Dining out as cultural trade

Joel Waldfogel combines TripAdvisor data with gravity models of trade to figure out which cuisines reign supreme.

Perceptions of Anglo-American dominance in movie and music trade motivate restrictions on cultural trade. Yet, the market for another cultural good, food at restaurants, is roughly ten times larger than the markets for music and film. Using TripAdvisor data on restaurant cuisines, along with Euromonitor data on overall and fast-food expenditure, this paper calculates implicit trade patterns in global cuisines for 52 destination countries. We obtain four results. First, the pattern of cuisine trade resembles the “gravity” patterns in physically traded products. Second, after accounting gravity factors, the most popular cuisines are Italian, Japanese, Chinese, Indian, and American. Third, excluding fast food, the largest net exporters of their cuisines are the Italians and the Japanese, while the largest net importers are the USA—with a 2015 deficit of over $140 billion—followed by Brazil, China, and the UK. With fast food included, the US deficit shrinks to $55 billion but remains the largest net importer along with China and, to a lesser extent, the UK and Brazil. Fourth, cuisine trade patterns more closely resemble migration patterns than patterns of food trade or patterns arising from the extent of arable land in origin countries. Cuisine trade patterns run starkly counter to the audiovisual patterns that have motivated concern about Anglo-American cultural dominance.

The Economist does a prettier version of Waldfogel's tables:

The paper finds that migration matters, reinforcing my view that New Zealand needs to provide immigration preference to migrants from countries whose cuisines are underrepresented in New Zealand. 

GDP isn't just adding up all the nice things

People keep wanting GDP to be something it isn't.

The only thing that GDP is is a measure of the final value of goods and services that trade in markets. That's it.

There are all kinds of good things that are not in GDP.

High among those good things is the value of household production that does not trade in markets.

This is standard fodder in principles and intermediate-level coursework. If you have a two-parent household, with one working outside the home for wages and the other working inside the home, then the value of in-home production does not count toward GDP. If the one parent starts paying the other one, then GDP goes up - even though absolutely nothing has changed.

If I make a sandwich at home, the value that I add to the ingredients by my labour is not counted toward GDP. If I sell the sandwich to myself, like if I were owner-operator of sandwich shop, it would be - again, despite there still being no change in the real economy.

If I babysit the neighbour's kids at our place for free in exchange for their babysitting ours, it doesn't contribute to GDP. If I paid them, and they paid me, it would be.

This is all standard stuff.

And there are some real problems caused by this, but they have nothing to do with GDP. They have to do with tax. But we'll come back to that.

ANU's Julie Smith was on RNZ today arguing the case for including the value of breastmilk in GDP. She argues that the value of unpaid household services should be in GDP. She's right that there is a problem if we're setting GDP growth rates as a target and we're ignoring that increases in female labour force participation has been at a cost to unmeasured but valued household production. Patricia Apps made similar points in her keynote at the NZAE meetings this year.

But there's good reason for keeping GDP as it is, and just being careful about how it's used.

Let's start thinking about all of the unpriced non-market activities that go on and that could, alternatively, be provided within markets.

Parents provide a lot of services for their kids, from chauffeuring to tutoring, and from homecare to mentoring. People can hire Ubers, and tutors, and home-care workers, and life coaches. Valuing all of those services would be tricky. And it would be pointless if GDP numbers were being used in ways that they should be used.

Except, that is, when it comes to tax.

I'd raised this as question during Patricia Apps' keynote at the NZAEs. People thought I was joking as reductio, but it's a serious point - and I expect a very real distortion. Just one that's probably not worth worrying about because trying to fix it would be even worse.

The distortion is as follows.

If you have a two-income household, both earners pay income tax on their earnings. And they pay GST for the services that they have to buy-in to help around the house, if they're buying in services to help with the lost time for home production. And the workers providing those in-home services pay tax on that income.

In-home services are paid for out of after-tax income, are subject to GST, and the worker takes home an after-tax income.

That builds a substantial tax wedge encouraging the in-sourcing of a lot of services, and distorting activity and formal labour force participation. There is a substantial tax advantage to having one partner stay home and provide untaxed services rather than be out in the formal paid workforce.

