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:

• Ending the pandemic is worth between 5-15% of total wealth. For one potential sense of the gains in NZ's having ended the pandemic, here. 
• Trump likes to hate on immigrants. Unfortunately, there's a lot of it in NZ as well, except the ideological positioning of it flips. In the US, everyone rightly recognizes Trump's racism for what it is. And Kiwis recognise Trump's racism for what it is. But NZ does love itself a bit of discussion about banning "low skilled" migration. Ilya Somin had a nice roundup of migrants' contributions to the development of the Covid vaccines - worth 5-15% of total wealth. The Pfizer vaccine comes courtesy of the children of two Turkish guest workers who moved to Germany. 
• Robert MacCulloch is blogging! He's Prof of Econ at Auckland Uni, and one of the country's most-cited economists. He posts on the Northland Tooth Fairy - a woman in Northland who's been helping locals to fix their dentures. Newshub reports she's been doing a great job; unfortunately, she hasn't the appropriate licences, so folks in Northland can go back to using pliers to pull out their own teeth if they can't afford a dentist. 
• One reason we can't have nice things: the police can't be bothered to help out a guy whose mobile ice-cream shop was stolen. They still have plenty of time to go out hunting for people growing cannabis though. 
• Wellington's pipes are very leaky

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. 

. @jacindaardern says public bears some responsibility for housing crisis after failed taxation attemptshttps://t.co/eGJryWLfUx pic.twitter.com/s4gydf5FSX

— 1 NEWS (@1NewsNZ) November 29, 2020

Egads.  

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.

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.  

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. 

Rationing scarce MIQ spaces

Imagine yourself in the place of the MBIE boffin tasked with deciding which application for a scarce MIQ space is most deserving or most needed.

The job isn't easy.

The government keeps a small number of spaces in MIQ for getting critical workers in. But somebody has to decide which workers are most critical. Applicants fill in forms to make their case, but that won't help a pile. Every applicant will have incentive to present the most sympathetic case possible, and whoever is assessing the cases has to figure out how much overstatement is present in any of them.

Think only about agriculture for a moment. 

I can easily sympathise with the horticulture folks who are looking at just horrible losses because they can't get workers in through MIQ to do the picking. 

There are lots of calls for them to just pay more, but it can easily be the case that differences in worker productivity at wages paid, combined with fairly elastic demand for the picked product, mean that the growers really don't have space to move. If paying what it would take to get Kiwis to move out to where the crops are and pick them would exceed the value of the picked crop, it makes more sense to let it rot in the field. 

Should the expert zucchini picker from Thailand get the next space?

Or should it go instead to experts in driving the specialised equipment used in silage harvesting? Seven Sharp covered it last month, suggesting that certification in driving the rigs is a five-year process. I've watched the video, and honestly it doesn't look that much different than the old Gleaner L2 we ran decades ago. Hydrostatic drive, rear wheel steering, pick-up header, more controls (and steering!) on the joystick than the L2 had but the basic concepts are the same. I'd imagine that, in a pinch, any retired farmer could do it if they had basic familiarity with other harvesters. Heck, I'd even like to imagine that I could do it if I watched an expert driving around for a few rounds then had the expert supervise me for a few rounds - even though Dad never let me drive the Gleaner and instead had me in the dusty dusty grain trucks as opposed to the lovely air-conditioned cab of the L2. I'd watch the tutorial, note the autopilot button (no tractor I've ever driven had autopilot!), and have at.

But I could really really easily be wrong, and those machines are worth a lot of money. Some of the fields here have crazy hillsides and hazards that might really really need an expert, especially if they're often running a straight-cut header rather than just a pick-up reel.  

How is it that some desk-jockey in Wellington has to decide whether it's more pressing to get a harvester-driver in, or a horticulture worker, or an engineer? Some applications sound more plausible, but Wellington desk jockeys like me aren't expert in any of it even if we drove tractors when we were kids. We don't have the knowledge necessary to make the call and we can't acquire the knowledge necessary to make the call. Who should get the next spot will depend on a big mix of how expensive it is to get a local trained up to do the job, how urgent it is, the value at risk if the job doesn't get done or gets done to a lower standard, and piles of other considerations that would be hard to credibly convey to somebody at a desk in Wellington.  

