The scream test

Imagine two policies.

Policy A would have government nationalise all liquor companies and distribute their product, for free, for anybody who wants some, with costs borne out of general taxation. There would be no compensation of the liquor companies.

Policy B would strengthen alcohol intervention programmes for prisoners with alcohol abuse problems. They'd spend a fair bit on it and work hard with prisoners, both while in prison and during their re-integration back into the community, to help them to avoid falling back into substance abuse.

Now Alcohol Action NZ proposes a "scream test" to tell whether some proposed policy would reduce alcohol harm. In their model, industry profits are increasing in the harm imposed by alcohol, and industry screams when profits are threatened. Anything that reduces harm reduces profits, so the scream test tells us which policies are likely to reduce harm.

I suggest instead that industry would scream a lot about Policy A, and would likely support Policy B. I also suggest that Policy A would increase harm and Policy B would reduce harm. Note further that National is already implementing something like Policy B - kudos to them. I've yet to hear screams from industry.

The scream test is a bad one. Profits are perhaps increasing in total consumption, but they're likely decreasing in alcohol's harms not only because of the policy reaction function but also because moderate consumers' consumption is likely decreasing in perceptions of harm.

The one spot where Sellman's scream test could be right would be policies potentially hitting the very heaviest consumers. There are discrepancies between median reported consumption figures and total alcohol available for consumption suggestive of that there is a small group consuming booze by the barrel. Policies disproportionately hitting that group could potentially reduce both harm and profits. But I hardly expect that mandatory 1 am bar closing times fit the bill.

Information failures and risky buildings

There's a trade-off when government agencies disclose known risks. Take, for example, AIDS disclosure laws. Some US states require that partners or others likely to be at risk from a patient testing positive for HIV;  others fear that the effect of such disclosure laws is to induce those at risk to avoid being tested. I've certainly not seen any data sufficient for running that cost-benefit analysis,* but it's plausible that either regime could be the correct one.

Wellington Council has a list of buildings sharing the same design flaw as the collapsed CTV building in Christchurch. But they won't tell anybody which buildings are on that list. Is this likely to be efficient? It depends on how Council knows and what they do with the information. If these kinds of flaws get found when Council officers dig back through the old building plans, then there's little risk that disclosure induces building owners to hide flaws. If they're found instead when owners inform Council, then disclosure could induce owners to keep quiet. So, in the former case, disclosure makes sense. In the latter case, it's a trade-off. Whether it makes sense to keep things quiet then depends on the number of owners who would likely be deterred from revealing risks in the disclosure regime and on whether Councils actually do anything to ensure that risky buildings are made safe. If buildings of that sort fall under the usual "you have 30 years to fix it" rule, then it seems unlikely that we're doing much good by keeping things quiet. If they're working towards much quicker repairs of disclosed faults, and if we think that tenants would overreact to the risk disclosure, and if we think that building owners would hide faults in a disclosure regime, then perhaps non-disclosure makes sense.

I'm inclined to agree with NoRightTurn that the case for disclosure seems strong - and especially since the justification seems to be to avoid imposing losses on the owners of risky buildings rather than to avoid that other owners notify Council of building deficiencies. But I'd reverse that call if it turned out that Council were really pushing to get this fixed and if there were substantial risk from unknown building flaws that would fail to be notified under a disclosure regime.

* This state-by-state variation seems eminent fodder for empirical work on the effects of disclosure laws on testing rates. File under "future honours projects" if it's not already been done.

Competition in small markets

Another for the "New Zealand's Fixed Costs Matter" file: Aaron Schiff posts on the relative lack of competition in New Zealand. Where inefficient firms are driven from the market in other places, New Zealand has a long tail of pretty unproductive outfits.

Roger Procter has dug into the stats a bit deeper and found that some New Zealand firms have very high productivity but there is a very long tail of unproductive firms that are able to survive.

He notes that the ratio of the productivity of the firm at the 90th percentile (i.e. near the top) to the 10th percentile (bottom) of the productivity distribution in New Zealand industries is around nine.

In other words, a firm that is nine times less productive than the best in the same industry can survive in New Zealand. In Denmark, for example, the ratio is reported to be around 1.6 to 3.5. Danish firms that can’t achieve at least a quarter of the productivity of the best firms get killed off quickly.