I recall stories about, when top marginal tax rates here were a lot higher, econ faculty doing a lot more of their own home renovation work. The tax wedge mattered. It's the same kind of problem.

Effectively, single-earner families are tax dodgers. No GST is paid on the in-home services provided by the stay-at-home parent. No income tax is paid on the monetary transfers to the stay-at-home parent from the in-work parent.

So I'd asked Apps whether, if we wanted to be really serious about addressing the value of household production, we shouldn't be taxing single-earner families based on the value of the household services implicitly provided. I don't think she'd thought about the problem that way before.

Of course, down this path lies madness. There are plenty of services provided between couples that do also trade, one way or another, in markets - legally in New Zealand, illegally in other places. But we'd all recognise it as insane to wish to impose GST on the imputed value of those activities - or to start having Stats NZ ask couples how often they had sex, put a dollar value on it, and start adding it into the GDP statistics. It sounds nuts and all, but as sex work is now legal, every visit to a brothel counts toward GDP (and attracts GST and income tax), while tax-dodging black market activities in the bedrooms of the nation do not.

Better I think to just keep GDP as it is, and recognise its limitations for policy purposes.

NZIER Economics Award - and an implicit critique? [Updated]

Last night, Motu's John McDermott was named as this year's recipient of the NZIER Economics Award. 

My former colleague Les Oxley read out the citation, which I copy below:

Dr John McDermott has been the foremost macro-economist in New Zealand policy circles for at least the past decade. He was Chief Economist and Assistant Governor at the Reserve Bank of New Zealand from 2007 to 2019. Over this period, John has been a beacon in ensuring that economic rigour is brought to bear on policy formulation. He showed similar qualities in his prior roles in the private sector (the National Bank of New Zealand) and at the IMF.

John began his senior role at the Reserve Bank of New Zealand just prior to the onset of the Global Financial Crisis. It is difficult at times such as this to draw on experience of prior crises because, by nature, crises are rare and each differs from the one before. It is at times such as this when a combination of a deep understanding of economic forces plus common sense is required. The team at the Reserve Bank, led by Dr Alan Bollard and supported by the macroeconomic expertise of John McDermott and his colleagues, ensured that the GFC impinged only marginally on New Zealand (relative to most other countries).

John’s contributions have shone through not just in his direct contributions to policy-making (such as during the GFC) but also through his championing of economic rigour amongst his colleagues within the department that he led at the Bank. Policy-relevant research from experienced colleagues such as Ozer Karagedikli and Christie Smith are relevant examples. So too is the work that John undertook with Michelle Lewis. With Michelle, and subsequently with Ozer, John showed the importance of the specification of the official inflation target for inflation expectations and thence for inflation outcomes. These papers are important examples of the need to design appropriate institutional constructs when making public policy.

John has also contributed in a very major way – together with Prof Viv Hall – in documenting and understanding New Zealand’s business cycles. Macroeconomics has always had a major focus on the control of business cycles. However, prior to control is the need for understanding. The important work that John and Viv have done has been to identify when and why certain business cycles occurred in New Zealand – both at the macroeconomic and regional levels.

John’s academic credentials are undisputed. What sets him apart from many of his highly trained academic colleagues is his ability to bring those academic credentials to play in shedding light on real world problems facing central bankers and other macroeconomic policy-makers. His expertise in this regard has been recognised across the Tasman through his role since 2016 on the Australian Treasury Expert Panel on Forecasting Methodologies.

Since leaving the Reserve Bank of New Zealand in early 2019, John has maintained his connection both to policy and to research through his two key roles: as Executive Director of Motu Economic and Public Policy Research, and as Senior Consultant, Wigram Capital Advisors Limited. The latter role involves significant interaction with developments in the Chinese economy.

John has set an example to colleagues and institutions alike: top class economists can make very important contributions to real world policy-making, while good economic policy requires the input of rigorous thinking from excellent economists. John has set a very high standard over an extended period showing how this match can work for all concerned.

Ozer Karagedikli is now with the South East Asian Central Banks (SEACEN) Research and Training Centrre.

Christie Smith left RBNZ in May 2019 and is now with the Electricity Authority.

