Over and underestimating effects of minimum wages

Interest.co.nz editor David Chaston blames raising the youth minimum wage for the loss of 30K jobs.

I think that's overstated: we can't just look at how much more the youth unemployment rate rose than the adult unemployment rate; we have to look at how much more it rose than we would have expected it to rise given the increase in the adult unemployment rate. We expect youth unemployment to be worse hit in a recession than adult unemployment; this time, it's been rather worse than in prior recessions. I've pegged it at around 10-12k more kids unemployed than we'd expect given the prior worst performance of youth unemployment. The method's described here; results here. It remains possible that something else happened that threw a great big wedge between the adult and youth unemployment rates, but you'd need something that happened about the same time as the change in minimum wage legislation and that has persisted from 2008 to present and that has a plausible theoretical reason for causing the effect and is big enough to have done the job.

On the other side, the New Zealand Herald columnist Tapu Misa says minimum wage critics are falsely painting Labour as folks ignorant of economic reality, citing Card & Krueger and Hyslop & Stillman as evidence against disemployment effects of minimum wages. But the American studies over an era where minimum wages were about a third of average wages just don't carry over well to New Zealand, where the minimum wage is half the average. And the Hyslop and Stillman paper, while very nice, spanned a period during which ability to fog a mirror was sufficient to get a job in New Zealand; increases in the youth minimum wage over that period were unlikely to be binding.

It's a bit ironic that Misa writes:

Since the global financial crisis, I've wondered if even economists understand what Thomas Carlyle called "the Dismal Science".

As all economists know, or ought to know, Carlyle called economics the Dismal Science because economists like JS Mill opposed slavery; Carlyle thought that slavery was necessary to turn blacks from subhumans to being fully human. Economists were dismal for wishing to deny blacks the beneficent lash, in contrast to the gay science of poetry that recognized blacks' inferiority. And the minimum wage was introduced by early twentieth century progressives deliberately to disemploy blacks and women, rendering them unemployable.

Those wishing to ally with Carlyle in deeming economics as dismal ought consult the work in which he coined the term: his "Occasional Discourse on the Negro Question", or the US version entitled "Occasional Discourse on the Nigger Question". And their research on the economics of minimum wages really ought to go beyond literature reviews from the Council of Trade Unions.

Dealing with uncertainty

Incoming Cera chief executive Roger Sutton said his advice from GNS Science was for:

A 23 per cent chance of a magnitude-6.0 to 7.0 quake in the next year, dropping to a 10 per cent risk the following year.

More than 90 per cent chance of a magnitude-5.0 to 6.0 shake in the next 12 months, falling to more than a 70 per cent chance in the following year.

Says The Press.

I wish I could just roll d% and have uncertainty be resolved.

Optimal planning - even just individual level "Do I fix my house or just wait a couple years" - is tough under these conditions. And things get worse at higher levels of aggregation. I'd expect that reinsurance will be unaffordable for AMI if the likelihood of another quake is around one in four. On the plus side, if everybody insured by AMI has already had their house fall over (ours hasn't), then potential value at risk from another quake is lower. The same holds for the Earthquake Commission.

The government then becomes the effective reinsurer for AMI and maybe a few other companies once current coverage is due to roll over. I hope the market would look kindly on a large bond issue should one become necessary. I hope that the election campaign will herald the kinds of structural policy changes on the spending side that will be necessary to make a successful bond issue, should one be necessary.

I hope everyone's emergency water and food stocks have been replenished.

Ugh. Ugh ugh ugh ugh ugh.

Bad economics, good politics

Seamus wonders whether politicians can signal sincerity by advocating policies that they know will be unpopular: the doctor who prescribes bad-tasting medicine may be more credible than the one whose remedies taste sweeter.

As with everything else, there's a literature on this. Long story short: politicians do better by pandering.

Let's run a Wittman line as a starting point. Specify two parties and two potential policies. Party A says policy 1 is best for the country; policy 1 is generally disliked by voters. Party B says policy 2 is best for the country; voters' priors tell them policy 2 is better. A bunch of economics wonks jump up and down about policy 1 being the better one; a bunch of talk show demagogues say economists can't predict anything. If voters are rational truth seekers who care about achieving the best outcomes, they'll discount the demagogues and vote for Party A. In that world, pandering can't be maintained, just as a used car dealer can't pass off a Trabant as a Porche.

Add the Caplan / Brennan twist that because voters really don't affect outcomes, they've little incentive to vote instrumentally; they vote to ally with groups with which they affiliate, to express their preferences about what the world could be like, to tell themselves and others what good people they are. Pandering can work in this world.

Now, look out into the real world. If Seamus were right that advocating sensible policies were best, or even were occasionally best, then we'd expect a whole lot better policy to emerge from the political process. Political markets are competitive; if voters wanted the effective but unpalatable medicine, they'd vote for it. Pointing to the NZ reforms of the 80s just says that voters will recant from Christian Science when the deathbed otherwise looms.

As for the lit, here's a couple worth checking:

• Ilya Somin, contra Jacobs and Shapiro
• Ashworth and Shotts: media monitoring of politicians can make pandering worse.

Unfortunately, politicians are largely constrained by what voters want, and what voters claim to want when at the ballot box is generally awful.

Where my taxes go

I like the visualisation over at Where My Taxes Go. In addition to giving the Budget 2011 breakdown by sector, they also give the per capita tax receipt. Here are some of the big ticket items.

• The set of DHBs (Health). 12.4% of total, $2298 per capita.
• New Zealand Superannuation. 11.7% of total, $2174 per capita
• Debt servicing. 4.5% of total, $829 per capita.
• New Zealand Defence Force. 3.8% of total, $700 per capita (though recall that almost none of this is spent on any actual deployment)
• Primary education. $620 per capita
• Secondary education. $456 per capita
• Tertiary education. $512 per capita
• Family tax credit. $492 per capita
• Domestic Purposes Benefit. $430 per capita.
• National land transport programme (highways). $407 per capita
• Student loans. $361 per capita. [Am mildly shocked that the per capita spend on student loans is this high; we must net from it though the $165 per capita in student loan receipts and the $109 in interest on impaired student loans.]

