Tiki tours and useful idiots

Back during the Cold War, Western intellectuals were given guided tours of the Soviet Block and sent home to heap praise on the wonders achieved by Stalin. They were collectively called "useful idiots": too dumb to see through the Potemkin villages raised, but useful for internal and external state propaganda.

Last week, Liberty Scott started posting and tweeting on Gareth Morgan's motorcycle tour of North and South Korea. He pointed to numerous instances of Morgan's appearance being used in North Korean state media helping to legitimise the regime.

When I visited the DMZ on a USO tour back in 2007, we were given really strict instructions by the American military. Do not smile at the other side. Do not point. Do not do anything that the North Korean agents on the other side could photograph and print in their newspapers as "Westerner points to the Glorious North, admiring the wonders of Juche." I'm not generally all that keen on "do as I say" regs, but these ones made a lot of sense. One of the world's most evil regimes was staring back - literally, guys with binoculars and big-lens cameras - and I was publicity-shy.

But maybe playing the regime-supporting shill while there was needed so that he could have some chance at seeing what was going on.

Matt Nolan at TVHE yesterday pointed to Gareth Morgan's comments on his tour. Morgan wrote:

Having passed successfully through the demilitarised zone Gareth explains to the world’s media why the West’s “beat-up” view of North Korea is completely wrong.

Gareth and Jo and their group were free to set their own route through North Korea, witnessing at first hand the lives of ordinary North Koreans.

What they found surprised them – a people who were poor, yes, but wonderfully engaged, well-dressed, fully employed and well informed. In Gareth’s view, what North Korea has achieved economically despite its lack of access to international money has been magnificent.

He and Jo support active steps towards providing greater opportunities for ordinary Koreans from North and South to interact together – a goal of leaders from both North and South Korea. Hopefully, with enormous interest from the world media, this trip will be the catalyst for such a change.

Unbelievable. I'd thought that he was going to come out claiming that starvation works wonders on reducing feral cat numbers; this is worse.

Maybe there was some case for the tour somehow facilitating better North-South talks. Unlikely, but not impossible. But that the West has a "beat-up" view of North Korea? They have freaking concentration camps! Morgan's next tour could perhaps hit a few of those off-piste highlights. Morgan found the North Koreans with whom he spoke wonderfully well-informed; it's problematic even asking what that means in a place where preference-falsification is a necessary survival characteristic. As Xavier Marquez wrote:

There is a terrific story in Barbara Demick’s Nothing to Envy: Ordinary Lives in North Korea (pp. 97-101), which illustrates both how such control mechanisms can work regardless of belief and the degradation they inflict on people. The story is about a relatively privileged student, “Jun-sang,” at the time of the death of Kim Il-sung (North Korea’s “eternal president”). The death is announced, and Jun-sang finds that he cannot cry; he feels nothing for Kim Il-Sung. Yet, surrounded by his sobbing classmates, he suddenly realizes that “his entire future depended on his ability to cry: not just his career and his membership in the Workers’ Party, his very survival was at stake. It was a matter of life and death” (p. 98). So he forces himself to cry. And it gets worse: “What had started as a spontaneous outpouring of grief became a patriotic obligation … The inmiban [a neighbourhood committee] kept track of how often people went to the statue to show their respect. Everybody was being watched. They not only scrutinized actions, but facial expressions and tone of voice, gauging them for sincerity” (p. 101). The point of the story is not that nobody experienced any genuine grief at the death of Kim Il-sung (we cannot tell if Jun-sang’s feelings were common, or unusual) but that the expression of genuine grief was beside the point; all must give credible signals of grief or be considered suspect, and differences in these signals could be used to gauge the level of support (especially important at a time of leadership transition; Kim Il-sung had just died, and other people could have tried to take advantage of the opportunity if they had perceived any signals of wavering support from the population; note then the mobilization of the inmiban to monitor these signals). Moreover, the cult of personality induces a large degree of self-monitoring; there is no need to expend too many resources if others can be counted to note insufficiently credible signals of support and bring them to the attention of the authorities.

Even if Morgan was away from his handlers, everyone is a handler. That's the point of a totalitarian regime. Any disclosure can get you and your family sent to a concentration camp because somebody else will have purchased an indulgence by dobbing you in. And the safest course is making yourself believe the things you have to say.

Compare Gareth Morgan's visit with a couple other recent Western visits. Here's Neil Woodburn's travelogue. Here's what Curtis Melvin did while visiting North Korea, and subsequently. Melvin's mapping project would let Gareth Morgan check to see which prison camps he missed along his tour. Liberty Scott's update has some useful recommended readings as well.

Can tax and subsidy incidence really be negative?

