Friday, 22 September 2017

Food prices

Whenever food prices go up in one of the quarterly surveys, cue the news stories on how bad it is that food prices went up. When food prices drop, crickets.

Anyway, Aaron Schiff's got a handy new tool out to provide a sense of perspective. It tracks the nominal prices of the different food items that StatsNZ tracks. Here's the nominal price of mild cheddar, going back rather a while.



Thursday, 21 September 2017

The election asylum

New Zealand is mostly the Outside of the Asylum. The rules around what you can and can't do on election day - not so much. Lots of things are banned.

Back in 2011, I'd written:
How about using clever special characters to tweet the binomial formulation of the voter's probability of decisiveness and thereby discouraged mathematicians' turnout? How about tweets pointing to George Smith's tracts against voting coupled with text saying "Don't read this, he's wrong"?

Would a blog post very neutrally specifying the mathematics of decisiveness under MMP implicitly be encouraging abstention and consequently be banned?

Is it possible that it's legal to phone your friends and offer a ride to the polling place while noting the merits of your preferred candidate, but illegal to post the same offer to a Facebook group of the same friends?

So many questions. But I'm far too cowardly to test things on Saturday. Pretty much anything I say on Saturday could be interpreted as being intended to encourage abstention, because I've a long track record of encouraging abstention.
And I remember when iPredict started worrying that allowing trading and consequent public prices on election day would breach the rules, and so froze trading on election day. If early on the morning of election day, one of the candidates were caught in an embarrassing situation with a goat that would likely affect the election results, you couldn't trade on it. If I remember right, they opened things up again when the polls closed.

Duncan over at The Spinoff has a great piece highlighting the absurdities.
The classic I-just-voted-here’s-me-looking-good-with-a-sticker selfie is allowed and encouraged. But don’t you dare say who you voted for. Voting is a private and shameful thing that legally we should all be ashamed of. So keep it to yourself or you’ll be getting a visit from your local social media police who are in fact the real police.

To summarise, don’t wear a mask of a politician’s face; don’t wear that Labour x Supreme collab tee that you kind of regret paying money for; and don’t write a status about why everyone should vote for Greens/TOP/National because this far into the election campaign, no one cares. Also all those things are illegal.

But you know what’s great? You can vote today if you want. And if you want, you can do any and all of the things listed above. In fact, you can do anything you want right up until 11:59pm on Friday 22nd September. What’s the difference between posting a political status at 11:59pm and posting one at midnight, you ask?

Like I said, it’s dumb.
Not part of the Outside of the Asylum.

Wednesday, 20 September 2017

The costs of policy uncertainty

From the latest issue of the American Economic Review (gated):
We examine the impact of policy uncertainty on trade, prices, and real income through firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China’s export boom to the United States following its 2001 WTO accession. We find the accession reduced the US threat of a trade war, which can account for over one-third of that export growth in the period 2000 – 2005. Reduced policy uncertainty lowered US prices and increased its consumers’ income by the equivalent of a 13-percentage-point permanent tariff decrease. These findings provide evidence of large effects of policy uncertainty on economic activity and the importance of agreements for reducing it.
Accession of China to the WTO gave China the same Most Favoured Nation status as other WTO members. That meant that the US could not impose trade punishments on China whenever it got mad about Chinese policy. The paper notes that the risk of this was high prior to WTO-accession as the House kept voting to remove China's MFN status post-Tienanmen.

They generate a variable on trade policy uncertainty to put into the gravity equations for trade. Trade policy uncertainty winds up mattering - folks don't want to sink investments into trade relationships if policy can wipe them out quickly.

Now think about the effects of government-induced policy uncertainty in the downtown Christchurch rebuild. Wellington focused on trying to provide certainty around demand in the Christchurch downtown and paid no attention to the uncertainty it was generating around supply and investment through its fiddling with precincts, what was allowed where, whether there would be a new convention centre (and when and where)...