Michelle Lewis is now with the Reserve Bank of Australia.

John has a PhD from Yale.

The RBNZ's current Chief Economist, Yuong Ha, has a Bachelor of Commerce (Honours) from Auckland.

The citation's noting of the importance of rigorous thinking from excellent economists for good economic policy, and the noting of those who have left the RBNZ since Orr came in, seems a bit pointed.

Update: A correspondent emails me to note that the serious researchers at RBNZ were on the way out prior to John's departure, and that the research culture there was in decline over a longer period. The problem, according to the correspondent, goes back over a couple of Governors and is not new to Orr. I have every confidence that my correspondent knows far more about it than I do, and so I have updated my views.

Part of the implicit pay packet for serious macro/money people at reserve banks is getting to do research that interests them, but that might not have obvious or immediate application in local policy.

Keeping around the folks who are able to quickly understand the point of leading edge technical papers in macro/money means giving them scope to play. But that always makes for a tension in smaller central banks in getting that balance right.

It seems the RBNZ over the past few years has set the balance such that a lot of the serious macro researchers have left. That might not matter over the short to medium term, but having folks around and on call when heavy lifting needs to happen in a hurry can matter, and it can matter suddenly, and you can't know in advance when it will matter.

And it especially matters in a small country where it is hard to point to academic macroeconomists who pay much attention at all to anything relating to macro/money policy in New Zealand. Hard to name more than a handful. There isn't a big reserve army of those researchers sitting in the universities on-call if needed.

Refreshing water and valuing the priceless

The latest issue of Policy Quarterly covers freshwater management. My article in there makes the case for cap-and-trade systems for both freshwater abstraction and for nutrient/effluent management.

Here's the abstract:

The most promising way of reducing water use and nutrient load in overburdened catchments builds on the same kind of policy New Zealand is developing to reduce greenhouse gas emissions: cap-and-trade systems that operate at the water catchment level. Because cap-and-trade approaches are more cost-effective than other regulatory approaches, they allow us to do more good at less cost than other alternatives. Developments in smart-market technology and geospatial mapping allow for smart-market solutions that overcome barriers to success in existing trading arrangements. And, if initial rights allocations respect both the existing use rights of current users and incipient iwi water claims, they build a powerful constituency in favour of environmental management institutions that can withstand changes in government.

I'll be talking on similar issues at the coming WaterNZ conference in Hamilton.

I argue that:

• Cap-and-trade systems that provide allocations to existing users help ensure a just transition; if the government just abolished existing use rights in favour of either a water tax or nutrient charge, a pile of current users would be bankrupted. Current land prices are predicated on an existing rights and regulatory structure. If you want a system that can withstand a change in government, or its first experience with reality, you need one that can have buy-in from current users. 
• Current cap-and-trade setups for water abstraction (Canterbury) and for nutrients (Taupo) are stymied by high transaction costs. Council has to sign off on trades. It's all just too hard. Council has to be involved to be sure that the trade results in comparable environmental effects, but that process isn't easy. So we have rather illiquid markets. That can be overcome through a smart-market interface that runs the environmental constraints in the background. 
• But the whole thing has to start with a reckoning of iwi water claims. If there are claims that weren't extinguished by sale, contract or Treaty, those have to be dealt with; avoiding the issue with the fiction that water is either unowned or Crown owned is the main reason we don't have functioning cap-and-trade systems as yet. 
• Where the allocation to iwi and to existing users creates an overallocation, deal with it by attenuating existing users' rights over time, building up iwi rights over time, and using Crown buybacks through the system to get the rest of the distance - the burden cannot fall exclusively on current users. It has to be shared because the benefits of a cleaner environment are not solely enjoyed within the affected catchments, and to effect the kind of just transition that builds buy-in to the system.

Doughnuts

Arthur Grimes goes through some of the problems in Kate Raworth's doughnut framework in a podcast with her over at Newsroom. 

I remember a review of some other book, ages back, that went along the lines of "what's true in it isn't new, and what's new in it isn't true."

Michael Cameron over at Waikato Uni reaches a similar conclusion.

