Nobel Visas

Sir Clive Granger won the Nobel Prize in Economics while a visitor at the University of Canterbury's Economics Department. He loved visiting us. And we loved having him visit us.

One of my favourite Sir Clive stories, which predated my joining the Department, was of a departmental seminar where he, as usual, sat quietly at the back of the room. The visiting economist presenting didn't know he was there. But when the seminar speaker claimed that something had Granger-caused something else, Clive piped up from the back of the room, "No it didn't!"

He considered moving to New Zealand more permanently. But he didn't go ahead with it. Why? Our points system would have turned him down on the basis of his age.

Richard Dawkins has called on New Zealand to invite eminent scientists, fed up with the US or UK, to take up New Zealand citizenship.

I can't imagine the government issuing letters of invitation of that sort - especially as it would seriously annoy the American and British governments to frame things that way.

But I can totally imagine a great new skilled migrant immigration category. Applicants holding a Nobel Prize, a Fields Medal, the Kyoto or Crafoord Prize, the International Cosmos Prize, Fellowship in the Royal Society, membership of the National Academy of Sciences, or Fellowship of the British Academy would be considered for immigration to New Zealand under this category, subject only to meeting the good character requirements established by Immigration New Zealand.

We should warn them that science funding here is a bit more limited than they might be used to. And we shouldn't get our hopes up either: research productivity depends on having a great team with you, and I'd be surprised if many Nobellists would leave their teams behind.

But we could have had Sir Clive, and we didn't.

Google tax, again

A few things to remember for the folks angry about how much tax Google pays in New Zealand:

• Company tax is based on revenue less costs, not on revenue.
• Google New Zealand's costs include substantial payments to its foreign parent that allows Google New Zealand access to the foreign parent's IP;
• Imagine there were no Google NZ. Some NZ company is paying Google International for access to the adwords platform, and selling ads in NZ. What would they pay? Do you really think it would be less than Google NZ pays now?
• There is always opportunity for fudging things in transfer payments. For all the bluster, I have seen zero analysis showing that the transfer pricing is set inappropriately.
• Consider the value of all of the services that NZ gets from Google, for free. It is plausibly orders of magnitude higher than any potential tax take.
• Google disappearing wouldn't fix newspapers. Newspapers have been screwed since TradeMe siphoned off classified revenues. Want to make that disappear too?

Fundamental causes

There's a well-known income-health gradient: people who earn more tend also to be healthier and to live longer.

Parts of this could be causal from income to health, as being less able to afford the best medical care can matter, and overcrowded housing is associated with the lower tail of the income distribution. Other parts can be causal from health to income, where poor health means you can't work.

But still other parts could be due to common underlying causes for both health and income. Linda Gottfredson pointed to IQ as a fundamental underlying cause: correcting for IQ knocks back the association between health and income. Higher IQ people know how to follow doctors' orders and also earn more.

Here's the latest from Current Biology:

Individuals with lower socio-economic status (SES) are at increased risk of physical and mental illnesses and tend to die at an earlier age [1, 2, 3]. Explanations for the association between SES and health typically focus on factors that are environmental in origin [4]. However, common SNPs have been found collectively to explain around 18% of the phenotypic variance of an area-based social deprivation measure of SES [5]. Molecular genetic studies have also shown that common physical and psychiatric diseases are partly heritable [6]. It is possible that phenotypic associations between SES and health arise partly due to a shared genetic etiology. We conducted a genome-wide association study (GWAS) on social deprivation and on household income using 112,151 participants of UK Biobank. We find that common SNPs explain 21% of the variation in social deprivation and 11% of household income. Two independent loci attained genome-wide significance for household income, with the most significant SNP in each of these loci being rs187848990 on chromosome 2 and rs8100891 on chromosome 19. Genes in the regions of these SNPs have been associated with intellectual disabilities, schizophrenia, and synaptic plasticity. Extensive genetic correlations were found between both measures of SES and illnesses, anthropometric variables, psychiatric disorders, and cognitive ability. These findings suggest that some SNPs associated with SES are involved in the brain and central nervous system. The genetic associations with SES obviously do not reflect direct causal effects and are probably mediated via other partly heritable variables, including cognitive ability, personality, and health.

