Friday, 27 March 2015

A low cost way to help the retailers

Eric asks
If Hartford, or anybody else, is able to come up some better way of processing GST at the border, without imposing undue hassle on either those who might be deterred from exporting to New Zealand or on Kiwi shoppers, and without collection costs that exceed the value of the GST collected, that would be great.
I’ll quibble a bit at the wording, the collection costs should not exceed the value of the improved allocative efficiency from removing a tax distortion, not the revenue collected, which is likely a much tougher hurdle, but either way I’m prepared to give it a go. 

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.

I don’t imagine for a moment that any government would implement this policy. Instinctive mercantilism is too strong in all voters, and only a few have experienced the epiphany of general equilibrium reasoning. But this is not a “modest proposal” in the Swiftian sense. I am deadly serious. 

Why we drink

Maybe it's because I went to an econ grad programme where Geertz was on the syllabus, but anthropology and economics always seemed pretty complementary to me.

Anthropologists tend towards thick narratives describing the rituals we undertake in hopes of understanding the function they serve. Economists think about what ultimate good is being pursued in any action and how behaviours change with changes in the relative costs of undertaking different activities that further those ends. Whatever you might think about the rituals undertaken by your group, or somebody else's group, if you don't understand the functions they serve, you're going to mess things up if you blunder in with policies meant to change things.

And so we come to drinking rituals. Why do people go out in groups and consume alcohol together before engaging in particular types of normally proscribed behaviours? If some young men drink excessively and take dumb risks, might there be any underlying reason?

Anthropologist Anne Fox surveyed Australian and New Zealand drinking cultures for Lion; her report is hosted at Lion's website.

One of Anne's very good points is that alcoholic disinhibition effects are culturally constrained. There are prescribed sets of things that are allowed or excused while drunk, with others very much not.
The phrase “it loosens (or takes away) your inhibitions” is like a magical spell that releases drinkers from the normal rules of behaviour. Interestingly, the social rules of alcoholic disinhibition allow for certain behaviours but not others: no one becomes so disinhibited and ‘out of control’ that they steal or pickpocket from others, for example. Most people would not excuse theft because the person was drunk. Neither is it acceptable to insult or injure vulnerable members of society such as the elderly, handicapped or children. But taking off ones clothes, urinating (but not defecating), shouting, fighting, singing, flirting, and even going home with the ‘wrong’ person – are all blamed on the drink.
That isn't to say that these cultural issues are easily changed. But I do worry that public ad campaigns and public education campaigns highlighting all the nasty things people do while drunk, instead of modelling appropriate drinking behaviour: they may reinforce norms about what drunken behaviour looks like rather than counter them. A lot of the recent NZ public service ads on alcohol have been good on this front, like ghost chips.

I know a lot of the anti-alcohol brigade hates the paper, viewing it as trying to shirk blame from alcohol or divert attention from their preferred policies.

But there are important points in here. If young people drink to overcome social anxiety, then maybe we should worry about stronger substitutability between alcohol and other anxiety relievers than we otherwise might have (though the strength of such things remains an empirical question). If adults get drunk together as a form of social bonding and trust building, what of that is forgone in population-based measures hammering on all forms of consumption?

And, Fox's focus group work suggests areas worth trying in information campaigns. I know that information campaigns targeting kids have not proven particularly effective, but perhaps they've not been hitting the right messages. Fox writes:
It is vital that parents and teenagers understand how large amounts of alcohol can negatively affect a developing brain, and that brain development continues until around age 21. Young people we spoke with assumed that the reason for the under-18 prohibition was the impact of alcohol on behaviour. This simply led to exaggerated rebellion and resentment, as evidenced by the following typical comment:
“Before I was 18 I thought it was so hypocritical that we couldn’t drink. The grownups would get drunk at the weekends and not let us have any so we used to sneak it and steal it all the time and feel so clever doing it right under their noses! When my Dad caught me drinking with a friend when I was 15 he yelled at me and I yelled back ‘well you do it!’ and he said ‘Yes but I know how to handle it.’ That is so hypocritical. Even then I could handle it better than he did!” – Female, 22.
In focus groups where it was requested of us, at the end, we shared information about the devastating impact of drunkenness on brain development. This was invariably met with stunned silence followed by choruses of “why didn’t anyone tell us?”
Practical suggestions for reducing night-time violence? Minimising the stuff that causes frustration and conflict: good availability of clean and safe toilets; good availability of late-night food service; visible but not heavy-handed policing; fines for infringement of public order (drunk & disorderly); and, decent transport options late at night.