Tuesday, 19 September 2017

Incomes and expenditures

There is a big known problem in New Zealand income and expenditure data. The big known problem is that incomes in the bottom decile are very badly reported. 

Some people will report large negative incomes because they are business owners who have had very bad years - but who often have other assets to draw on in bad times.

Other people are on mixes of benefits and informal income and worry about whether truthfully reporting incomes might have consequences.

Bryan Perry at MSD has been on top of this. I learned it from him - and from chats with John Creedy, if I recall correctly. Anyway, Appendix 8 and 9 of Perry's Incomes Report walks through the problem. Here's one of the implications of the problem: 46% of those reporting income at or below the lowest low-income measure (first column below) also report expenditure that is more than double that income threshold.


All of it means that you should use bottom decile figures with caution. If you're trying to track incomes at the bottom, I tend to go for the upper boundary of the second decile - as that won't be messed up by inconsistencies at the bottom.

And it means that taking expenditures on any category as a fraction of incomes is tricky. It can work fine in the middle deciles. But not so much if you're comparing things to average incomes for the bottom decile, or average income within the bottom quintile. Those averages get affected by what's going on in reported income. If you want to know the burden of food expenditures on households over time, it's better to look at it as a fraction of outgoing expenditures rather than as a fraction of income.

Kirsty Johnston at the Herald reports on high food expenditures among those on low incomes, and on malnutrition among poor kids. The overall stats are worrying. But I would suggest that she should correct this part of it:
The new health data comes as food prices continue to rise, with the consumer price index last week indicating food costs were up 2.3 per cent on a year ago. At the same time, income in the poorest third of households has remained flat since 1982.

Statistics New Zealand information released to the Herald shows for families on the lowest incomes (under $35,000), that means they're now spending 60 per cent of their income on food, compared to 48 per cent in 2007.

More than half of that goes on fruit and vegetables, data shows. Among middle-income families, 22 per cent of income goes on food, with one fifth of that on fruit and vegetables.
First off, it isn't true that income in the poorest third of households has remained flat since 1982. Here is real income growth, before housing costs, for each decile - but remember to be careful with the bottom decile figure. Again, this is from Perry. Real income growth has been at least 20% for each decile.
If you take instead After-Housing-Cost incomes, you have basically flat real income for the bottom decile, but real income increases from $14k to $17k in the second decile, from $16k to $20k in the third decile, and so on up the track. 
But the more particular problem is in comparing the expenditure measure on food with the reported income measure. The $35k figure Johnston reports would be the top of the first quintile (second decile). A mean household expenditure of $13.3k on food within that quintile is believable. But the same specialised Stats data pull suggests mean household total regular recurring income within that quintile of $22.8k. Maybe they adjusted the zero-incomes appropriately, but I'd expect they left them as-is unless they were requested to do something with them. 

Here's Perry on that. 
The bottom quintile's mean will have the same problem as the bottom decile's mean, but in attenuated form. Perry reports that are usually 20-30 households in the bottom decile reporting zero or negative income, and that the bottom decile sample will have about 250 households. The bottom quintile would then have about 500 in total, but the same 20-30 reporting zero or negative incomes.

Anyway, I'd suggest a couple corrections:
  • Note that real incomes have not been stagnant. After-housing-cost incomes have been flat for the bottom decile, if we trust bottom decile income figures, but real incomes otherwise have risen;
  • Compare food expenditures to total expenditures over time rather than to incomes. I suspect that, were the data pull across all expenditure categories rather than just food, the sum of all expenditures might have exceeded income for the bottom quintile. The 2013 Household Expenditure Survey is up here. Average weekly household expenditure for the bottom decile there is $476.20, so $24,762 annually (in 2013). That is higher than the reported mean household total regular recurring income that Johnston was given for the bottom quintile in the 2016 data.
  • The decile breakdown on proportionate expenditures on food might also need looking at. Among those in the bottom income decile, in the 2013 data, food expenditures were 19% of total expenditure. Among all income groups, food expenditures were 17%. 
And I wish that the 2016 HES data were up in the darned Stats tool that has a bit more disaggregated data than you can get from the main tables.

