Friday, 9 December 2016

The Gibson Critique - sugar tax

Waikato's Professor John Gibson last week delivered at Motu what has to be the most devastating critique of the empirical estimates on sugar tax effects that I've yet seen. Gibson's slides are here.

Minister of Health Jonathan Coleman has been holding off on sugar taxes, saying that he needed to hold on the results of a couple of forthcoming studies, one of which is Gibson's. Julie Anne Genter and the Greens have been arguing that his opposition relies on one industry-linked report; I'm not sure how they missed Gibson's work, as I've pointed Julie to it many, many, many times. 

Gibson's presentation at Motu goes beyond what I'd seen him present at the Ministry of Health a few months ago, and which we cited in Jenesa's report The Health of the State

He walks slowly through the problems of demand elasticity estimation where there can be consumer response on the quality as well as quantity dimension when all you have is household expenditure data. Price variation on the quality dimension is huge. If you infer consumption by how much people spend, but people respond to price changes by downshifting in quality, you will overestimate the price elasticity of demand. And even more so if people stockpile when things are on sale for later consumption. He shows how Deaton's method of inferring price elasticity by restrictive assumptions on cross-brand shifting fails. 

Here's Gibson on the Mexico studies:
He later shows that hardly any of the existing papers out there deal reasonably with quality substitution, and that there are other substantial problems out there.

But the more interesting part comes at the end, where Gibson contrasts how economists read a literature and how public health people do. 

Sugar tax advocates in New Zealand need to stop pretending this work isn't going on. Gibson's final report isn't due out in a while. The sugar tax people can't continue claiming that all the opposition to sugar taxes is somehow motivated by Big Sugar. There are serious empirical issues in the literature and I have pretty big doubts that any of the sugar tax proponents have been able to wrap their heads around those issues. 

3 strikes, redux

We still don't know what effect New Zealand's 3-strikes law has had on recidivism.

Graeme Edgeler had undertaken a bit of ocular least squares last year; I'd commented on it here. It then looked like the number of second strikes had dropped, although the conclusion was still tentative. It turns out that the data Graeme was using wasn't as comparable across the two time periods as he had thought, and so he retracted his post. I've updated my post as consequence.

In theory, the law should be effective and at lower cost than American alternatives, for the reasons I laid out here. The American version gets rid of marginal deterrence by having the same hefty penalty across broad categories of offending, so you may expect a severity shift in offending among third-strike offences. New Zealand sets things on the third strike to the maximum penalty for the offence, without parole, unless it would be manifestly unjust to impose the penalty without parole, so proportionality across offence categories is maintained. 

Judges so far seem to be undermining Parliament's intent in the legislation. The two second-strike cases that have come up involving murder, where judges are to impose the maximum sentence without parole unless the 'without parole' provision were manifestly unjust, have both had the non-parole period waived as being manifestly unjust; the only third strike offence so far has also used the 'manifestly unjust' provision for waiving of the without-parole condition. Radio New Zealand reports on the three cases here

It would not take many more uses of that provision before offenders expected that judges had no intention of following Parliament's intent, and so deterrence would be lost. Maybe each of the three cases so far really are the exceptions that Parliament intended have this kind of exception. But say that the provision were intended for 10% of cases. The odds that the only three to come up all happened to be manifestly unjust are one in a thousand. Is it more likely that we are seeing the one-in-a-thousand sequence, or that the judges have little intention of following Parliament's intent?  

And so any future empirical study might expect a rise in strikeable offences from 2017 onwards, as judicial credibility diminished - barring changes in sentencing practice that change expectations.

UPDATE: In comments below, Andrew Geddis notes it's been five second-strike murders, and that the judges deemed applying Parliament's intended sentence in all cases would be manifestly unjust. I doubt that's an accident. 

Tuesday, 6 December 2016

Prime Minister English?

If outgoing Prime Minister John Key has any influence over the choices, and if Bill English wants the job, I expect English will succeed Key as Prime Minister and Steven Joyce will move to the Finance portfolio.

