Friday, 31 October 2014


The NBR last week featured New Zealand's economic research outfits. We're a pretty diverse group. The New Zealand Initiative conforms most closely to the classic think-tank model, albeit one funded by member subscriptions, while others, both for-profit and not-for-profit, do a mix of commissioned work and a bit of public interest work. The NBR's Jaime Ball writes:
If the idiom is true that “he who pays the piper calls the tune,” could it be that most economic research institutes in New Zealand are leading the rest of us on a merry dance?
The lion’s share of research stems from work commissioned, or paid for, by such persuasive pipers: the public and private sector client.
His description of the different players seemed about right, though he mostly lets the different organisations tell their own stories.

Oliver punted Jaime over to me on the question of whether there are problems in commissioned numbers in New Zealand public policy debate. I pointed him to the examples of the old PWC report on adult and continuing education, where they got a big number on the social benefits of adult and continuing education by assuming that taking a night course in cooking halves your risk of committing any crime. I also pointed to BERL's work on the social cost of alcohol.

Ball's article today hit that topic.
“I’ve seen a few really shonky kind of studies,” New Zealand Institute Initiative’s head of research Dr Eric Crampton says of his 11 years in New Zealand. [EC's edit]
“I think the main problem that we have is in defining who the ultimate consumer of these numbers is.
“So the commissioning agency in some case might not want to know the real number. They might just want to have a number that can show up on the headlines for a few days and put it into the public debate around the time some policy is being decided upon.”
Dr Crampton says this country has got a problem in that it has fairly thin markets.
“There isn’t that many people who will go in and take a look at how these things are constructed and offer a critique of them. We also have a problem where in small markets people can be a little bit reluctant to critique other people’s numbers, because there would be turnabout.”
The article's headline, "When Research Goes Wrong: Handbags Fly Five Years Later" doesn't give quite the right impression. I was asked about whether there are problems with commissioned figures; I pointed to some, and not just BERL's. All fun though.

Nana rehashed his standard defense of the report.

Thursday, 30 October 2014

Ladies and Gentlemen, the Party of evidence-based science.

The Greens like to claim the mantle of evidence-based science, and especially around climate change.

I knew that they veered away from science on GMOs and instead into the fearmongering realms, and tried to square things with handwaving about the science not being settled and that mandatory consumer labelling was all about consumer choice, but it was always a bit nonsensical. I think some of the anti-fluoridation movement came from there too.

Green MP Steffan Browning's endorsement of homeopathy for Ebola in Africa was more than a bit over the top though. I'd last night seen a webpage advocating homeopathy for Ebola - pretty terrible. The last thing that anybody should want are idiots going around pandemic zones, claiming to be doctors and looking like doctors, but advocating absolute nonsense. There are massive potential reputational externality problems here in which people stop listening to real doctors because they can't tell the difference. Well, that plus the people they'd kill directly.

Matt Nolan keeps wishing for a sane version of the Green Party. One that ditched this kind of garbage and focused on market-based or market-friendly solutions to environmental problems, like carbon pricing, water allocation markets for irrigation, effluent pricing or permitting, congestion charging and the like, without the other baggage.

How insane do the crazy parts of the Green Party have to be before it finally splits or before rational environmentalists start their own party? It's basically the old Alliance Party currently: the amalgam of environmentalists, including a few rational folks, and social justice / conspiracy theory / anti-corporate naturopathic oddballs.

Maybe we need to start with a public information campaign on homeopathic voting. The smaller the mark you put on the ballot, the more powerful it really is. In fact, if you can't even see the mark with the naked eye, it counts for like 50 votes. The vote counting machine knows the strength of your vote by its dilution. Very very lightly bring the marker close to the voting paper, but don't touch it. The memory of the marker ink will be in the circle.

Update: I note that others in the Greens have now clarified that they do not support homeopathy as it is not evidence-based. Good news.

Tuesday, 28 October 2014

Afternoon roundup

Stories hitting today's mark:
  • Can't it be both? NZTA shut down a website offering $20 sober driver services via Facebook. Apparently it's cool to catch a ride with anybody you meet at the bar, but if you want to charge $20 for it, it's illegal because safety. Anyway, taxi driver David Buckingham comments "People thought [closing the page] was anti-competition. The reality is that actually it's pro-safety.". Sounds like the great "More taste" vs "less filling" debates of the 1980s. It's definitely anti-competitive. And maybe it's pro-safety, if people catch a ride in a cab as alternative. If they drive home drunk or catch a ride with a random stranger they met at the pub, perhaps less so. The "More taste" part of the older debate was always pretty dubious too.