Collectively, transfers through Ministry of Social Development, the health system and education take up about sixty percent of the budget. It would be tough to run a serious attempt at getting the deficit down without taking on some of the bigger ticket items.

Is good economics necessarily bad politics?

Over at the Worthwhile Canadian Initiative, Frances Woolley has been wondering why the HST (previously known as the GST, a value-added tax like New Zealand’s GST), is levied on used furniture. Frances, quite correctly, notes that a sensible VAT would tax the commission part of a dealer’s income (the value-added from dealing services), but not the full value of the furniture. Eric in the comments discussed the New Zealand case, which led the comments thread to talk about the silliness of exemptions, and the limits of what is politically feasible.

This has led me to wondering if politicians consistently underestimate the economic sophistication of the voting public, or at least overestimate the extent to which pandering to a lack of sophistication will translate into success in elections.

I was living in New Zealand when the GST was first announced and debated here in 1984, and when it was implemented in 1986. By 1989 I was living in Canada and witnessing the announcement, debate, and implementation of the GST there. The thing that struck me was the parallels. In both countries, the calls for exemptions of all sorts started immediately, there were assertions that “a tax on books is a tax on knowledge”, there were cries that a value-added tax is regressive and so basic foodstuffs must be exempt (technically, zero-rated, but the public discourse never distinguishes between exemption and zero-rating), etc.

Politically, though, things were very different. In New Zealand I went to two talks by government ministers on campus discussing the GST. In one, associate finance minister David Caygill openly admitted that it would probably cost the government the next election, but it wouldn’t matter as the opposition wouldn’t actually change it. He then went on to say, “but you never know; we might become the first ever democratic government to introduce a value-added tax and still win the next election!”. Associate minister of revenue, Trevor De Cleene, soft-talked a room or angry students and converted just about everyone present over to the logic of a clean VAT. In Canada, in contrast, I went to a presentation by finance minister Michael Wilson also speaking to angry students at McGill, brilliantly explaining the definitional problems that arise when trying to exempt some goods, but completely evading the question of why his logic didn’t apply to food.

In New Zealand, the suposedly politically naive, VAT-introducing government went on to increase its majority at the next election. In my classes at McGill, I used to joke how the Canadian government looked to New Zealand to what was different about their VAT that enabled them to beat the curse of losing the next election. They discovered two differences: first, NZ introduced a clean VAT with no exemptions; second, they named it GST not VAT. So the Canadians, convinced that it was all in a name, introduced a dirty VAT, but called it the GST. The result? The government was reduced to only two seats at the next election.
So what is the political lesson from all this. One could be simply that regressions with two observations and lots of missing variables (non-Canadians please google “Meech Lake”) can’t tell you much. Another might be that, if there is an air of economic crisis about, a policy that is blatantly not populist might serve a role of signalling that a government really is trying to do what is right and be poliically sucessful, not becuase of its true merits but, in a kind of reverse Yogi Bera, be popular because of tis perceived unpopularity.

But I wonder if the message is that politicians should forget the aphorism about a week being a long time in politics, and conclude that doing the right thing can be the right policy for winning elections, even if it is not the best way of doing well in the next opinion poll? Or am I just being naive?

Obvious points on student loans

John Key's suggested limiting access to New Zealand's zero percent government guaranteed student loans; folks nearing retirement age will no longer be eligible to get zero percent loans from the government for living expenses while in tertiary study.

Folks in the Labour Party have called the move discriminatory; some implausible parallels were tweeted.

Two obvious points that perhaps need spelling out.

First, there is a good market failure argument for government guarantees of student loans. Namely, asymmetric information about the likelihood that human capital investments will yield returns that would be paid to the bank combined with the bank's inability to foreclose on your B.A. in Poetry. So the banks may abstain from participating in that market without some kind of guarantee. Nothing in that argument justifies low interest or zero interest loans.

If the point of policy is to remedy the market failure, then best policy would have the government act as backstop guarantor on student loans where the government expects to be able to recoup the loan. Government can always force repayment through the tax system and by confiscating the passports of those with outstanding debt, so long as the debtors have sufficiently augmented earnings consequent to education to pay off the loan.* If it's exceedingly unlikely that someone would be able to repay the loan, it would make sense for the government to decline to extend the guarantee; it's not a market failure that a bank refuses to extend a home loan to an overvalued property where the buyer has little prospect of paying the mortgage. And, by and large, near retirees taking on student loans will be in this group. Sure, some will be retraining for a late career change. But even for those, paying off the loan will be tough. And many others will be taking courses for consumption rather than investment purposes.

So if government guarantees of student loans are meant to solve market failures resulting from asymmetric information, putting in an age cutoff doesn't seem obviously discriminatory. It's no more discriminatory than that a life insurer might refuse to extend coverage to the terminally ill.

If the point of policy is other than solving market failures, then maybe it's a bad idea to restrict access to the elderly. But we'd need to specify then what the purpose of policy is. Barring specifying some point other than meliorating market failure, I'll stick with that it's entirely reasonable to restrict government student loan access.

* Note that the alternative solution to the market failure would solve things by allowing banks to make more restrictive and enforceable contracts with folks taking on loans for human capital. Government is able to solve the problem by compelling payment through the tax system: future income streams then become collateral. Were banks able similarly to compel payment, I'm not sure there would be any particular failure to solve.

Conscientious non-voting revisited

I'd posted before on my reasons for abstaining from voting - I'm a conscientious non-voter. I'd not claimed priority in usage of the term, but I'd not known of any prior use. Turns out Joey King has used the term since at least 2004.

The arguments are different though. I'm a conscientious non-voter because of an odd contractarianism: if I vote, I agree with the rules of the game and consequently have given moral assent to the outcomes. And so I cannot vote without doing violence to myself. It's purely an inward-oriented argument. Voting is then closer to Sophie's Choice, but where your choosing one over the other only adds epsilon weight to which is chosen and non-voting only makes outcomes worse by epsilon. But if others who share my preferences also refuse to vote, I'm probably worse off.