None of that's to say that there aren't real budget problems at the bottom. We just need to be careful with HES data. 

Monday, 4 September 2017

The Outside of the Asylum

The Spinoff published the last episode of its serialisation of The Outside of the Asylum on Friday. You can catch the full serialisation at The Spinoff here:
If you prefer the full PDF, it's up here at The Initiative's site. And, if you prefer, you can listen to it over at SoundCloud. Share and enjoy!

I'll keep tweeting Asylum-relevant content at @TheDaggEffect. I suppose I could attach the essay to my eventual citizenship application, when I get around to that...

Saturday, 2 September 2017

AML Costs

A reader sends me the following email he received from someone selling Anti-Money Laundering compliance services.

I hope that the country is getting just a ton of benefits out of this thing, because it sure doesn't look cheap.

Email copied below, company's name stripped out.
Please see the below information as to your upcoming requirements and our service offering to assist your compliance with the new regulations regarding AML/CFT:
  • Phase II of the AML/CFT Act is due to come into effect by August 2018 for Lawyers, and October 2018 for Accountants.
  • Those changes will mean Lawyers, Accountants and Real Estate Agents will have to comply with the AML/CFT regulatory environment in their day to day business.
  • October 2018 is not far away. This sounds like a long time, but once you understand the requirements for compliance, it is not long at all.
  • Compliance with the Act will be expensive should you choose to comply “in-house”. The essential requirements needed to comply are:
    • You must undertake a risk-assessment of your business and record your business risk profile. This must be reviewed quarterly.
    • You must have in place a full AML/CFT programme that all members of your staff are familiar with, have access to and understand the procedures required for take-on business or new transactions with existing clients.
    • You must appoint a Compliance Officer/Manager. This person is responsible for managing and overseeing the AML/CFT programme in the office. If you do not have staff, you must hire an employee for this role. (This is a requirement of the Act). This person must keep informed of all updates and changes in the law.
    • You must file annual reports with the governing body (Dept. of Internal Affairs).
    • You must submit your programme to independent audit biennially.
    • As you take on each new client or undertake new business for your clients, you must screen/identify your clients and their source of funds to be used in the proposed transactions. That means independently checking photo I.D through a verified service such as “World-Check” (the only service providing passport verification), proof of address, internet checks and reviewing information as to source of funds depending on the risk level of the transaction. This must be carried out prior to undertaking the work anticipated. 
    • Any transaction that appears to be “suspicious” must be investigated in-house and if the suspicion is not allayed, a suspicious transaction report must be filed with the Dept. of Internal Affairs/Police. Records of the suspicious transaction investigation or report must be maintained.
    • This is a significant increase in workload that does not (at least visibly) increase your bottom line.
XXXXX offers to provide you with a solution to the new compliance environment.

WHO ARE WE?

We are a corporate services and trustee company that has been operating in the new AML/CFT environment since the application of Phase I, and prior to that HWL worked under the European rules which at the time were more stringent than the NZ rules. The shareholders are lawyers based in Christchurch, two compliance specialists (ex-NZ Police, APRA and CBA Bank, ex-NZ Navy, qualified educator and certified by the GRC Institute (Australia)) and compliance managers/administrators.

We have extensive experience in drafting risk assessments, programmes and application of those on a day to day basis including conducting “know your client” checks, suspicious transactions and identifying source of funds of potential and existing clients. Our systems have passed Dept. of Internal Affairs audits and are robust – including extensive use of services such as “World-Check” and KYC360. We have liaised with banks and enforcement agencies on suspicious transactions and know the environment well.

WHAT DO WE OFFER?

