Screwed?

Bill Kaye-Blake gives his bleak assessment:

Well, Christchurch is screwed. Sorry for the language, but it’s true. And the rest of the country should take notice, because this is what will happen to them in a big event. The problem is the government — EQC and Cera — and the insurance companies. It’s the eternal run-around. It’s your worst medical insurance problem while waiting to renew your driver’s licence at lunchtime on a Monday.

The government is doing what bureaucracies do. It is creating processes. It is making sure that everything is correct, that all the boxes are ticked, and, above all, that their asses are covered. So it moves slowly, carefully. Safer to keep people from doing something than allow them do the wrong thing.

Insurance companies are doing what they do. They are minimising their expenses and protecting their bottom lines.

We have been pretty lucky. Our house is perfectly habitable while we wait. It's going to be more expensive to heat this winter as the weatherboards are no longer as tight as they ought to be, and we've been deferring a few other improvements that are best bundled with all the other repairs that are needed. But we're in no particular hurry to get everything done - especially given the 75% chance of  another plaster-cracking event and the 23% chance of another pile-and-foundations-heaving quake.

Bill gives a couple of examples of Christchurch's problems. One of them is worse than he thinks.

He notes that a change in the regs has let insurers deem a lot of red zone properties repairable where previously they were write-offs giving a payout at the cost of building a replacement home; he wonders how they'll rebuild on condemned land. Well, they won't, and that matters. In normal times, insurers have strong incentives not to lowball the cost estimates on repairs versus rebuild; the insured party will notice pretty quickly if the house has not been fixed to an acceptable standard. But in the red zone, there will be no repairs. Instead, if I understand things correctly, insurers provide  notional estimates of repair costs in an environment where the only way of disputing their estimate is commissioning your own estimate and going to court. We might well expect pervasive lowballing of repair estimates that bank on the insured's difficulty of navigating through things.

It's doubly galling that insurance companies can simultaneously hang on the new regs as justification for lower payouts and insist on the older building code in determining the standard to which repairs must be made. It's surprising that there's not yet been a declaratory judgment on whether insurers' "full replacement cost" policies must deliver commercial buildings that meet the code that existed at the time of contract or the code that applies at time of rebuild. Getting a declaratory judgment on this is something a sane Council would have prioritized.

While Council's made some (*) great efforts in getting the sewers and water supply working again, onanistic light rail visions and new stadium plans seem more important to our Mayor and Council than things fundamentally more important to anybody on the East side of town, to commercial property owners downtown, and increasingly to the West-side folks now inconvenienced by rental price increases from East-side refugees.

Wellington ought to be awfully worried about getting EQC fixed before they get their earthquake. And, adopting the Productivity Commission's recommendations about easing up the regs around land use policy isn't just sound policy for housing affordability, it also makes the whole country less fragile in case of earthquake.

Leaving the farm

Bill Kaye-Blake says there's not much that can be done about long-term trends towards rural depopulation. And he puts rural New Zealand especially on the wrong side of broader trends:

Technology isn’t going to be the saviour of rural New Zealand. We’ve been hearing for years that new communications technologies (will) allow us all to work from home, the cafe, and the beach. We do that to some extent. A few people do build business empires on the back of broadband. But we also spend lots of time in our offices, seeing and talking with our co-workers. One of the interesting economic geography arguments I’ve seen is that technology is making face-time more valuable. As a result, work that requires us to spend time with each other is becoming more highly paid, and work that can be made routine and parceled out in bits and bytes is becoming less valuable. New Zealand is on the wrong side of that trend, and rural areas even more so.

Let's take the agglomeration economic geography arguments as starting point. Tech is more a complement to big cities than they are a substitute for face to face interactions. Who gets the strongest benefit from this in a world that's mostly free-trading? Big global cities, not Auckland. Our small size makes us, over time, less competitive in sectors that compete with international big-city industries; our comparative advantage then pushes farther towards agricultural production.