Buckle up

I wrote a short piece last night for The Spinoff on last night's election. I'll change my views if we get refined exit poll data that tells me otherwise. But it also seems to be the conclusion others are now drawing too. I also talked about this with Mark Sainsbury this morning.

It isn't an income inequality class war thing. It's more complicated than that, with a lot of it being the mess I'd hinted at in my summary comments on our inequality debate: the egalitarianism of respect that is sorely needed.

A snippet from The Spinoff piece:

I expect a lot of kiwis will be tempted to see the Trump phenomenon through an income inequality lens. While rising income inequality is a myth in New Zealand, it isn't in America. But that easy narrative doesn't sit well with the data, or not in the obvious ways. Gallop polling back from August even showed Trump supporters weren't those, on average, left behind by globalisation or automation. Supporters did not have lower income and were not more likely to be unemployed. And the same Gallup study showed supporters were more likely to work in industries that did not really have to worry much about competition from China - like construction. But they were more likely to live in places far from the media and political elites.

...

What exit polls are out so far show Clinton won among those earning less than $50,000 per year, but lost among those on higher earnings - despite Clinton having much stronger support among the college-educated. It isn't easy to simultaneously lose badly among those on higher incomes and win strongly among those with college degrees. And race has certainly played a role. None of this cleanly fits an income inequality narrative. But it does fit a cultural narrative.

...

Look back again at Vance's description of life in hillbilly country. There was a great interview with Vance in The American Conservative a few months ago. He talks about the resentment felt in those communities about being looked down on by urban elites. About being told that their way of living and religious beliefs and pride in military service are wrong. About their accents being a great source of amusement. Trump earned the same condescension from urban elites that a lot of people who aren't in that elite feel pretty regularly. And warnings about Trump's racism, misogyny, and potential fascism ring hollow when those words have lost the meaning they should have through overuse: when everything is a microaggression and when President Bush was regularly compared to Hitler, well, people start discounting when they shouldn't. And there's always a fraction of the population that just wants to watch it all burn.

...
As for what now?

It won't be the end of the world.

But it will be rather bad.

Back in March I'd pointed to the institutional constraints that would stop a Trump Presidency from being apocalyptic. I was too optimistic about two of them.

Read the whole thing...

Simple investing weren't so simple

I wanted a low-fees market-tracking Kiwisaver provider. Simplicity started up recently. Their low-fees model just had funds going into a selection of Vanguard funds to track the market, with conservative, balanced and growth options. 

Then they announced that their investments were flipping into Vanguard's ethical funds. Simplicity noted there would be no effect on their charged fees. But they didn't note that Vanguard's ethical funds have had middling to low returns compared to other Vanguard large-cap funds. They've done well over the past 5 years, but less well this year, and  poorly over the longer term.

Here's the ethical funds against some of the other large-cap Vanguard funds.

Average annual performance—quarter end
	Vanguard Large-Cap Index Fund Adm	Vanguard FTSE Social Index Inv	Vanguard 500 Index Fund Adm	Vanguard Diversified Equity Inv	Vanguard Dividend Growth Fund
YTD	7.66%	6.37%	7.81%	5.63%	6.46%
YTD as-of date	09/30/2016	09/30/2016	09/30/2016	09/30/2016	09/30/2016
1-year	14.93%	13.13%	15.39%	11.64%	13.73%
3-year	10.80%	11.23%	11.12%	9.16%	10.07%
5-year	16.24%	17.08%	16.33%	15.93%	14.70%
10-year	7.41%	6.28%	7.23%	6.95%	8.44%
1-, 3-, 5-, 10-year as-of date	09/30/2016	09/30/2016	09/30/2016	09/30/2016	09/30/2016
Since inception	7.70%	3.33%	5.05%	7.30%	8.17%
Inception date	02/02/2004	05/31/2000	11/13/2000	06/10/2005	05/15/1992
SEC yield	2.09% B	1.76% B	2.13% B	1.26% B	1.99% B
SEC yield as-of date	11/04/2016	11/04/2016	11/04/2016	11/04/2016	11/04/2016

If I had already flipped over, I would be annoyed. Past performance doesn't predict future returns and all, but any fund that prioritises things other than performance seems unlikely to do better on average than funds prioritising performance.

