Monday, 16 May 2016

Bobsledding down the sugary slopes

It's interesting to peruse the list of policy recommendations coming from New Zealand's public health academics. I'll summarise, but do check the link above. I'm really not exaggerating here.

  • Reduce retail availability of sugar-sweetened beverages (SSBs);
  • SSB excise (hypothecated to healthy school lunches and education programmes);
  • Marketing restrictions on SSBs and junk food;
  • Prohibit SSB sales in all organisations receiving government funding or on government-owned land;
  • Ban SSB sales within 1km of schools;
  • Local governments ban sales of SSBs in Council facilities or on Council-owned land (presumably this would include all the CCO-owned sporting facilities);
  • Tertiary education organisations banning SSB sales on campus;
  • NZ Defence Force ban SSB sales on military bases, as "some of these bases have children living on them".
  • Restrictions on artificially sweetened beverages could be a good idea in the longer term but they should remain as an option for those swapping away from SSBs.
University students need protecting from soda. America sets campus safe spaces to protect students from dangerous ideas; Kiwi public health academics want to protect them from having a Coke while studying. 

I applaud the Kiwi health profs for their honesty about their end goal. 

Every step of this ought to be opposed. It won't just be a 20% soda tax. We know, and they really do too, that a 20% tax won't do anything. But it's the critical first step towards getting annual excise hikes until soda is as taxed as tobacco. Along the way, the excise would broaden out to other sugary foods. And the other restrictions in the play book would start layering in. 

You don't have to be industry-funded, or some crazy ideologue, to look at the agenda they've clearly laid out and just say no. Jenesa’s report provides some helpful ammunition.

When I think back to how I fuelled my late-night university essay writing back in the day....


Friday, 13 May 2016

A test of character

It's not easy to invest in New Zealand, or at least not if that investment involves sensitive land or any relatively large firm. The Overseas Investment Office requires demonstration of the prospective investor's good character, and often requires that the investment meet certain other constraints.

This week's brought news that the overstretched OIO has not been particularly diligent in its character assessments; some folks with seemingly dodgy prior histories made it through the filter.

And so we have a great potential test here. Folks on my side have always argued that these character tests are a bit nuts as no foreign investor, however dodgy, can do anything with New Zealand land that a Kiwi couldn't do. Plenty of dodgy Kiwis own land. But doing anything with land requires getting resource consents. It's not like they're going to abscond in the night with a high country sheep station.

If my side was wrong all along, then we should be able to find at least some examples of the dodgy people who slipped through the net having done dodgy things that a Kiwi mightn't have done. And then I'd update. On the other hand, if not really enquiring into folks' backgrounds didn't lead to any real harm when people of less than stellar character made investments, then we should ease back or do away with the character tests.

It's just been a bit odd that all the talk's been about staffing up the OIO so that they can do diligent tests, rather than asking whether not having really done the tests made a whit of real world difference.

Friday, 6 May 2016

Democracy and Political Ignorance

Ilya Somin will be speaking here in Wellington next week at Victoria University on his recent book on democracy and political ignorance. I really hope you can join us. An American perspective on political ignorance, given the current GOP nomination, could be rather enlightening.


One of the biggest problems with modern democracy is that most of the public is usually ignorant of politics and government. Many people understand that their votes are unlikely to change the outcome of an election and don't see the point in learning much about politics. This creates a nation of people with little political knowledge and little ability to objectively evaluate what they do know.

Ilya Somin mines the depths of public ignorance in America and reveals it as a major problem for democracy. He weighs various potential solutions, provocatively arguing that political ignorance is best mitigated and its effects lessened by decentralizing and limiting government. People make better decisions when they choose what to purchase in the market or which state or local government to live under, than when they vote at the ballot box, because they have stronger incentives to acquire relevant information and to use it wisely.

Somin walks us through the connections between political ignorance and the disproportionate political influence of the wealthy, new proposals for increasing political knowledge, and up-to-date survey data showing just how little Americans really know about their government.

About the Speaker:

ILYA SOMIN is Professor of Law at George Mason University. His research focuses on constitutional law, property law, and the study of popular political participation and its implications for constitutional democracy.  He is the author of Democracy and Political Ignorance: Why Smaller Government is Smarter (Stanford University Press, 2013), The Grasping Hand: Kelo v. City of New London and the Limits of Eminent Domain (University of Chicago Press, 2015), co-editor of Eminent Domain in Comparative Perspective (Cambridge University Press, forthcoming), among several other books.

