Things that don't make sense when you have an ETS

RNZ reports on the potential effects of the ban on coal in industrial heating.

Fonterra supported the ban. Smaller industrial users didn't:

Horticulture New Zealand said in its submission that the consultation document did not appear to consider impacts of the proposals on greenhouse-grown crops.

It said phasing out existing coal boilers used for space heating of greenhouses would be "devastating" to indoor vegetable crop production.

Barnes said food production in New Zealand could be dramatically affected.

"If things move too fast we could end up seeing some of our members go out of business before they're able to implement new alternatives, which would mean you would be getting potentially more imports and less locally produced product, particularly in the South Island."

We have an Emissions Trading Scheme with a binding cap. Industrial process heat is covered. Every lump of coal that's burned in the covered sector has to buy an emission credit. If that credit doesn't get purchased to cover the emissions from an industrial heating plant, it'll get purchased instead by someone else for some other bit of emission. The binding cap binds. 

If it happens to be the case that the lowest cost way of stopping the next bit of carbon emissions is in industrial process heat, then those will be the uses that stop as the binding cap binds and emission prices go up. At best, the ban gets you the same outcome that the ETS would give you. But there's no particular reason to believe that those plants are the cheapest spots for reducing carbon emissions. The ban in that alternative case just means forcing higher-cost ways of abating emissions.

Tax burdens and the proposed new tax rates

Susan Edmunds at Stuff asked me what effect Labour's proposed new tax rate on earnings above $180k might have on the usual "people in the top x% pay y% of all income tax" figures.

The actual answer is complicated. Some on those kinds of incomes can just reduce their wage income and keep income within a company structure, where it would hit a lower tax rate until earnings might be dispersed. 

But Labour had had estimates of that the new tax rate would earn $550m per year from the top 2% of earners. If we take the total income tax paid by those on >$150k per year, add the $550m from those above $180k, you can ballpark it. 

Using 2019 figures, the top 3% of earners on $150k+ paid 23.5% of all income tax. Adding the expected revenues from the new tax rate would increase that to 24.7%.

I don't think that's any material difference. 

So my notes back to Susan included this bit that she used:

“Income tax is only one part of the Government’s overall tax take, though. GST, company tax and excise all also matter. Focusing on income tax alone would then overstate the proportion of overall revenues paid by the highest-earners.

“On the other hand, the Government provides many income transfers, some of which are targeted by income, some of which are universal.”

He said data from 2010 showed the bottom 40 per cent of households each received about $20,000 more in services than they paid in taxes, while the top 10 per cent of households paid about $50,000 more in tax than they received in services and transfers.

Crampton said lower-income people had been more heavily affected by Covid-19 job losses, which could skew the tax bill even further to higher incomes.

But he said some higher earners would also restructure their affairs to make the most of lower company and trust tax rates, to reduce their overall tax bills when facing a new, higher rate. Most companies are taxed at a flat rate of 28 per cent.

It would be great to get an update of those 2010 Policy Quarterly figures; it would be a big job to do it though. 

For my sins in being helpful when a reporter called asking for an update on a commonly-used figure: 

(The story the NZ Initiative is trying to put around is here: https://t.co/VtXU8xkBco. As Zucman points out claims like this partly just highlight how unequal NZ is, and how much is earned by the top 3%. It’s no reason for alarm.) /2

— Max Harris (@MaxHarr03421445) November 5, 2020

I think it's pretty funny. Running a simple calc when a journalist calls asking for an update on a basic number, well, if that's raising an alarm, I'm not quite sure how I'd characterize my more normal ways of raising alarms. 

When I'm trying to raise some kind of alarm about something, it isn't that hard to tell. I'll be jumping up and down about it on Twitter, putting out press releases, and writing reports or short policy notes. 

I'd not bothered running the calculation before because I'd never seen it as being all that important. 

I had seen misperceptions of the effects of the Greens' proposed wealth tax as being important. 

My raising the alarm about stuff tends more to look like this:

The Greens' proposed wealth tax would catch WAY more than 6% of Kiwis.