Everyone has a different idea of what's ethical anyway. My ethical investment choices would be rather different from anybody else's.

Happy to eschew landmines, but not the company whose landmines help keep North Korea from crossing the DMZ. Those are good landmines. Landmines that make the world a better and safer place. Can I invest only in the companies making those landmines?

I'm happier investing in tobacco stocks than in whatever company is doing the meth testing in NZ state houses while simultaneously providing cleaning services their testing shows is necessary. Nobody forces anybody to smoke, but lots of people were forced out of state houses because of those meth tests.

I'm also happier investing in nuclear weapons companies than in whoever is selling drugs to state governments for use in lethal injection. I'd also want to divest from the manufacturers of the flash-bang grenades used by American police departments. There are plenty of countries that shouldn't have nukes; companies that trade on stock exchanges can be barred from dealing with them.

Ultimately, the whole thing is too fraught. My ethical preferences are idiosyncratic.

And this statement from Simplicity was a bit worrying:

The debate on ethical change will not go away, and it shouldn't. There should be an ongoing discussion on what is right and wrong to invest in, and the debate will evolve. It will never be fast enough for some, but it's clear that investors are becoming more aware of what they invest in, and they should be.

In the case of the investments we have eliminated, there are no 'rights' about them. But in other areas, the argument is much more complex.

Take fossil fuels as an example. We have been asked a few times why fossil fuels weren't included in the exclusion list, and it's a very legitimate question. There are several reasons why.

Primarily, it's not what the vast majority of our members want. Demands to remove fossil fuel companies is low, because it would also remove investment in a large number of global companies which also produce things like plastics, food, electronic components, roading materials, and many other things now considered essential to modern living.

Secondly, it would have resulted in a much smaller, and more expensive, fund. Other managers would have likely shunned it, making it more expensive to run. To reduce fees, KiwiSaver managers need economies of scale too. Our primary goal is to increase your retirement savings via the lowest fees. If we can eliminate sin stocks in the process, we will do so, because it's the right thing to do. However, most of our members would resent us passing judgement on fossil fuels, and charging them more for doing so. That's also democracy in action.

Popular moods change. Would I want my investment portfolio divested of oil stocks if a majority of other investors in the fund decided they didn't like oil?

In grad school, my friend Ed Stringham talked about setting up a Vice Fund. If ethical investors have non-return preferences over portfolio allocations, that should mean lower returns in ethical funds as compared to the companies seeing divestment by ethical investors - and opportunity for others. Turns out there now is a Vice Fund. The picture below tracks VICEX against other benchmarks, and the Vanguard social investment fund.

The vice fund the ethical fund over that long period, but the fund has pretty high fees and is beaten by the ethical fund over some periods too. Catch Jim Rose on the topic as well.

I was pretty enthusiastic about Simplicity's simple model. But if you don't necessarily mind your stocks runnin' with the devil, the simple life ain't so simple.

Trump reconsidered

In March I said that Trump wouldn't be the end of the world.

He likely won't be the end of the world, and is still likely to be less bad than most people think. But he will be terrible.

Two things I'd revise from my March piece at The Spinoff:

First, I had not sufficiently accounted for the harm that a vindictive President can do through the levers of the administrative agencies.

Second, I had thought that the GOP elite's hatred of Trump would prove a constraint against him: that he would face internal party opposition that would constrain some of what he might want to do. I was too optimistic on that one. The GOP elite fell into line when Trump won the candidacy. I doubt it was because they accurately forecast a Trump win. Rather, they had, I think, careerist concerns about being seen to oppose the President. That part is the scariest if we look ahead through a Trump Presidency, forecast at 81.6% as I head out from the office.