Fox also points to parts of the alcohol-aggression literature that I hadn't seen before. The common lab experiments there seem to provide alcohol in varying doses, then have participants react to a fictitious opponent's moves in different kinds of games. For example, if a fictitious opponent steals from your earnings or endowment, you (as subject) could respond by ignoring the opponent or punishing the opponent where punishment is costly.

Increased punishment is taken as evidence of aggression in these experiments, but it's manifestly unclear to me that it should be taken as such. The experimental economics literature looks at altruistic punishment, where those in a public goods game can pay to punish a defector who hurts group performance. Punishment is there viewed as a second-order public good: if it is costly to you to punish someone who is behaving in ways that hurt the group, your punishment is altruistic, not aggressive.

There are other kinds of studies drawing links between alcohol and aggressiveness, but I worry that lab experiments taking punishment as aggression might be missing an alternative explanation.

Thursday, 26 March 2015

Migration, amenities, and median multipliers

In the standard spatial urban economics model, the marginal person has to be indifferent between living in different cities. That doesn't mean that all cities have to be identical but rather that, from the perspective of the marginal resident, the downsides and upsides of different alternatives come to a similar balance. 

Because Detroit has fewer amenities than, say, San Francisco, its housing prices have to be lower than those in places with better amenities and stronger opportunities. If that weren't true, people would move out of Detroit until housing became sufficiently cheap that there were no longer reason to move from one to the other.

One reason for this is that houses are durable goods. Detroit built up a large stock of housing when the city's industry could support a much larger population. If people took their houses with them when they moved, housing costs wouldn't adjust downwards as much when there were substantial out-migration. 

Another reason can be time-to-build in high-amenity locations. Incoming migrants push up the price of the existing stock of housing; that provides a signal to developers to convert more houses into higher density uses and to expand on the fringes of town. High housing costs relative to incomes are then a disequilibrium phenomenon - they're something that happens in the interim until developers are able to get new housing on-stream. And you get a nice price gradient in the standard simple model where housing close to downtown amenities is very expensive to housing farther away, with the slope of the gradient depending on things like the ease of commuting and the desirability of the amenities. At the edges of the city, the cost of a house should be the cost of building it, plus the cost of providing basic infrastructure, plus the underlying base value of land in its next best alternative use.

So median house prices relative to incomes can tell us a few different things. High prices would be associated with strong amenity values. But if there are also very high prices at the city fringes, or if the very high prices persist for a long time, there's also something else going on - something related to building new houses and apartments. You don't get sharp drop-offs in land values at metropolitan urban limits, or apartment buildings built to only 10 stories when another 5 stories would cost less to build than the apartments' sale prices, unless something else is up.

What else can be up? Well, you could be in a place like Hong Kong or Singapore where there is little land available, and where much of the land that can be turned into high-rise apartments already has been. In places with hard physical constraints against further building, benefits of productivity increases or stronger agglomeration effects get capitalised into the price of existing land. Why? Spatial equilibrium: if people are just more productive in those places, that draws in more workers, which bids up the price of housing, which can't really draw in more housing supply, and then confers rents on the holders of existing land.

In other places, it's zoning constraints. Both the metropolitan urban limit and the city height limits seem binding: Arthur Grimes showed strong discontinuities in prices at the MUL, and that apartment buildings are being constrained by height restrictions. Yes, Auckland has physical constraints on land supply too, but there are plenty of places that could be upzoned (and haven't) and land at the boundaries that could be brought into use as suburbs were it not forbidden.

Peter Nunns really doesn't like Hugh Paveltich's median multiplier measure of housing affordability. Nunns says that because it ignores differences in amenities, it's worthless as a measure.

Maybe I'm an easier grader than Peter, but I do find good value in Hugh's measure. Cities that persistently have high median multiplier measures and no particular physical constraints on further building likely have issues in regulations around land supply. 