Joey, in the link above, argues that mass conscientious non-voting could force social change. I'm less convinced of that argument - I'd rather expect that if all the libertarians failed to vote, democratic outcomes would be a bit worse as the location of the median voter would move maybe ten points closer to totalitarianism. And folks closer to the median won't abstain.

Scalping - vertical integration

Further evidence that artists are now taking the rents from ticket scalping: Katy Perry's contracts specify that if the venue uses a secondary market, the proceeds go to her rather than to the venue.

HT: @AnnieLowrey

Previously...

Why oh why can't we have a better press corps?

(with apologies to Brad DeLong).

Eric has covered off last week's budget well, so I had thought of writing a parody of the reaction of different interest groups, in the spirit of Fred Dagg's farmers' lament about the lack of a black-singlet subsidy or a gorse retention scheme in one of Muldoon's budgets. But this sort of response is already self-parody, so what is the point?

So instead I am going to put in a plea for better media coverage of future budgets. Here are some suggestions:

1. Don't publish any press releases from interest groups; instead, interview the spokespeople and ask each one two questions: First, "please comment on those parts of the budget that did not relate to your sector"; and second, if you had to put the same total resources into your sector as in this budget, how would you have allocated it differently?".
2. Don't publish any press releases from opposition parties; instead, interview the leaders or finance spokespeople and ask each one, "please state the areas in which you would have spent less money".
3. In a one-marshmellow-now, two-marshmellows-later exercise, promise to give twice as much coverage to anyone whose response is "I haven't had time to fully digest the information yet, let me get back to you tomorrow with a more considered response".
4. Simply refuse to quote any statement with the words "bold", "imaginative" or "Titanic" in it. (To be fair, on the last of these, I didn't see a deckchairs cliché this year, but it will be back.)

Other suggestions are welcome. And while we are at it, could someone please ask Phil Goff why, if a fall in unemployment following a small increase in the minimum wage during a boom period is post hoc ergo propter hoc evidence that a large increase during a recession would not reduce empolyment, why he isn't promising to raise the minimum wage to $20?

Ethics versus ethicists

Only an ethicist could find a way of deeming this nonsense to be ethically required.

TVNZ reports on an infertile couple who had to leave New Zealand to find donor eggs; prohibitions on sale for money led to drying up of the New Zealand supply of willing donors. Those who've made the expensive trips abroad recommend that New Zealand allow donor compensation. But that riles the ethicists:

Professor Gareth Jones, a bioethicist at Otago University of Otago says the situation should be looked at.

"The present reality is that commercialisation of any human tissue is prohibited in this country," Jones told Sunday.

But he said to pay donors changes the whole ethical framework.

"Do we want to have markets of buying and selling for not only human tissue but also children, or babies? I think there are issues involved here ethically."

Professor Jones regards paying for eggs as the start of a slippery slope leading to buying and selling live organs such as livers and kidneys.

Organ sales would save many lives and dramatically improve others, allowing those suffering from kidney disease to get off dialysis. But the ethicists would feel bad because a voluntary trade between a willing donor and a willing recipient somehow becomes unethical if money changes hands. And so anything that brings compensation into the transaction has to be banned, as must anything that might lead to it anywhere down the line. So folks needing donor eggs have to be forced to go abroad, or to go childless if they can't afford it.

Perhaps the ethicists ought to start by insisting that the doctors work free, spending their nights begging for alms by the side of the road. If cash is evil, then the first ones that need be spared its taint ought to be the doctors. If the bioethicists can't convince their medical colleagues to work for free, why should we let them legislate that others have to?

Previously...

HT: Ed.co.nz

Regulatory earthquakes

In yesterday's post, I lamented the state of Manitoba's craft brewing scene compared to Christchurch. A town about two-thirds Winnipeg's size has more craft breweries making fantastic beer even after two really huge earthquakes than Winnipeg has after zero earthquakes.

Well, let's compare the regulations. The typical path for folks in Christchurch is starting out as a home beer brewer, then upgrading the kit a bit and selling at farmer's markets, then getting kegs into some of the bars in town that care about craft beer (Pomeroy's in particular), then getting into some of the New World supermarkets where the liquor manager cares about good beer (New World Parklands is great; South City isn't bad either). Regional Wines and Beer Store are great online shops that also help get craft beer to market. So long as the brewer is paying his alcohol excise tax, things are pretty easy. Cassels supplied the market using brew facilities in their garage 'till they found demand justified upgrading; they're finishing up a brew pub now in Woolston.

Here are the MLCC regs for Manitoba. Of particular note:

• Can only distribute beer to licensees within a designated geographic area. MLCC must approve the geographic area in writing and any changes to the area must be agreed upon between the MLCC and the microbrewery.
  • No chance of testing the market at craft sales or farmer's markets to see if your beer is really as good as you think it is. You've got to start big.
• Authorization by the Federal Government of Canada


• Manufacturing process including labelling in compliance with Canadian Food and Drugs Act and Regulations as directed by CFIA or Health Canada


• Approval from provincial and municipal health authorities


• The manufacturer must sell to the MLCC and buy from the MLCC all product that is to be resold in Manitoba
  • Best I understand things, this means a BrewPub has to sell its product to MLCC before buying it back to sell to customers.
• Exported (this includes to other provinces) product subject to conditions imposed by the federal government and the jurisdiction receiving the product.
• Only one type of manufacturer (Brewery, microbrewery, or brewpub) can be licensed at a single location unless otherwise authorized
  • I think this rules out the increasingly common NZ startup brewery that brews its product in another brewer's facilities: Number 8 Wired, Yeastie Boys - they're out.
• Maintain the same high standards for cleanliness and hygiene in their facility that all food production plants or restaurants must. Subject to inspection, ongoing testing at accredited labs.
  • This means stainless steel kit throughout and pretty much rules out using your garage as a startup venue. Brewers have to be high hygiene to avoid infection of the brew; the regs are going to be superfluous for beer quality but really increase production costs.