Roger argues, and I agree, that lack of competition is a major reason for this. Competition forces firms to increase productivity and kills off those that don’t.

Aaron agrees with Procter's assessment that New Zealand's low level of international trade hurts things, then makes a rather interesting argument for import-led growth.

We’re stuck in a low-competition, low-productivity, low-trade equilibrium. New Zealand domestic markets are too small to support enough intense competition to get us out of this state. Exporting is hard work and not enough firms are motivated (or forced) to drag the economy up the productivity mountain.

On the other hand, if low cost imports from productive foreign firms start coming in, maybe NZ firms will be forced to improve their game, or get killed off.

I realise this is a harsh “stick” type strategy, rather than an export “carrot”. Exports create jobs and imports can destroy them, at least temporarily. Maybe I’m getting soft in my old age but there might need to be assistance for some workers during the transition. But given the dire productivity stats, maybe a strong shock to the system is required.

There's not a lot that we can do to make New Zealand even more open to imports: tariffs are very low, GST rules around imports currently make sense, and we see no need for the New Zealand government to enforce at the border any exclusive dealing arrangements that foreign manufacturers have seen fit to make with New Zealand retailers. But getting rid of our ability to run parallel importing, or doing dumb things imposing GST on low-value imports, or forcing a policy preference for New Zealand Made products, would do harm.

Taking less offence - revisited

Loyal readers will recall that New Zealand's Broadcast Standards Authority decides which words are particularly offensive by surveying New Zealanders. Alas, where they once ran face-to-face surveys asking them which of a series of pretty rude terms were particularly offensive, and in which contexts, they now run it via an internet panel survey. I had no end of fun imagining Eric Cartman volunteering to run a door-to-door version of the survey.

The BSA's 2013 list came out this week. It's called "What not to swear: the acceptability of words in broadcasting, 2013". They warn that the report contains language that some would find offensive. There hasn't been great changes in acceptability since 2009; the 2009 figures showed a fairly substantial increase in tolerance of robust language as compared to 1999.

One interesting bit from their summary:

• When comparing the different demographic groups, it is evident that
  
  • Males tend to be more accepting of the words than females
  • Younger respondents tend to be more accepting than older respondents
  • Those that state they have no religion tend to be more accepting than those of religious belief
  • Those of Māori ethnicity are generally more accepting than those of other ethnicities, while Pacific peoples are less accepting
  • Those on high household incomes tend to be more accepting

I wish they'd run some regressions rather than just comparisons of means. Pacific groups tend, in New Zealand, to be lower income and more religious. Are differences between Pacific responses to swearing based on religious differences between Pacific and Maori groups, or something else?

I try to set the dial, for lecturing, to avoid terms considered offensive to a majority in the context of "people being interviewed (TV or radio)".

The very very best part of the report is Appendix I, where respondents were invited to fill in those terms that they personally found offensive. They make a point of reminding readers that the comments are copied verbatim. Words typed in range from "goodgracious" and "Doodoohead" and "OMG, Oh My God" to very creative spellings of other terms. Just go read it. And imagine what you'd have added in, had you had the chance. Please do not contribute suggestions in the comments though. We're not that kind of blog.

We remain impressed by the robustness of language frequently heard on broadcast television, after 8:30, in New Zealand.

Cupcake Freedom

Campbell Live tonight reported on Auckland Council's shutting down of some kids' cupcake stands at a local mall. Because the mall ran the kids' day once a month, according to the story, it then counted as a commercial market. And so the kids had to produce their food in a commercial kitchen.

I initially thought that the new Food Bill was to blame. It was introduced back in 2010 and got a fair bit of push-back in early 2012. But that cannot be the case. Submissions on the Bill closed only a month ago. Since I had never heard of Councils in NZ hitting kid bake stands like this, and as Auckland was blaming national regulations, I incorrectly assumed that the Food Bill had to have gone through. And so I apologise for blaming the Food Bill and its sponsor, Kate Wilkinson.

I still would very much like to know whether there is basis in existing national regulations for Auckland's rather heavyhanded actions in this case. Either the regulation has existed and hasn't been enforced elsewhere, the regulations have changed, or Auckland's interpretation is incorrect.

The original post follows below. It is based on an incorrect premise. I have run a strikethrough tag through it so that it's obvious that it ought not be relied upon.

Update: And I thank @mellopuffy for the correction.
Update 2: More detail here.