This is already happening too: it's not crazy to see the "Dutch Disease" stuff as just being international markets telling us to put resources into the sector where we have a comparative advantage (dairy, ag production), abandon the ones where we don't, and build non-traded services around the sector where we have the comparative advantage. Our cities would then wind up doing more to provide domestic support services for the ag sector than building innovative non-agricultural products for international markets. And then it's a bit of a race between productivity increases in domestic agriculture pushing down needed labour and relative prices pushing towards intensified agricultural production yielding migration flows to the countryside.

Best counterargument: Peter Thiel is investing heavily in the NZ tech sector, seeing here perhaps a comparative advantage in sane regulatory approaches (albeit one that's eroding).

I still favour strongly increased immigration coupled with fixing urban land use policy to make our cities more internationally competitive. And who knows - maybe some of those migrants would then decide they'd prefer to live out in the countryside. It is ridiculously beautiful out there.

Welfare reform

New Zealand moves towards welfare reform, with a greater emphasis on moving recipients, especially those on the DPB (our version of AFDC) into work. Those with children aged 14 and up will be expected to make serious efforts to find full time work; those with children over the age of 5 should be finding part-time work.

The change will, hopefully, lead to most income support for single mothers being handled through Working for Families, a wage subsidy scheme similar to the EITC, and indirect subsidies for childcare via both government subsidization of early childhood centres, tax credits for childcare expenses, and additional subsidies for childcare for low income families.

My usual worry on requiring parents on the DPB to seek work when their youngest child hits age X is that it provides reasonable incentive to have another child at that point: if MSD made data available, it would be awfully interesting to run probit on likelihood of an additional birth conditional on hitting that age threshold. Apparently 4,000 children were born last year to women who were already receiving the Domestic Purposes Benefit.

The latest changes have taken some account of this incentive. The birth of an additional child while on benefit provides one-year's respite, followed by a resumption of the status that existed ex ante. So if your youngest child was 5 when the next one came along, the expectation of part-time work would resume after the one-year hiatus. The Greens were worried the government might go farther and require long term contraception as condition of receiving a child-related support package; it looks like National's not going that way. It's not immediately obvious to me why such requirements are so objectionable, but neither is it obvious that the chosen policy alternative won't work. If we're going to worry about fiscal externalities imposed by those who choose to drink too much, or perhaps even ski without helmets, I can't see what logically keeps this off the table.

The changes also incorporate some targeted paternalism. Teen parents and young people on benefits will receive extra payments for completing budgeting and parenting courses; rather than receiving payments directly, their rent and utilities will be paid directly by the government with remaining funds under stricter monitoring through payment cards. Bill Kaye-Blake doesn't like the programme's paternalism:

The ‘managed system of payments’ just sounds awful. It message is, ‘You haven’t learned to take care of yourself, so we’ll just do it for you. Here’s your pocket money’.

I'm no particular fan of paternalism either. But if it's going to be anywhere, targeting it here isn't crazy. Scott Beaulier and Bryan Caplan make a pretty convincing argument that the behavioural anomalies that behavioural economists worry about hold especially strongly among the poor. Note: my post above-linked suffered linkrot; the original Beaulier & Caplan article is here. Beaulier and Caplan argue for reducing the size of the welfare state, but you can also take the article as implying that welfare payments ought to be combined with fairly prescriptive approaches to benefit use combined with directed training to help recipients learn the skills to help keep them off of benefits when time limits hit. Combining the paternalism with training to wean them off the paternalism doesn't sound nuts.

Bill worries too about consequences for existing children whose parents are on the benefit. I'd share some of those worries, but just look at the scope of support already available to working poor families. And payments aren't killed for failure to find a job given an honest attempt; they're killed by proving to a welfare case officer that you're utterly uninterested in trying to find work.