And, if the microbrewer wants to sell his product on-site, he needs a retail licence. The MLCC regulates selling prices. Here's what the brochure for prospective manufacturers has to say:

On the first business day of the week, manufacturers holding a retail licence must pay the MLCC for the amount of liquor they sold during the preceding week. They should:

• Make a payment equal to the MLCC's markup on each litre sold....

I think, but am not sure, that the MLCC markup is in addition to excise - that it's compensation to MLCC for the sale lost by MLCC rather than excise payment; the excise would have been paid on the manufacturing side rather than the retail side.

I'm seeking clarification from MLCC on a couple of these. But if that's how things run, it's no particular puzzle why there's no craft beer scene in Manitoba.

Let's hope the prospective changes to MLCC regs will fix things. As things stands, regulations do more harm to craft brewing in Manitoba than two earthquakes did to craft brewing in Christchurch.

Manitoba craft beer

Christchurch, with about 400,000 people, has a huge number of really great craft brewers. A short list, with apologies to anyone I've forgotten (it's not because I don't know your beer, it's because I've forgotten you're from Christchurch):

• Three Boys, whose Oyster Stout is truly excellent; other highlights: IPA, Wheat. I never got a chance to taste Aftershock, the beer that was in the tank when the 7.1 hit. Ah well.
• Twisted Hop. Their Nobokolov Imperial Porter is probably my current favourite NZ beer. Hopefully they'll be brewing again soon.
• Casels & Sons. Medicinal particularly nice.
• Harringtons. Probably produce the best value beers in the country than Wobbly Boot Porter and Clydesdale Stout, though some disagree. Beers that are great for drinking with dinner, but that you don't feel bad about using as base for lamb shanks.

If you expand to the South Island as a whole, with about a million people - roughly as many people as the province of Manitoba, you get to a whole ton more.

I'm in Winnipeg. It's (almost) a craft beer wasteland. Fort Garry is the main local brewer, but honestly, their Fort Garry Dark roughly matches a Speights Old Dark. Not a bad beer - the Old Dark is what I'll get at a Christchurch restaurant that doesn't have proper craft beer - but it doesn't really make the grade. Half-Pints is a recent addition that produces good craft beer - a nice IPA, a fun coffee stout, and a raspberry-tinged beer brewed in support of Winnipeg's Pride 2011 festival. Half-Pints is good. But how can it be that a town almost twice the size of Christchurch and that hasn't had two massive earthquakes has such a bland overall local beer scene?

Stay tuned for tomorrow's post, in which we'll see how Manitoba's alcohol regulations are more devastating to the Manitoba craft brewing scene than were two massive earthquakes for Christchurch's.

Theory of Winnipeg

Winnipeg approaches the Tim's Event Horizon. The Brewpocalypse looms.

When last I lived in Winnipeg, Tim's wasn't a bad place to get decent brewed coffee and rather good doughnuts.

Now, there seems to be one on every block, each with a queue through the drive-through 15 cars long.

And the coffee seems much worse. I don't think it's just long exposure to NZ coffee. The brewed coffee at Tim's just seems much weaker than before.

I have a theory.

There's only so much caffeine and coffee goodness allocated to the Tim's in Winnipeg. Each new Tim's means there's less caffeine in each cup. So drivers have to go to shorter intervals between fixes. Which leads to more Tim's. And a downward spiral.

Heed the warning of Frogstar World B. Before long, naught will be left but Tim's, with cars flitting from one to the next in a desperate quest for caffeine before their drivers give up and evolve into birds.

World famous in New Zealand

Air New Zealand's Kia Ora in-flight magazine has a blogwatch feature. This month's issue features Wellingtonista and Offsetting:

Who knew economics could be so fun? Eric Crampton, senior lecturer of economics at the University of Canterbury, gives his take on all things current, with an economics twist. We've all read about price gouging in a disaster zone - where else can you learn the economic benefits of price gouging over rationing?
www.offsettingbehaviour.blogspot.com

For folks Stateside who've not tried AirNZ, it's generally worth it when heading this way. A rather better flight experience than Qantas, which feels a lot more like a US carrier for longhaul.

And now, Air NZ comes with more Richard Simmons.
I think I preferred the previous iteration...

Budget 2011

Assorted first impressions on the budget.

• Using a dedicated bond issue to partially fund Canterbury reconstruction is a good idea (previously noted here). Not sure how many folks will take bonds paying 4% nominal interest when inflation's set to run reasonably high; hope sufficient numbers of investors will go for it.
• Slowed spending increases coupled with inflation running close to the upper bound means real cuts over time larger than those advertised. It's an election year budget: can't make many real cuts, so nominal spending freezes coupled with increased nominal tax revenues with inflation do some work. Shame there wasn't more courage, but little was expected. I hope the government's growth projections hold up.
• Increased mandatory employer KiwiSaver contributions increase a payroll tax from 2% to 3%, but are scheduled for 2013. That gives plenty of time for employers to shift the burden onto employees as part of general salary negotiations. I think that's a good thing as it reduces disemployment effects. I'm personally disappointed that I'll be losing the beneficent effects of the exemption from the Employer Superannuation Contribution Tax when it's scrapped next year. But it's decent policy as it removes a distortion in total compensation bundles. With the cut in the tax credit, a lot of folks may have to re-evaluate whether Kiwisaver is their best retirement savings vehicle. The loss in flexibility was worth it when the subsidy was high. But for $521 per year, not so much. Remember this if KiwiSaver inflows drop: folks may well be shifting out of the minorly tax preferred retirement savings scheme and into other retirement investments that provide more flexibility.
• I'm not at all averse to the government's selling off partial stakes in SOEs to raise money. The efficiency gains of partial privatization aren't strong relative to full privatization, but it's not particularly bad. But this bit of Key's speech worries me:

  KiwiSaver funds are well placed to participate in the Mixed Ownership Model, which I will come to shortly.
  
  Where State-owned Enterprises raise outside equity, New Zealand investors will be at the front of the queue to invest. We expect KiwiSaver funds to become substantial long-term holders of these investments.