Over 20% aged 66-69 have over $1m in net wealth. Somewhere between a fifth and a quarter of Kiwis should expect to be liable, if the thresholds adjust with inflation.https://t.co/1Il8W3xxuV pic.twitter.com/3tJIcELQPf

— Eric Crampton (@EricCrampton) October 12, 2020

Newstalk:

One economist claims the Greens' wealth tax will hit more Kiwis than the Party thinks.

The Greens say the tax, which has become a hot issue in the final week of the election, would only affect the top six per cent of the population.

However, New Zealand Initiative economist Eric Crampton told Heather du Plessis-Allan the real number's closer to 20 per cent.

He says right now, about 20 per cent of retirees would be subject to it.

And he expects future generations will also build wealth over their lifetime, reaching a peak after retirement.

"We need to be thinking not just about who is currently subject to the wealth tax, but who can we expect to be subject to the wealth tax."

Newsroom

But the Greens’ numbers have their own problems. To go through those, we need a brief detour through basic wealth dynamics. It is a problem plaguing every iteration of wealth inequality surveys using static comparisons to make claims about what proportion of wealth is held by which proportion of people.

Wealth builds over time, and that matters for every question about wealth measurement.

Most people start life with little wealth. Taking on student loans to earn a higher income later on means beginning adulthood with a heavy net debt position, as education does not contribute to measured wealth on Statistics New Zealand’s balance sheets. As graduates move into employment, they begin paying down their student loan debt while (hopefully) building up savings. If they buy a house, they take on debt that has an offsetting and appreciating asset. Otherwise, they build up retirement savings.

Individual net wealth peaks shortly after retirement. Retirees then draw on those savings.

A cross-sectional snapshot of the country will reveal a lot of people with net debt, a lot of people with few net assets, and a few people with a lot of net assets. That, and the failure to account for the effects of New Zealand Superannuation, can make wealth distributions look more unequal than they really are.

Even if every Kiwi followed exactly the same wealth trajectory, beginning with net debt and ending with the same retirement net worth, simple differences in ages would mean that a small proportion would be wealthy at any given time.

The Greens argue that only 6 percent of Kiwis would be subject to their wealth tax. But that seemed almost certainly to be based on a misleading cross-sectional snapshot. A reasonable proportion of today’s youth would be subject to the tax as they reach retirement. After prodding their representatives on Twitter more than a few times if they had checked what proportion of retirees might be subject to the tax, I decided to ask Statistics New Zealand instead.

I asked Stats to go back through the 2018 Net Worth Survey and sort net wealth holdings by age.

Without any sorting by age, the 2018 survey suggested 8 percent of individuals held net wealth in excess of $1m – so that was already rather higher than the 6 percent suggested by the Greens.

And, as expected, there was a severe age skew in the data. While only 1.5 percent of those aged 15-44 held a $1m in net assets, that proportion rose steadily for older age groups. Just over 18 percent of those aged 60-64 reported more than $1m in net assets, along with just under 18 percent of 65-year-olds. Wealth peaks among those aged 66-69 which means 21.8 percent of retirees would be liable for the wealth tax.

I'm not exactly subtle when I'm actually raising an alarm about something. I tend to get a bit excited and go on about it. 

Far from the frontier

Richard Harris spent a bit of time going through firm-level panel data on NZ firms, looking at the productivity frontier here and the distance to the global frontier.

Here's the upshot:

The most important conclusion from this study is that while there is some evidence of a failure of productivity-enhancing technologies to diffuse from firms operating at the national productivity frontier, the major problem is failure of productivity-enhancing technologies to diffuse from firms operating at the global productivity frontier. New Zealand’s major problem is that frontier firms are underperforming because of their characteristics (e.g. small and lacking international connections) while productivity is overall adversely affected by a lack of competition, which generally creates barriers to exiting and insufficient reallocation of market shares from lower- to higher-productivity firms. In terms of the policy response needed in New Zealand, Andrews et al. (2015, p. 93) note that ‘innovations at the global frontier do not immediately or inevitably diffuse to all firms ... frontier innovations often need to be adapted to national circumstances’. However, to increase the likelihood of diffusion from the global frontier, there is a need for a sufficient level of global connections via trade, FDI, participation in global value chains and the international mobility of skilled labour. New Zealand does not do well on any of these factors. In addition to improving the trajectory of firms at the national frontier (towards the global frontier), there is also the need to ensure greater resource reallocation towards more productive firms. As Andrews et al. (op. cit., p. 97) argue: 

If small firms are (on average) old, this might reflect barriers to post-entry growth and weak market selection mechanisms ... A key message is that creative destruction and up-or-out dynamics are central: entry matters but what happens next is crucial – all else equal, young firms should grow rapidly or exit (i.e. “up-or-out”) but not linger and become small-old firms. 

