Budget 2014

Budget 2014 is coming out today. Members of the NZ econ blogsphere will be tweeting their reactions (at #NZ14). In preparation, I thought I would link back to a previous post of mine calling for better press coverage of budgets, here, and, since an election-year budget is always an election issue, a post from the 2011 election about what to ignore in the economic policy section of parties' election manifestos, here. The latter contained a couple of points specific to the 2011 election, but 4 timeless points, that are worth restating. These were

1. Decide whether what matters to you is what serves your selfish interest or what would serve the social good. If you are genuinely concerned about the social good, you should ask what sacrifices you are being asked to make, not how others are going to pay.
2. Pay no attention to a policy that promises to create jobs or reduce unemployment, unless it specifically mentions labour market policy.  
3. Ignore promise of goodies to be financed by stronger economic growth.  
4. Ignore any policy that labels social spending “investment”.

(I expand on each of these further in the original post.)

Matt has covered off alternative-budget, election-manifesto announcements from ACT, Labour, and the Greens. It would say that ACT fails on Point 3, and Labour on Point 2. I fully expect to see all the parties failing on one or more of these by the time of the election, and I will be looking out for examples in today's budget and the resulting discussion.

A request for a one-handed economist

Hoisted from the Economics Department all-staff email list: a request from an echo-chamber. I've redacted the sender's name and contact details. Meredith, our departmental administrator, sent it round on his request.

Subject: Request for speaker about Public Private Partnerships -- their disadvantages and weaknesses.

Thankyou Meredith for for helping me with my request.I am a member of the coalition  Keep Our Assets Canterbury. We wish to hold a seminar about the aspect of PPP's that I mentioned above. The stance of the coalition is that we oppose them.We hope to hold this seminar in late June or early July, on a Saturday.  We are wanting to have as many non- academic people  in the audience as possible. Participants in this proposed seminar are free to go elsewhere to be persuaded that PPP's are good.
Would any of your colleagues in the Dept of Economics at Canterbury be willing to be a speaker?If they are, I can be contacted by email, or at [redacted]

Would for a world in which coalitions sought to find out whether they were right rather than wanting only the confirmation of priors.

Seamus comments, "Well I guess, technically, a speaker who sees only disadvantages and weaknesses in PPPs and would much rather see assets sold off to the private-only sector would meet his criterion, but I'm not sure it is what he has in mind."

Welcome Kirdan

The excellent Kirdan Lees has a post on Labour's proposed monetary policy up at TVHE. I don't know for sure, but since he posted under the byline "Kirdan" rather than "The Hand", (the catch-all for guest posts at TVHE), I am assuming he has joined the TVHE team. If so, that is great news.

Mostly, Kirdan is spot on with his post. But blogging is boring if it becomes an echo chamber, and I disagree with one aspect of his post, which is summarised by his statements that "Getting kiwis to save more is probably a good thing", and "compulsory Kiwisaver probably pushes in the right direction".

Here is my comment on the post at TVHE

Kirdan, I am puzzled by your statement that making kiwisaver compulsory pushes in the right direction, and that encouraging New Zealanders to save more is probably a good thing. Saving means forgoing one good thing (consumption today) in order to get a different good thing (consumption tomorrow for yourself or your heirs). What is the welfare framework for thinking that people are making the wrong decision on that margin? Note that Investment is an intermediate good into the production of future output. If we did proper intertemporal accounting of GDP we would consider future discounted consumption as part of GDP, but deduct Investment spending as an intermediate good. Having one-period measures of GDP means that we double count investment twice: I is included in current GDP and future C is included in future GDP, but mis-measurement is not a reason to favour one consumption path over another.

And here is Kirdan's reply.

On balance I have enough sympathy with macroeconomic balance models – which show lower real interest rates and exchange rates from a better savings-investment balance – to favour promoting savings a bit more.
I used the phrase “probably pushes in the right direction” since most microeconomic studies suggest sufficient savings while the macro evidence suggests New Zealanders have a way to go.
Both the micro studies and the macro data are pretty fraught though. The revisions to GDP and the savings track in the UK show just how fragile the conclusions economists draw in this space can be.
The Treasury, the Reserve Bank and the IMF all suggest the exchange rate is 5-15 percent “overvalued” and point to savings being an issue. So some savings imbalance seems a reasonable problem definition for the Labour Party to start from.
I don't see GDP as the discounted sum of current and future consumption.