Kate Wilkinson promised us this wouldn't happen. And yet here we are.

Her op-ed of January 2012 sought to put to rest petitioner fears that the Food Safety Bill would shut down a lot of small scale entrepreneurship. She wrote:

Those behind the online petition opposing the bill claim it will seriously impede initiatives like community gardens, food co-ops, heritage seed banks, farmers' markets and roadside fruit and vegetable stalls. This is nonsense.

At most, people involved in such activity, where it presents a low risk, will be provided with information.

Events such as sausage sizzles, home bake sales, and other fundraising events will still occur as they always have.The bill is intended to protect, not harm such events, as the bill's critics would have us believe.

Bartering of food is currently included in the Food Act 1981. The proposed bill simply clarifies that those bartering with food, as part of a food business, must ensure it is safe and suitable.

Many small-scale bartering activities will only be subject to food handler guidance – for example, those bartering home-grown produce for goods and services. However, larger scale bartering of food exists and it is appropriate that those enterprises are subjected to the same risk-based measures as those selling their food products in a more conventional manner.

I wrote:

So is the new regime worth the cost? That depends on the compliance costs that will be faced by small and mid-sized traders. Wilkinson assures us that small traders won't face onerous burdens, but I'd really prefer seeing proper analysis of the Bill from someone like Otago's Andrew Geddis. And we have to keep in mind that a substantial proportion of the costs Wilkinson cites might actually be voluntary choices consumers are making that, on lucky draws, yield tasty goodness any diminution of which consequent to regulation ought be counted against the Bill's possible health benefits. Banning me and others like me from having my hamburgers medium-rare might save the health system a bit, but it'll certainly cost me some utils. Equally bad is what a big fixed-cost regime would do to food startups. I really hope that the legislation isn't as costly on those two fronts as some folks fear; I'd love to see independent legal analysis.

So: I was worried about compliance costs on small traders; Wilkinson promised there was nothing to worry about.

Tonight's Campbell Live has Auckland Council shutting down a mall's efforts to support young entrepreneurs. Once a month, they let the kiddies set up little stands selling their cupcakes. Council says that they're forced to shut it down because of Kate Wilkinson's Food Safety Bill. Hit the link to watch the video.

Kate, if you were serious about what you wrote in 2012, you will fix this, right? If your op-ed was right, Auckland shouldn't be interpreting your legislation this way. Please tell them, and tell every other Council, that they are not required to do what Auckland is doing. The problem is Auckland's interpretation, right? Because when I tweet stories from the States about Council health people knocking over kids' lemonade stands, I usually append an #emigrate tag.

Surely here in New Zealand we're not going to need a cupcake equivalent of this?

Standards shopping

Small jurisdictions have a hard time covering all the bases. Developing regulations is expensive. If you're determined to have "My Jurisdiction" versions of each and every regulation that could be out there, you're either going to have a ridiculously expensive regulatory regime or you're going to stymie development in niche markets.

Yesterday I pointed to the problems facing Manitoba's Harborside Farms. They want to develop traditional Italian cured meats in small artisanal batches for sale in Manitoba. But they're forbidden from doing it because, unless you can prove your product meets Manitoba regulations, you can't sell it. And it's a sufficiently small market that Manitoba never got around to writing any regulations that would allow them to operate.

Leaving aside for now the very sensible alternative of simply allowing standard consumer protection legislation and liability solve this kind of issue, there's an obvious alternative. Let them produce their product under the Italian regulations, then have Manitoba inspectors verify that they've met the Italian standard.

The problem is very similar to one facing importers of niche-market DVDs in New Zealand. How? You can't sell DVDs here unless you get them rated by the Censor's Office. And they don't rate DVDs for free. If you make a buck a piece on the sale, you'd still need to ship a thousand units in a country of four million people (and change) to cover just the ratings cost.

The solution there is the same as that which should obtain for Harborside. Allow import of films that have been rated by the Australians, or the Canadians, or the Brits, or the Americans, or some other set of trusted countries, and simply require that the ratings sticker note the country which issued the rating.

This kind of solution can be applied across rather a few thin-market small-jurisdiction scenarios. Why does every small area have to reinvent every wheel?

