Wednesday, 2 December 2020

RSE, MIQ, and WTF

Last week, the government announced it would allow 2000 seasonal workers into New Zealand's Managed Isolation and Quarantine system on Recognised Seasonal Employment (RSE) scheme, with workers to arrive from January to March 2021. 

There's just so much that's backward in all of this. 

The RSE scheme is open to workers from the Federated States of Micronesia, Fiji, Kiribati, Nauru, Palau, Papua New Guinea, the Republic of the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu, and Vanuatu.

The most recent World Health Organization COVID-19 situation report for the Western Pacific notes that the Federated States of Micronesia, Kiribati, Nauru, Palau, Samoa, Tonga and Tuvalu have not reported a case to date - as of 25 November. Since then, Samoa has had two positive cases caught at their border. 

Meanwhile, Papua New Guinea has large-scale community transmission - you wouldn't want to restart RSE entry from there. 

Does it make any kind of sense that scarce MIQ spaces are being taken up by people who come from places that do not have Covid-19? Why couldn't we just admit RSE workers as usual from places without Covid, on an understanding that the gate would be shut if their Covid-status changed?

Does it seem plausible that the most valuable uses of scarce spaces in MIQ is for people coming in for fruit-picking, if those workers are coming in from places where Covid is prevalent? If it were the outcome of an auction for spaces, I'd take that seriously - I could too easily be wrong! 

The policy simultaneously plausibly lets too many RSE workers into MIQ, and too few RSE workers into the country. It seems unlikely that the highest valued use of an MIQ space is for someone who would come in to pick fruit at $22/hour, but it also makes no sense at all that they be required to be there in the first place. 

There are very reasonable concerns about Covid getting back to the Islands from NZ if we had an outbreak. But there are very reasonable ways of mitigating that risk that do not involve banning safe people from travelling here. For example, RSE employers could be required to provide isolation for workers before they went back to the Islands, with those returnees tested before departure. 

Surely the odds of catching Covid are higher in a NZ MIQ facility, including in transport to those facilities with people who are coming in from far riskier places, than in the Covid-free Islands. 

Recall the stakes on the RSE programme. Here's John Gibson and David McKenzie on it.

Their abstract:

Seasonal migration programs are widely used around the world, and are increasingly seen as offering a potential “triple-win”- benefiting the migrant, sending country, and receiving country. Yet there is a dearth of rigorous evidence as to their development impact, and concerns about whether the time periods involved are too short to realize much in the way of benefits, and whether poorer, less skilled households actually get to participate in such programs. New Zealand's Recognised Seasonal Employer (RSE) program was launched in 2007 with an explicit focus on development in the Pacific alongside the aim of benefiting employers at home. We present the results of a multi-year prospective evaluation of the impact of participation in this program on households and communities in Tonga and Vanuatu. Using a matched difference-indifferences analysis based on detailed surveys fielded before, during, and after participation in the RSE, we find that the RSE has indeed had largely positive development impacts. It has increased income and consumption of households, allowed households to purchase more durable goods, increased subjective standard of living, and had additional benefits at the community level. It also increased child schooling in Tonga. This should rank it among the most effective development policies evaluated to date. The policy was designed as a best practice example based on lessons elsewhere, and now should serve as a model for other countries to follow.

Here are some of the gains:

The results show that the RSE has had large positive effects on sending households in Tonga and Vanuatu. We find per capita incomes of households participating in the RSE to have increased by over 30 percent relative to the comparison groups in both countries, with per-capita expenditure also increasing, although by less than income. Subjective economic welfare is estimated to have increased by almost half a standard deviation in both countries, and households have purchased more durable assets such as DVD players, radios, ovens, and in Vanuatu, boats. In Tonga RSE households also doubled the rate of home improvement, and in both countries, households became more likely to have a bank account, likely reflecting more formal savings. School attendance rates increased by 20 percentage points for 16 to 18 year olds in Tonga, and community-level effects were generally modest, but positive. Overall these results show that the seasonal worker program has been a powerful development intervention for the participating households, and that the RSE policy appears to have succeeded in its development objectives in the short run.

I've bolded the most important bits.

In order to prevent a trivial risk of Covid coming in from places that do not have Covid, the Labour Government is preventing the vast majority of RSE workers from coming in to do the seasonal work that they traditionally have done successfully. The consequence of that is, in all likelihood, a substantial decrease in incomes in affected households, declines in their subjective economic welfare, and reductions in schooling for those families' kids. 