  • James Moore points to one part of Christchurch's continued insanity: the SimCity precincts
    Last month's revelation that the Government - which appears to have taken over the project from the Christchurch City Council for reasons unexplained - is lobbying cinema operators for an on-site art- house cinema appeared to reveal a mood of increasing desperation and unreality.
    Not only would such a development place pressure on what is a confined site, it fails to recognise that when the neighbouring Isaac Theatre Royal reopens next month, it will contain state of the art cinema facilities.
    Two film theatres within yards of each other? Oh please.
    With no firm indications about The Court Theatre's possible return to the precinct and criticisms about the proposed rentals in the music building, the performing arts precinct in its existing form is flopping around the stage like an ageing ballerina attempting a final performance of The Dying Swan.
    Indeed. If investors want to run a second cinema near an existing one, I'd be the last person to complain. But where the government's lobbying them to do it... I'm glad I left. Too much of Christchurch is still the Inside of the Asylum. 

  • The University of Canterbury continues to be gifted wonderful headlines about on-campus racism. There really isn't anything new in the story but for this excellent photo of James Graham from 2007, which I'm sure somebody somewhere will somehow find offensive.

Finding my religion

I've just had a religious epiphany. It happened over the weekend, after reading Rodney Hide's excellent NBR column.* I spent the weekend thinking about it. I've come to realise the following:

  • Neckties are religiously offensive, or at least are offensive for me to wear. They represent the time my people were in bondage and had to wear neck chains. I'm sure I have ancestry somewhere who were at some point enslaved; it harms the spirit of those ancestors that I wear a tie.
  • The Power of Evolutionary Biology Compels Us. Things are enjoyable, or comfortable, because they are fundamentally in keeping with that which nature and evolution have prepared us for. Foods are tasty because 30,000 generations on the Pleistocene savannah can't be wrong. That which is unenjoyable, or uncomfortable, violates the spirit of the evolutionary process that made us human. Consequently, I cannot wear a suit jacket, long-sleeved shirt, or long pants, in the summertime. They are perfectly comfortable in the winter. But when it is warmer than 20 degrees, it is religiously offensive to wear clothing more constraining than shorts and a loose-fitting short-sleeved shirt. They can be business-appropriate shorts and shirt, but they must be shorts and a short-sleeved shirt.
  • Art and music are an important part of what make us human; read Denis Dutton. Sufficient at-work bandwidth to allow streaming of Spotify, and accommodation of my religiously required Edifier speakers, is also important.
  • I am still pondering to what extent my religious beliefs require accommodation of flexible work hours. They took naps in the Pleistocene, right?
I'm sure that Oliver will have no problem in accommodating my newly discovered, but earnestly held, religious beliefs. 

Update: Simpsons Did It. (I actually cited the Feast of Maximum Occupancy in this morning's meeting as one of the days off I'll now be requiring.)

* The article is gated. Hide details the case of a satellite TV installation company where an employee, who signed a contract to work on Saturdays installing satellite dishes, joined the Seventh Day Adventists and declined to work on Saturdays. The court awarded him lost wages and sent the managers who fired him to human rights training. I'd normally say this kind of thing jeopardises our "Outside of the Asylum" status, but if it lets me wear shorts in summertime....

Monday, 27 October 2014

Tax on Tax

I'm not a fan of taxes, but GST should be levied on top of other taxes where those taxes are levied to cover service costs. Maybe it's a tax on a tax, but that's not self-evidently bad.

Suppose that there are some goods that could be provided by City Council, but aren't necessarily best provided by Council. For instance, mowing the lawn on the verge in front of your house. Pretty simple for you to do it yourself while you're mowing everything else, but there are also some efficiencies in just having the Council mower go over it. Some places provide verge-mowing; others leave it to homeowners. If you're a homeowner paying somebody to mow your verge, you pay GST on the service. If the Council mows the verges, you pay for it in your rates; there's GST levied on top of your rates. There's then no tax advantage to Council-provided services over privately provided services.

If instead there were no GST levied on rates, there would be a set of services currently best provided by the private sector that would flip into being Council-provided because of Council's tax advantage.

