Reader Mailbag: the proposed forestry legislation

Back in April, BusinessDesk warned about some pending legislation around logging; I went through some of it then at Newsroom:

BusinessDesk last week reported that Jones is considering levies on log exports to fund some kind of “re-setting” of local industry, or a variety of regulations to ensure domestic lumber processors have their needs met before logs are exported.

The story noted how local lumber processors are struggling to compete with processors elsewhere when international prices for logs are high. Jones viewed protections were necessary to ensure a viable domestic log processing sector in New Zealand.

But it’s worth explicitly stating what that means. Jones, as Minister, would effectively be setting a price cap on logs, restricting exports whenever international demand is high. This would be a transfer of money from timber farms, which would otherwise profit from higher prices, to sawmills.

It would also mean a substantial shift in New Zealand trade policy. If another country banned the export of raw materials to New Zealand to subsidise its own processors, New Zealand’s processors might see that as basis for a complaint about unfair trade practices. New Zealand’s trade negotiators can boast about New Zealand’s clean record in following trade rules. If Jones has his way, those negotiators will have New Zealand’s trade restrictions in lumber thrown at them any time they object to trade practices which disadvantage Kiwi companies.

So it is misguided on pragmatic grounds that it will disadvantage New Zealand as the world leans toward greater protectionism – New Zealand has more to lose than most from a weakened rule-based international trading system. Wellington should be working to support that system rather than help tear it down.

The legislation is working its way through now. And it looks to be a complete disaster. BusinessDesk again had some excellent reporting from the Select Committee hearings, and on consequences like cancelled plans for lumbermill expansions.  

Stephen Layburn emails me today with more on the legislation:

Here’s one live example – the Forests (Regulation of Log Traders and Forestry Advisers) Amendment Bill

The submissions on the Bill are illuminating. Sadly, they are much more illuminating than officials’ reports.

IMHO, this has to be amongst the leading contenders for the worst piece of emergency legislation promulgated by the Government.

A glance at the regulatory impact statement elicits some truly worrying signs, in terms of both:

• strained application (or disregard – depending on your point of view) of the most basic of economic concepts; and
• a fundamental misunderstanding of the economics of domestic wood processing – and the nature of the NZ wood resource and its uses. 

Where, for example, is the comparative analysis of the over-arching policy espoused in support of the Bill - and the investment policies of the Provincial Growth Fund? Both are overseen by the same Departments.

From where I sit, the much-needed restructuring of domestic processing must be part of a much wider analysis of the wood resource, its uses and the new technologies coming on stream. To take just one example, surely, a key part of that study must include what New Zealand is going to do about important issues such as social housing. On the latter score, the appalling spectacle of clusters of campervans being used, during the COVID-19 lockdown, to house families in rural Northland – because they provided a better solution to the leaky, cold, houses available to those affected families must be a wake up call that technology such as prefabricated housing (using available domestic timber resource) needs to be applied urgently to address a problem that most New Zealanders would (if asked) agree needs to be addressed – right now.

Instead, we have another go at occupational licensing and more regulatory hurdles - that will hobble an industry and stifle innovation.

What next, legislate to require the coarse wool industry to prop up ailing carpet mills? Or force fine wool growers to supply the local craft industry rather than pathfinders like Icebreaker?

This is just a subsidy disguised as public good legislation and should be confined to the dustbin.

I am sure that it was Bernie Galvin who said (30 years) that past Presidents of the Manufacturers Association were buried 3ft under – so they could still get the next hand out.

I am not an economist or an industry expert, I have just spent a lot of time saving or closing down processing facilities. One issue that simply isn’t mentioned is that one of the reasons I am advised the economics of LVL plants are “challenging” – is that the resource isn’t stiff enough.

So you have the PGF, Scion and NZTE putting a huge amount of $$ into new technology (which will fix the stiffness issue) – and then the (same) Govt implementing a protection racket for old world technologies. Just terrible.