I suspect, but cannot know, that the government is doing all of this deliberately, to kill the RSE programme. Sufficiently advanced incompetence is indistinguishable from malice. Are the relevant officials being purposefully obstinate when they refuse to see obvious safe ways of getting those workers here and preventing transmission back to the islands? It's hard to tell.

Tuesday, 1 December 2020

Mattress Factories and broken council incentives

The Initiative's Exec Director, Oliver Hartwich, loves telling stories about German towns that did everything they could to encourage businesses to come to their area, as well as new housing, because their finances depended on having a successful local economy.

New Zealand's a bit different.

In last week's Politik newsletter, Richard Harman goes through how Environment Minister David Parker has had to signal readiness to get involved in a scrap between the Waikato District and Regional Councils. 

District Council wants to allow the Sleepyhead Mattress Company to build a new factory and village; the company figures they can't have a plant if there's nowhere for workers to live. 

Regional Council doesn't want to rezone land to let it happen. Why?

The Council’s submission said that by enabling an isolated, car-dependent urban settlement at Ohinewai with few community services, the proposed rezoning would be contrary to the Waikato Regional Policy Statement “and therefore, unlawful.”

But now the question becomes whether the foam factory can exist without the houses and if it cannot (which would seem probable) whether Parker will then use the fast track again to approve the houses.

In short, is Parker using the fast track for the factory as a prelude to fast-tracking the entire development.

Parker here is on the side of the angels, but it really shouldn't take Ministerial intervention for somebody to be able to put up a mattress factory and some housing. That isn't a model that scales well. 

Monday, 30 November 2020

Afternoon Roundup

Egads the browser tabs. Enough! I haven't shut down the computer in a week in hopes of giving each of these its proper due; time to give up and move on. 

The worthies that each deserved a proper post:

Building Pressure

Capacity constraints are building in the construction sector. Some of it is weird supply-chain issues with the global pandemic; some of it is a substantial building boom here and worker and material shortages. 

The Herald goes through it, noting some promising SNZ data:

Stats NZ has been highlighting strong building activity lately.

In the year ended September 2020, 37,725 new dwellings were consented, up 3.5 per cent from the previous year. Auckland alone had consents issued for 15,470 residences, up 5.7 per cent.

This month, Stats NZ said that for the first time, the monthly value of building consents issued in Auckland exceeded $1b and accounted for about 44 per cent of the national total of $2.4b.

Auckland makes up about one-third of New Zealand's population, it noted.

"This is the first time a region has issued more than $1b worth of building consents in a single month, with more than $700m coming from residential projects," acting construction statistics manager Bryan Downes said on November 2.

"This reflects both the rising volumes of building consents and higher construction costs," Downes said.

The sector running at full-speed is still nowhere fast enough to address the shortage though. 

My column from Newsroom, last week: 

If Parliament had a pressure gauge, the needle would be redlining. That pressure risks venting through policies to target the symptoms of the current shortage while worsening the real problem.

The Prime Minister highlights government schemes like Welcome Home Loans and the First Home Loan grant that support people buying their first home. She also pointed how hard it is for new buyers face in building a deposit for a first home. It would be rather surprising if Ministries have not been asked to give her some policy options to assist those buyers.

But programmes that subsidise home buyers, when housing supply is constrained, will mainly boost the price of existing homes. They won’t get new housing built. If real estate auctions are a game of musical chairs with more buyers than available seats, giving bidders more money only increases prices.

Boosting housing demand through subsidies to buyers, when construction cannot keep up with demand, might look helpful but is actually making things worse.

The Government has other unhelpful ways to vent political pressure.

The Green Party has proposed wealth taxes; Bernard Hickey proposes land taxes. But it is difficult to see how new taxes get more houses built.

The current shortage combined with house price inflation benefits landlords, making rent control policies more attractive. But those policies can make investment in new apartments and townhouses even more fraught. In the immortal words of Swedish economist Assar Lindbeck, rent control is “the most efficient technique presently known to destroy a city – except for bombing.”

And policies to help tenants while supply is tightly constrained – like rental warrants of fitness – risk doing harm over the longer term.

The real problem is hard to solve in a hurry, which is a problem when you’re in a pressure-cooker.

Meanwhile, Ardern today blames the housing shortage on Kiwis not liking Capital Gains taxes. 



Egads.  

Tuesday, 17 November 2020

AFR on the RBNZ

Harsh stuff from Grant Wilson at the Australian Financial Review ($):

Even with the RBNZ flagging macro-prudential tightening next year, via the reimposition of loan-to-value ratios, house prices are now a de facto constraint on monetary policy.

