Tay on the education of economists

Frank Tay, back in 1966, in the inaugural issue of New Zealand Economic Papers, suggested the minimal training prerequisites for professional economists in New Zealand:

Thirdly, I would stress a four-year full-time honours programme as the minimal "professional preparation for economists". I have in mind one which, in terms of depth of specialization in technical economics, falls between the level of the M.A. and Ph.D. courses recommended by H. R. Bowen, especially in the degree of theory, mathematics, statistics and economic history required.19 Obviously, this would violate the "depth and breadth" criterion of some teachers.20 But, unlike Professor Holmes, I believe this pedagogic conflict is real rather than potential and that a more effective solution than the "B-B variant" might be realised through the "Knight's Move". This consists in allowing students who have a first degree in the sciences and technology to sit, after a year's preparation, for a preliminary examination in economics equivalent to the Stage III level, say, in Macro and Micro economics, International Economics, Econometrics and Economic History, and then march straight into the Honours or Master's programme. True, such a scheme favours the Beta-plus and the more mature students, especially those with a substantial core of "Q" work behind them. However, a four-year Honours programme or the "Knight's Move" should give students a reasonably firm intellectual foundation for their own post-graduate professional development.

He wasn't, and isn't, wrong. Note that he was responding to Frank Holmes's suggestions around the curriculum.

This is relevant to tomorrow's column in the NBR on Treasury's hiring practices.

European antitrust time-warps

It’s astounding. Time seems to be repeating. European madness takes its toll.

Two decades ago, the European Commission (EC) worried that Microsoft was abusing its dominant position. Microsoft’s operating system was the way most people interacted with computers, and the operating system came bundled with a media player and an internet browser. The EC reckoned that Microsoft was exploiting its dominant position in the operating system market to lock up other markets.

And so, late in 2004, it required Microsoft to offer European versions of Windows that did not include a media player. Five years later, it required Microsoft to offer users choices among internet browsers when installing Windows so Internet Explorer would not be privileged by Windows’ dominant position.

It was always ludicrous. Installing alternative media players, or browsers, was and is trivially easy. Microsoft’s dominance was driven by its superior products. In areas where Microsoft’s products lagged, Windows’ dominance provided it with no advantage. A typo in Internet Explorer’s URL bar would lead the user to an MSN Search window, but Google provided the better search engine and users chose it despite the Commission’s contrived arguments about consumer lock-in.

Early last year, Google’s Android overtook Microsoft Windows as the most popular way of getting to the internet. The EC decided this week, in a bit of a mind flip back into the 2000s, that it should be harder for Android users to access Google services like Google search. It fined Google €4.34 billion, or just under NZD$7.5 billion.

The EC’s complaint is at least as ludicrous as its 2000s worries about Internet Explorer. It was as simple for me to install Firefox in the early 2000s on my Windows machine as it is for me to install DuckDuckGo on my Android phone today. Google’s search dominance depends on keeping ahead of its competitors.

And while the EC sees anticompetitive purpose in Google requiring that manufacturers build from its version of Android, the better explanation is that apps available in Google’s Play store might not work well on alternative versions.

New Zealand is on the sidelines of this dispute but does have a stake. Kiwi app developers may have to look forward to coding for compatibility with a bevy of Android variants. And if Google has to fund Android development through licensing fees rather than bundled search tools, we can expect higher phone prices.

I hate doing this time warp again.

Me in last week's Insights newsletter.

I like Julian Morris's take over at Truth on the Market as well:

The importance of these factors to the success of Android is acknowledged by the EC. But instead of treating them as legitimate business practices that enabled the development of high-quality, low-cost smartphones and a universe of apps that benefits billions of people, the Commission simply asserts that they are harmful, anticompetitive practices.

For example, the Commission asserts that

In order to be able to pre-install on their devices Google’s proprietary apps, including the Play Store and Google Search, manufacturers had to commit not to develop or sell even a single device running on an Android fork. The Commission found that this conduct was abusive as of 2011, which is the date Google became dominant in the market for app stores for the Android mobile operating system.