  I don't like partial privatization where KiwiSaver providers are leaned on to invest in the SOEs. Why? Imagine that, 30 years from now, Solid Energy is 51% government owned, 49% owned by the retirement funds. Changes in Solid Energy dividend flows then become of strong public interest as they affect retirement incomes. I worry that political pressure to maintain dividend flows over investment and maintenance could distort SOE decisions over the long term. Hopefully here Key is just saying what he thinks might happen rather than that there will be any particular encouragement. But he repeats it later in the speech - that KiwiSaver, NZ Superannuation Fund, and ACC should all be investing in the mixed ownership SOEs. I've argued before that it's nonsense to require the NZ Superannuation Fund to invest domestically; pushing these investments into the SOE mixed ownership vehicles doesn't help. If the funds raised by partial privatization are just funds held by the government elsewhere in the system, it's a bit hard to see the point.
• I like that they're issuing inflation-protected bonds, if only because relative bond market prices then give a very quick indicator of whether the market thinks RBNZ is meeting its statutory mandate of keeping inflation between one and three percent over the medium term.
• Key committed nothing in promising to support ACT's two bills through to committee as it's always easy to kill them after committee. And spending caps, in practice, are difficult to make binding; there's always some potential emergency that can justify lifting the cap.
• The changes to WFF save money but worsen the EMTR distortions. The latter I think is worse. Abatement rates rise to 25% from 20%. So the non-working spouse in a WFF family considering taking a job paying $14K - $48K per year would face a 45% effective marginal tax rate (17.5% income tax, 2.04% ACC, 25% WFF abatement). Ignoring the moving of the threshold for WFF abatement, you can probably just ratchet this graph up by five points.
• Looming risks. Here's some of Treasury's list of risks, generally unquantified, that might affect revenue and expenditure projections: AMI Support Package (earthquake); Kyoto obligations (hopefully we'll just ignore it like everyone else); Leaky home assistance (risk exceeding the billion already provided for); Rugby World Cup (unquantifiable contingent liability).... It's harder to find plausible upside risks.
• Biggest personal disappointment: that @adzebill's early tweet hearkening the end of PBRF wasn't true (but was reported). It would have been comedy gold. After seven years or so of NZ universities (the other ones, unfortunately for us) working out how best to game the system: which staff to put on which kinds of contracts so they wouldn't count as being PBRF eligible despite effectively being faculty; how to rig a contract so an international high-flyer who's only here a few months of the year gets to count as full time PBRF-eligible and a guaranteed A for the Department (looking at you, Auckland, with a tip of the hat); endless resources put into presenting sow's ears as silk purses ... it's been all kinds of fun. Having the whole thing turned into block grant funding would have been much funnier than Lucy pulling the football away from Charlie Brown. Alas, no sense of humour.
• Tertiary funding also gets real declines, though nominal increases. Unfortunately, Canterbury will be hit reasonably hard by the CPI increase as wage contracts are CPI (not CPI less already-compensated GST changes) linked. Things will be a bit tight.

Electricity "Overcharging" Again

Earlier this month, the Electricity Authority came down on Genesis Energy for overcharing in the wholesale market during a freak 7-hour event on March 26-27 and has retrospectively rest the wholesale price for that period. The price spike, apparently resulted from part of the tranmission network south of Auckalnd being down for a few hours, cutting the far North off from the rest of the grid and giving Genesis an effective monopoly in the North. The spike and resulting angst from buyers was well covered by Matt at TVHE. But what has caught my attention now was the reaction of Labour's energy spokesman, David Parker to the authority's decision.

"The Government will no doubt argue that cutting back the overcharge on this occasion is enough. Labour says it is not good enough. This event is part of a wider problem, and New Zealanders are still paying excessive prices, which the Government defends and allows to continue," David Parker said.

"The excessive prices are yet more evidence of how consumers are overcharged for electricity, and it happened because the lack of an effective competitive electricity market means they can do just that.

"The Commerce Commission report (22 May 2009), based on an in-depth study by Professor Frank Wolak of Stanford University, a world authority, found NZ$4.8 billion of overcharging by electricity companies, equivalent to 18 per cent overcharging," David Parker said.

I have three issues with this:

First, as most New Zealand commentators who have studied the Wolak report have acknowledged (for a symposium of papers on this issue that I have contributed to see here, here, and here), if there have been monopoly rents earned in the New Zealand wholesale market, the amount is nowhere near $4.8b (or even the $4.3b cited in the Wolak report).

Second, it is ridiculous to cite an extreme event where one firm had a temporary monopoly as evidence of a "lack of an effective competitve electricity market".

Finally, while there is an important question of what safeguards (if any) need to be in place to deal with situations where temporary monopolies arise due to transmission constraints, complaining about "greedy" companies, who even with these periods of monopoly are not earning a competitive rate of return on their marginal assets, is a major distraction from the important questions about optimal investment in the transmission network, the incentives of buyers to take out forward cover, the lack of price responsiveness in demand even to predicted extreme events, and so on.

Introspection isn't always the best model

Perhaps this is one reason why do-gooders get frustrated when their earnest entreaties fail to yield the desired effect:

Amara Brook has illuminated this dilemma further. She measured how important environmental issues were to the self-esteem of 212 undergrads. Then she had them complete an ecological footprint questionnaire to which they received false feedback - either positive or negative (ie they were told that they consumed fewer resources than most people, or far more resources than most people). Finally, they were given the opportunity to write a letter to their local politician, on any pro-social topic they liked.

For those students for whom the environment was not important to their self-esteem, receiving negative feedback on the ecological footprint questionnaire actually prompted them to be less likely to write to their politician about environmental issues (relative to the students who received positive feedback about their footprint). In other words, for people who aren't green minded, alarming feedback on a footprint questionnaire can actually make them less sympathetic to green causes. For students whose self-esteem was tied to the environment, negative feedback on the footprint questionnaire had the effect you'd expect, prompting them to be more likely to write to their politician about environmental issues.

The nudgers who think it would be a great idea to tell folks the average power usage in their neighbourhood as part of their bill in hopes of encouraging conservation forget that some folks try for the high score.

When I lived in Virginia, the licence plate on my old Buick was "13 MPG"....

Fractional reserve banking

Bryan's post at EconLog critiquing Rothbard on fractional reserve banking is entirely correct.