More than anybody else in government, as best I've been able to tell, Bill English thinks in terms of incentives and institutions. He sees the long game in changing structures to get better policy outcomes. And I have only ever heard him talk about that long game in terms of policy outcomes, not politics.

As Finance Minister, English's vision was clear. He wants government spending to be effective. This isn't bean-counting stuff, it's about wanting that outcomes actually improve because of policy and spending decisions. And he wants the institutions to be in place to provide the incentives for that to happen.

English's enthusiasm for Statistics New Zealand's Integrated Data Infrastructure was built on using it to figure out where government spending is working to improve outcomes, where it isn't, and setting up the mechanisms so we can distinguish between those. I remember his visit to Canterbury University beseeching us to use the IDI to help him figure out where the government does well, and where it could improve.

At the Victoria University School of Government awards ceremony a couple of weeks ago, English also highlighted the importance of institutions. He there, and this is my paraphrase, said that policy graduates need to think beyond the shift from inputs and outputs to outcomes, although that's important too, but rather towards the incentives that lead to those outcomes, and the institutions that shape the incentives. He noted that he has a lot more time for "these are the institutional features leading to bad policy leading to bad outcomes" thinking than for "here are bad outcomes, change this policy to get better outcomes".

As Prime Minister, English would be in a better, and worse, position to promote and execute that vision. On the plus side, he will be better placed to make the changes necessary. I expect he might take a harder line in Cabinet if RISes fail to meet the necessary standard, and ultimately bureau willingness to supply those depends on bad ones being batted back by Cabinet. And there are tweaks that could make IDI work better.

But on the downside, he'll need Treasury working well for in order to implement the investment approach, and he wouldn't be the Minister to which Treasury reports any longer. That will matter too.

Monday, 5 December 2016

Housing solutions

Paavo Monkkonen has a few solutions to California's housing affordability problem.
First, California’s current Housing Element framework should be strengthened. It gives cities goals for new affordable housing but is now an almost symbolic exercise. Cities that fail to meet their targets should face fines or legal action, while cities that meet or exceed targets should be rewarded through infrastructure funding or other means. In addition, the state should reform the way it determines regional housing needs. The current system relies on population estimates, which underestimate the need in high-cost areas flush with jobs, amenities and public services. Vacancy rates or an affordability index would be more accurate and have a greater impact on affordability.

Second, the state must encourage a more diverse group of residents to take part in the planning process. Planners must actively seek meaningful input from families, low-income renters, young people and those unable to attend public meetings. If outreach is too cumbersome, cities should consider cutting off input that unduly benefits small groups. For example, neighborhood councils could be eliminated, as was recently done in Seattle.

Third, some planning decisions should be moved from the local to metropolitan or state levels since housing and labor markets operate beyond city limits. Where neighborhood opposition is a persistent roadblock, developers could be granted “by right” approval for projects that meet existing rules, exempting them from some reviews and public input. California’s density bonus law – which grants developers additional density in exchange for a share of affordable units – is an important example of this kind of approval. The state might expand the types of projects that are eligible.
Council incentives and infrastructure financing are at the heart of the problem here too. I've liked the idea of having a national default plan that takes effect if housing costs are more than five times median income. Do what you want locally so long as housing remains affordable. Turn unaffordable for too long, and allowed density in every spot is automatically doubled, everyone has by-right permission to build up to three stories, and urban growth boundaries are wiped out.

Sunday, 4 December 2016

The greatest superhero of them all

I look forward to future episodes of this one, in which The Utilitarian (ΣU) gets in a big fight with The Utilitarian (Max median(U)) and The Utilitarian (Max U-bar) about just what they should be doing.

ΣU: Stop what you're doing! He clearly prefers being alive to your killing him, and his existence is a net addition to total utility (unlike that criminal from before)!

Maximize average: Nobody will even notice that he's gone, and he just barely prefers being alive anyway - thanks to you. What the hell did you do to increase the birth rate by so much anyway? 

ΣU: Zapped all the contraceptive plants. People enjoy life less because of less sex, but the addition of more people is clearly worth it. You were too busy stealing from people to give to the utility monster to notice (and I didn't mind that either). 

Median U: I noticed...