Somin’s work has appeared in numerous scholarly journals, including the Yale Law Journal, Stanford Law Review, Northwestern University Law Review, Georgetown Law Journal, Critical Review, and others. He features regularly, either in the opinion pages or quoted as expert, in American media outlets from the Wall Street Journal to the Washington Post, and from the New York Times to Al Jazeera. He has testified before US Senate Judiciary Subcommittee on the Constitution, Civil Rights, and Human Rights and the United States Senate Judiciary Committee. Somin writes regularly for the popular Volokh Conspiracy law and politics blog, affiliated with the Washington Post. From 2006 to 2013, he served as Co-Editor of the Supreme Court Economic Review, one of the country’s top-rated law and economics journals.

Location GBLT4, Victoria University of Wellington

Tuesday, 3 May 2016

In search of Arrow-Debreu worlds

I remain a bit puzzled as to why I have been utterly unable to convince any insurer to provide me a quote for earthquake insurance for Wellington.

I've mooted the product before; I've stripped it down here to what I think is its simplest form.
In short, I want insurance against a large Wellington earthquake. If the risk is on the order of 1/10 for a large one sometime over the next century, that’s about 1/1000 annual risk. I’d like to purchase a contract that provides a large lump-sum payment if a sufficiently large earthquake hits Wellington. I’m sure there’s a way of specifying a set of legal conditions that would effectively say “If something at least as substantial as the 2011 Christchurch event happens in Wellington, this contract pays out.”

As first cut, I’d suggest basing it on the Modified Mercalli reading for downtown Wellington, with a trigger at MM 9 or higher. The 1855 earthquake was MM10, but nothing else higher than 9 has been recorded in Wellington since colonisation. The Christchurch February quake was MM 9. We would need to check that MM ratings applicable to downtown Wellington are reported for larger events farther from downtown.

I’ll explain why I want this contract, and in doing so potentially explain the size of the potential market.

I was in Christchurch for the 2011 event. That event resulted in substantial uninsurable losses not just from the event, but from the post-earthquake experience. Businesses who had continuation insurance found themselves out of luck when Council barred their entry to their premises: acts of Council are not covered. Homeowners who thought they were insured to a rebuild-as-new standard found themselves instead with revised standards for reinstatement methods that left them substantially worse than prior to the event.* And the process, involving large-scale coordination failures between EQC and private insurers, let things drag out for years. I never want to go through that again, and I suspect that many who experienced Canterbury would appreciate a different kind of contract.

A large lump-sum pay-out that comes if the insured event happens requires no lengthy claims adjudication process: the MM9 quake either happened or it did not. No assessors need argue about whether anything on the house were pre-existing damage. There’s no interface between EQC and anyone else arguing about whether something is over or under-cap.

Instead, I hike out of town with my family as best I can, start my life over somewhere else in the world with the resources to do so comfortably, and have a real estate agent pack out our house and sell it as-is, with all earthquake claims transferring to the new owner to deal with.

There has been sufficient press around the problems in Canterbury post-quake insurance that many owners in the Wellington area would be aware of the problem. Simply announcing the existence of the new insurance product would undoubtedly lead to press coverage that would help to attract new customers.

Moreover, I expect that this is something you could and should take worldwide. California and the rest of the Pacific Northwest, Japan, and other places offer a bundle of offsetting uncorrelated risks that could build a pool for purchasing reinsurance against claims. If you look at the Pacific Northwest, many homes are uninsured because earthquake insurance for natural disaster is too costly, but it’s too costly at least in part because insurers face costly assessment and dispute processes after an insured event, where homeowners will be tempted to pass off pre-existing damage as being due to the event. Insurers then face very uncertain overall liability. With my proposed product, the pay-out is known with certainty: if the event does not happen, claims are zero; if it does happen, the pay-out is the total sum. It is then more like life insurance than like any standard homeowner insurance.

Please let me know if this is a product you think could be developed, or if there’s something obvious I’m missing explaining why this cannot easily be offered.
The only explanation that makes any sense to me thus far is that contracting costs are non-trivial and fixed, that the potential number of customers for such a product is smaller than I would anticipate, and so it is worth nobody's while to develop the contract and set up the reinsurance. The alternative is that insurers are leaving dollars on sidewalks because they're too conservative; in a world with insurance against your celebrity endorser's disgrace, that doesn't seem immediately plausible.

If the actuarially fair price for a $1m payout for a 1/1000 annual event is $1000, I'm happy to pay the standard insurance multiple over the actuarially fair rate for the contract.

* Since then, the High Court has - five years after the earthquake - issued a declaratory judgement that repair to an "as new when new" standard specified in insurance contracts actually means that the repair has to be to that standard, updated to meet current building code. EQC had been instead rebuilding to an alternative standard that MBIE came up with, in which notched bearers, jack and packed piles, and floors up to 5 cm out of level counted as good enough. And those with the patience to go through the whole rebuild process again can now presumably go back to EQC for a do-over. This Press editorial is also good.