Imagine a country where shoes cannot be imported and furthermore the elasticity of supply of shoes is very low. Imagine that the government in this country subsidises shoes. The person on the street who doesn't understand tax incidence might think that this policy lowers the price of shoes by the amount of the subsidy. An economist, however, would be likely to point out that, because supply is fairly unresponsive to price, the subsidy mostly results in an increase in the before-subsidy price to the seller.    In our jargon, he would be saying that most of the incidence of the subsidy would be on sellers and only a bit on buyers.

So far so good, but what if that economist now explained that removing the subsidy would make shoes cheaper to consumers, by stopping buyers from bidding up the price. This would seem to now be claiming that the incidence of the subsidy on buyers would be negative. Sure removing the subsidy would reduce the price to sellers but it would be a very strange model that would have the price falling by more than the reduced subsidy. In fact, it would seem to require that the supply curve be downward-sloping. 

And now, imagine that the economist further claimed that removing the subsidy would be good, as it would result in investors switching from investing in shoe production to investing in productive assets. This would go beyond strange. Sure the subsidy might have been diverting assets to having too much shoe production and not enough other stuff, but in what sense would we say that producing shoes is unproductive? And, how is it consistent to argue at the same time that removing the subsidy would lead to less investment in shoe production at the same time as arguing that it would result in lower shoe prices for consumers? 

O.K. this country, this policy, and this economist are fictitious. But if we change "country" to "New Zealand", "shoes" to "housing", "subsidy" to "tax exemption", and "economist" to "Gareth Morgan", you pretty much get this blog piece from Gareth on Tuesday. 

Gareth argues, correctly, that owner-occupied housing receives a favourable tax treatment relative to other investment since we are not charged income tax on the implicit rental payments we receive from ourselves. But he then goes on to argue that removing this exemption would "bring affordability within reach of many more families". This is an argument I have commented on before; it really looks like arguing that tax incidence can be negative: If housing is effectively subsidised by the tax system, we can't expect removing the subsidy to make it more affordable. 

And he then says that our tax treatment of housing has "discriminated against productive investment in favour of property speculation". Now if he means that we have invested too much in building houses and other kinds of investment, then we have to ask: In what sense is it unproductive to build houses that provide housing services to people that they value enough to pay for? And, how is it possible that curtailing such investment would "bring affordability within reach of many more families"? If, in contrast, he means diverting investment resources from building new equipment to buying existing houses as speculation, I have my perennial concern that this line or argument fails to note that buying existing houses for speculation or other reasons is not "investment" at all, and the assumptions you have to make to conclude that such behaviour diverts resources away from productive investment are a stretch to say the least.  

One final curious seeming contradiction in Gareth's post. At the start, he notes "When, not if, interest rates increase, this illusion that housing is `affordable' will burst....house prices will adjust". But later he suggests that if we don't remove the tax-favoured treatement of housing, he should "go out and buy another three houses now and just wait for the rest of you to bid the prices up". Why would that be good personal investment advice if, as he says, house prices are sure to fall? What am I missing?

Optimal cats

I'm not sure that you can make a case for the phased abolition of cats from New Zealand within a utilitarian framework, even one counting animals' utility directly, without arguing that you also have to abolish any carnivore elsewhere in the world whose prey is not at the Malthusean fringe.

It's conceptually easy to add animals' utility to utilitarianism; read Peter Singer. Animals utility will be weighted by their self-awareness and capacity for pleasure and pain, but it counts positively and directly in the social welfare function. This interview of Peter Singer by Tyler Cowen is superb, though it doesn't hit this topic directly.

If the marginal increase in terror imposed by cats on their prey*, accounting for that cats may have greater self-awareness and greater capacity for pain and pleasure than do prey species, outweighs the cat's enjoyment of its own life (including all the murder) and the cat owner's enjoyment of the cat, then a Singer framework would support getting rid of cats. If pet owners get particular disutility from the forced euthanasia of their pets relative to not being allowed to get a new one, then it could be consistent with Gareth Morgan's proposed mandatory neutering and non-replacement.

But it's also consistent with other required policies. The proposal above is only optimal where prey animals would otherwise have had happier lives and deaths: trading starvation at the Malthusean fringe for death by cat might not be all that bad. But consider rabbits and mice in Britain that feed on crops and are not at the Malthusean fringe. Foxes that eat them then do harms little different from the harms imposed by cats here. And what of the terrors keas impose on helpless sheep?

Aha, you might say: rabbits and mice are not endangered, while some New Zealand native bats and birds could be. This matters in a Singer setup to the extent that people value endangered species more at the margin than they value rabbits and mice, and to the extent that any extinction may have flow-on effects elsewhere, but we also have to weigh it against cat owners' enjoyment. And given the likely rather large consumer surplus provided by cats, well, I'm not sure the case is obvious.