Saturday, 3 December 2016

Guaranteed Employment for Lawyers

Our excellent Research Fellow Dr Rachel Hodder warns about potential legal nightmares in the government's proposed pay equity framework.
Last week, the government announced that it would accept the Joint Working Group’s recommendations, which will allow employees to take pay equity disputes directly to their employers.

These changes were motivated by the landmark ruling in the TerraNova case where it was ruled that female-dominant aged care work has been historically undervalued due to gender discrimination. This has opened the door for a flood of similar claims to be made in other female-dominant industries.

The intentions of the changes are laudable but good intentions do not always make good policy. Overseas experience with similar pay equity laws is a good reason to be concerned.

There is little evidence that similar laws have reduced gender pay gaps. Adjusting pay in undervalued female-dominant industries is a blunt tool compared with adjusting pay for individual undervalued female employees in any industry.

Ironically, some studies have demonstrated that pay equity laws have widened the pay gap. Making employers pay more in whole industries reduces the number of jobs available, pushing many women into lower paid work.

A review of similar pay equity laws in Ontario is discouraging. The costs of administering the system ate up much of the available compensation change.

Establishing plans for compensation systems was much easier said than done. These costs were disproportionately felt by small employers where often the administrative costs were more than the recognised pay differences.

Difficult in practiceDisputes turned into a litigation nightmare. Rules to determine what counted as equivalent work seemed simple on paper but were difficult to evaluate in practice.

This led to endless disagreements about what male-dominant industries could be considered as relevant comparators. The main winners of the laws were consultants and lawyers, not women.

One would hope the government has been advised on the likely problems the new laws could encounter based on overseas experience.
It would be very interesting to know just how much warning Treasury or the ministries provided about the difficulties encountered in Ontario, and likely difficulties here. One should be especially careful about the quality of advice in areas where there is a lot of wishful thinking, and a lot of social sanction for even suggesting that outcomes might diverge from intentions.

Meanwhile, The Listener does not give us reason to hope for reasonableness:
The law change won’t be a magic wand. Comparing the relative value of different jobs in disparate industries was a contentious issue within the working party and threatens to be a sticking point in workplace negotiations. A suggestion by the New Zealand Educational Institute that pay rates for teacher aides be linked to those of Corrections officers, whose work entails risks not generally present in primary schools, isn’t a promising start.
The government hasn't drafted the legislation yet; I hope that the government gets some better advice around this stuff before it does.

Friday, 2 December 2016

Tax and trade barriers

Trump's potential incoming Commerce guy, Wilbur Ross, has a bizarre take on sales taxes. And it might mean that New Zealand should rethink how we treat imports and exports in GST. 
Ross co-authored an economic policy paper that proposed renegotiating NAFTA and included a call for combating the use of foreign consumption taxes that render American-made goods less competitive. Trump echoed the paper’s views in campaign speeches.
The document argued that foreign countries offer a sales-tax rebate on their own goods shipped abroad, but then tax incoming products from the U.S., which does not have a value-added tax. The net effect, he said, is to invite U.S. companies to relocate.
“Like many countries, Mexico has shrewdly exploited the (value-added tax) backdoor tariff to further its competitive advantage,” Ross wrote in the 31-page paper, co-authored in September with University of California business professor Peter Navarro.
“It is thus not surprising that U.S. corporations want to move their factories offshore and then export their products back to the U.S.”
Canada's GST is a mess, but even then it's tough to see how the heck this works. If a US manufacturer makes things in the US and sells in the US, no GST applies because the US has no GST. If it exports to Canada, GST applies on sales in Canada. If the plant moves to Canada and sells in Canada, GST applies on sales in Canada, but not on exports to the US - exactly the same as if it were US-based.

So the whole thing is nuts.

But that's not a constraint on Trumpist economics. And so what should New Zealand think about this? We have a clean GST that's charged on a point-of-consumption basis: imports draw GST (barring the GST-free threshold for low-value imports), but exports are zero-rated.

If a Trump administration thinks that's a trade barrier, they're nuts - but their being nuts doesn't much matter. It can take the WTO a long time to slap back stupid things the Americans decide to do, and who knows whether Trump would agree to pay whatever penalties they'd impose anyway.