More broadly, the reforms are in keeping with a reasonable social contract for social support payments. Middle class support for welfare disintegrates when it becomes seen as a way of life for those who could work but choose not to. Charles Murray documented that in the US in the 1980s; Bill Clinton's welfare reform followed. Reforming welfare such that it provides temporary support for those falling on hard times, longer-term support for the disabled, and incentives keeping those getting a helping hand from becoming dependent on the system is a pretty good way of ensuring that the social compact over welfare doesn't break down over the longer term. The Greens' complaint that it's unfair  to require DPB mothers to look for work after a year rings pretty hollow for those of us whose kids have been in daycare since they were three months old so we could earn enough to pay the taxes to pay for the system.

Critics also ought to keep in mind that, the longer things are left before reform, the greater the likely support for tougher approaches. American welfare reform brought lifetime maximum welfare eligibility of 5 years for most folks.

Do follow Lindsay Mitchell for what's likely to be the best ongoing coverage of NZ welfare reform.

Stories need scarcity, and unrelated bits

Bill Kaye-Blake has migrated over to a new blog, Groping Towards Bethlehem. I'll comment on a few of his recent posts here; I'm sure his blog will be worth following in future for those watching Kiwi econ policy.

• Bill's bored by a SciFi story which effectively finds the end of scarcity - the protagonists do away with constraints on space, energy, time and mortality.
  
  I've not read The Number of the Beast, but Bill didn't mention whether knowledge remained limited - if the multiverse already has a thorough and completely accurate Encyclopaedia Gallacticus. Presumably the protagonists could find challenges in expanding the domain of knowledge. Or, finding ever more creative forms of hedonism. 



• Does welfare reform posit $20 bills lying around?
  
  My quick read of National's proposal was that it didn't seem to do a whole lot; the biggest change was that additional children had while on the DPB won't extend the duration of the benefit by as much as it would have ex ante [see also Lindsay Mitchell]. I'll agree with Bill about the multiple barriers to work issues, and he's very likely right on National's overselling the benefits.
  
  But most outrage about the proposals thus far seems centred on the immorality of forcing women back to work before their kids are 14. This falls entirely on deaf ears for me - both our kids have been in daycare since they were 3 months old, in part to keep our family net income sufficient for raising the two kids adequately; were we not paying to keep a few single mothers home with their 12 year olds, maybe we could afford to choose otherwise. I suspect that more than a few double income families with kids in daycare get just a bit angry when called on to solve the injustice of that folks might not be able to choose to stay at home with kids at others' expense. If I had a button to push, it would be for 1) more daycare funding; 2) making childcare benefits of limited duration; 3) requiring Norplant (or other equally-effective equivalents) as condition for receiving the childcare benefit. I can accept that there are cases where it's more efficient that the mother stay home with the kids rather than pay for daycare given the woman's earning potential; I'm happier eating the losses from subsidizing daycare than the losses from screwing up the incentives. 



• Externalities and risky buildings. Bill's thinking about things in the right way: buildings with unreinforced masonry impose a risk on passers-by in case of earthquake - a negative externality - while providing uncompensated amenity value - a positive externality.
  
  Optimal response, I think, will have to involve Councils' putting some budget [hopefully supplemented by private donation] into paying building owners for heritage amenities. Rather than listing thousands of buildings on heritage registers and making it hard to fix them up, list the couple hundred most important and pay their owners for the heritage amenity provided. Then either add into a building's property tax assessment a fee for risks imposed by unreinforced masonry or require holding adequate liability insurance for damage potentially done to passers by in an earthquake. Some older masonry buildings will be torn down, but if their heritage value isn't sufficient to make them worth the risk, that's optimal. But we won't know it until we start putting some real prices on heritage value and paying owners for it, and charging owners for risk imposed.

I'm pleased to see Bill striking out on his own! We now have a decent selection of economics blogs by NZ-based academic economists: Offsetting, Anti-Dismal, and Sam Richardson; we've also another economics blog by non-academics that capably tackles academic issues: the Visible Hand. If we're not careful, we'll soon have enough folks around for reasonable conversations.