If Detroit implemented strong restrictions against upzoning or new suburbs, it wouldn't show up in a median multiplier measure because the regulations wouldn't be binding - there's a large stock of housing available relative to demand. A high median multiplier does not necessarily follow from bad regulations, nor does a low median multiplier necessarily follow from good regulations in places with binding physical constraints. But a persistently low median multiplier in a city with a growing population likely signals accommodative regulations and a persistently high one in a city without strong physical constraints likely signals regulatory issues.

The measure simultaneously tells us that places like Auckland have highly desirable amenities, and that they have pretty binding regulatory constraints against new building. 

Wednesday, 25 March 2015

Snapshots of academic life

A friend with a young daughter emails the following transcript:
(The daughter - almost age 4): “Mummy, quickly, I’m giving birth!”
 …. 5 dolls immediately arrive.
 “Ok, here they are. Now I’m going to a conference – can you look after them please?”


Protecting retailers

Retail NZ spokesman Greg Hartford explains why he believes GST on imports is important:
But Retail New Zealand spokesman Greg Hartford says the proposed online GST idea will help retailers that can’t compete with foreign websites.

He says the cost to the government of not having an online GST system is somewhere above $200 million a year and adds that he expects this figure to climb as online shopping becomes more popular.

“We’re certainly aware of retailers going out of business because they cannot compete with foreign websites.

“We’re also aware of shops having to reduce staffing because of the state of their businesses.”

Mr Hartford disagrees that the higher level of bureaucracy will put smaller retailers off.

“Creating a level playing field isn’t a magic bullet that’s going to solve all the issues facing New Zealand’s retailers but it’s certainly one that is an easy fix for the government that will at least mean that everyone is competing on the same page.”
Hartford would prefer that the threshold be dropped to $25.

Both the above pieces also quote from our recent media release.

I'm not sure about that $200m figure: it would require that Kiwis spend $1.3 billion on direct imports from abroad, or a bit over $300 per capita. Total retail spending in New Zealand last year was just over $20 billion. Is it plausible that 5% of retail volume is direct to consumer imports of low-value items?

I'll assume that Hartford would wish the abolition of the biosecurity levy and the Import Entry Transaction Fee for lower valued imports - they add $47.29 in transaction costs for any import that runs through Customs processing, and $47.29 in fees on a $25 import (plus $3.75 GST) hardly makes sense. But abolishing those levies doesn't abolish the associated handling costs - it just shifts them to the general ledger. And without making it cheaper to process GST at the border, a $25 threshold necessarily imposes transaction costs far in excess of the revenues collected - and that's even imagining that the mechanism doesn't impose other hassles on customers.

If Hartford, or anybody else, is able to come up with some better way of processing GST at the border, without imposing undue hassle on either those who might be deterred from exporting to New Zealand or on Kiwi shoppers, and without collection costs that exceed the value of GST collected, that would be great.

Tuesday, 24 March 2015

Bleg: Quantifying the value of bowling variety

A common critique of the current English ODI side is that they suffered from having a sameness to their bowling attack--a series of right-handed fast-medium swing bowlers. It's an interesting question. Obviously, diversity in bowling styles can only take you so far: there is a limit to how much aggregate quality a team would be prepared to sacrifice in order to increase diversity, but it is not clear that there is any value to diversity at all. The question was raised recently in the following tweets:
There are some obvious ways in which diversity might improve a team's bowling as a unit. First, having the style of bowling change from over to over might make it harder for batsmen to settle into a rhythm. Second, if some bowling types are more effective wicket takers against right-handed batsmen and others against left-handed, then style diversity might help stop one batsman running away with a game. But these are big mights. The twitter thread above led to this request:

I'm up for the challenge, but I can't see obvious solutions to three conceptual problems:

1. As @CricketFanBob asks, how do you define variety?

If you look at the cricinfo player profiles, you will find that Bill O'Reilly and Clarrie Grimmett, who played in the same Australian test team, are both classified as "legbreak googly". This is true, but this simple classification does not tell you that O'Reilly was an unusually fast spinner who liked to bowl with the wind, while Grimmett was a more-classical flight-into-the-wind legbreak bowler. Similarly, player profiles will tell you that Joel Garner and Malcom Marshall were both "right fast", but the difference between quite fast delivered by a 6'8" bowler and extremely fast delivered by a 5'11" bowler is probably quite substantial. Maybe, however these examples are sufficiently rare that simple cricinfo categorisations are sufficient. But...

2. ...What is the best way of aggregating these bowling-type classifications into a measure of variety.

