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.

Can't please 'em all

Treasury took a bit of flack for its very sensible advice to the government on school breakfast programmes.

Treasury rightly noted that evidence for effects of these kinds of programmes on educational outcomes is very weak, that it's hard to even show that they increase the proportion of kids who report having had breakfast, and that money could be better spent.

The main NZ study on the topic concluded that school breakfast programmes had no effects on any outcome other than the child's self-reported satiety: how hungry they reported being when surveyed. The study also found substantial shifts from eating breakfast at home to eating breakfast at school. If you shift breakfast to an hour or so later in the morning when kids eat at school instead of earlier at home, you're going to affect how hungry the kid reports being when questioned before lunch. Treasury didn't note this part of the study's result in its briefing to the government, likely because you can't tell whether there was even really any effect there other than a timing effect. And so we got this:
No Right Turn said Treasury was cherry-picking by failing to report that schools with breakfast programmes reported reduced hunger among children surveyed later on. I suppose that could have been cherry picking if any of the debate around it at the time had been on "what policies reduce reported hunger when kids are asked sometime before lunch". Alternative policies could then have been encouraging kids to bring snacks to eat at 10:30. Most of the argument had been around that breakfast programmes would lift student achievement in low-decile schools. The Ni Mhurchu et al study suggested no great shakes on that front, and neither did a reasonable look at the remaining literature.

The overall review of the literature and options seemed pretty reasonable; organisations like Treasury will take flack whenever they make assessments where the evidence doesn't stack up for whatever policy option feels good. I suppose people don't go for jobs at Treasury to be loved, although the "living standards" policy framework does suggest that some there are aiming at a friendlier packaging.

Monday, 20 October 2014

What's wrong with caveat emptor?

This was the kind of thing I was worried about when the new food safety bill came in:
Tourists flock to her [Biddie Fraser-Davies] 4.4-hectare farm 20 minutes north of Masterton to enjoy a unique, gate-to-plate culinary and farming experience. Each of her cheeses bears the name of the jersey cow whose milk was used to make it.
But earlier this month a letter from a ministry food safety official told her she had until November 1 to get a $3680 risk management audit, or be forced to close.
That sum amounts to about a ninth of her annual turnover from a business that produces less than a tonne of cheese a year and earns her about $33,000.
Her problems began with an appearance on TV's Country Calendar in 2009, after which government food safety inspectors visited. She said they found her hygiene and equipment were faultless, but still told her she would be closed down unless she developed an approved risk management plan and swallowed a big rise in her compliance costs.
The regime, as I understand it, scales rigour to risk so that lower risk products have fairly small compliance costs. But high fixed costs on things like cheese risks killing off small producers.

Recall that, in 2012, then-Minister Kate Wilkinson said:
The cheese that's produced from three cows or three thousand cows is still expected to be safe. ... We want the Biddies [cheese-maker Biddy Fraser-Davies] of this world to keep producing fantastic cheeses, but we also want that cheese to be safe.
Why shouldn't Biddie Fraser-Davies be able to put a big sign up outside her shop saying that her cheese is produced without an approved risk management plan and that caveat emptor applies? Who's the we in Wilkinson's statement? If it's the people buying the cheese, they should be able to judge for themselves. If it's people who don't buy the cheese, why do they get a say?

I can understand worries about industry-reputation effects if there's botulism or something in one small producer's batch. But are those effects likely to be substantial where things are sold with an explicit caveat emptor sticker?

UPDATE: I had wrongly assumed that Biddie was being chased under the new Food Act. The Food Act, passed in the last Parliament, was meant to stop some of this nonsense for small-scale operators. But Donald, in comments, usefully notes that she's being chased under the old Food Act as the new 2014 Food Act doesn't come into force for some time yet. And so there is no particular inconsistency between the former Minister's having said she wanted Biddie to be able to continue making cheese under the new Act, and that she's currently being chased. It's a bit odd that none of the officials quoted pointed to the forthcoming changes that might ease things up for those in her situation.

Friday, 17 October 2014

Wellington bleg: good high schools for music

The staggered move of Offsetting Behaviour to Wellington will soon be completed. I will be following Eric to the capital having taken a position at the School of Government at Victoria University, starting in the new year.

When Eric was about to make his move, he blegged on real estate in Wellington. I shall free load off the intelligence that he gathered then, but now I have a different request: What are the good high schools for children with a strong interest in classical (orchestral) music? Considerations here are whether they have music options as a classroom subject that group together people who already know how to read music and have the rudiments of theory, and whether they have school ensembles (not necessarily an orchestra) of a reasonable standard. We have a preference for co-ed over single-sex and state over private, but are looking at all options. All suggestions welcome.