With respect to New Zealand, there does appear to be clear evidence that here are higher exit barriers (except for frontier firms where the wrong firms, with higher productivity, were exiting 2001–16) due in part to a lack of competition associated with an over emphasis on producing for small domestic markets.

One particularly depressing bit: the data from his study ended in 2016. Over the fifteen years covered, "only mining saw a substantive upward trend in the frontier." 

Which part of mining? 

"In mining, being located in the rest of the lower North Island provides a nearly 11% greater probability (cet. par.) of belonging to the frontier in this sector (reflecting the gas and oil sector that is predominantly located in the Taranaki region." 

Tarankai's oil and gas industry was speeding ahead of the rest of the sector, and ahead of every other sector. 

Of course, that kind of behaviour cannot long be tolerated around here. 

Renting sucks

 Leigh-Marama McLachlan notes one of the bizarre things about renting in New Zealand.

After encouraging me not to stress about inspections, my new property manager hit me w/ a breach of tenancy for a dirty mirror in my room (boys sticky hand marks) and vacuuming (small part in toy room) and wiping down kitchen cupboards. The house was bloody clean. Ridiculous.

— Leigh-Marama McLachlan (@leighmarama) October 31, 2020

Landlords here do 3-monthly inspections, and they can be rather a bit more invasive than anything you'd be used to if you've lived in North America.

It's worth thinking about why things are like this. The knee-jerk reaction is to want to ban it; I'm more interested in why this happens. Banning symptoms tends not to fix problems. 

Some potential explanations:

1. New Zealand houses are of worse quality than those overseas. Without constant vigilance, they turn to mold and rot. Owners have incentive to monitor and make those investments; renters do not.
   1. This could be part of it, but does that really require visits every three months? And while checking that vacuuming and the like is done might be a way of getting a signal on tenant type and whether less noticeable things are being done, it does seem more than a little over the top. Couldn't a landlord do better by easing back the intrusiveness as they get a better sense of tenant type?
2. Perhaps it's harder to evict a problem tenant in NZ, so running processes that are guaranteed to provide a pretext if needed can have value.
   1. Again, perhaps part of it, but still seems to be overkill.
3. Insurers require regular inspection of rental properties
   1. Sure, but nothing requires that the inspections be crazy over-the-top, right?
   2. And this just pushes the problem back a level: why do insurers require this?
4. More small-time landlords here, so each investment property is likely to be a much larger fraction of the landlord's wealth.
1. If you're a shareholder in a firm that owns hundreds of rental properties, that firm will exercise due diligence over all of them but any tenancy-gone-wrong is hardly world-ending. If you own one rental property that is a substantial part of your wealth, a tenancy-gone-wrong can be a catastrophe.
2. While I find this plausible, it doesn't explain why insurers would require it as part of landlord cover. The insurers would be diversified, and they still demand it, so there has to be something else going on as well.
5. Property management companies expect to be sued by the owner if they're not hyper-vigilant and something goes wrong, so they go over-the-top.
1. Much of this remains question-begging: why don't they then strike better contracts with the owners? Why would owners prefer contracts like this to ones that might let them charge tenants a bit more in money rent rather than in hassle-rent?

The fundamental underlying problem I think is still the massive shortage of housing. 

In a housing shortage, landlords can extract higher rents. And in a rental rationing equilibrium, that won't just be on money rents. 

Were we in a land of plenty, landlords would have to compete harder to get tenants. An insurer that didn't require 3-monthly inspections would outcompete others because landlords who wanted decent tenants would want to offer something that felt less like prison cell inspections. You could still have problems with (4), but worse landlords would be competed out, and those landlords would do better by selling their properties to those who could rent them out more efficiently. 

Peter Pinter and central banking

Neil Gaiman had an excellent short story, published back in 1989, imagining some of the dangers of a determined bargain-seeker. Peter Pinter just couldn't refuse a good deal. And when he found that the assassin he'd hired offered bulk rates that didn't just reduce the per-person cost for a large contract but also the total cost, well, who could say no?