I'm afraid this still doesn't do it for me. Let me note that I can see all sorts of reasons based on market failures, externalities, paternalism, or intergenerational equity why one might reach the policy conclusion that the market is delivering too much current consumption. My problem with much of the policy debate is that these underlying values are never made explicit. As Matt at TVHE would say, we need to discuss trade-offs. Yes, Treasury, Reserve Bank, and the IMF: I am looking at you.

It is hard to make every part of one's analysis explicit in a blog post, and even harder in a reply to a comment, but I want to push Kirdan to provide a bit more.

First of all, what is a macroeconomic "imbalance"? I know we hear that term all the time, but I don't understand it. Countries don't borrow and lend, individual people, firms, and governments do for their own reasons. The sum of all borrowings less the sum of all lendings, may not necessarily equal zero at any time, but it is exactly balanced (by the laws of arithmetic), but the sum of all overseas lendings less the sum of all overseas borrowings, and is equally balanced by the difference between the sum of all NZ individual decisions to import less the sum of their decisions to export.

Second, why does the fact that models show lower real interest rates and exchange rates from higher savings (or lower investment?) imply that one should favour promoting savings. Those of us who are net savers and net importers beg to differ!

Finally, no, GDP is not the discounted sum of current and future consumption. It is what it is, and shouldn't be blamed for not measuring what it doesn't try to measure. But the discounted sum of current and future consumption is a better welfare measure than the discounted sum of current and future GDP. Focusing on the latter would lead one to see favouring savings as a way to increase welfare, but without articulating a reason for believing that the current decisions about consumption versus saving are inappropriate in some way, it does seem to be begging the question.

Price gaps and policy

Growing up in Canada, I was always really irritated by American prices well below ours. I remember trying to call Commodore to direct ship me an Amiga 500 in, I think, 1989, because the Canadian retail prices were rather in excess of the American prices; they sensibly wouldn't do it, because doing so would not have been welcomed by their Winnipeg retailer.*

There are plenty of good reasons that prices can vary across borders. Leaving aside taxes, if something about borders require separate distribution networks and channels, then the country with higher fixed costs and smaller markets would pay more. And there can be reasons to price discriminate across markets even absent differences in costs.

Policy responses to these price differences vary. New Zealand runs what I think it about the best policy possible on this one: make it real easy to import goods from abroad, set a high enough exemption on GST on imports that most goods don't get held up at the border, and refuse to have any part in enforcing supplier exclusive licensing arrangements with retailers.

New Zealand Post, a State-Owned Enterprise more innovative than other post offices because it is not protected by a monopoly on mail delivery, runs an expensive but very handy reshipment service: YouShop. A lot of American retailers simply refuse to ship overseas, whether they don't want the hassles of dealing with international freight, with international customs and duties, or whether they're hindered by supplier exclusive territorial licensing arrangements. YouShop lets Kiwis order anything they want in the US and have it shipped to an address in Oregon; they then on-ship it to you in New Zealand. It's not cheap, but it breaks the dumb geographic restrictions. I bought a pair of Merrell shoes through it that otherwise weren't available in NZ; the set-up works.

So: if you want to reduce the price differences between your country and the US, just set policy to make it really really easy for anybody to import directly from the US and elsewhere. It's not perfect, but it bounds the price gap that can be sustained. Nobody needs to monitor the prices: customers do that themselves. And so too do entrepreneurs: a whole array of importers exist on PriceSpy who pull in supply from Singapore and on-sell it to Kiwis at lower cost than the licensed NZ retailers. That's where I got my Samsung S3 a few years ago: the default phone setting was Singapore, but it wasn't hard to change; a factory reset would mess things up more than it would if I had a Kiwi phone, but I saved a few hundred dollars. I was also able to get an Everki laptop bag delivered to me in NZ for less than the US retail price; it came direct from Asia.