This is simply absurd, to say nothing of ahistorical. As noted, the restrictions on Android forks plays an important role in maintaining the coherency of the Android ecosystem. If device manufacturers were able to freely install Google apps (and other apps via the Play Store) on devices running problematic Android forks that were unable to run the apps properly, consumers — and app developers — would be frustrated, Google’s brand would suffer, and the value of the ecosystem would be diminished. Extending this restriction to all devices produced by a specific manufacturer, regardless of whether they come with Google apps preinstalled, reinforces the importance of the prohibition to maintaining the coherency of the ecosystem.

It is ridiculous to say that something (efforts to rein in Android forking) that made perfect sense until 2011 and that was central to the eventual success of Android suddenly becomes “abusive” precisely because of that success — particularly when the pre-2011 efforts were often viewed as insufficient and unsuccessful (a January 2012 Guardian Technology Blog post, “How Google has lost control of Android,” sums it up nicely).

Meanwhile, if Google is unable to tie pre-installation of its search and browser apps to the installation of its app store, then it will have less financial incentive to continue to maintain the Android ecosystem. Or, more likely, it will have to find other ways to generate revenue from the sale of devices in the EU — such as charging device manufacturers for Android or Google Play. The result is that consumers will be harmed, either because the ecosystem will be degraded, or because smartphones will become more expensive.

Afternoon roundup

This afternoon's worthies:

• Things that make me wish genetic data were in New Zealand's Integrated Data Infrastructure: polygenic scores predict 11 percent of the variance in educational attainment. (full paper here). 
• Matt Nolan's back at TVHE, defending GDP against the fashionable types. 
• There's reasonable support in New Zealand for some cannabis legalisation, but people are still way conservative about allowing marijuana sales in stores - only the Greens are sensible on that one. Me on that stuff from earlier this year; NZIER from before that. 
• The Productivity Commission's terms of reference for its review of local government look good, but note that Labour has excluded discussion of capital recycling through privatisation of some existing Council assets. One excellent way of generating the capital for a new project is selling off an old one. Prod Comm's not allowed to say that. 
• Do you want pirates?
• Epistocracy now!
• Dick Puddlecote on vaping developments in NZ. And note that the Smokefree Coalition's now suggesting a pause on tobacco excise increases. I'd say we should be rolling back the last ones, but great to see more support for a pause. 
• I'm very glad that New Zealand sporting events aren't military recruitment drives. Meanwhile, in America...
• Caving in to internet bullies sets bad precedents.

Net debt

I don't get the Salvation Army's push against the net debt target.

Salvation Army social policy analyst Alan Johnson said there was a real danger that the crisis in mental health, social housing and well-being of older New Zealanders would become ingrained.

"One of the things with those caps is that they were literally straight out of the National Party rule book, which was disappointing that both the Greens and the Labour Party signed up for them even before the election.

"They are unnecessary and they could be relaxed I think without a massive impact on our credit rating, and the cost of capital and borrowing," Mr Johnson said.

Finance Minister Grant Robertson does have some wriggle room.

Core government spending is forecast to be about 28 percent of the value of the economy for each of the next four years.

In the 2018 financial year, the gap between the Mr Robertson's spending plan and the 30 percent cap equates roughly to an extra $6bn.

Net debt already sits just above its 20 percent of GDP target - four years early.

That's still not enough for Ricardo Menendez March from Auckland Action Against Poverty.

He wants the cap set much higher.

"I would say their limits should be at least twice as much.

"Some European countries have established 60 percent of core Crown spending in relationship to GDP and I don't think that's unreasonable," Mr Menendez March said.

"But ultimately the spending limits should be based on what society actually needs."