Could the government perhaps consider, well, not doing this?

New normals

I had a chat with RNZ's Emile Donovan for The Detail as part of his whip-round of views on where this is all taking us. I show up last in a roundup including Simon Wilson, Sam Sachdeva, and Megan Tyler. 

Enjoy!

Fingers crossed! Dave Guerin on The Border Issue

From Dave Guerin's excellent Tertiary Insights newsletter ($):

Quarantine Winston Peters was supportive of opening up now to international students. That comment came as Jacinda Ardern announced officials and industry representatives were working on a Trans-Tasman bubble. She said that it could be in place by September, but we suspect she’s continuing to underpromise so that she can overdeliver on an opening in, say, Jul. Officials are also working on international student quarantine options. The ODT had more on SIT’s proposals for a student quarantine centre in Queenstown, which is supported by the Queenstown mayor.

If they are planning on having things good to go earlier, it would be nice to tell folks about it. You can't admit international students for July semester entry if you don't know until July that entry might be allowed!

I really hope Dave's right

RBC and COVID

From my column in this week's Newsroom Pro (ungated)

No recession is purely of one model. A Reserve Bank failing to respond properly to a real shock can compound a real recession with a monetary one. Second-round effects from a real shock, as unemployment rises and people fear for their jobs, can bring a more Keynesian-flavoured problem. And easy credit to prop up zombie firms can sow the seeds of more Austrian-style problems down the line.

But this time, it’s real – or at least that’s the underlying problem. Let’s go through some of those issues.

The major changes in business practices brought on by a contagious disease – for office desk spacing and consumer preferences about being near other people – mean that existing configurations of workers, buildings and equipment will evolve.

Economists will describe this as a technological shock. Five months ago, the recipe for mixing workers, equipment, buildings and supplies yielded profits.

After the shock, that recipe becomes impossible but no new recipe is as profitable, yet. Meatpacking plants were never designed for 2m worker spacing, for example.

Some of these changes will only last until New Zealand returns to Alert Level 0. But some will linger as the virus remains overseas. The international arrivals lounge may take some time to get back to normal.

But that is hardly all of it.

The collapse in tourism is a lot more like a huge negative price shock to an important export commodity than it is to a traditional Keynesian domestic aggregate demand problem.

Supply chain issues when international suppliers and deliveries are less reliable is another kind of technological shock: firms used to rely on speedy delivery of needed materials, now they need to store greater stockpiles.

Shifts to working from home is its own kind of shock to the demand for services in cities – simply giving people more money will not jumpstart demand at Lambton Quay lunch counters or retail outlets when fewer people want to be downtown. It’s a real change, not just one caused by issues in aggregate demand.

More than anything, firms now need an easier path to reconfigure and change. Policy must embrace greater dynamism, rather than building in protections to entrench current practices.

Last week, The Spinoff reported Vodafone’s adaptation includes training its retail staff as online chat agents to help clients which have shifted to digital. In many countries, rigid labour market regulation stymie that kind of change – and it is easy to imagine similar policy changes might happen here.

The Government has so far mainly reached for familiar tools and policies to fix this recession: quantitative easing to avoid unintentionally contractionary monetary policy, fiscal stimulus to boost aggregate demand. Things like the wage subsidy scheme were more directly keyed to the specific nature of the Covid-19 problem.

But who is thinking about simplifying business adaptation?

If a restaurant wants to turn its disused car parks into outdoor seating areas, would city planners get in the way by enforcing minimum parking restrictions that never made sense and now make even less sense?

If a building owner wants to change some commercial offices into apartments, would the zoning laws allow it?

If a company needs more capital to leverage a post-Covid opportunity, would new restrictions in the Overseas Investment Act and a lack of domestic capital sources scuttle the business?

And if a tourism operator wants to pivot to support high-income visitors for months’-long stays, rather than a fortnight (with appropriate quarantine and testing), will the border even be open?