Now, with that in mind, what would you expect Canada to propose in response to continued price differences between Canada and the US? Here's Andrew Coyne:

“Canadians work hard,” the last federal budget thundered, “and should not be gouged with higher prices simply because of where they live.” And yet, it was scandalized to report, “some companies charge higher prices in Canada than in the U.S. for the same goods.” Accordingly, the budget promised “legislation to address price discrimination that is not justified by higher operating costs in Canada.” The Commissioner of Competition would be charged with enforcing it.

The mind reels. How many companies are there operating on both sides of the border? Hundreds? Thousands? How many thousands of different goods sell in both countries? The government, to be sure, was not proposing to set all these prices directly. Rather, it was proposing to monitor them, each and every one of them, in both countries and in all markets in each, continuously; and not only to monitor the sale price, but the operating costs of each, including not only the costs of production, but of distribution, marketing and retailing as well; and not only to monitor prices and costs and the differences between them, but also to correct any domestic price that exceeded its U.S. equivalent by more than the difference in the operating costs of each — a quasi-judicial process that would include gathering evidence, laying charges, holding hearings, considering and rendering a verdict, and finally ensuring compliance, or rather meting out penalties for non-compliance. Subject to appeal, of course.

Coyne goes through the many reasons this is a dog of an idea. But he doesn't give the simple solution. Open the border to more direct consumer imports from the US, refuse to use Customs Agents to enforce corporate exclusive licensing arrangements, put a high de minimus threshold for excise or GST application, get rid of the dumb arrangements Canada's typically had where UPS had to run things through a customs agent at the border and tack on a high charge for doing so, and direct Canada Post to open a company in the US that exists solely to provide on-shipment to Canada of things Canadians want to buy from American retailers.

It's more than a bit easier than monitoring thousands of prices and trying to decide which ones are right.


* I now can't remember where I got it. But get one I did. With the "fatter" Agnus chip too, a RAM expansion, and Workbench 1.3. I was in about the 7th or 8th Grade and so hopefully can be forgiven for unrealistic expectations of success in calling Commodore.

Remembering Gary Becker

Blogging has been very light recently as the Department has been kept administratively busy, and I'm late to commenting on Gary Becker, who passed away recently.

Like any economist, I have long know of Becker's work, but my own research hasn't taken me in the same directions, and so I have not engaged with it directly, and therefore not competent to write a Eulogy. But I would like to relate one anecdote. Back in the mid-1990s, I attended the ASSA meetings in (I think) Chicago, where there was a session on race involving three Nobelists: Lucas, Friedman, and Becker. Friedman was ill, unfortunately, and so could not attend, and Lucas chose to talk about growth rather than race. Becker's talk, in contrast, was engaging, and surprisingly (to me, based on reputation) very un-ideological and fully recognising both the power and the limitations of theory for thinking about ideas. But, it was a throwaway line that I remember the most. Apparently, when he went to publish his thesis on the economics of discrimination, the working title was Price and Prejudice, but he was persuaded by his editors to go with the more prosaic, The Economics of Discrimination. Darn editors. Fortunately, Greg Clark, has more reasonable editors. 

The way I know it's May

I know it's May when the Christchurch Press calls me seeking comment on Council asset sales. Georgina Stylianou quotes me in this morning's Press. Here's the full comment I'd sent her, not all of which could make it into her column.

“We’ve suffered from a lot of wishful thinking over the last three years. After the earthquakes, a lot of people really wanted to believe that we would have a sparkling new city funded by insurance payouts. And as each of us has had to come to grips with the difference between what we might have hoped our house insurance contracts covered and what the fine print actually says, the Council similarly has had to realise that it can’t budget based on wishful thinking about what they’d like to be owed in insurance payouts. Unfortunately, a lot of hopes were built up based on expectations of the larger payouts, and a lot of projects were mooted around those. It’s hard for politicians to step back from those, and doubly so when so many of us have had so many disappointments over the last three years. But where the real tradeoff is deciding between Council spending money on things like big stadiums or things like making sure we have overpasses and sewers that are safe and fit for purpose, well, I really hope we put more priority on the more boring core infrastructure.”

“Compounding the problem has been the regulatory and planning morass that has kept downtown from springing back to life. Vacant downtown lots do not return much to Council in terms of property tax.”