Is RFM, RFM, LF, RM, SLO more diverse than RFM, LF, RM, SLO, SLO? I think so, but how do you quantify that. And above all,

3.... How do you assess what performance a given set of individual bowler abilities would be expected to produce in order to assess whether variety (or its absence) can explain some of the difference?

In particular, how do you control for the endogeneity that, for example, a spin bowler in spin-friendly conditions will probably a) be in a team with other spin bowlers to take advantage of those conditions, and b) likely to do better than average because of those conditions, making it difficult to infer any value to diversity that might exist.

I have some ideas, but I suspect that the number of variables needed would exhaust the useful degrees of freedom. Any thoughts?

Outsider perspectives

It's interesting to contrast Alan Bollard's take on New Zealand with Daniel Davies's.

Bollard's address for the NZ Initiative at PWC last week highlighted what the APEC Chair and former RBNZ Governor thought about the place: too little investment in the higher value R&D and marketing activities, too much hewing of wood and drawing of milk. Oliver Hartwich's summary is good.

I asked him there what's stopping Kiwi businesses from picking up the $20 notes laying on the sidewalk if there are such great returns in those activities: whether Kiwis are just stupid; whether there are regulatory impediments to their being able to realise returns; whether they're already innovating and he's not noticed it; or whether a lot of that work is really better done elsewhere and that pushes for value-added here might not be value-destroying.

He noted that Fonterra is constrained by its cooperative structure and that capital markets here might not be deep enough. I note that Fonterra is investing into Chinese dairy to have better understanding of and access to Chinese markets, that they're already doing a lot of milk processing beyond straight powder drying, and that opening to greater foreign investment seems a decent idea. I'm pretty agnostic about Fonterra's governance structure, but that too would seem a $20 note on the sidewalk: if they could be so much more valuable under a fully corporate structure, they will eventually convince their farmer-members of it.

Tyler Cowen points to Dan Davies' review of New Zealand. One relevant bit:
The key to understanding the economy of New Zealand is that it’s an industry cluster, and the industry in question is agriculture. Or, and this might be a bit more controversial, the industry in question is agriculture marketing, the most perfect example of which being the way in which the Chinese gooseberry was renamed the “kiwifruit” and production ramped up exponentially to meet US and European demand. At some point, if they can transport them without bruising, I’d guess that they’ll have a go at doing the same thing with the Feijoa, a kind of South American guava that’s very popular domestically. Marketing isn’t looked down on as a frivolous activity for people not clever enough to do science in New Zealand, as far as I can see – farmers, if they want to enjoy middle-class incomes, have to be very aware about the difference between the stuff that comes out of the ground or off the animal, and the sort of thing that people want to see in their shops.
They are really very snappy about working out what the world wants and how to give it to them. Australian wine starts selling in the UK? Bang – New Zealand plants a load of vines. The Marlborough region develops a brand premium for Sauvignon? Bish bosh, ship truckloads of chardonnay grapes from Hawke’s Bay down to Marlborough and you can sell Marlborough Chardonnay too. Craft beer, did someone say? New Zealand agriculture is on the case, digging up the less successful vineyards and ramping up on a dozen new specialty varieties of hops. It is one of the few agricultural industries in the world which has basically no subsidies or tariff protections, and as a result they are just so much sharper and more responsive; it’s a perfect example for anyone wanting to talk about X-inefficiency in their economics class.
What’s interesting is that the general level of awareness of agricultural matters, and of the trends and fashions in global foodstuffs, is very widespread and very detailed. Over a barbecue, my brother-in-law asked me why I thought it might be that Europeans were prepared to pay such big money for manuka honey these days, and mentioned that a friend of a friend had been putting in more beehives. He had no real personal interest in apiary as far as I could see – he has a good job helping to keep the dairy giant Fonterra’s vast logistics chain of tanker trucks moving. It’s just the sort of thing that one makes conversation about in New Zealand, same as I might, six months earlier, have asked someone at a similar party what they thought about house prices. House prices are a common topic of conversation too, by the way, it’s not a totally alien culture.
From Singapore, Bollard's current home, New Zealand can seem lacking for want of the kinds of things that Singapore is very very good at. But Davies's take is more like mine. Some of the kinds of innovation here undertaken would have been next to impossible in supply-managed Canada.