The story was made into a short film.

"We only had to be asked, Mr Pinter. We always have to be asked."

In our Friday Insights newsletter, I used our third column to think about the dystopias that can emerge where an ambitious central bank and SuperFund find that money is free. That last line from Gaiman was in my head when I was writing it. 

THE NEW ZEALAND WORLD ORDER

It all finally started coming together in the 2021 Budget. The pieces existed before it, but nobody had put them together. When they did, Pax Zealandia followed.

Borrowing to invest in the New Zealand SuperFund was nothing new. But while money was cheap, the Government hadn’t seriously leveraged up to make stock market plays. Bernard Hickey screamed from the sidelines that the Government should borrow far more. But even his thinking was blinkered by prevailing orthodoxies.

And SuperFund investments were previously used, in limited ways, to advance Government objectives. During the Christchurch Call, the fund had coordinated with other investment vehicles. But ambitions remained too limited.

Once the Government realised that borrowing was effectively free, that debt-to-GDP ratios were passé and that it could exercise ownership rights through the SuperFund to advance state aims – well, things started getting interesting. The Government could print and borrow near-infinite money, put it into the SuperFund and buy all the things.

The world’s airlines were dirt cheap. A controlling interest in every publicly-traded international carrier was chump-change. It cost less than $40 billion, or about 12% of GDP. The Government’s high-value tourism policy was the end of economy-class tourist fares to New Zealand.

The US dairy compacts always lobbied against free trade deals. Buying them out simplified an agreement with President Biden. But the second American Civil War made the trade deal futile.

Gross debt-to-GDP really blew out on buying Google, but net debt-to-GDP was fine. A substantial asset offset the debt. Legions of Kiwi censors suppressed unkind search results, and the world was a happier place.

That led to a series of leveraged state takeovers ushering in the new and better global order we all now enjoy. The SuperFund bought whole countries. After installing Kiwi administrators and fixing the worst of those countries’ problems, it sold them back to the residents at a profit. Turkey was the first after its regime imploded. But others were snapped up, including the salvageable bits of the former United States.

The exact moment it started is a small ironic footnote in the history books. Some columnist teased the Government that if it was such a great idea to borrow more than half a percent of GDP in a pandemic to make leveraged plays on the stock markets, then borrowing 50% could be even better. And, for once, the Government listened.



If you would like to stay in the loop about our research and our public events, please feel free to sign up to our weekly Insights newsletter.

Doesn't take long for folks to take bad ideas too seriously these days though.  Here's Brian Gaynor in BusinessDesk on Saturday, in an article titled "Spending huge to save us all", with one idea that's apparently been making the rounds:

The Reserve Bank could merge with the NZ Superannuation Fund, which was run by Adrian Orr before he moved to the central bank. This would be an innovative move in unprecedented times with a Reserve Bank/NZ Super Fund merger having much more going for it than the Orr connection. The two organisations are Crown-owned; NZ Super has no debt while the Reserve Bank is highly leveraged. With the current Reserve Bank Governor in the driving seat, the merged group could be incredibly innovative.

We only had to be asked, Mr Robertson. We always have to be asked.  

Managing the commons: DoC photography edition

It isn't hard to imagine that the Department of Conservation might have good reason to want to know whether a big film crew, for example, might be spending a few weeks trampling part of the Estate. There are places that might have endangered plants that need to be protected. Or nesting sites. 

But this seems a bit nuts. 

DOC requires photographers for news organisations to get permits to take pictures on public land, but other photographers are okay.

Nope, it doesn’t make sense to me either. And I’m worried about media freedom. https://t.co/rG1eK4nivU

— RebekahWh (@RebekahWh) October 29, 2020

From the article:

A third of the country might be off-limits to camera-wielding media who don’t have an official escort or permission, if a Department of Conservation policy is rigorously enforced.

DoC introduced a mainstream media permit in November 2018, requiring media to get permission for filming, including taking photographs, on public conservation land. It’s been applied haphazardly since, and is only now being enforced.

(The department told New Zealand Geographic magazine a few weeks ago that journalists would need a permit, too, but it subsequently reversed that position.)