Coming out of months of restrictions, the Government must start thinking of ways to enable everyone to get on with the job of recovery. There is a lot of work to do.

A principled border re-opening

As much as I don't look forward to Avatar sequels, I can't argue against the government's letting the film crews back in. They underwent quarantine, so the entry was safe.

What I do worry about is the process. It seems to get things backwards.

Currently, entry is barred to foreign nationals unless there is a strong economic reason for their coming in. If they meet that threshold, they're quarantined and then allowed to operate. 

But that requires the government to pick and choose among potential visitors and that path is fraught. It also causes a lot of damage: lots of folks on work visas desperate to come home, but unable to.

Lawyer Alastair McClymont has been inundated with hundreds of pleas from migrants desperate to get back into the country along with calls from employers in industries like agriculture who want their managers and workers back. 

"There is a complete vagueness around the rules and an inconsistency in how the rules are being applied. It is just creating mayhem." McClymont said.

"Within the migrant community they're worried about what's going to happen."

"They need to really make a decision and they need to make it very quickly and they need to be very clear about who's going to qualify and who's not going to qualify."

The principle should be reversed. If you're able to enter the country safely, you should be allowed in (subject to the normal visa stuff that's always applied). Basically it would require showing proof of having a spot at a quarantine facility when you rock up to the ticket counter to board a flight to New Zealand. The government wouldn't have to provide the facilities but would probably want to have an oversight role in certifying them and ensuring compliance. 

What happens under that model? If there are more people wanting to come here than spaces available, prices bid up. If prices bid up, more hotels and other facilities get converted into quarantine facilities. Eventually you hit a point where the cost of bringing the next quarantine room on-stream just outweighs the value of getting here to the next person who wants to come here. Government doesn't have to decide which uses are most economically important; people demonstrate it instead in the usual way - just as we don't have government deciding who should get the next car or computer or anything else.

I've been pleading that the border be reopened to safe entry (testing, quarantine, more testing) in time for students to come here for the July semester. Auckland Mayor Phil Goff also is very keen for international students to be allowed back in. 

Here's me on the AM Show talking about it. If nothing else, my having missed last week's appointment at the barber's because I was home sick may have provided amusing results. 

Otago epidemiologist Dr Michael Baker also agrees:

Otago University epidemiologist Dr Michael Baker said in principle there was no reason why foreigners should not be treated in the same way as returning New Zealanders, who have been allowed into the country on condition that they stay in quarantine for two weeks.

"The current extreme form of management is 14-day quarantine, but there is a reasonable chance that a mix of other measures could shorten that," he said.

It's just so frustrating. In every other area, we desperately hope that sectors can get up to a fraction of what they were at pre-COVID. With international education, there's a strong growth potential - getting students who'd otherwise have gone to the US to come here instead for a normal university experience. 

It's also very frustrating and disappointing on a more personal front.

Since moving to Wellington, we've helped host students attending the Campbell Institute. It's an English language school. Students from overseas can billet with families. In some cases, they pay room and board. In others, like ours, they provide some assistance with childcare before and after school. It's a wonderful programme. 

Campbell had the international connections into schools around Europe and beyond, vetting the students coming here for those who'd be suitable for the demi-pair programme while vetting local families. Our kids get to learn a lot more about the world beyond New Zealand; the students get an immersive English-language experience. We've hosted students from Germany, France and Argentina. 

Last week, the school told host families and students that it will be closing. With no prospect of the border reopening, there's nothing else for it. There's an obvious market niche for this kind of thing, but economies aren't machines - they're organic. This isn't something like replacing a broken cog when it's time for the machine to run again. It's more like cutting down a tree and never quite knowing whether another like it will take its place. Developing the connections and nous to make this kind of business run is hard work. The school only needed to know when it might be able to bring students in again under quarantine. The government's continued dithering killed it. Meanwhile, the government spends billions on make-work schemes.

Some job losses and business failures with COVID are inevitable. International export education could instead be a growth sector. 