And it brings back memories of the Rothbard Graduate Seminar that I attended in the summer of '99 in Auburn. I pressed a couple of the folks there: if we were in a free banking system and people chose, with full knowledge, to use deposit accounts that paid interest in exchange for the bank being able to lend that money out to others, we could hardly call the arrangement fraudulent. The answer I'd then received, if I recall correctly, was that such an arrangement was fine, but it shouldn't be called banking.

I'd be pretty surprised if the nominal change resulted in less confusion. Jimmy Stewart reminded folks pretty well how banking as we now know it works.


And the Simpsons reminded us a bit more recently.

Rule by comment thread

Somebody quipped recently that we should read the comments threads on news articles and despair for democracy.

With that in mind, here are some of the suggestions for rebuilding downtown Christchurch. It's high time that folks other than the Czars get a say in what will happen downtown. And public input's pretty important for some parts of town planning. But a lot of the comments ride pretty heavily on the rights of existing property and building owners. We need to remember that only half the buildings downtown are likely to be demolished. And even demolished buildings still have owners.

I don't know what final cityscape is best. But I'm pretty sure that none of the commenters do either. Should we have mandated mixed use buildings, with apartment lofts over shops on pedestrian-only cobblestone paths? High density apartments within walking distance of commercial areas? Bans on industrial tenants like autobody shops? I've my own preferences, but I don't know why they ought to have any more weight than anyone else's; I especially don't know why they ought to supercede the plans of the folks who own property downtown.

I try to think about frameworks that can encourage decent outcomes. Keeping a loose zoning framework making it easy to build different types of buildings - residential, commercial, even light industrial - and encouraging early posting of plans so people can plan around others' plans doesn't seem a bad way of going about things. Designating cultural and commercial precincts... I'd be a bit more sceptical.

Hiatus

Where we're leaving.

(full series here, HT: Peter Cresswell)

Where we're going.

We fly out to Winnipeg today; we'll spend a week there before driving down to DC via Pittsburgh. Looking forward to seeing family and friends again and popping in on coauthors along the road.

But we weren't banking on Manitoba being in flood. At least my folks' place near Starbuck doesn't yet seem affected.

Manitoba, Pittsburgh or DC folks interested in beers can find me on email or @EricCrampton.

I am really looking forward to having nights interrupted only by an angry one year old (Bryan: folks' mileage may vary on the whole Ferber thing) rather than that plus aftershocks.

We're back in Christchurch end June and trust our housesitter won't throw too many wild blogger bashes while we're away.

Blogging will be light from the road; I will be looking out for the budget though.

Sick quitters?

Robin Hanson points to new work showing that folks on low salt diets are more likely to die than folks eating normal or high amounts of salt. The study follows over 3600 people for about eight years and controls for baseline health correlates like blood pressure, BMI, smoking, and being on blood pressure medication.

I still wonder though whether the "sick quitter" hypothesis raised as explanation for the alcohol J-curve (and thoroughly refuted in that case) might need to be checked. If a couple years after starting in the sample group, your doctor tells you to cut the salt from your diet because your blood pressure's blowing out and you then have a heart attack two years later despite having reduced salt intake, the finding could be spurious.

I'd need to check the actual JAMA paper to see how well they've ruled that out. Off campus access to gated resources is such a pain though.

Full disclosure: I eat a lot of salt. Sometimes, but rarely, I'll even eat a teaspoon of salt if the mood strikes me. BP's fine though. I tend to figure that evolution gave me a taste for salt for a damned good reason and that I'd be overthrowing the wisdom of 30,000 generations were I to hold back. I do compensate somewhat by eating a lot of potassium.

Results from a non-representative sample

Flicks.co.nz ran a web-based survey to learn about Kiwis' film watching habits. The sample skews, as expected, towards young folks who use the internet.

Among that non-representative group, a slim majority download films regularly despite New Zealand's awful average download speeds from international servers, and a large majority of those downloaders do not pay for the downloaded films.

The main reason cited for illegal downloads? Films being released in New Zealand much later than in the States and elsewhere; if all your friends elsewhere are talking about a movie you can't legally pay to see here, you might just be tempted to torrent it illegally.

I don't buy that the survey figures are representative of overall Kiwi downloading habits, but I'd expect that they have a fairly representative sample of those who do download. And the cited reasons for downloading ring true.

I hope the eventual shift to fully digital film distribution to cinemas ends the international windowing of film release dates. It can make sense to wait to send physical media to far-flung small low revenue markets until after the first run theatres stop showing the film in the major markets.

But I've not heard of any Kiwi theatres that have flipped to digital projection to get early access to films. The costs are high but not prohibitive; I'd have expected that a cinema making the investment and then having access to early digital releases would take the market. Or do the distributors preclude single cinemas from doing that? If anybody knows how licensing arrangements here work, I'd be interested in hearing about it. I'm curious.

Antipodean academic blogging

The Age covers the academic blogging scene in Australia. The Aussies enjoy a rather more vibrant academic blogging community than the Kiwis.

I read Core Economics - the team that blogs there is excellent. But I hadn't realised that Core's Stephen King is Dean of Economics at Monash. Here's King on the merits of Monash over Melbourne. I can't imagine Kiwi PVCs doing this; differences among programmes here seem more seen as a problem to be solved than an opportunity.

Once there's enough bloggers around, universities can start doing this sort of thing:

Most Victorian universities have created blogging sites on their home webpages for their opinionated academics and students. ... RMIT University created a site last month called "blog central" as a space for academics to blog, with 15 categories ranging from arts and community to social science and sustainability. Deakin Speaking is a blog page for that university's academics to publish opinions and comments.

I don't particularly like the format of either; they're dedicated platforms rather than syndicators of independently produced content. But it shows there's a critical mass within Aussie universities that doesn't exist in New Zealand. I don't think that any New Zealand university would have enough bloggers to make a go of it.