Giving credit the credit it's due

If we assume that people who use credit cards get no benefit from using credit cards instead of using EFTPOS, then it's pretty easy to show that using credit cards is socially costly. It's more expensive to process credit card transactions; these can be real resource costs. Anytime the benefits of something that has real resource costs are assumed equal to zero, it's pretty easy to show it's something pretty costly, on net.

MBIE's consultation document on credit card fees racks up some substantial costs of credit card use, under the assumption that the 40% or so of consumers who pay off their balances in full every month get no benefit from the use of the credit facility.

I pay off my credit card balance in full every month. Among the many benefits I enjoy when using my credit card rather than EFTPOS:

1. Simplicity in ordering things online. It is a pain to arrange a bank transfer when ordering things online. I've done it for some retailers who didn't take credit when I was last building a computer and needed to buy components. But it adds 15 minutes to a transaction. 
2. Consumer protection. Credit cards come with protection against fraud that doesn't come with normal EFTPOS.
3. Ease of use internationally. We had a few issues in using our credit card last time we went back to North America, despite having warned Kiwibank ahead of time that we'd be travelling abroad and that we needed our cards working in North America. But the EFTPOS cards only work at bank machines, not at retailers. Visa and Mastercard work everywhere - barring glitches.
4. Not having to carry foreign cash when travelling abroad. If you pull cash using EFTPOS rather than just using your credit card, you have to guess how much cash you're going to need. 
5. Before we had a mortgage with a credit line, the credit facility was useful even if we did pay it off every month - the 40 days' interest-free after purchase before payment gave time for smoothing things out for big lumpy purchases like whiteware. That is helpful. Since having the mortgage with the credit line, the credit facility lets us shave off some of our monthly mortgage interest payment - although that counts as a transfer in the welfare analysis.

I don't know what the monetary value of all of that is. But it sure isn't zero.

I hit some of this in my column in last week's NBR ($). A snippet:

MBIE assumes that 40% of customers choose credit cards over EFTPOS solely because of rewards like cash back or Airpoints dollars. They then go on to calculate the $45 million in costs to the economy on the assumption that those consumers receive no benefit from using credit other than the rewards. That is a huge problem in their analysis, and we will come back to it. Let’s pretend they’re right for now, even though we know better.

On a first cut, it seems that there should be little to worry about. Retailers can choose whether or not to accept credit cards; customers can choose whether to go to places where the prices are slightly higher and credit cards are accepted, or to go to retailers with slightly lower prices that only accept EFTPOS. What’s the issue?

The MBIE report worries that all but the largest retailers are forced by competition to accept credit cards. It also warns that things may get worse, with increasing popularity of credit over EFTPOS and the potential rise of reward-scheme debit cards. And it notes that if merchants increase prices across-the-board to cover the higher fee cards, poorer customers who are less likely to those cards will be adversely affected.

If part of MBIE’s basic model is that retailers cannot afford to forego accepting credit cards because the more valuable customers choose retailers based on whether they can use their reward-laden, high-fee cards, it seems odd that high-end (but low margin) Wellington grocer Moore Wilson has a surcharge for credit card users that dwarfs scheme-based rewards.

Merchant choice really does not seem that weak. I expect that you, like me, have seen plenty of shops and restaurants with a piece of black electrical tape over the credit button and others with a little piece of paper taped underneath the credit button saying “No Credit.” And plenty of small shops and restaurants will put a minimum purchase size on credit card transactions – often $15.

If merchants do have effective choice in whether to accept credit cards, or to accept them only with a surcharge, then the power-based arguments in MBIE’s analysis are less compelling.

But there seems to be a more fundamental problem in MBIE’s cost tallying. Reward schemes are nice, but they are hardly the only reason that a lot of consumers choose credit over EFTPOS.