Monday, 2 May 2016

Sweet sweet leave

While I was chasing the kids on Fijian beaches last week (and not blogging), the Dom Post ran my piece on tax hypothecation and sugar taxes.
It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.

Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that's mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.

Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn't love the New Zealand saddleback and support its recovery? Nobody.

Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.

The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters' beard oil. And if a tax on hipsters' beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.

But none of that much matters. Treasury would scream, because economists know that these kinds of taxes are abominations. But Labour dismissed Treasury critiques as ideological burps, and National's Gerry Brownlee has been no less dismissive of sound Treasury analysis. Politics rules in the end.

Taxing beard oil may sound frivolous, but consider campaigns to tax soda, or sugar, to fund public health campaigns. If a soda tax makes sense, then it makes sense regardless of whether the public health campaigns are the best use of funds. And if the public health campaigns are that valuable, why is the government not already cutting other less beneficial programmes to fund it?

The answer of course is that public health campaigns worth running are already largely being tried, and that a soda tax makes little economic sense – as Jenesa Jeram shows in her report, The Health of the State, released recently by The New Zealand Initiative. Putting the tax and the health campaigns together hardly improves the economics of the tax-and-spend bundle, but does make the package more politically appealing.
One Prominent Local Auckland Hipster thought the op-ed was about him. Oh, Jackson, you so vain.... But when I was thinking about something that nobody could object to, something really motherhood and feijoa pie, I remembered his perennial pro-Tieke tweets. And from there, the beard thing just kinda followed.

Note too that the case for hypothecated taxes would not at all be improved if the hipster beard thing had any connection at all to Tieke. This is pretty standard public finance textbook stuff. If the tax makes sense, it makes sense on its own. If the recovery programme makes sense, it makes sense out of general revenues.

We have hypothecated taxes on petrol, but that's really a form of user-pays. Petrol tax and road user charges reflect users' use of the roads; the roads are funded by the tax. And with RUC, vehicles that do more damage to the roads pay more. It's not perfect, but it's a pretty decent user charge. Sugar taxes aren't really a user-pays scheme for hospitals.

On a related note, John Roughan had an excellent piece on the public health campaigners' response to our report on sugar taxes and the like.

Tuesday, 19 April 2016

What's the product? Locavore edition

I've wondered how much locavore, or GMO-free, or other strong expressed ethical-preference consumers' demand is real as compared to notional. Do people really want the product they're buying to satisfy all the constraints, or do they just want the warm glow that comes from thinking that it might and that they're good people for affiliating with that kind of product?

We can think about what the two different worlds would look like and reason from there. Suppose there really were very strong effective demand for locavore products. A restaurant, or boutique grocer, catering to locavores would do a lot to demonstrate to their customers that their products meet the constraints. They'd make verifiable claims about their supply chains. If a product couldn't be sourced locally, there'd be explanations about how that product weren't local and why - like that bananas just don't grow here. And if a store or restaurant were found to have cheated, customers just wouldn't trust it any more and it would go under.

In a world where people cared about the feeling more than about the practice, stores would make unverifiable claims about supply chains. It would be ambiguous which products really were sourced locally and which had to come from elsewhere because of cost or other factors. And deception wouldn't be punished so long as the image could be maintained - customers would look for rationales for whatever had happened, and just continue eating there.

Via Thomas Lumley, here's a rather extensive story on scam-versions of buy-local in America. Most claims turn out to be wrong. Shops and restaurants that want to provide locavore alternatives find that customers are simply not willing to pay prices that are multiples of the prices that would otherwise obtain, so they fudge things. And when they're caught, and there's media coverage:
INSIDE EDITION CORRESPONDENT Lisa Guerrero wore a fitted black blazer and stilettos when she busted with her camera crew into Get Hooked, a casual seafood restaurant in Hudson that on occasion hosts micro-championship little people wrestling.

Taking co-owner John Hill by surprise, she confronted him about his “Delicious Lobster Sensation,” part of a Feb. 8 segment about the frequent fraudulence of lobster dishes.

Although the restaurant has its own fishing boats, and Hill likes to say, “Our refrigerator is the Gulf of Mexico,” its lobster roll-like sandwich is made with a commercial product that contains cheaper fish such as whiting and pollock.

After the show aired, I followed up to see how the revelation had affected the restaurant.