It is consistent to argue for higher taxes and higher spending in support of more government social service delivery. I'd rather like government not to expand relative to the overall size of the economy, but reasonable people can disagree with me on that. But pushing for increases in social services and the government's share of GDP on the back of higher debt targets rather than as part of a higher tax regime I don't think is consistent with the Public Finance Act.

Nana's argument for more debt for infrastructure funding is more coherent - you should use debt to finance long-lived infrastructure. But that infrastructure still has to pass a CBA. And if we're looking at infrastructure for urban growth, we should be thinking about mechanisms that set the incentives for long-term growth and not just the current crisis.

Tobacco harm reduction

It's great that the Ministry of Health's latest Health and Independence Report points to the benefits of vaping. But there's still work to do here. 

The report notes that smoking is most prevalent in poorer communities and that while smoking rates have been declining, there's no way that current trends get the government to its preferred <5% smoking rates by 2025. And the report points to how e-cigarettes might help:

E-cigarettes: an option to help smokers to quit

Although the best thing smokers can do for their health is to quit smoking completely, the Ministry of Health considers that e-cigarettes have the potential to contribute to the Smokefree 2025 goal and could disrupt the significant inequities that are present. How much e-cigarettes can help improve public health depends on the extent to which they are a route out of smoking for New Zealand’s 529,000 daily smokers, without providing a route into smoking for youth and non-smokers.

Expert opinion is that e-cigarettes are significantly less harmful than smoking tobacco but not completely harmless. A range of toxicants have been found in e-cigarette vapour, including some cancer-causing agents. In general, levels of these toxicants are much lower than they are in tobacco smoke or are unlikely to cause harm. Smokers switching to e-cigarettes are highly likely to reduce their health risks and that of those around them.

Where smokers want to use e-cigarettes to quit smoking, the Ministry of Health encourages them to seek the support of local stop-smoking services. Local stop-smoking services provide smokers with the best chance of quitting successfully and should support smokers who want to quit with the help of e-cigarettes (Ministry of Health 2017f).

But there are still problems in getting there:

1. There remain interesting conflict of laws problems around plain packaging rules and the Fair Trading Act. Plain packaging rules for tobacco products would include heated tobacco, including Iqos. And, in theory, would also cover any nicotine derived from tobacco for vaping too. But putting the big smoking warnings on packages of products that are not smoked could be considered illegal under the Fair Trading Act's prohibitions around false representations and misleading conduct.
   
   I emailed MBIE asking about this, and they punted to ComCom. When I asked ComCom, they said that they cannot vet specific advertising or business practices for any company - and that companies would have to seek independent legal advice. So it is legal to sell vaping products - but if MoH believes the nicotine to be tobacco derived, it might consider it to be subject to the plain packaging rules. And it might be illegal to put those plain packaging warnings on the packages. But the government will not tell you. Seems pretty dumb. And it's an odd kind of dumb - companies that are cagey about how their nicotine is derived are probably ok, but ones that publicly state that their nicotine is derived from tobacco may not be. 


2. MoH is of the view that the Iqos decision does not apply to snus. Snus has seemed rather important in getting people away from smoked tobacco in Sweden. Why they want this to still be illegal - I don't get it. I expect that if they ever sued NZ Snus for selling the stuff, that the prohibition could easily be deemed inconsistent with the purposes of the Act.


3. Excise rates on non-combusted tobacco for reduced harm devices remain unjustifiably high. This doesn't affect vaping, which is not subject to excise (phew!), but would be a problem for other products. And what about the display bans and bans on advertising less harmful alternatives? 

Meanwhile, Imperial Tobacco / KPMG's annual report on illicit tobacco is out. They figure illicit tobacco consumption in New Zealand is now around 200,000 kilograms, most of which is Australian or Chinese packaged cigarettes coming in here - with an estimated excise value of $180m. Their method in figuring this out is interesting - one of the ways they do it has folks out collecting empty packs from roadsides and garbage bins, then checking the proportion that were not labelled for NZ domestic sale. The whole report's an interesting read for those who are keen on the organisation of illicit markets.