Media outlets have expressed surprise and disappointment at the requirement. In a letter to the department, the Media Freedom Committee called it “an unnecessary impediment to legitimate news-gathering activities on the conservation estate”.

...

Such a draconian requirement throws up weighty issues about the role of the media, and the ability of a Government department to restrict its access to public land when the public interest is at stake. It’s also worth considering how the policy might be wielded by over-zealous managers.

(An example might be DoC’s pursuit of a Japanese photographer last year for using his hobby photos in a self-published book.)

Two magazine editors express their desire to work with DoC, but have been left scratching their heads, wondering, in exasperation, what problem will be solved by the permits.

Mike Dickison weighs in:

Wikipedia consultant Mike Dickison wants to be constructive, and to have a good working relationship with the department. He’s just spent six weeks on the South Island’s West Coast, in the employ of the regional development agency, taking photos – including in national parks – and uploading them to Wikimedia Commons under an open licence, for any use.

(“Have I done a bad thing,” he asks, “by taking photos that the media can now use without anyone asking for a concession or permission?”)

Dickison says DoC’s concessions were created to stop people profiting off conservation land – “to stop businesses setting up, you know, hot dog stands in national parks”.

“And now we’re extending it to the activities of the media, who are doing no harm to the national parks. It puzzles me as to how this is justified.”

Why the hate for hotdog stands? I don't think I have ever been anywhere and thought "Man, I'm really glad that there isn't a hotdog stand here", but I have frequently wished that there were a hotdog stand.

The policy, as practiced, makes little sense. 

Problems in credible commitment

If you can credibly commit to punishing, you won't have to do it. If you can't, then you'll have to, but you won't be able to, and that'll be a problem. 

A couple of weeks ago, Newsroom reported on problems in state housing. The state housing provider, Kainga Ora, has had to spend about $300k on security guards during Auckland's lockdown. Why? Because they don't know how to deal with part of the cross-section that shows up in state housing.

For the real reason, on top of a violent home invasion linked to the complex shortly after tenants moved in, an email trail in a follow-up official information request is more compelling: a dispute stretching months between neighbours and the agency over general behaviour - in particular, one tenant and her visitors.

And not just neighbours either. Other state tenants, looking for peace and quiet in pleasant new homes, were as upset as anyone by late night noise, rowdy visitors, partying, drunkenness, abusive behaviour, lockdown breaches and suspicions of criminal behaviour.

With the gate excuse quietly shoved aside, the corporation was more candid in its second attempt to explain the security presence at Asquith Ave: “Security guards have been deployed at this site to mitigate anti-social behaviour. The primary focus is to provide for the safety and security of vulnerable tenants.”

The email trail identified one “risk related” tenant among “many vulnerable” others and indicated problems had been drifting on for months.

Which begged the question asked by neighbours: why not move her, and any other irresponsible and anti-social tenants, and let the problems go with them?

It took until mid-September before Kainga Ora apparently decided enough was enough and the problem tenant was shifted – presumably to cause friction elsewhere. One suburb’s solution becomes another’s headache.

You'd think good behaviour would be part of the quid pro quo in being given a home by the state. 

If the state could credibly commit to excluding antisocial jerks from state housing, behaviour among some of those tenants would change. But the state cannot do so. The person who made the neighbours' lives miserable would have a made-to-be-compelling sob story to provide to newsmedia on being evicted with nowhere else to go. There would be demands that a house be found, especially if there were a child in the house. And so the state doesn't exclude.

I wonder whether an alternative mechanism might be helpful. You could imagine Kainga Ora setting the equivalent of a body corporate for residents in the development, and that governance body having the ability to evict a resident on secret ballot of neighbours. If someone were then so evicted, reporting on it would be different. Instead of getting sad stories from the person evicted, and a bureaucrat who can't say much because of privacy considerations, there'd have been some majority of neighbours who triggered the eviction. 

I'm not sure whether that could work either - there can presumably be all kinds of reprisal mechanisms and consequent difficulties in coordinating collective action. But the status quo holds a lot of vulnerable people hostage to the biggest jerks in the area. And it also helps ensure that state housing gets opposed by potential neighbours fearing that the state does a poor job in dealing with its problem tenants.