Oh the Vogonity. 

The COVID and the damage done

Wednesday's Law & Economics Association of New Zealand lunchtime panel discussion on limiting the economic fallout of COVID included Andreas Heuser, me, and Richard Meade. 

Panel Discussion on Limiting COVID Economic Fallout – 27 May 2020 from Andreas Heuser on Vimeo.

Richard made the case for running something like the student loan scheme for non-students, and for business. Richard and I independently hit on the idea of extending the student loans scheme to non-students. I'd pitched it back in March as part of our initial COVID-response batch of papers. I still think it rather preferable to helicopter-money options.

I went through the importance of scaling up contact tracing as alternative to future lockdowns, suggesting we use a structure like the Army Reserves. Get trained in it, spend a weekend a year on a refresher course, and be ready to be called into service if needed. Then I went through the case for safely reopening the borders before re-emphasising the need to maintain fiscal prudence if we want to get out from under the debt COVID makes us take on.

Andreas covered impending liquidity crunches and contrasted NZ's business support regimes with some of those found abroad. I still need to wrap my head around the idea that IRD is acting now as a bank. 

Afternoon roundup

A much belated closing of the browser tabs brings some worthies:

• Kiwibuild never made sense. If it were needed, it couldn't work because the same things that block private development would block Kiwibuild. And if it could work, it wasn't needed. The government tried anyway, sticking bloodymindedly to a stupid election promise dreamed up on the back of a napkin in a taxi as the legend has it. And it continues to be a disaster. I hate to say I told you so, but ...


• Kiwiblog links to Adam Creighton at The Australian on NZ's economic problems. Creighton's been on the crankier side when it comes to matters Covid, but he's not wrong on the economic worries here. Notable is that he has Graham Scott on record raising concerns as well; he's former Treasury Secretary and recently retired from the Productivity Commission. 


• Nouriel Roubini is more grim than usual:

  What I have argued this time around is that in the short run, this is both a supply shock and a demand shock. And, of course, in the short run, if you want to avoid a depression, you need to do monetary and fiscal stimulus. What I’m saying is that once you run a budget deficit of not 3, not 5, not 8, but 15 or 20 percent of GDP — and you’re going to fully monetize it (because that’s what the Fed has been doing) — you still won’t have inflation in the short run, not this year or next year, because you have slack in goods markets, slack in labor markets, slack in commodities markets, etc. But there will be inflation in the post-coronavirus world. This is because we’re going to see two big negative supply shocks. For the last decade, prices have been constrained by two positive supply shocks — globalization and technology. Well, globalization is going to become deglobalization thanks to decoupling, protectionism, fragmentation, and so on. So that’s going to be a negative supply shock. And technology is not going to be the same as before. The 5G of Erickson and Nokia costs 30 percent more than the one of Huawei, and is 20 percent less productive. So to install non-Chinese 5G networks, we’re going to pay 50 percent more. So technology is going to gradually become a negative supply shock. So you have two major forces that had been exerting downward pressure on prices moving in the opposite direction, and you have a massive monetization of fiscal deficits. Remember the 1970s? You had two negative supply shocks — ’73 and ’79, the Yom Kippur War and the Iranian Revolution. What did you get? Stagflation.



• If you haven't sorted out a VPN yet, you might want to. Tracy Martin wants to be the boss of what you get to see on the internet: content filters that always risk misclassifying content and creeping to cover more and more stuff. Just VPN around the stupidity.


• The Shane Jones problems in forestry continue: his musings about nationalising the industry (go ahead and call it something else if you want, but setting something up where Shane Jones gets to decide which logs get sold to whom and at what prices...) have stopped the expansion of a pulp and timber plant in Tangiwai. BusinessDesk has the details (you should subscribe).

  "Submitter after submitter have told the committee the consultation on the Forests (Regulation of Log Traders and Forestry Advisers) Amendment Bill has been farcical and its rushed implementation under Budget urgency an abuse of process.