We can provide the following services on your behalf:
  • Preparation and drafting of your business risk assessment and the provision of on-going monitoring to ensure changes to your business are covered by your risk assessment;
  • Preparation and drafting of your AML/CFT in-house programme, along with training for you and your staff as to your obligations under the programme and Act;
  • Provision of a compliance officer (contractor basis) where you are unable or unwilling to nominate an existing member of staff as such;
  • Prepare and file annual reports to the governing body on your behalf;
  • Arrange and provide the biennial independent audit on your behalf;
  • Undertake individual client risk assessments on your behalf as and when required, using “World-Check” for identity verification, and make recommendations on the outcome of the verification in line with your risk assessment for you to act on or over-ride;
  • Supervise or provide guidance on suspicious transactions and the reporting of said should the need arise.
HOW MUCH WILL THIS SERVICE COST?

Our service is comprehensive, and the fees charged will cover all the services as outlined above.

Our service is on a yearly basis, and is NZD15,000 per annum (plus GST) broken down as follows:
  • Initial mobilization fee of $4,000.00 (plus GST). On receipt of this payment we undertake the preparation of drafting the risk assessment and your AML/CFT programme. We will meet with you on site and provide in-house training on responsibilities under the programme for you and your staff. 
  • Thereafter 11 monthly payments of $1,000 (plus GST). 
  • During the 12-month contract we will carry out the above services on your behalf, as and when required by you and as due dates for obligations arise.
COST COMPARISON OF SERVICES

Employment of compliance officer (average salary) $50,000.00 per annum

Subscription to World-Check for identification verification (the only service offering passport verification) $10,000.00 plus GST per annum

Consultancy services for preparation of AML/CFT programme and risk assessment – usually $400 per hour (plus GST) and expectation of 20 hours for the programme and assessment - $8,000.00 plus GST

Consultancy services for quarterly review of assessment and programme – usually $400 per hour – expectation of 4 hours per quarter - $1600.00 plus GST

Consultancy services for provision of in-house training on the programme, STR’s and any updates or changes – usually $800 per presentation(plus GST) – expectation of 16 hours training per annum - $1,600.00 plus GST.

Independent audit – $90.00 per hour plus GST (biennial cost). Estimated time for audit – 20 hours.

XXX  COST

XXX annual fee $15,000.00 plus GST

Biennial independent audit $2,500.00 plus GST

Total in first year: $15,000.00 plus GST
Total in second year: $17,500.00 plus GST.

Total in first year: $71,200 (plus GST)
Total in second year: $73,000.00 (plus GST)
Government. It's what we do together. Like impose $73,000 per year in compliance costs on small accountancies for no well-stated reason.

Friday, 1 September 2017

Tax Working Group?

Ardern is right not to be making up tax policy on the hoof - it's best thought through deliberately. Setting a Tax Working Group to come up with recommendations makes sense.

But I would expect that she might signal who would be on that group. There aren't that many serious tax people in New Zealand. Seeing some of those names show up on a list would signal something good; seeing none of them on that list would be worrying.

And a draft Terms of Reference might not be out of order either. Like, you wouldn't expect a fully finalised one, but it would give an indication of what sorts of things they'd be looking at.

Big questions I'd expect a reasonable Tax Working Group to be considering under an incoming Labour-Green government:
  1. Do current tax settings cause a distortion towards investment in housing as compared to other real assets, or towards real assets in general as compared to interest-bearing instruments? How much real world efficiency does a capital gains tax really get you as compared to just flipping to taxing real returns instead of nominal ones? The last Tax Working Group considered that while capital gains taxes sounded good in theory, there were big problems in any real world implementation. Any reason to believe that's changed? Plus, Seamus did have rather a few good questions about a CGT.

  2. What are the costs involved in flattening out the EMTR schedules that are generated by the combined clawbacks across different income-contingent benefits? It's always a trade-off: flattening things out for the small number of people stuck in terribly high EMTRs always means increasing the EMTRs for everyone else if you keep things budget-neutral. And at least some of the current high EMTR ranges can be hurdled by flipping to full time from part-time work depending on salaries. But how much would other income tax rates need to go up if we wanted to shave the peaks off those EMTRs? The last Tax Working Group asked for a comprehensive review of the interaction between tax and the welfare system. 