Take it a step further. If Manitobans can import Italian-made products meeting Italian standards, why shouldn't they be able to produce things in Manitoba to Italian specifications, even if a Manitoba regulation does exist? Simply require that the product be labelled as meeting Italy's standards.

Maybe it wouldn't work for everything. A building that meets Canadian building standards instead of New Zealand standards would be better than a New Zealand standard building, unless there's an earthquake. But again, it isn't hard to imagine strange niche construction areas where there might not be domestic specifications, but where the Japanese standards would work a treat.

The fixed costs of developing regulations aren't trivial. Why not allow a bit of forum shopping to spread the burden?

Living wage mandates revisited

Two candidates for the Labour Party leadership have promised that they will require the payment of "living wages" for all government employees and for all government contractors. Matthew Hooton asked about the likely effects.

Were the government promising an $18.40 minimum wage across the board, things would be rather worse. The median hourly wage in the 2012 NZ Income Survey was $20.86. A minimum wage that's 88% of the median wage would be rather, well, breathtaking. Recall the median wage is the one where half of all wage earners earn more and half earn less. Workers vary in ability; a minimum wage at 88% of the median would disemploy anyone who cannot produce value equal to just a bit less than the median worker. This would obviously be very bad. Recall that unemployment weighs far more heavily in disutility than do wages. Chris Dillow made the case a few months ago. Those who want to improve the lot of the working poor do far better by pushing for wage subsidy schemes like Working For Families [New Zealand's EITC] than by making it too expensive to hire lower productivity workers.

The proposal here isn't for an $18.40 minimum wage but rather for a living wage mandate for government workers. The effects then are more minor. Imagine that we have rent control on a bunch of apartments but no rent control on new buildings. We'd then expect excess demand for the rent-controlled flats, but a clearing market elsewhere. Similarly, a living wage mandate in the government sector shouldn't have huge equilibrium unemployment effects. Lots of people queue for jobs in the high-paying sector, but they take lower-paying jobs in the private sector.

The main effect will be an increase in the cost of providing some government services. At the margin, this should mean that we have a few fewer things done by government, albeit within the context of an expansion in the size of government under a future Labour government. There would also then need to be an increase in taxes to fund it, or reduced spending in other areas to compensate, or higher deficits. I suspect Labour would bridge the gap via tax.

There will be some transitional unemployment as marginal jobs undertaken by government get shifted away from the government sector. If some of these workers were earning substantial rents in the government sector and are not employable above the legal minimum wage in the private sector, there could be some increased longer-term unemployment from that. But that shouldn't be any substantial part of the market. There will also be rather a few transitional costs where bureaus start renting fully serviced buildings with gardening and cleaning provided as part of the rent rather than either hiring those kinds of workers directly or through a contractor.

Another important effect: contractors will enjoy less of a cost advantage relative to government departments; we could easily read the policy as a way of trying to knock out contracted services to benefit public sector unions. See my discussion on the same issue when some city councils were talking about similar ideas. Some of my discussion of the likely effects of maximum wage gap mandates in government also apply.

Note as well that government sector workers are already overpaid relative to their private sector counterparts. While this may worsen the imbalance, it means that fewer government workers would be caught in the interval from the minimum to the proposed "living" wage than would be the case among private sector employees. The costs of a living wage mandate may be lower where imposed on the government sector than where imposed broadly. Imagine it in the limit: a $500/hour minimum wage in government. I expect that while government workers would earn a lot more, government would be a much smaller share of the economy. And think of the productivity gains in government: we'd only be choosing to use government rather than markets where we expected the social value of some government function were exceptionally high indeed.  

So while I wouldn't expect large disemployment effects from the policy, it's hardly a great idea. If you want to increase the wages of the working poor, you hardly should be starting with government workers, who earn more on average than those in the private sector and who typically also enjoy greater job security and flexibility. And if you want to run transfers to the working poor, generalised wage subsidies are the least distortionary way of doing it. Labour's proposed mechanism would be likely to reduce the efficiency of government services by pushing away from contracting out, and to skew the optimal balance between government services and other goods and services by increasing public sector costs.

Update: John Key also is no fan of Labour's proposal. He suggests additional costs where aggregate wages are bid up, or at least that's my interpretation of his argument that companies wind up having to pay more and that consumer costs then go up. That's possible within particular labour markets but I have a hard time seeing big aggregate effects.