But there is a workaround that solves another problem at the same time.

Last year, Seamus found a beautiful solution to local retailer complaints about GST on imports. The retailers association gets real mad about the de minimus threshold for imports. In their view, it makes an unfair playing field. The 15% GST difference is absolutely trivial relative to the cost difference between local retail and direct-to-consumer imports in way too many cases for the de minimus threshold to be distorting things, but doing away with it would serve as a big barrier against imports because there's no clean way of applying at the border without wrecking direct-to-consumer imports.

Except for Seamus's solution.

Seamus reminded us of Lerner symmetry. A tax on imports (like GST) is identical to a tax on exports - they're both taxes on trade, effectively. Long run, imports match exports. So flipping from taxing imports to taxing exports causes a one-off drop in the exchange rate equivalent to the tax, but doesn't mess anything else up. And so he argued that New Zealand should shift to zero-rating imports, which are tough to police at the border anyway, and apply GST to exports. The price of all exports would go up by that 15%, but we face world prices: that means the value of the dollar drops. I'll quote Seamus in full here:
My proposal will not just deal with the distortion that purchases by consumers that are made directly from overseas through on-line retailing receive a favourable tax treatment relative to those that are processed through an importer. It will also deal with a larger distortion in the GST. As it currently stands, the GST applied to imports does not apply to purchases made by New Zealanders while travelling overseas, and similarly the zero-rating of exports does not apply to the sale of services to foreign tourists while in New Zealand. That is, the current GST regime favours overseas tourism by New Zealanders over other imports, and penalises the New Zealand tourism industry relative to other exports.

So here is my proposal: Completely exempt all imports from the GST, and at the same time stop zero-rating exports and require firms to charge GST on all sales, including those to foreigners. Retail New Zealand should be happy, they would no longer be treated in differently from overseas on-line sellers in their tax treatment in New Zealand. And firms selling both overseas and in New Zealand would be happy to no longer have to have separate out sales overseas and domestic sales when filing their tax returns.

This idea runs completely counter to our inner mercantilist instincts, but our instincts don’t cope well with general-equilibrium reasoning. In my experience the greatest eye-opening moment you can give students in economics—the sort of epiphany that has them changing instantly from “this is obviously wrong” to “this is obviously right” is the Lerner symmetry theorem,  which shows that an import tax is exactly equivalent to an export tax. The idea here is that a tax on exports or imports is really a tax on trade. In the long-run, the present value of exports has to equal the present value of imports, as they are just opposite sides of the equals sign in a budget constraint. A tax on exports is a tax on imports, as it shifts resources away from producing for overseas (with the consequent importing from overseas that that allows) to producing for local consumption. (I was told that, during the Muldoon era, Treasury, knowing that it could not pursuade Muldoon to reduce tarrifs encouraged him in his policy of export subsidies, knowing that the latter would counteract the former.)

In a country with a floating exchange rate, the way that the Lerner equivalence theorem would play out if it were to adopt the change from levying the GST on imports to levying it on exports, would be through a depreciation of the currency by the amount of the GST. So sure exporters would have to put up their prices to foreigners in NZ dollars by 15%, but the goods would not seem to be more expensive to foreigners because of the 15% depreciation. Similarly, the 15% GST coming off imports would be offset by the depreciation. In general, therefore, there would be no change, but with a few exceptions. On-line purchases would become 15% more expensive in NZ dollars due to the depreciation with no offsetting change in taxes. Trips overseas would similarly become 15% more expensive, but at the same time, New Zealand would become a far cheaper place for foreigners to visit, again.
It's a clean solution for the online GST / import issue, but seemed politically difficult. If the incoming US administration thinks that zero-rated exports are some kind of trade distortion warranting sanction, though, we could flip to zero-rating imports and taxing exports. Ta-dah. Trump's inner mercantilist will love us for it, and we know it makes no difference. Like Seamus's example on Muldoon.

I thank @TrevorTombe for the pointer. He's a convert to Seamus's beautiful tax idea. You should be too.