  3. Is the mix between central and local taxes right? I love the clear split between what's local government's tax base, and what's central's, but the current system seems to yield perversities where local councils don't see enough of the economic benefit of facilitating growth, particularly in housing, given the infrastructure costs - and this seems to be driving a lot of the scraps between central and local over housing. For local government, what would be the benefits and consequences of flipping from land plus capital valuations for rates to land-value only? I'm a fan of land taxes over land + capital - but anything looking at land taxes for central government would have to be careful of trodding on local toes. 

  4. The set of tradeoffs I have in my head is that the top marginal tax rate can't be too out of line with the company tax rate or you do too much to encourage folks to set up companies; the company tax rate can't be too out of line with international company tax rates or corporates want to put their revenues elsewhere; and, the dividend imputation regime means that mucking about with the company tax rate mostly affects foreign owners that don't benefit from imputation credits. Have we got the rough proportionalities right? How does that change if an incoming Labour/Green government wishes that overall tax revenues should increase?

  5. Taxation of multinationals would come up, but all of that's subject to what's going on in international negotiations that I know nothing about. 
Minor issues that could show up, but are probably well below the threshold for what a Tax Working Group should be thinking about:
  1. Is there any feasible way of collecting GST at the border on low-value imports that doesn't do more harm than good by introducing a barrier to trade because of the administrative hassles? We should weigh the importance of direct-to-consumer imports as part of overall market competitiveness: it would be very surprising if prices in thin NZ markets were not constrained by this competition, and it would be very disappointing if the pursuit of 'level playing fields' wound up having anti-competitive effect. 

  2. I see absolutely no basis for any new landfill tax - Councils should just be making sure that they're running the appropriate charging regime. Simplest way of thinking about it: if the landfill's capital costs were completely bond funded at the outset (buying the land, putting in all the clay lining and stuff), with annual payments to bondholders that expired at the end of the life of the tip, the tip fees should match the payments on the bonds plus the tip's operating costs. But I expect the Greens would want to see something on this. 
Things that should be thought through, but likely need prior work first:
  1. Are there important real environmental externalities that might be reasonably addressed through Pivovean taxes, and are taxes the best way of dealing with them? This one would likely need to be later down the track, after work looking at whether the ETS is up to scratch, if it isn't whether it should be modified, and whether a best-form ETS is preferable to a carbon tax (for example, on that front). Do water charges and nitrogen taxes make more sense, or should we be looking at a trading regime both for water drawing and for effluent? I expect that trading regimes make more sense in both cases. But there could be other Pigovean taxes that should be in there that I've not considered, and that wouldn't be as well handled by trading. 
Things that I would get worried about if they were in there:
  1. Tobin / financial transactions taxes are nutty enough not to be worth investigating. Like, maybe they could be in there just so that a tax working group could lay out the evidence on that they're not a good idea;

  2. Looking at putting in a new top income tax rate per se rather than looking at the most efficient means of getting higher overall government revenues, if that's the desired outcome. Higher top rates could be part of increasing overall government revenues, but shouldn't be done for their own sake. It increases the gap between the top marginal rate and the corporate rate (and so causes problems) or forces up the corporate rate too and so causes problems in the gap with other countries' corporate rates. 
Things I dream about that would never be in there:
  1. Desirability of abolishing or substantially curtailing Schedule 1 of the Local Government (Rating) Act;

  2. Appropriate mechanisms for inflation-adjusting tax rates. Currently, inflation causes fiscal drag as wages bump past income tax thresholds. Those thresholds are rarely adjusted. When they are, politicians pretend it's a tax cut instead of an inflation adjustment. The same parties that get mad if a department's budget doesn't keep up with inflation don't worry much about inflation's effects on taxes. What's the best way of running inflation-adjustment given menu costs? Set an automatic trigger for review for every new fiscal year, and provide an adjustment whenever fiscal drag has exceeded some threshold since the last adjustment? Should the adjustment push up the thresholds for the different tax rates, or provide small cuts to each tax rate.
Anything I'm missing in any category?