Petrol levies cover road maintenance and construction, at least in part; the service should be taxed. Excise levies are meant to defray some kind of external cost associated with consumption of excised goods; those costs should also be subject to GST. Sure, we're then heavily over-paying on tobacco, where tobacco excise is multiples of tobacco's cost to the Ministry of Health, but that's a problem with the excise rate, not with the GST. You also don't get the GST back on the amount by which you overpay for something at auction.

Friday, 24 October 2014

Things that make me want to get citizenship here...

I haven't yet gotten around to upgrading from Permanent Residence to Citizenship in New Zealand.

This kind of thing does make it tempting.

New Zealand still does not have an armed constabulary. The police, some of them, have a gun in the trunk of the car that they can get if they really need it. But otherwise they're unarmed.

That doesn't stop their agitating to be armed. The head of the police union, Greg O'Connor, keeps demanding it. The attack on the Canadian Parliament helped spark his union's latest demand that the police regularly be armed.

Here's the New Zealand Police Commissioner's response:
The Police Commissioner said calls from the Police Association to arm all officers are not backed up by evidence which shows assaults on staff are falling, along with crime.
Commissioner Mike Bush said arming the police would change the police's relationship with the public beyond repair.
He said it was incorrect to say that the Police Association was talking on behalf of all police staff.
Darned proud of that folks stand up to the likes of Greg O'Connor here, in the Outside of the Asylum.

Update: here's more complete comments from Police Commissioner Mike Bush.
But Mr Bush says officers already have firearms readily available to them if they need to use them, and arming the force would be "quite a different style" of policing.
"I'm sure the majority of New Zealanders don't want to change the relationship they have with the New Zealand police," he told Radio NZ.
"We're a very prevention-focused organisation. Yes, we need to respond when people need it and we believe we've given [officers] the tools, the equipment and the training to do absolutely that."
Mr Bush says assaults on police had declined in the past few years and the use of available firearms – the bushmaster, glock and Taser – accounted for about 5 percent of total use of "tactical options".

Thursday, 23 October 2014

The Status of the Status Quo, NIMBY edition

Can we ever change the status quo and know that we've not done harm?

I had an interesting Twitter exchange with David Seymour and Jim Rose the other night. I'd characterised Epsom as a millstone for any aspiring liberal party in New Zealand. Epsom voters, or at least enough of them, strongly oppose that any of their neighbours be allowed to build anything anywhere: no subdivision, no townhouses, no apartments. Seymour's maiden speech, which I otherwise generally liked, included this bit:
Our communities are leafy and our schools prestigious. If people want more Epsom the answer should be to create more Epsom. More good schools, more good suburbs.
But the opposition would cram more people into smaller denser dwellings, changing the character of our communities and putting intolerable pressure on burgeoning school zones.
I totally support building more suburbs. But you cannot build more Epsom where an essential part of it is location: close to amenities and downtown. The only way of having more Epsom is building more in Epsom.

Maybe some parts of Labour or the Greens would support approaches that would force densification by banning development on the outskirts of town, but simply allowing property owners to decide how to use their land isn't cramming more people in, or at least not beyond that which those residents would voluntarily choose. A neighbour down the road putting up a townhouse does not force you to cram more people into your house. And neither does an apartment two blocks over. And while there can be pressure then on local schools, the better response is to expand the schools. It's not like Epsom voters own or pay for the schools: schools are covered out of everybody's income taxes and GST, not just current Zone residents' taxes.

In the later Twitter chats, David re-emphasised that neighbours do have a property right in each other's land use, and that Coase could solve.
I agree with David that, because our consenting processes give many many people veto rights over others' developments, or at least the right to impose hassle and cost on anybody wishing to develop, there are de facto property rights in others' land use. That's one reason that it's important to find ways of paying off the losers to encourage that change can happen. But I'm very pessimistic that Coasean solutions can obtain where the starting point is that just about anyone can deem themselves to be an affected party and object to a change in land use.

Coase makes the important point that externalities are two-sided and that the efficient solution can obtain where parties can negotiate: whether I have the right to subdivide, or my neighbour has the right to block me, we'll get to the efficient solution either way so long as property rights are clear and we can bargain reasonably. If my subdivision annoys my neighbour more than it benefits me, then either he'll block my subdivision attempt if he has the right to do so, or he'll pay me to not subdivide if he doesn't.

