlords, you seriously need to have your houses professionally cleaned. Last time we checked, $500 a week didn't buy us mould.

Still, such filth seems not to deter most. Four or five people will fill out applications then and there, before greasing up to the agent to find out how they're going to "win" this grubby, fungus-friendly house.

The answer? Be a white couple (yes, it seems race matters in agents' eyes), not a group of potential flatmates. Come with no kids, no pets, your own whiteware, and full-time jobs in a stable industry like law. Good references are vital, and you can't have a current lease - you need to be able to move in, well, tomorrow, so the landlord doesn't lose any money.

If such qualifiers are not already ridiculous enough, you'll also need to be flexible on your budget. I started with a price range the $450-$500 vicinity. Every week, my husband and I renegotiated the ceiling on our accommodation allocation. Last week, the budget had reached $600 per week.

Oh, and you'll need $3500 in the bank to give away as move-in costs to seal the deal - inclusive of the ever-ridiculous "letting fee", which seldom exists outside of Auckland and goes straight into the agency's pocket alongside five or 10 per cent of your weekly rent.

Viewing after viewing, application after application, your spirits will sink low. Really low. Finding a rental is like applying for jobs: you're excited and hopeful in the beginning, but come week three of rejections you think there's something seriously undesirable about you.

Rental-hunting depression is also fuelled by the sheer lack of decent houses out there - those you'd never thought you'd live in, but now, somehow, are actually considering.

Suppose you had a queue of 20 potential renters at a $600/week rent. At a higher rent, you'd have a shorter queue, but you'd have a worse pool from which to draw and less ability to be selective. So keep the rent lower and pick-and-choose.

If your basic model is that landlords are trying to eke out as much in rent as possible and that they'll hike the rent at any chance, why aren't they charging more if they're getting queues of dozens of potential tenants? A rental-rationing equilibrium could explain part of it.

Sure, maybe they're lowballing things to draw in a bigger pool for the at-house auction, but the additional anecdotal hurdles are all characteristics-based, not offer price. The tenants' expected financial stability matters a lot more when it's hard to evict non-paying tenants.

The rental-rationing story is also consistent with other odd accounts you'd hear, like that longer-term tenancies induce the landlord to charge more rather than less. If the rental-rationing story is right, a long-term tenancy subsequent to a short-term tenancy would be preferred by the landlord who's then learned tenant type, but the initial request for a long-term tenancy is riskier because you have fewer opportunities to be easily rid of a bad tenant. I don't know whether that's the case: I'm neither a landlord nor a tenant.

On the other side, Tenancy Tribunal decisions are already publicly searchable; landlords can find out about the riskiest tenants. This limits the extent of any rental-rationing equilibrium by knocking out the tenants who've recently had judgements against them and who are applying for your place under the same variant of their name that they used at their last place.

Potential solutions?

Making it easier to evict problem tenants can help, but that comes at the risk of empowering bad landlords.

Best solution would be to allow sufficient increases in housing supply that landlords had to compete a bit harder for tenants - while also making it fairly easy to evict bad ones.

I wonder too whether some of the grottiness and lack of upkeep is explained not only by the tight market for rentals but also by regulatory uncertainty around zoning. If you think the unitary plan might let you bowl a run-down property in a couple of years to put up townhouses, why invest in upkeep?

Migration targets

Suppose that all of the following are true.

1. Auckland land use policies restricting both densification and expansion on the fringes make Auckland house prices highly subject to migration pressure. If you run a vertical supply curve, any shift in demand translates into moves up and down that curve.
2. Migrants will go to the place that best suits them; that will depend on things like having an established community from their home country and on their likely wages in the different places.
3. Many rural regions would really really like to have more migrants; it's easier to fund existing infrastructure if population isn't declining.
4. Migrants prefer to go to Auckland and so current immigration policy is hitting on 1; that will continue until housing costs are so high that migrants are indifferent between moving to Auckland and moving elsewhere. This means that productivity differences between Auckland and the regions are capitalised into house prices.

The Immigration Minister's contemplating adding more extra points for those migrants willing to live outside of Auckland. This puts less pressure on Auckland housing prices, but does mean that migrants are forced to go to places were they would be less productive than they otherwise could be - or where they're worse off as they view things for want of Auckland-specific amenities. 

Best would be to fix Auckland land use policy so that more people could live there. Without that, we're in second-best worlds where the alternative to "migrants have to go to not-Auckland" could well be "well, then, we won't let so many migrants in."

While we're in this second-best world, I wonder whether there could be option for Councils to say how many points they'd like to award for migrants willing to come to their regions. The "Not Auckland" space is pretty heterogenous.