The "least regrets" formulation also assumes that the RBNZ’s approach to unconventional monetary policy, which was first articulated back in 2018, holds up.

While we agree that the first round of LSAP, in conjunction with other measures announced in March and April, was highly effective in lowering the local term structure of interest rates, the jury otherwise remains out.

We highlight (again) that the RBNZ’s expectation of LSAP imparting downward pressure on the NZD via the portfolio balance channel is in doubt.

In contrast to their pass-through model, non-resident holders of local bonds have not sold to the RBNZ.

Their percentage of ownership has fallen sharply this year (from 47 per cent to 30 per cent at end September), but the stock of holdings has remained steady, in a range of NZ$35 billion to NZ$40 billion.

Speaking plainly

Beyond these substantive points, there is the RBNZ’s communication strategy.

Back in May we noted that Governor Orr is known for speaking plainly, including his questionable comment that direct government financing was "achievable", and that there is "no right and wrong".

Assistant Governor Hawkesby managed to top this in mid-October, saying that preparations for negative rates were "not a game of bluff".

Perhaps not. But certainly the RBNZ over-represented its hand (in poker terms).

The result was seen on Wednesday, with the local money market strip abruptly repricing higher (and from negative to positive yields), by fully 30 basis points.

Then on Thursday, Hawkesby made perhaps the most asinine comment we have a seen from a central banker this year, in suggesting that the repricing was due to sell-side banks revising their forecasts, rather than the RBNZ’s decision.

As any intraday chart will illustrate, this was a daft thing to say. It belongs in the domain of alternative facts.

Journey ahead

Looking ahead, the RBNZ has its work cut out. It will need all the institutional credibility it can muster in tapering the LSAP program and in cooling the increasingly parabolic housing market.

Rather than continuing to emphasis the downside, the RBNZ would be well advised to contemplate the upside.

This includes the tourism sector, where Australians comprised nearly half of international visitor arrivals prior to COVID-19.

The RBNZ does not need to be the hero of the hour. It just needs to do its job.

I'm not a macro guy, and I'm certainly not one who watches the mechanics of these markets. 

It seems obvious that the Bank's policies have had the consequence of inflating house prices. If the supply side were less constrained, Bank easing would help fund more construction. The Governor is certainly right that the supply side needs addressing. Monetary policy needs mates, as they say. But given the constraint, it would be nice to think that the Bank views what is happening in housing prices as an unfortunate consequence to be mitigated.

I don't think the Bank should be blamed for having gloomy forecasts earlier in the year. Erring on that side seemed a lot less bad than what could have happened instead, and everything then looked horrible. Being unintentionally contractionary when the velocity of money plummets isn't good. 

Despite everything the Bank has pushed on, inflation expectations over the next two years seem firmly planted in the 1-2% range. If pushing the throttle to the floor keeps the speedo constant, is it because the engine's broken, because you're in the wrong gear, or because you're driving up the Otira Viaduct and Friedman's thermostat is running?* If it's the former, you might want to check into what's going on. A broken engine spraying oil all over the housing market without moving the speedo otherwise isn't the greatest. If it's the latter, shifting into neutral before cresting risks rolling downhill. And if it's because you're in the wrong gear, running a QE policy rather than implementing negative interest rates, well, I'm not enough of macro guy to know.

I do wonder whether there's anything the Bank could be doing to mitigate flow-through into asset prices though. 

* For those unfamiliar with Friedman's thermostat, here's a bit from Nick Rowe from the link:

And it bugs me even more that econometricians spend their time doing loads of really fancy stuff that I can't understand when so many of them don't seem to understand Milton Friedman's thermostat. Which they really need to understand.

If the driver is doing his job right, and correctly adjusting the gas pedal to the hills, you should find zero correlation between gas pedal and speed, and zero correlation between hills and speed. Any fluctuations in speed should be uncorrelated with anything the driver can see. They are the driver's forecast errors, because he can't see gusts of headwinds coming. And if you do find a correlation between gas pedal and speed, that correlation could go either way. A driver who over-estimates the power of his engine, or who under-estimates the effects of hills, will create a correlation between gas pedal and speed with the "wrong" sign. He presses the gas pedal down going uphill, but not enough, and the speed drops.