According to The Age, "thousands of Australian academics have personal blogs, including at least one vice-chancellor...". I don't believe the number's in the thousands unless you count grad students. But it's got to be more than in New Zealand. Here, we have the folks at SciBlogs and maybe a half dozen independents, of which I can only think of two off the top: Xavier Marquez and Bryce Edwards. I really don't know what accounts for the difference between NZ and Australia. Academics on both sides of the ditch face similar incentive structures. Maybe it's a combination of the more demure Kiwi personality and agglomeration effects.

Here's John Sides in PS on political science blogging.

A payroll tax increase? Now?

The Prime Minister signals cuts to come in government spending on KiwiSaver, the tax-preferred retirement savings vehicle. The government currently subsidises KiwiSaver contribution with a one-off $1000 deposit into new KiwiSaver accounts and matches employee KiwiSaver contributions up to about $1040 per year. Employers are required to kick in contributions equivalent to 2% of your pay if you're eligible to join.

This has proven somewhat expensive for the government; consequently, John Key's signalled a halving of the government's contribution, with minimum employer and employee contributions to rise.

I hope that Key doesn't go for any large or quick increases in mandatory employer contributions. Tax incidence says it doesn't matter whether the employer or the employee bears the statutory cost, but if nominal wages are downwards sticky - and I can't believe that wage cuts consequent to mandated employer side contribution increases wouldn't get the employer into hot water - employers will react similarly to other payroll taxes. If it's done through a slow ratchet, employers can more easily compensate by varying the proportion of the total compensation bundle going to employees via cash and retirement funds.

And now I'm mildly curious whether StatsNZ data on hourly wages include effective payments made to employees by employers through KiwiSaver. I doubt that it does. Nominal wage data will then understate the growth in full employee compensation. [Update: One series includes it, another doesn't. I'll have to watch next time to see which is the one quoted in media reports. See here and here. Thanks Scott!]

Next week's budget will be interesting.

Roy on Youth Rates

Heather Roy asks Hon. Paula Bennett a few questions about youth unemployment and the youth minimum wage.

First, Roy asks why National opposed Sir Roger's bill to reintroduce a youth minimum wage (rather than have youths be subject to the adult rate). Bennett's answer? "We weren't persuaded it alone would reduce youth unemployment."

Sir Roger's bill alone would not have reduced youth unemployment. It allowed the committee setting the minimum wage to set a lower rate for youth but did not require that it do so. And, even if the bill had prescribed a youth minimum wage set at some fraction of the adult rate, it would have taken time for that to result in job creation. But that something "alone" isn't enough for the job is hardly a reason to oppose it; do we forgo bread because man cannot live by bread alone?

In supplementary questions, Roy asks if National accepts any responsibility for the twelve thousand youths who've not been able to find jobs because the youth minimum wage is set to the adult rate. I'd quibble with Heather here, but only slightly. As noted above, had Parliament passed Sir Roger's bill, and had the youth minimum wage then been reduced, it would have taken time for new jobs to be created employing youths at the lower rate. I'm reasonably confident in the estimates I've blogged as a measure of the consequence of removing the lower youth minimum wage; I'd be more hesitant to use it as an estimate of the short run benefits of reintroducing a lower youth minimum wage.

But Bennett's answer that it's generally hard for youths to find jobs anyway is disingenuous: the estimate is relative to what youth unemployment would have been relative to adult unemployment in the counterfactual. The general disadvantage of youths in finding jobs is already factored in.

Roy concludes by asking if Bennett agrees with a statement by John Key in 2007 that youth rates give employers a reason to hire younger people and give them experience; Bennett answered that she does agree and listed alternative measures they've been using instead. In other words, youth rates are good for employment but not worth the political cost.

As always, hit the minimum wage tag below to find the prior posts with the estimates and method.

Fiscal externalities of population

Bryan Caplan's changed my mind again. I'd always expected that the overall fiscal externality of having more children was small and, perhaps, slightly negative. Public schooling isn't cheap and neither are the per student subsidies for tertiary education. But I'd not thought too hard about it. I choose to mood-affiliate with Julian Simon and consequently tend to expect that increased population is generally beneficial; I'd just not expected that the effect on the government's coffers was particularly positive on average.

Bryan cites Wolf et al's finding that replacing the average non-parent with the average parent provides a $217,000 net fiscal benefit: total taxes paid by the children less total government services consumed by the children. Since lots of government services like national defence are non-rivalrous, having a bigger population reduces the average burden. The average additional child confers $83,000 in additional net fiscal benefit. The greater is the proportion of spending on rivalrous rather than non-rivalrous goods, the lower will be the fiscal benefit: the numbers for New Zealand would have to be lower since more of our spending is on transfer payments relative to defence.

Bryan argues for child tax credits to encourage greater fertility. Relatively small baby bonuses can push folks at the margin into having an additional child - Bryan says about $9000 would do it, citing work by Kevin Milligan. If folks whose children are expected to have lower than average positive fiscal contributions were more responsive to the tax incentive, the policy's consequences would not be what Bryan's expecting. But the Milligan paper finds the opposite: richer couples' fertility was much more responsive to the Quebec tax credit. There's reasonable heritability of income generating capacity; the baby bonus would increase the average positive fiscal effect over time rather than reduce it.

There's still something weird in the Wolf et al paper.

Nonparents pay about $327,000 more in taxes than they receive in benefits, while parents pay about $278,000 more in taxes than they receive in benefits. The offspring of the parents, in turn, pay over $266,000 more in taxes than they receive in benefits. In each case, the excess of tax payments over benefit consumption results partly from the exclusion of pure public goods from the benefit side of the balance sheet: whereas all tax payments represent a reduction in private consumption possibilities, only the “excludable” part of public expenditures belong in these accounts.

Suppose that the "non-excludable" part of public expenditures totals $300K per capita, giving a slight overall deficit. If those expenditures are invariant to new persons' entry, then we're right to exclude that portion since the benefits received by the new persons come at zero marginal cost. The bulk of the new entrants' taxes help defray the average cost of providing a fixed set of public goods.

But why should we expect that government expenditure on nonrivalrous goods is invariant to population? If spending instead is elastic, then we'd need to count the new spending on rivalrous goods for which the new person's entry were responsible. Depending on that elasticity, we could quickly get back into the world where the fiscal effect is ambiguous.