The shadow price of MIQ spaces has to be in at least the tens of thousands of dollars, and much higher than that in cases that would be inframarginal in any sane world but are still knocked by by MBIE bureaucrats. We hear of cases of projects running in the tens and hundreds of millions that are held up because the relevant MBIE officials figure that engineers are all perfect substitutes for each other and that a specialist from overseas could be perfectly replaced by a local who doesn't know the kit. To me those engineering cases sound more plausible than that a retired farmer couldn't train up to drive newer harvesting equipment, but that's just a reckon on my part. I can't know for sure. And neither can the MBIE decider.  

The only real way of knowing which uses are highest value for a fixed number of scarce spaces would be to auction the spaces held for overseas workers. The companies that would have the hardest time finding a local to do the job and with the most value at stake would outbid the others. 

I really doubt that someone who might pick zucchinis would get the next space, but fair enough if so. The point of an auction system is to discover the most valuable ways of allocating scarce spaces. 

And if you don't like that money then picks winners, consider that the alternative saves piles of spaces for stupid boat races because Ministers think that subsidised boat races are more important than any other business purpose or family need. The alternative to letting those benefitting from the spaces decide it amongst themselves through an auction is leaving it with people with less knowledge and worse incentives. Imagine if we tried dealing with housing scarcity in Auckland by abolishing house auctions and letting the Ministry of Housing evaluate applications to buy houses. They'd have given half the houses in Auckland to the boat race people by now, and another quarter to anyone involved in horse racing. 

Afternoon roundup

 The afternoon's worthies on the closing of the browser tabs for a system update:

• This mess has been a long time coming. There are piles of small rural water schemes that largely supply stock water. The government has been trying to figure out how to apply water quality standards to that sector where the number of people on those water supplies is tiny, where treating huge volumes of water intended for stock is just stupid, but where government and councils worry that cost-effective solutions could leave them legally liable if anything goes wrong. You'd think there'd be some way of letting households on those schemes install their own UV filtration on a caveat emptor basis. Three cheers for the Local Democracy Reporting fund that helps this kind of journalism. 

• Getting a tenant who terrorises the neighbours evicted apparently takes long enough that the neighbours have all gotten security cameras installed, there have been multiple police calls, and finally the tenant breaking into the neighbour's house at night. It's great that the Tenancy Tribunal granted the immediate eviction, but you've got to wonder about a process that takes all that to get there. I wonder what things would look like if landlords, including state housing providers, could evict a problem tenant on having letters requesting it from a supermajority of neighbours. 

• The Ministry of Health does not like to comply with the Official Information Act. Just read through this mess. Some journalists wanted to be able to map out vaccination rates by neighbourhood. The data exists. It wouldn't have been hard for the Ministry to aggregate it up from meshblock to neighbourhood if it wanted to confidentialise, but nothing really enforces the Official Information Act. 

• I am still angry about an old Circa Theatre play that cast developers as moustachioed villains, and NIMBYs as heroes. Continuing to try to get housing built in a housing crisis, despite the best efforts of the politically powerful, is heroic. So three cheers to Ian Cassels, and brickbats for everyone else trying to stop Shelly Bay.

• The RBNZ is again talking about LVRs. House prices are terrible, and RBNZ policy is exacerbating things because of the existing supply constraints. But Michael Reddell's critiques the last time through remain pertinent. Is there really a plausible financial stability / prudential regulation basis for the rules? They never made much sense to me on that basis, or at least the case for them hadn't seemed to have been made. I could kinda see how they might make sense if the Bank were targeting not just CPI but also wanting to pull the peaks down on asset price inflation. 

• Jack Vowles starts parsing the numbers on party switching in the NZ election. For every voter National lost to ACT, it lost about 2 to Labour. And Labour pulled in a pile of votes from people who hadn't voted in the prior election. One bit relevant to some speculation:

  There has been speculation that many of those switching from National to Labour did so to keep the Green Party out of a coalition and thus prevent any possibility of a wealth tax being introduced. When asked the reason for their vote, five people who switched from National to Labour did mention the wealth tax and the need to keep the Green Party out of government. For only three of these was this the major reason for their vote shift; and these people form a small minority of the 500 National to Labour switchers in the sample. In their responses to another question in the survey, two thirds of those 500 switchers indicated they were actually in favour of a wealth tax.