“I note that Minister Brownlee is questioning some of the figures in the report. I’m not an accountant and cannot vouch for the figures’ accuracy. But I do worry that things could yet be rather worse than the report suggests. The report explicitly notes that it makes no accounting for the costs that will be involved in fixing our now very flood-prone neighbourhoods. I doubt that Council will be able to avoid incurring pretty substantial costs in fixing places like the Flockton Basin and parts of Woolston.”

“The KordaMentha Report explains pretty reasonably what the Council’s options are. There’s little room to take on more debt, so we either have to spend less, increase tax revenue, or sell other assets. A mix of the three seems most appropriate. Sorting out the regulatory morass downtown so that we can again start having reasonable property tax revenues from downtown would be rather helpful on the revenue side. I think we should be considering cancelling the new stadium rather than just delaying it: too many property owners have to sit in limbo, under threat of expropriation, not knowing when or whether their businesses will be taken from them to make room for the stadium. And, again, we should be considering selling some of Council’s assets. Every May since the earthquakes we have talked about Council asset sales. And every year we’ve failed to do it. Council should be fully divesting itself of assets that are at least as well managed by the private sector in order that the funds can be put towards those things that are really important, like fixing our roads and drainage system. I worry that, if we do not sell assets like the Lyttelton Port of Christchurch, Council’s substantial financial pressures will instead squeeze excess dividends from those assets and run down their capital stock. And, in a decade’s time, we will have substantial problems arising from deferred maintenance and poor investment. Selling these assets off now may be the best way of ensuring their future. Selling the family silver so you can afford to re-pile your foundations and avoid having the house fall over is sad but sometimes necessary. What use is silverware if your house has fallen down?”

See this post for the general arguments around Council asset sales, and for the May 2011, May 2012, and May 2013 Press discussions around asset sales.

Harmful registries

New Zealand's Police Minister Anne Tolley is proposing a national sex offender registry. 

I don't know what's all planned for this registry. If it's restricted to violent or dangerous offenders, with access restricted to checks by employers for positions involving access to children, then it could do some good. Unfortunately, these things do often wind up overreaching. Here's Reason Magazine from a couple of years ago:

“Without the registry,” says Shirley Turner, “he would still be alive today.” She is referring, in a 2006 interview with Human Rights Watch, to her 24-year-old son, William Elliot. He was murdered that year by a pedophile-hunting Canadian gunman who found his name and address in Maine’s online database of sex offenders. Elliot’s crime: When he was 19, he had sex with his girlfriend, who was three weeks shy of 16, the age of consent in Maine.

The panic that followed Megan Kanka’s murder produced an alarm system that often fails to distinguish between dangerous predators like Timmendequas, who had a record of assaulting little girls, and nonviolent lawbreakers like Elliot, who posed no discernible threat to the general public. They are all mixed together in the online registries of sex offenders that every state is required to maintain as a condition of receiving federal law enforcement funding—a mandate imposed by another Megan’s Law, enacted by Congress in 1996.

American rules typically bundle completely nonviolent, no-risk offenders with the most violent rapists. They're restricted in many states from living near schools or parks or daycares. Some neighbourhoods consequently built tiny parks with the specific purpose of making it illegal for an offender to move in nearby. Consequently, there is literally almost nowhere that sex offenders can live in some places:

Registration only rarely leads to murder, but it routinely ruins relationships, triggers ostracism and harassment, and impedes education and employment. These burdens are compounded by state and local laws that ban sex offenders from living near schools, parks, day care centers, and other locations where children congregate. Such restrictions, which often apply even if an offender’s crime had nothing to do with children, can be so extensive that entire cities are effectively off limits. In Miami local residence restrictions have given rise to a colony of more than 70 sex offenders who live under the Julia Tuttle Causeway, a bridge that crosses Biscayne Bay. 

And the registry can be forever:

A man who was convicted of statutory rape when he was 16 for having consensual sex with his 14-year-old girlfriend told Human Rights Watch: “We were in love. And now we are married. So it’s like I am on the registry for having premarital sex. Does having premarital sex make me a danger to society? My wife doesn’t think so.” 

I hope that the Kiwi policymakers looking at this stuff will design it to avoid the kinds of problems evident in the US. Restrict it to violent or otherwise risky offenders, and restrict access to it.