Let's think of the market for service workers in restaurants. Suppose that the lowest-skilled workers work the cashier's station at the cafeteria in some government office. And let's suppose that this cafeteria continues to exist rather than the venue being leased out to a private sector firm, which it would under a $18.40 living wage mandate. The highest-skilled workers work at the fancy high-end restaurants, or work more complex jobs requiring a lot of balancing of tasks.

The living wage mandate then comes in. Currently employed cafeteria workers then are earning huge rents. Suppose we then have a lot of job applications from higher-skilled restaurant workers and, as consequence, job redefinitions to make better use of the more highly skilled staff. We then have more competition for more highly skilled restaurant staff and could see some bidding up of wages within that market. But there would still be low-skilled cafeterias in the private sector. With migration into that sector from former public sector workers who had been displaced, we could see some bidding down of wages in that part of the market. I can see mechanisms where there's bidding up of private sector wages in some markets, but I'd also expect potential bidding down where lower-tier government workers move back into the private sector. 

Thursday updates

Blogging has been light; I spent the last two days catching up with folks in Wellington and attending the National Drug Policy Summit run by the New Zealand Drug Foundation, about which I'll blog properly later. A few bits of interest in the meantime:

• Westpac notes that LVR limits can have short term effects on house price inflation, but only short-term effects.
  • Duh
  • There are sensible justifications for this kind of policy based on prudential regulation and avoiding any situations where banks take on too risky a loan portfolio and downside risk winds up being borne by the government. Justifications based on curbing house price increases don't make any sense to me, whether or not it's the RBNZ comms team or the Governor making them. In that sense, it's no damning of the policy that it only has transitory effects on house prices. But it still reinforces the NZ econ blogosphere's "it's just dumb trying to justify LVR on the basis of house prices being too high." consensus position.


• Scott Sumner praises Finance Minister Bill English. Agreed. Some credit could go to Minister English's truly excellent economics adviser as well. 


• The New Zealand Police have decided that despite GCSB's having acted illegally in the DotCom surveillance, they will not press charges because there was no intent to act illegally. But:

  Intent to break the law is not an element of the charge of illegally intercepting private communications.
  — Graeme Edgeler (@GraemeEdgeler) August 29, 2013

  The government, through the new GCSB and TICS legislation, is giving us an expansion of GCSB's scope with increased nominal oversight, but no expectation that GCSB would ever be prosecuted for doing anything that was in fact illegal. Lovely. Big slow clap here for everyone involved. Meanwhile, here's Ars Technica on some of this mess.


• The insurers here argue for something sensible, and something for which I've argued before: have EQC effectively cover a large excess in case of natural disasters, and otherwise stay out of the darned way.

So endeth the closing of the browser tabs, so closeth the day.

Update: note that Edgeler also argues that lack of intent to break the law could be a decent reason not to go ahead with prosecution in this kind of case and reminds us that criminal penalties are not the only form of accountability. That's all true; I hope that everyone who has illegally been spied upon knows that it has happened so that they can launch civil suits.

Reader mailbag: LVR edition

A loyal reader writes, and I anonymise:

My [partner] is a [high ranking title] at [large professional services firm] and over drinks last night the young [professionals in this industry] (under 28, mostly single, still have student loans, gross income btw 60k and 90k, most 2/3 years’ experience max) were crapping themselves re the RB’s loan restrictions…really pissed about it. Most had planned to buy modest apartments this year using KS… centrally imposed adverse selection bars have costs! I said to go to Mum/Dad and/or finance houses, get a mortgage and then fold the other debt into after a year … impossible to police?

Yes, it is impossible to police. And that's a feature rather than a bug, if the point of the Loan-to-Value Ratio regulations is to increase the amount of collateral standing behind each home loan and thereby reduce systematic risk that could come from a housing downturn. If every one of these young professionals gets their parents to take on some of their mortgage risk by backing it with their own homes, which is effectively what they'd be doing if the parents take out a mortgage to front a 20% deposit, then the kids are less likely to default on the loan to the bank in case of downturn, though they may default on Mom and Dad, and the parents may be on the hook for some unexpected mortgage costs. But that has lower systemic risk. RBNZ noted it in their initial paper too: these workarounds are hardly unanticipated, and I don't think they're unwelcome. They work around the regulations in ways consistent with what the regulation should be trying to achieve.

