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.

Tracy Martin's Porn Filter

My column over at Newsroom this week ($) (ungated) went through some of the likely problems if the government goes ahead with Tracy Martin's mad scheme for a national pornography filter.

A couple of years ago, I wrote a short report making the case that New Zealand is the world’s last sane place. Or, at least, if it’s going mad, it’s going mad more slowly than the rest of the world. Perhaps I was too hasty. Internal Affairs Minister Tracy Martin this week told Newshub about the government’s plans for protecting children from online pornography. Newshub reported that the government is looking to the United Kingdom as example, and that nothing is yet ruled out. Some things should be ruled out. Let’s have a look at what has been going on in the United Kingdom, and why it is a bad idea to follow their example.

The Great Firewall of Britain

The UK has a long history of internet filtering. In the 2000s, the government encouraged ISPs to block access to websites blacklisted by the Internet Watch Foundation as potentially including child pornography – not unlike New Zealand’s Digital Child Exploitation Filtering System.

The implementation of the filter did come with a few problems. In one famous 2008 case, clients of ISPs using the filter were barred from editing any page on Wikipedia because the Wikipedia page for a Scorpions album included an image of that album’s cover; the decision was reversed a few days later. New Zealand’s Child Exploitation Filtering System has not had similar problems.

From 2013, the Great Firewall of Britain became rather more stringent. David Cameron’s government sought to protect people from pornography by changing the defaults. Previously, those who wished to prevent anyone in their home from accessing pornography would need to turn on filtering, whether by subscribing to an ISP providing a filtered experience, or by purchasing a service like NetNanny.

Under Cameron’s changes, the default switched. Everyone’s internet access would be filtered to prevent access to pornography. Those who wished an unfiltered experience would need to inform their Internet Service Provider that they wished to have access to pornography.

But, perfectly predictably, the filter went a bit wider than pornography, and included websites relating to alcohol, smoking, suicide, anorexia and more. One reader of my blog, Offsetting Behaviour, reported that about half of the blogs linked by fellow Kiwi blogger Lindsay Mitchell were classified as adult content and were blocked – none of those sites could reasonably be considered objectionable. He could not opt-out as opting out required having a UK credit card with a UK postcode as proof of age.

In 2014, the UK Council for Child Internet Safety began implementing a whitelist to deal with overblocking. Overblocking occurs when the web filters erroneously identify a website as pornographic. Overblocked sites included suicide prevention websites, drug advice, sexual education and sexual health sites and more.

The UK is looking to tighten things further, with a requirement that pornography websites verify the ages of those visiting their sites; noncompliant sites would be blocked by the Great Firewall. How would sites check visitor ages? Wired reports that credit cards, passports, or drivers’ licence details could suffice. But there are a lot of dodgy websites out there providing access to free but copyright-infringing pornography, coupled with a risk of a malware infection for your computer. It seems a bad idea to force people using those sites to provide material that could easily be used in identity theft.

If New Zealand government wishes to follow the UK down this rabbit hole, the government will have more than a few problems it will need to solve.

It will need to develop a comprehensive list of sites deemed pornographic and consequently requiring age checks, as well as processes for whitelisting sites mistakenly listed as pornographic. What would the appeal provisions be for sites wrongly listed? Many foreign-based sites simply won’t care if Kiwis no longer have access to their pages and will not undertake any kind of costly whitelisting process.

It will need to develop a trustworthy mechanism for age verification. This is not a simple problem. If the government requires foreign websites to collect personally identifiable details on Kiwis, what obligations would those sites face under New Zealand’s privacy regime? How could we tell whether those obligations are being met? What recourse might a Kiwi have in case of breach? And, if the foreign site was compromised and Kiwis’ passports or drivers’ licence details used in age verification were then used in identity theft, where would liability lie? The latest messes over at the Ministry of Culture, where passport details of hundreds of kids applying for a programme were compromised in a data breach, might give the government pause.

And if the government wishes to leverage its existing RealMe online identity system for age verification, might we worry about whether the government is keeping track of everyone’s viewing habits? If Winston Peters was unhappy about his superannuation details being leaked, we can imagine what Shane Jones might think about the dangers inherent in this proposal.

During 2016’s Parliamentary Select Committee hearings on Uber, Parliament proved itself to be completely ignorant of the basic details of the technology at play. Any Select Committee hearings on the proposed pornography filter promise to be at least as entertaining. I look forward to hearing whether the Select Committee knows whether the letters V, P, and N might have any relevance to their proceedings.

But all of it risks New Zealand’s coveted status as the world’s last sane place.

For some reason, Newsroom pulled the line about Jones's internet browsing history. I've here provided the unfiltered version.

Drinking Freedom

I plug Ben Powell and Bob Lawson's latest book in my column in this week's Insights newsletter:

Drinking freedom
The very best part of grad school was the drinking. Well, not so much the drinking. Too often, the beer was stuff that would make an Export Gold taste like Export Gold had taste. It was the arguing about economics, over beer, until close to sunrise, with other people who cared deeply about ideas. That was heaven – despite the bad beer.

Professor Ben Powell was a year behind me in grad school at George Mason University, and a fantastic drinking companion. But Ben was, and is, a lot smarter than I am. He persuaded people to cover the costs of an interesting book project with the creator of the Economic Freedom of the World indices, Professor Robert Lawson.

The project’s genius is obvious in the book’s title: Socialism Sucks: Two Economists Drink Their Way Through the Unfree World (2019).

Ben and Bob went on a tour of some of the world’s less-free places in search of a decent beer. As they put it, “We wrote this book because too many people seem to be dangerously ignorant of what socialism is, how it functions, and its historical track record. We also wanted to get drunk in Cuba, and this was a great way to write off our expenses.”

The tour starts in Sweden, mostly to explain the country is definitely not socialist. It has a lot of redistribution, but the government mostly leaves the rest of the economy alone. From there, they head over to Venezuela – or at least a few feet over the border. Then on to Cuba’s subsistence socialism, China’s fake socialism, a peek across the Chinese border into North Korea’s dark socialism, the hungover socialism of Russia and Ukraine, Georgia’s new capitalism, and back to the USA for drinks at the Democratic Socialists of America’s annual convention.

Just like those late-night sessions in grad school, the drinking mostly isn’t the point – despite the title. It’s the ideas. The book takes us to parts of the world you might not otherwise visit to teach us history lessons that are quite relevant today. We’re right to lament how many Kiwis haven’t the faintest clue about the Holocaust, but how many Kiwis know that Mao’s Great Leap Forward starved 45 million people to death?

If you like reading P.J. O’Rourke, you’ll want to pick up a copy. It’s ridiculously fun, especially when paired with a bad beer for authenticity.

Socialism Sucks: Two Economists Drink Their Way Through the Unfree World is available at Amazon. 

Book's a strong recommend. Great fun.