This book is partly a critique of current economic thinking, and partly some of Raworth's ideas on a new model for economics. Any critique of economics hits the zeitgeist right between the eyes, and so this book got a lot of press when it was released in 2017 (e.g. see here), and again in New Zealand earlier this year when Kate Raworth visited the Treasury.

However, I found the book to be quite unbalanced and full of lazy writing. Raworth is a great fan of metaphors and stories, but to my taste they were overdone. Moreover, large chunks of the book were unnecessary in order to make the central argument. The first couple of chapters essentially create a strawman of economics, which Raworth can then set alight. The economics she describes, with GDP growth as its core and only goal, is not an economics I recognise. Her argument is valid in many places, but she doesn't contribute anything new in pointing out that decision-makers are not purely rational. In her desperation to make us believe that economics and economic teaching is not fit for purpose, she far over-sells her argument.

It depresses me when Wellington bureaucrats, with minimal training in economics, see imprimatur from Raworth having given a talk at Treasury, and take the book as some kind of overturning of economics.

Listen to Arthur on it. Economists are fans of economic growth because economic growth tends to correlate with all of the things we really do care about. And we favour making sure that external costs are appropriately incorporated: carbon taxes or an ETS; appropriate water charging frameworks and the like. The worry for me is that when folks take Raworth too seriously, the become complaisant about the merits of economic growth, and what we give up if we don't fret our current low productivity growth rates or the growth costs of other policies.

A few weeks ago, James Shaw tweeted:

“Researchers say that 7% of global GDP is likely to vanish by the end of the century unless ‘action is taken.’ Japan, India and *New Zealand* lose 10% of their income.” -- ScienceDaily https://t.co/HXDXn31Nph

— James Shaw (@jamespeshaw) August 21, 2019

It's good to worry about this.

But it's also worth understanding what 7% of global GDP is, at the end of the century. If annual economic growth rates were just 0.09 percentage points lower every year over the next eighty years, that's a 7% difference in GDP at the end of the line. So if economic growth were 1.91% instead of 2% over that period, GDP would be 7% lower at the end of eighty years. Growth compounds; small differences in any year add up to big differences down the track.

How often do we throw away fractions of a point of GDP growth, reasoning them to be small, and taking Raworth's kind of rhetoric too seriously - and not considering the long term consequences?

Afternoon Roundup

The afternoon's closing of the browser tabs brings:

• Tony Burton at The Spinoff on unemployment figures. Far fewer of those aged 15-19 are in work now than was the case prior to 2008. The jump, to my eye, coincides with Labour's abolition of the differential lower youth minimum wage. There's been of course expansion in tertiary education over the period, but the timing is consistent with the change in the youth minimum wage combined with the GFC, then levelling out to a higher steady-state youth unemployment rate. 
• The government isn't just mulling over porn filters. They're also looking at blocking access to online gambling. Another Tracey Martin initiative. 
• This older piece at the New York Times uses the Mercatus Center's tallying of regulations to look at the quantum of regulation facing apple growers in the US. It would be pretty interesting to replicate that Mercatus project in New Zealand. 
• Andrew Leigh on Australia's second convict age. Incarceration rates have been rising in Oz since the mid-1980s, with rates now again where they were around 1900 (though nowhere near incarceration rates in the US, and still below New Zealand's rates). He cites Kleiman approvingly on the importance of the swiftness and certainty of penalty over the duration of sentence. 

Road to tolling

Well, this one's disappointing. 

I'm used to hearing that we can't have road tolling on important routes because there aren't alternatives for commuters. I think that's nuts, but the argument goes that there has to be alternative transport paths to address equity issues for those who cannot afford the tolls. It's nuts because we allow pricing everywhere else, and try to solve equity issues through income redistribution. The toll can shift driving by time of day even if there aren't alternative routes.

But let's take it as given.

Here's the argument against having tolling on the coming Transmission Gully alternative to State Highway 1:

Transport Agency Director Emma Speight said an assessment showed a toll would likely see more drivers avoid the road in favour of the current coastal State Highway 1.

"That would compromise the safety, environmental and access benefits which the new road will deliver to drivers as well as for communities along the coastal route."

So we can't have a toll on a road if there aren't alternatives to the toll road, but we also cannot have tolls when there is an alternative to the toll road.