Thursday, 16 October 2014

Inequality narrative-buster

It's been pretty clear that income inequality in New Zealand has been stagnant for at least the last decade or two. It rose in the late 80s and early 90s, but nothing much has happened since then.

And whenever I point it out on Twitter, against assertions from others that income inequality is worsening, I get replies that the problem isn't income inequality but wealth inequality. I hadn't seen great data on wealth inequality, so I couldn't much comment. But we have some data on wealth growth and median wealth growth now from Credit Suisse. Everyone should read the report. Here are the important bits for the New Zealand debates.

First, New Zealand is far wealthier now than it was in 2000. Per-adult wealth is up by over 300% (a 100% increase is a doubling, a 200% increase is a tripling, a 300% increase is a quadrupling) over the period, when we evaluate wealth at current exchange rates: a high dollar means we are wealthier, no matter how much some groups want to make us poorer by devaluing the dollar. When we use constant exchange rates instead, wealth has more than doubled (the yellowish line).

Per-adult measures, which I interpret as meaning an average, can be a problem though: what if all of that is because of massive gains at the top? We need medians. Medians are below.

This is the one using current exchange rates rather than constant ones, so growth is overstated relative to constant exchange rates. Note that here the base year is 100, so our being nearly at 500 means a near quintupling of median wealth. Now it would be lower were we using constant dollars, but we can compare the current dollar mean rise with the current dollar median rise. If gains were accruing at the top, we'd see larger increases in means than in medians. If they were accruing at the bottom, we'd see bigger gains in medians than in means. And it looks rather like larger gains in medians. 

This is then confirmed when we get out to Table 1, which lists New Zealand as a "Medium wealth inequality" country, along with Australia, Canada, Finland, France, Greece, Ireland, Italy, the Netherlands, Portugal, Singapore, Spain and the UK. I note that Denmark, Norway and Sweden rank as having higher wealth inequality than New Zealand.

The report then discusses trends in wealth shares of the top decile, by country, from 2000 through 2014. Their data doesn't go back to the 80s and 90s, unfortunately. But over this period, New Zealand ranks as one of the countries experiencing a significant reduction in wealth inequality over the period. Their measure is the share of national wealth held by the top 10%. In 2000, the top 10% owned 62.3% of the wealth in New Zealand. This placed New Zealand as 19th out of 46: the top 10% had a smaller share of national wealth than was seen in the median country in the survey (19th lowest). 

In 2007, the top decile owned 61.2% of the wealth; wealth inequality dropped slightly from 2000 to 2007. In that year, New Zealand had the 22nd lowest wealth inequality - about the median. In 2014, the top 10% owned only 57% of the wealth in New Zealand: a substantial fall. In 2014, we had the 12th lowest wealth inequality. 

So, according to the Credit Suisse report:
  • Wealth inequality in New Zealand is lower than in most other countries in their survey;
  • Wealth inequality in New Zealand has been falling from 2000 through 2014, with the biggest drop concentrated in the period from 2007 to 2014;
  • Low wealth inequality isn't necessarily a great thing: while Australia, Belgium, and the Netherlands had less wealth inequality than did New Zealand in 2014, so too did Spain, Greece and Italy. 
Please update your narratives accordingly. 

Wednesday, 15 October 2014


Last year, Gosplan* wouldn't let the Copthorne Hotel rebuild because they couldn't decide whether or not the Arts precinct designation they imposed on the area was consistent with the existence of hotels.

And now, somehow, there's a problem in hotel room availability.

Delays in getting hotels re-opened could leave Christchurch facing a bed shortage when the Cricket World Cup opens in the city in February.

... New Zealand Hotel Council regional chairman Bruce Garrett said February was the busiest month of the year for hotels, with occupancy typically running at around 90 per cent, so there was little capacity to absorb the additional demand for beds created by the Cricket World Cup.

The number of hotels operating in the city was fewer than expected by this point in the city's recovery and accommodation was going to be at a premium.

"There's a number of projects on the go that will add another few hundred rooms but they are not going to be ready on time," Garrett said.

Visitors coming to Christchurch in February would probably have to stay in backpackers or motels rather than hotels if they had not yet booked a bed for the night, or fly in just for the day.
The number of hotels operating in the city is fewer than expected by this point in the recovery. There could be a few reasons for that. Dithering over the site for a convention centre and blocking hotels from rebuilding because of grand precinct visions might be near the top of the list.

* Central Christchurch Development Agency.