Here's a picture of the potential gains from getting foreign-sourced cigarettes to the NZ market.

I hope the government does not set a new path of excise hikes and rather focuses its attention on making sure the regs aren't in the way of selling less harmful alternatives. 

Working for Families as employer subsidy?

Matthew Hooton critiques WFF in the Herald:

In fact in 2004, the left-wing critique of Working for Families was stronger than Key's, that it would operate as a subsidy of low-paying employers.

That is, using Key's original numbers, if there was a job to do worth $60,000 a year, an employer could hire someone with two kids, pay them just $38,000 a year, and they'd end up with almost the same pay in the hand.

Union bosses rightly feared it would be difficult to get workers with children to sign up for a pay campaign if it made little difference whether they earned $38,000 or $60,0000 a year.

Worse, if Government subsidises something, there will be more of it, in this case low-paid jobs. To an employer, Working for Families screams out: "Don't buy more plant and machinery or invest in on-job training, just hire a few more low-skilled labour units and get the government to pick up a big hunk of the tab."

There is very little doubt Working for Families has led to lower productivity and wages across the economy than had Clark not launched it as her big 2004 Budget bribe to fend off Don Brash's Orewa-speech challenge.

That is bad for everyone but the most pernicious effects of Clark's bribe are on those without children trying to save for a first home, such as young nurses, teachers, doctors, and police officers.

They suffer from the economy-wide lower wages caused by Working for Families but without the top ups.

Let's think this through. Labour markets are generally competitive - employers have to compete for workers, and workers have to compete for jobs.

The incidence of the wage subsidy through Working for Families, like the incidence of any other tax or subsidy, will wind up depending on relative elasticities. The relatively inelastic side of the market draws the larger portion of the burden of a tax, or the benefit of a subsidy.

If the demand for labour were perfectly inelastic (and labour supply were other than perfectly inelastic), a government wage subsidy would only benefit employers. They would employ the same amount of labour at a lower cost (to them), with workers taking home the exact same amount as before. The supply of labour depends on the after-tax-and-transfer salary on offer, and take-home pay would not change.

But labour demand is hardly perfectly inelastic. And labour supply can be pretty inelastic. I haven't the labour demand estimates to hand [anyone who knows them off the top, point me at them!], but here's Creedy and Mok's estimates on labour supply elasticity:

Elasticities on labour supply range from very low for married men, to less inelastic for sole parents. Any number below 1 is inelastic, so all of this shows ranges of inelasticity. Is it then particularly likely that the main thing going on in WFF is a transfer to employers?

A few bottom lines:

• Unless one side of the market is perfectly inelastic, both sides of a market wind up sharing the burden of a tax or the benefit of a subsidy. The more inelastic side gets the larger share of either. Labour supply is reasonably inelastic. I haven't labour demand elasticities to hand, but it would be unlikely for labour not to be benefiting substantially from the transfer. 
• At least some of the point of Working for Families was to increase the benefit of being in work relative to being on benefit for people like single parents. The simulation models have it having increased sole parent labour supply, but reduced labour supply among married women with children - the latter due to the combination of income effects and high EMTRs.
• There are big problems yet with the Effective Marginal Tax Rates in some of the abatement ranges [which I had wished the Tax Working group had had a chance to look at]. But how else you run a programme to provide an in-work cash transfer to those with kids to build a gap between earnings in work and earnings on benefit? There are variants of Milligan's trilemma that are going to apply here. Like, pick two of {not incredibly costly; reasonable wedge; low abatement rates}. If we want lower abatement rates, either benefits have to go down or the overall cost of the programme has to go up. And if the overall cost of the programme goes up, then we're trading off a reduction in a very high EMTR affecting a small group (which can often be hurdled by working more hours) with an increase in EMTRs for a very broad group.
• Wage subsidies place the burden of supporting the employment of those with lower productivity on the tax base in general. Minimum wages place that burden on those who would employ those workers, their customers, and on workers disemployed in the process. The former seems to me both more efficient and more equitable. 