“We’re selling more lobster rolls now than ever, and we’re serving the same product,” co-owner Michelle Bittaker said. “What the show forgot to tell you is that the sandwich is $9.95, with french fries and coleslaw. Nobody in America could serve a real Maine lobster roll for $9.95.”

They also offer a real Maine lobster roll on their specials board, she said, 6 ounces for what she calls a more realistic $24.95.
I don't like fraud, and there's a lot of fraud in the story. But I wonder how many of the customers would really prefer knowing. Here, at least, I'd expect the Consumer Guarantees Act could have something to say. There, if customers really wanted to know, they'd make sure to buy from restaurants and shops certified externally as meeting some verified supply chain regime.

I also take it as cautionary tale about NZ agricultural imports into the US.

New Zealand has a great product story to tell: Canterbury lambs have happy lives, and even Peter Singer said it's ok to eat them so long as they're net happier existing than not and so long as their being eaten is what allows them to exist. But as for any real willingness to pay real substantial price premiums for things that are guaranteed GMO-free, or organic, or whatever else... if the restaurant next door has something with a similar label that costs half as much, well, good luck.
Rebecca Krassnoski of Nature Delivered has sold her naturally raised pork to restaurants like The Refinery and Pearl in the Grove. Here’s a little bit of her math:

Her cost to raise a pig to slaughter weight is $240 to $300, plus $50 to slaughter it and $50 to transport it. So, let’s say her total cost is $400. That whole pig, minus entrails and hair, will weigh 192 pounds. If she sells it at $3 per pound, that’s a sale price of $576.

“I make $200 if everything goes well,” she said. “That’s on a perfect day. On average, I’m lucky if I make $100 on a pig and maybe I raise 100 pigs in a year.”

Ten thousand dollars a year is not a living, she said, but “nobody wants to pay $6 per pound for pork.” Most restaurants can’t, or won’t, pay her what she needs to live.

“I can’t think of a time when my chops have been served at a restaurant on a daily basis,” she said. “I think a lot of times farmers with a good story are used as a billboard.”
Americans balk at paying $6 per pound for local natural pork. In NZ terms, that's about $20/kg plus GST.

There'll always be small niches where there are customers willing to pay a premium and who care about the authenticity of claims made. My sister's market in Winnipeg serves some of them, and she has rightly earned their trust. And I think it's great when NZ growers find ways of tapping into those kinds of North American markets.

But setting NZ policy in the expectation that there are $20 notes sitting on American sidewalks waiting to be scooped up if New Zealand could better capitalise on clean green stuff... I'm a sceptic.

Monday, 18 April 2016

Painting features as bugs

I hadn't quite understood New Zealand's carbon emissions trading scheme before I moved to Wellington. The thing seemed a little dodgy with a fair bit of reliance on dubious foreign credits. But then the genius of the thing was explained to me. I've not looked at it properly myself, but the story is interesting, and seems plausible.

It goes something like this.

New Zealand's first preference is for everyone in the world to be on-board for serious GHG reduction. But we can't get to the first best directly. Plenty of countries have dodgy emissions trading regimes with credits of dubious origin. And the worst case for New Zealand isn't doing nothing. Doing nothing is bad, but even worse would be New Zealand taking GHG reduction seriously while other countries don't.

Why is that bad? New Zealand is, relatively speaking, one of the less GHG-intensive producers of milk. Our pastoral systems might not be nice for water, but they're not as bad on methane emissions as barn systems elsewhere. And NZ pushing too hard too fast on GHG abatement, when other places aren't, isn't just bad for the NZ economy. It also risks pushing production away from relatively clean NZ to places where production results in more emissions. Bad for the economy, likely bad for the environment too.

So what's the solution? NZ joins an emissions trading scheme and is happy to accept whatever dubious credits other countries are willing to countenance. Why is that good when dubious credits are, by definition, dubious? It means that New Zealand gets serious about GHG reduction whenever other countries do too. As soon as the international trading systems stop accepting dodgy credits, New Zealand stops using them too. And that means NZ is on board for more substantial climate change action at the same time that everyone else is.

At least that's the potted history I've heard around the Wellington traps. If that's what's going on, it's genius. The dodgy credits are far from hidden and far from a bug. They're a feature that lets New Zealand set up an ETS apparatus that automatically scales to being serious when it's the right time to be serious, and avoids imposing serious costs until the international community is ready to take things seriously.

The Morgan Foundation's report goes through some of this, noting that New Zealand disproportionately makes use of dodgy credits. But it draws a different conclusion than I would. Rather than follow some countries in unilaterally cancelling carry-over credits into the next round, New Zealand should be arguing that all of the trading schemes use a stricter standard on credits. Then everybody tightens up, us included.