How could the passenger figure out if the gas pedal affected the speed of the car? Here's a couple of ideas:

1. Watch what happens on a really steep uphill bit of road. Watch what happens when the driver puts the pedal to the metal, and holds it there. Does the car slow down? If so, ironically, that confirms the theory that pressing down on the gas pedal causes the car to speed up! Because it means the driver knows he needs to press it down further to prevent the speed dropping, but can't. It's the exception that proves the rule. (Just in case it isn't obvious, that's a metaphor for the zero lower bound on nominal interest rates.)

2. Ask the driver. If the driver says that pressing the gas pedal down makes the car go faster, and if the driver says he wants to go at a constant 100kms/hr, and if you see the car going a roughly constant 100kms/hr, then you figure the driver is probably right. Even more so if you ask him to slow the car to 80kms/hr, and he says "OK", and then the car does slow to a roughly constant 80kms/hr. If the driver were wrong about the relation between gas pedal and speed, he wouldn't be able to do that, and it wouldn't happen, except by sheer fluke. (Just in case it isn't obvious, that's a metaphor for inflation targeting.)

3. Find a total idiot driver, who doesn't understand the relation between gas pedals and speed, and who makes random jabs at the gas pedal that you know for certain are uncorrelated to hills or anything else that might affect the car's speed, and then do a multivariate regression of speed on gas and hills. But you had better be damned sure you know those jabs at the gas pedal really are random, and uncorrelated with hills and stuff. Which means this can only work if you are certain that you know more about what is and is not a hill than the driver does. Or you are certain he's pressing the gas pedal according to the music playing on the radio. Or something that definitely isn't a hill. Are you really really sure your instrument isn't a hill, or correlated with hills? And if so, why doesn't the driver know this, and why does he jab at the gas pedal in time with that instrument? You had better have a very good answer to those questions. And no, Granger-Sims causality does not answer those questions, or even try to.

Monday, 16 November 2020

Fixing Covid leave

My column in today's Dom Post:

New Zealand’s Covid-19 Leave Support Scheme took a page from Singapore’s book, but needs a few tweaks to really be effective. The scheme compensates employers, including the self-employed, if they need to self-isolate and cannot work from home.

It provides excellent coverage for workers who have been required to self-isolate because they have Covid or because they have been told to self-isolate as a close contact of a case.

It covers you if your child has been told to self-isolate and you need to provide support.

And, for a few workers in a few critical health sectors, it also provides coverage while waiting on a test result.

All of that is laudable.

But if you’re a hospitality worker, or a retail clerk, or a bus driver, you will not be eligible if you’ve developed symptoms, gone to a mobile testing station, and are waiting on results. The pernicious calculus remains. Are your symptoms really that bad? How many sick days do you have left? How annoyed is the manager going to be if you need to stay home for a couple of days?

The Covid-19 leave scheme should be updated to avoid those kinds of problems. Really, it should never have had those holes in coverage in the first place.

I think it makes rather more sense than doubling the number of sick days. Or added to a doubling of the number of sick days if they really wanted to double the number of sick days. But the case around changes in sick leave entitlements should hang on non-Covid matters, with specific Covid-leave to deal with what's in front of us.  

Saturday, 14 November 2020

Boiling credits

The price of carbon dioxide emissions in the ETS is $35/tonne. The scheme has a binding cap. If you buy a tonne of credit and then refuse to use it, you have reduced New Zealand's net emissions by one tonne. Somebody, somewhere, will not be able to buy that tonne. That person or company will emit less. 

Every time the government does something through regulation or other spending that costs more than $35/tonne to abate emissions, it is forgoing the opportunity to do even more good by buying credits and running them through the shredder. 

The waste documented in Marc Daadler's story is just infuriating.

Cleaner boilers in government buildings have a 20 year lifespan, a cost of $80m, and an annual emission reduction of 26,000 tonnes. Assume a zero discount rate, that's 520,000 tonnes abated at $80m, or $153.8 per tonne. The same amount of money put toward buying and scrapping carbon emission rights would have stopped 2.29 million tonnes of emissions, if the move didn't push carbon prices up much from the current $35/tonne.

But it gets even worse. Remember that the ETS exists. If the government isn't buying ETS credits to run boilers, somebody else buys those credits instead. Actual emission reductions aren't 520,000, they're zero because somebody else increases their emissions by 520,000 tonnes, using up the now-available credits.

The story notes that other process heat reductions cost $110/tonne, in shifting to biomass from fossil fuels, or $250/tonne, in shifting to electric. Both are much much higher than the current ETS price. 

I simply don't get why journalists on this beat aren't comparing the cost of a measure, and what it achieved, with what could have been achieved by buying and retiring ETS credits.