Kiwibuild lotteries

I'd put together a few notes on the Kiwibuild lottery last week in advance of a radio slot that got bumped in favour of an interview with Lauren Southern.* I blame all of you who complained about her visit. Nobody would have even known she and that Molyneux guy were coming to New Zealand if there hadn't been the reliable outcry demanding they be banned, and then that makes a story that makes them win regardless of whether they're barred entry to New Zealand. Just silly.

Anyway, back to Kiwibuild.

As background: the government's trying to get a lot more houses built in Auckland, and one of the ways it's doing that is through the Kiwibuild program, which will be building some houses directly and guaranteeing the purchases of others off the plans - the latter part might be a consequence of the government having banned foreign buyers from buying those houses and apartments off the plans to rent out and consequently screwing up the financing of new developments.

The houses are not going to be cheap, but are going to be cheaper than a lot of houses on offer in Auckland. But setting a low income ceiling guaranteeing them to low-income buyers could mean built houses would go unsold because they're still pretty expensive. So they have a high income cap and a lottery if they're oversubscribed.

I'd put together a few notes before the scrubbed interview; they're below.

1. Kiwibuild is only a very minor part of the real efforts to restore housing affordability. The real action is in changes in infrastructure supply that can enable more land to be brought into use in housing, and that can enable greater density in town. The constraints have been that Council has not been able to run the infrastructure the city needs under its current debt limits. Fortunately, the government’s latest statement on Kiwibuild noted that they’re looking at things like project-based financing that can unlock land for housing.


2. A substantial part of what Kiwibuild is doing is just displacing other construction that would have happened anyway. Treasury and MBIE disagreed a bit over the figures on this, but Treasury at least was taking displacement seriously while MBIE assumed there would be no displacement. Displacement is very likely when the construction sector is running at or near capacity – workers and materials that would have been used in other developments will get used in Kiwibuild houses instead (whether they’re built directly by government, or bought off the plans by Kiwibuild from existing developers).


3. Leaving that aside, Kiwibuild provides affordable housing not so much by selling houses below market prices, but rather to the extent that it increases the overall supply of housing. If all that happens is a displacement of existing building and sale at below-market prices, then there is that potential lottery problem. But if it expands housing supply successfully, then overall prices can start easing back and there’s less of the lottery component because house prices ease back. I understand there’s a 3-year ownership rule in place before the owner of a Kiwibuild home can on-sell it. 


4. The proposal to require Kiwibuild owners only to on-sell their house at below-market prices to another Kiwibuild-qualified buyer, or to let the government take a proportion (half?) of the sale proceeds, risks skewing homeowner incentives around maintenance and upkeep. I own my house, and I pay to keep it up to spec not only because it makes it nicer to live in, but also because it maintains the resale value should I ever want to sell. If I expected that the government would take a pile of the proceeds from any sale, then I’d do a lot less of that. To avoid that problem then starts getting into messy accounting finagling of keeping track of all of your receipts for home maintenance and charging that against the government’s side of any Kiwibuild sale proceeds – and invites inflating those figures with other shenanigans. 


5. Basically, the hassle doesn’t seem worth it unless the government is really convinced that Kiwibuild and the government’s other initiatives to address housing affordability won’t work. If prices ease back, the lottery aspect does too. But that makes for a bit of a catch-22. The other problem I worry about a ton is that the real cost of Kiwibuild is in bureaucrats’ time and attention. There are only so many folks in the Wellington bureaucracy who can actually manage to do anything. Some of the good ones are working hard on getting things right for infrastructure financing. The more of the good ones that get pulled over to sort out messes around Kiwibuild, which is still far less important than sorting out infrastructure, the less likely we are to get out of this mess.

* At point of queuing this post for ski-holiday-week, I don't know whether the interview is to be rescheduled.