These Coasean solutions are limited by the extent of transaction costs. When transactions costs are high, the allocation of default rights matters. Suppose that my subdivision is worth $1000 to me and annoys each of 10 neighbours by $150. If my neighbours cannot easily get together to pay me to not subdivide, then I subdivide if I have the right to subdivide, and I don't if they have the right to block me. Default rights then matter. Conversely, if my subdivision is worth $2000 to me and annoys each of my 10 neighbours by $150, they will block me, if they have the right to, unless I find some way of transferring at least $150 to each of them.

In the higher transaction cost case, we aim to set the property rights such that the nuisance is avoided at lowest cost. Is it simpler for affected neighbours to get together and negotiate a package to pay someone not to develop, or for the would-be developer to find all of the potentially affected neighbours and negotiate a package deal with them to let him develop?

If the number of affected neighbours is fixed rather than variable, then the solution on either side very likely involves option contracts or dominant assurance contracts. Consider the case listed above, where the development is worth $1000 to the developer and aggregate nuisance is $1500. In that case, if the developer has the right to develop, one affected neighbour could write the following contract:
I agree to pay $130 into a common pool to pay the guy down the road to put a covenant on his house against further subdivision, but only if each of the 10 affected neighbours, including me, signs onto the deal. If we don't all sign on, then the deal doesn't go ahead.
That's called an assurance contract. And if we worry about free-riding, we can use a dominant assurance contract: the most aggrieved neighbour (say a guy who experiences costs of $200 instead of $150) agrees to pay each of the others $5 to sign the assurance contract.  Everybody signs, then they buy the covenant restriction on the neighbour, and the inefficient development is stopped.

Flip is around now to have an efficient development but veto rights being held by the 10 neighbours. I would use an option contract in that case: go around to each of the 10 neighbours and offer them the following contract:
I will pay you $5, right now, if you promise not veto my subdivision. If I do subdivide, I will pay you an additional $160. If I do not wind up subdividing, you get to keep the $5 for having signed on.
Each neighbour is paid more than the cost of the development to him and gets a $5 signing bonus. Hooray! We get the efficient solution. There are transaction-cost reducing contractual forms.

Unfortunately, the mess is more intractable than that. We do not have a fixed pool of potential veto players. Any number of heritage advocacy groups could emerge to object, for instance, and they don't even have to be based in the local community. The emergence of veto players is then endogenous to the expected returns from objecting. In other words, if you expect that somebody might pay you off for not blocking, then you might just get people getting into the blocking business. We can also imagine endogenous entry into the subdividing business: if I just saw my neighbours pool together a pile of money to block the guy down the road from subdividing, I might start making noises about wanting to subdivide in order to extract similar payments, even if I had no interest in subdividing.

In that case, and if we follow a Coasean logic, we set the rights to minimise this kind of entry. Part of the solution is limiting the number of persons with legal standing to object, but that begs the question when the matter at hand is who should have the property rights. It is cheap and easy to object to things: entry into the objecting business is simple. Making credible threats of subdividing or putting up an apartment building are harder. You need to get a whole pile of planning documents together, get architectural plans for the new buildings, start the building consent process. It's far more expensive to get into the building-as-rent-extraction business than to get into the blocking-as-rent-extraction business. And so the default rights should lie with the property owner.

We also have the very serious problem, where entry is endogenous, of potential over-extraction. The assurance contract set-up, and especially the dominant assurance contract set-up, avoided that by getting ex ante agreement among the affected parties on the scale of the request. If you shift to individual one-by-one negotiated payments to each of the veto players, because more veto players can emerge endogenously, you risk that the sum of the extraction requests exceeds the value of the development project, even if the real costs of the project are less than the benefits: each party over-plays his hand and sinks the bargain.

I consequently argue that the Coasean logic points pretty strongly towards a right to develop rather than a right to block. I however agree with David that the status quo is otherwise. And so we then come to the status of the status quo.

When I argue against Canadian dairy subsidies, I suggest that we need to pay off the losers to make it happen. This isn't because I have inordinate sympathy for Canadian dairy farmers who have effectively stolen from Canadian children for decades: the value of their dairy permits is really the capitalised value of annual theft. It is because I recognise that you can't manage it unless you pay off the losers.

James Buchanan made a similar point in his classic The Status of the Status Quo.

Buchanan says the only norm is agreement; we can't use an efficiency norm. And the only way of getting agreement is to compensate the losers, turning Kaldor-Hicks moves into Pareto moves. In Buchanan's framework, the positive economist begins by identifying things that look inefficient, then moves into thinking about compensation frameworks that allow change to happen.