If you step outside of the utilitarian framework, it's perhaps easier to derive a "abolish cats but leave foxes alone" conclusion. Harry Clarke puts up a biodiversity standard, arguing that biodiversity should be sought for its own sake and regardless of whether people gain enjoyment from biodiversity. But if there's a continuum of policies that could be undertaken to encourage biodiversity, and if some are very costly, we have to draw a line somewhere about trading off biodiversity against other goods. And that puts us back into a utilitarian cost-benefit assessment even if we're adding in biodiversity as a non-preference-related constraint.

I'm not against this kind of messy pluralism; it's close enough to my own messy pluralism, where I invoke liberty side-constraints on utilitarianism rather than biodiversity side-constraints. But isn't it worth weighing up the shadow prices of the incremental gains? You have to put ridiculously high weight on the side constraint to reckon we shouldn't even consider cat owners' forgone enjoyment. And I'm not sure that there isn't a fundamental underlying anthropocentrism even to biodiversity standards where at least some of it seems to require choice among equilibria, and a lot of weight put on particular ex ante status quos. If many of New Zealand's species arrived here long after separation from Gondwanaland, and then evolved here, how far back should we go in turning back the clock? Sure, there was a stable equilibrium here before the arrival of Maori. But there would have been a stable equilibrium before the arrival of bats and buttercups too. And if the pre-human equilibrium was the 'best' one because it included some best stable set of creatures that didn't exist elsewhere, and we should invest resources in maintaining that set of creatures at the expense of other ones, why shouldn't we also invest resources in developing new creatures that do not exist elsewhere? There are lots of ways of increasing biodiversity.

* Every animal dies of something, eventually. If the cat kills an animal that otherwise would have died a painful death of Malthusean starvation, it has done no harm and may have done good. If the cat kills an animal that otherwise would have had a long and happy life because the environment is well below carrying capacity because there are too many predators, then it has done harm. If it kills an animal that otherwise would have soon been eaten by a weasel, rat, stoat or possum, then it's done no harm. See discussion of vegetarianism and eating fish in the Cowen-Singer discussion above-linked.

Kill all the kittens

Gareth Morgan wants to eradicate cats from New Zealand. His campaign website does a good job in describing the various evils cats perpetrate upon our ridiculously pacifistic native wildlife. But it's missing the first thing I'd have expected in a policy campaign coming from an economist: a cost-benefit analysis.

First, how much consumer surplus is generated by cats? It has to be pretty big. The New Zealand Companion Animal Council claims* that the 48% of NZ households owning at least one cat spend on average $838 per year on their cats. 1.419 million cats at $466 per cat is about $660 million spent on caring for cats. I don't know what the price elasticity of demand for cat ownership is, but aggregate surplus seems awfully likely to be big.

Second, how elastic are wildlife numbers to cats' presence? Cats kill a lot of things; they're awfully murderous. But if they weren't there, would native wildlife rebound, or would the population of other predators expand with the reduction in competition?

Finally, how much value do we really place on native wildlife? Sure, we get some existence value from the birds and lizards that cats eat, and it's nice seeing them and hearing them. But is it enough to trump the consumer surplus that people get from cat ownership? I don't know and neither does Gareth. But I'm not the one wanting to kill all the kittens.** Shouldn't we have to run a cost-benefit analysis before considering kitty genocide?

Gareth does recommend a few potentially useful things, like belling cats. I doubt that the cats who do the most damage would be the ones that are belled, but the proposal at least doesn't seem likely to do much harm. Another option: make your next cat a Persian. Our last one was so ridiculously over-bred*** that she could barely eat kibble, much less do any harm to, well, anything other than furniture, carpets, clothing, and my dignity.



* I have no clue how reliable their survey is.

** Ok, he isn't really saying we should kill them all, just that we should phase them out over time. But, still, I'm pretty sure that every time you drink a Coke, Gareth Morgan kills a kitten.

*** We got her from the Cat Protection League's cattery. Long story there. After we moved to New Zealand, Susan insisted we get a cat. I asked that it please please please not be another long-haired one. She sent me to the bank machine to get cash to pay the Cattery after we'd been looking at a nice short-haired one. When I got back, she'd signed all the paperwork for a defective Persian with a substantial underbite. The cat was lost eight years later consequent to the earthquakes.

More on Housing Affordability: Supply versus Demand

Over at TVHE, Matt has followed up on my post here on Gareth Morgan versus the Productivity Commission, arguing that we shouldn't view supply and demand explanations as mutually exclusive. Now I think Matt and I are pretty much in total agreement, but slight differences in language might make our posts seem at cross purposes, so I thought a couple of clarifications are in order.