I'm generally very nervous about taxes intended to rectify fiscal externalities. If the numbers came out showing a negative fiscal effect of additional children, would Bryan recommend per-child taxes? Suppose that more disaggregated data showed that the negative fiscal externalities of children born to poor unwed mothers were large and that abating subsidies for such births weren't sufficient to counteract the negative effect. Taxes? Regulatory measures? Note that the Wolf paper shows a much smaller positive fiscal effect for parents with less than a high school diploma; the required responsiveness of government spending on nonrivalrous goods to increased population need not be large to there flip the sign of the effect.

The permissible boundaries of taxation, regulation, and subsidy effectively disappear if policy needs to correct fiscal externalities.

Shameless Advertising

A combination of a heavy teaching load, earthquake disruptions to, and being on the organising committee for the 2011 New Zealand Association of Economists annual conference has kept me in radio silence on this blog for while. But the last of these has induced me to come out of hibernation to put in a shameless plug for the conference.
The conference is in Wellington, Wed June 29 - Fri July 1. Details are here. Eric and I are both on the programme, Eric exalting the value of alcohol and I exalting electricity markets. The visible hand's Rauparaha is also on the programme, having first gone to a phone booth to change back into his undercover identity as James Zuccollo.

But far more interesting than we humble bloggers is our keynote speaker, Tim Harford, "today's best active popular economics writer". He is scheduled to speak on the Wednesday.

Early-bird registration closes this coming Thursday. We hope to see you there.

Markets in Everything - Pretend to be a farmer edition

Pay £30 and join an online community telling a British farm how to run its affairs:

What sorts of decisions can subscribers expect? And how many?

Decisions will range from relatively simple ones such as what crops to plant and which rare breed animals to stock, to thornier, more controversial issues, such as which cow to slaughter, whether to spray wheat crops with an organic molluscicide to kill the slugs, whether to tail dock sheep, and when to start the harvest.

As the farm is already a going concern, and is run in accordance with the National Trust’s commitment to sustainable methods of farming (Wimpole has undergone conversion to organic), then the community of new Farmers will be given the information and parameters to make their decisions from. Some things will be immovable, but as many decisions as possible will be open to discussion and vote.

The year will be structured around a key decision each month, but there may well be dozens of decisions to be made throughout the year – just like a regular farm manager. These shorter timeframe decisions will be introduced a few months into the project, once we’ve got an idea of how things are going and where people’s interests lie.

The deliberative democracy folks could have some fun with the data that would here be generated. The farm managers craft the referendum questions, which ought to constrain outcomes.

Goff on youth unemployment

Labour leader Phil Goff talks with Larry Williams about youth unemployment (streaming audio, starts around the 18 minute mark).

He says a few things with which I'd agree. He talks about the importance of skills and training; I'd expect youth unemployment could be lower if some kids shifted earlier into training for trades instead of taking courses for potential university entrance. I disagree with him on using fiscal and monetary policy to goose youth employment figures, but shifting resources towards trade certification and training isn't crazy.

When asked about the effects of youth minimum wages, Goff replies that the youth minimum wage went away ages ago and that when the economy was booming, we didn't have high youth unemployment. There's a bit of a dodge in there. Eighteen and nineteen year olds were brought up to the adult minimum wage in 2001 but the under-18s weren't brought to the adult rate until April 2008. It's true that when the economy was booming, we didn't have high youth unemployment. But we have higher youth unemployment now than we did have in prior recessions when the adult unemployment rate was much worse. He rules out having folks working for less than what it costs to live, but a decent proportion of minimum wage earners are second earners or kids starting out while working at home - which is why the Canadian data shows increased poverty from higher minimum wages.

Williams asks Goff directly about the points I've been making here - that youth unemployment would be lower if we still had the lower youth minimum wage. Williams says seven percentage points; this quarter's data says eight, but other quarters have thrown out results from five to eight points. Goff replies:

• I don't think that's proven.
  • EC: That's true. It's not proven. Proof's pretty hard to establish in economics. I think the residual plots are a smoking gun, but there could have been something else that happened mid-2008 that threw a big wedge between the adult and youth unemployment rates and that has persisted until now. I cannot imagine what it could be, but it's possible that I just lack for imagination. It's not going to be cuts to funding for training programmes though - the numbers of positions cut don't make a big enough difference and the effect's timing is tough. In December quarter 2008, youth unemployment was already three points higher than its worst ever performance relative to the adult unemployment rate. National was only elected 8 November.
• Even if he's right, that still leaves you with very very high unemployment
  • EC: Entirely true. But the youth unemployment rate has been above twenty percent since mid 2009; I don't think it would have touched twenty absent having eliminated the youth rate. Some labour market features are really hard to fix. Lowering the youth minimum wage shouldn't be that tough. Another way of looking at it: if you have diabetes and are having to go for dialysis every other day, does that mean you should ignore a totally treatable toothache? Sure, it won't cure your diabetes. But it's still worth doing.
• It isn't fair that a young person doing the same job as an older person is paid less.
  • EC: I'm no expert on fairness. But I'd find it more unfair that a youth is barred from taking a job at lower pay and proving his worth; the employer will pick the worker with a decent track record if he's forced to pay no less for the worker of as yet unproven quality.
• When Larry Williams makes the point that lower wages can be a way for the young folks to get their start, Goff replies, "What you may be doing is simply displacing it so making it better for the employer to take on a young person so they don't take on an older person who then becomes unemployed."
  • EC: There may be something to that, but the US evidence suggests these kinds of displacement effects are relatively small. And we really need to remember our history. The point of the minimum wage for the early progressives was that it made the normatively unemployable positively unemployable - the displacement effect caused by forcing folks out of work through the minimum wage was the intention.

Big picture, Goff's right that the youth minimum wage can only account for a minority of current youth unemployment and that getting the economy back on track, though I disagree with his proposals for doing so, is best overall. Reinstating a lower youth minimum wage would likely only improve things slowly over time. But unless we're happier with youth unemployment being on a permanently higher track relative to the adult unemployment rate, we ought to consider reinstating youth rates.