While economists may well look to compensation regimes for buying out Canadian dairy farmers, or owners of taxicab medallions, it would be rather perverse for economists, or classical liberal non-economists, to spend a lot of time decrying any attempt to liberalise agriculture, or taxicabs, or housing, because of the implicit assault on de facto property rights. If the justice system failed to prosecute theft under $1000 because of the transactions costs, then a technology change made it efficient to prosecute theft in the $500-$1000 range, we would not spend a lot of time bemoaning the de facto right that thieves held in theft under $1000. If thieves were sufficiently politically powerful that we had to pay them off to make the change, we could recommend that, but we'd hardly spend all the lead-up time working to strengthen the thieves' bargaining position in the later political negotiations.

Buchanan takes a principled epistemic position here:
The Pareto construction may, of course, be translated directly into the Wicksellian approach (Wicksell, 1896) already outlined by making agreement the only test for determining whether or not any proposed change is Pareto superior. There may be normative properties of the set of compensations that might be required to secure agreement on proposed efficiency-enhancing shifts in constraints – normative properties that the observing political economist might, in some personalized way, abhor.
Straightforward "taking," as opposed to compensation aimed to secure agreement, may seem preferred, and especially if the positions in the status quo seem to be "ill-gotten." Nonetheless, a too-early or too-eager intrusion of external and independent value norms into the discussion will serve only to reduce the usefulness of the whole Wicksell–Pareto construction, which, as noted, remains value free save for the minimal normative weight assigned to the individualistic presupposition.
In this kind of case, we'd have no change to anything in Epsom unless we have the agreement of everybody in Epsom and every other potential veto player. But I caution that there would be zero case for any other change in this kind of world either: there will always be parties so intractable that you cannot compensate them for allowing the existence of partnership schools, mining on land they don't own but care about, or subdivision on land they wrongly believe to be critical for agriculture. There are no Pareto improving moves where we allow psychic costs to count; heck, some would object just for lulz. We need Buchanan and Stubblebine's framework instead, where we count actual willingness to pay rather than imagined harm.

But while that seems that it would allow for no change to anything anywhere, he de-privileges the status quo where the status quo policy emerged not from unanimous consent but rather from the operation of a majority coalition: the majority giveth the regulatory rent, the majority taketh away.
Return again to the rent-control example. If the initial legislation establishing rent control is considered to have been an unwarranted ‘‘taking’’ of potential value from acknowledged owners of property, the maximal compensation that might be offered to beneficiaries may be much below that required to secure agreement.
For any of several reasons, there seems to be a strong likelihood that the parties on the separate sides of any potential agreement will differ, and perhaps substantially, in their relative evaluations of the control claim. The current recipient of the housing subsidy may treat the claim as if protected by an operative property rule, whereas the prospective beneficiaries of abolition may reckon optimistically on electoral success, in part because they do not accept the claims to be legitimate. Both sides of the prospective debate about legislative action to remove existing controls may find it advantageous to invest resources in rent seeking – the occupant, to protect the value of her claim, and the prospective beneficiary of removal, to secure the promised return. The political economy of conflict replaces the political economy of consensus.
And what of the case in which abolition of height and density restrictions in Epsom would increase the value of land in Epsom, but reduce the cost of dwellings (each on a smaller footprint), and so enrich the current owners and benefit new residents? While it's frustrating, I still think we have to pay them off at the margin: they perceive themselves as aggrieved, and they're powerful enough to block things.

David is doing exactly what he needs to be doing as Epsom MP: enhancing the bargaining position of his voters in the later negotiations, so that when their illegitimate restrictions on others' land use are removed, a bunch of very wealthy people will be compensated with even more money for a policy move that will very likely make them wealthier even absent the compensation. But it's voters like these, in Epsom, that make me despair for the existence of a liberal party based there. Hard to say where would be better though; if it were based in the Coromandel, maybe it would care most of all about Coromandel people's right to block mining on other people's land even if there are zero real effects on them, because of the character of the Coromandel, and because they have a starting right that allows them to block.

The lefties have one part very right when they suggest that RMA reform should start in Epsom: why should the status quo be especially privileged in privileged places? I can't see how anybody can credibly stand on a platform of "Development for thee, but not for me". The better starting point is individual property rights, default presumptions of a right to build or to develop, and restrictions placed where there is evidence of real and substantial negative externalities. It's liberal, and it's right, and it's what moves the country forward: not just on housing, but on development more broadly.