First, the interesting question is not whether the cause of house-price inflation in New Zealand is supply, demand, or some combination of both. Obviously, since house prices are set by mutual agreement between buyers and sellers, prices are always and everywhere the result of both supply and demand. Rather the issue is, to the extent that house prices are inappropriate for some reason, whether the source of the inappropriateness is acting through supply or demand. Matt frames this by asking whether something is pushing demand for housing beyond what is "socially optimal" (or, by extension, restricting supply below what is socially optimal). Another way of saying this is to ask whether the policy response to high house prices would work by increasing supply (say changes to zoning or consent processes) or demand (say, changes in the tax treatment of housing).

The second clarification is that saying that supply and demand are not mutually exclusive is more than just saying that influences on both sides can contribute to the final effect. In the case of tax policies, the purpoted cause of house-price inflation only makes sense if there is an underlying problem with supply. To illustrate, consider Matt's statement

The key point against supply side issues will be fact that rental growth hasn't gotten as scary at any point -- if there are "too few" houses, then we should really see the cost of housing services/rent pick up.

The idea here is that if house prices are going up faster than rent, then the opportunity cost of owning a rental property must be rising faster than the direct income derived from it, so the only motivation must be the expectation of capital gain. This is true, but the expectation of capital gain only makes sense if the underlying trend is for the demand for housing for non-investment purposes to grow faster than supply. That is, to explain house inflation today as driven by tax-favoured investment, we need to assume a problem with restrictions on supply in the future.

Furthermore, consider what we would observe if there were no favourable tax treatment for owner-occupied housing or income derived from capital gains, but still an expectation of demand growth outstripping supply growth in the future. As long as the capital gains tax rate were not set at 100%, it would still be the case that expectations of future house price inflation would drive inflation in house prices today, there would be a positive after-tax return from capital gains, and hence a slower rise in rents, exactly the observations that Matt suggests might imply the problem is not exclusively on the supply side.

The bottom line here is that the favourable-tax-treatment story simply implies that problems due to insufficient supply will bite a bit earlier than they otherwise would have done. If there is no problem with supply being unable to keep pace with underlying demand, the tax-treatment issue is irrelevant.

Gareth Morgan on Housing Affordability

Gareth Morgan takes aim here at the Productivity Commission, for emphasising land supply as the major determinant of the high cost of housing in New Zealand. He notes that

[t]here are cities in the world with five times Auckland's population, living in an area no larger than Auckland's, and with housing prices lower as a percentage of income than in New Zealand.

Gareth, in contrast, points the finger at the Reserve Bank for directing banks to emphasise mortgage lending (for prudential reasons), and the tax code for favouring housing. He says that as a result of this "toxic duo" we have

driven the price of housing from twice the average household income to six times.

He restates his call for a capital tax (not a capital gains tax) to remove a distortion in favour of housing. Now, as I wrote here, I think that a capital tax has some really horrible properties that would swamp any benefits, but this is secondary to why I don't agree with this analysis of the NZ housing market.

First, explanations don't have to be either-or. Even if we agree that there are problems in New Zealand capital markets that contribute to house inflation, surely it would be the case that those problems are going to be more acute the lower is the elasticity of supply of land for housing?

Second, one of Gareth's concerns about the tax advantage given to housing is that it encourages people to buy housing as a path to prosperity, which presumably means that it is based on expected capital gain. Now this either means that house prices have been pushed up by a bubble, which will eventually burst without any change in the tax system, or that the fundamental price of housing is rising, and speculation is just bringing those price increases forward. If that is the case, then removing any favourable tax treatment on the capital gains from home ownership might cause a one-time drop in house prices now, but a faster increase in those prices in the future.

Third, Gareth's other concern about the favourable tax treatment given to housing--and the one that motivates Gareth's call for a capital tax--is the familiar fact that the implicit income earned from selling housing services to oneself in owner-occupied housing is not subject to income tax (although the transaction is implicitly subject to GST). This distortion will indeed cause the demand for housing to be higher than it otherwise would have been. But it will not cause the after-tax price of housing services to be higher, so again, it is hard to see how removing the tax distortion would be a solution to the problem the Productivity Commission are addressing.

Finally, if looking to the tax code to explain the change in house prices over time, or differences between countries in the fraction of income devoted to housing, one needs to identify time-series or cross-section differences in the tax code. Pretty much all countries have a tax code that favours owner-occupied housing and always have done. If anything, we have moved the tax code away from favouring housing in recent years with changes in the treatment of investment properties, and a switch from income tax to a higher rate of GST. And we don't have policies like the mortgage interest rate deduction that are seen in other countries, particularly the U.S.

Ultimately, it just comes down to ECON 100 supply and demand. The New Zealand population has been rising, and land-use policies have been preventing supply from keeping up with demand. Maybe those policies are a good thing, and we should be moving away from urban sprawl to high-density living. But it is hard to counter that the cost of such policies will be a steady increase in the price per square metre of housing.