My correspondent wonders further about effects where some young professionals have recourse to Mom and Dad and others only to the finance companies. I expect here that it has strong equity effects, but the efficiency effects still work in the right direction. Borrowers on the secondary loan market will be paying higher interest rates and so we still see a reduction in demand for highly leveraged loans at the margin. The ones most hurt by the regulations are indeed the ones with least access to family or other capital. But equity isn't RBNZ's job, and those would be the riskiest borrowers in any case - the ones that RBNZ is deliberately trying to knock out of the market.

The bigger problem is the one Matt Nolan points to: RBNZ is grasping at all kinds of justifications for its regulations, and some of them either are way outside of anything RBNZ should be doing, or just don't make any darned sense. I can see some kind of case for it on systemic risk, but I would bet against the regs being justifiable on that basis. Default and bailout risk under OBR is lower than it was prior to OBR. And RBNZ simply should never ever be in the business of trying to protect investors from the risk that their investment might decrease in value. They don't have that kind of crystal ball.

And if the regs don't make sense on a reasonable rationale, we might start worrying rather more about the equity considerations.

Ratings warning

I've done a fair bit of NZ cheerleading. Sadly, I have to warn of a potential downgrade of New Zealand immigration from a "buy" to a "hold".

Jason Sorens has moved, at reasonable personal cost, to New Hampshire, in pursuit of the free life and in support of the Free State project.

I also understand why libertarians who are promoting the cause in their own careers would see a career change and a move to New Hampshire as a step back. But most of what I have done as an academic does not promote liberty directly, and I have come to question seriously the “trickle-down” model of social change widely adopted by libertarian organizations. The idea, following Hayek’s essay, “Socialism and the Intellectuals,” is that creating new academic research showing the benefits of liberty will filter down through journalists and other “secondhand dealers in ideas” to the general public, eventually resulting in a freer society. But academic economics has long leaned free-market, and journalists don’t seem to understand the key insights of that discipline. If anything, the general public’s views are worsening in key respects. People under 30 are more likely to favor socialism than capitalism. The enterprise of educating the public via secondhand dealers in ideas seems doomed on a national scale, but it could work on a small scale.

Eric Crampton says libertarians should move to New Zealand. If only we were all lucky enough to have employers willing to sponsor our emigration there! They won’t just let you move without a job, after all. In my view, New Zealand and Switzerland are the only places in the world with a long-term better prospect for liberty than the United States, and I understand why some libertarians might move to those places. But they aren’t realistic options for most of us.

I fully agree with Eric that libertarians need to put their money (and bodies) where their mouths are. If they view liberty as important, either as a means to the ends that one enjoys personally or as a moral imperative for society, then it should be valuable enough to move for. Is enjoying significantly greater liberty worth a smaller car, a smaller house, a less fancy phone, slightly slower Internet, no cable TV, Chinese rather than Swedish or American furniture, making dinners at home rather than going out, or all of the above? If you think that gross injustice exists, don’t you have a duty to do something that plausibly could stop it? American society falls far short in protecting the rights and dignity of all its members. We have a real opportunity to change that situation in one place, and we are changing it.

Alas, things here have gone downhill a bit since 2011. I haven't started appending #Emigrate hashtags to NZ news tweets because it sure isn't obvious where one could go. But the reasons for coming here aren't as strong as they were.

On lots of margins, New Zealand remains excellent. Most of what I'd written on the merits of moving to New Zealand continues to apply. On a fair few margins, we remain the Outside of the Asylum. Other great stuff: New Zealand has moved from a prohibition regime for new party drugs towards a regulatory regime allowing the sale to adults of products that pass a safety check. Alas, we've not followed Washington State and Colorado.

Factors affecting today's ratings warning? Most substantially, the GCSB / TICS legislation. At the same time as pressure is growing within the United States to make their internet spy agency, the NSA, a little less spooky, New Zealand's giving new powers to its spy agency, the GCSB.

Where we'd had a market opportunity to be the "Outside the Asylum" destination for American tech entrepreneurs looking to establish cloud services in which customers could have some expectation of privacy, we instead seem to be determined to be every bit as bad as America. I'd worried about this back in May; Ian Apperley's since tried putting some numbers on the cost. Susan Chalmers from InternetNZ has similar worries. I haven't fisked Apperly's figures, which seem predicated on a reasonably optimistic view of the New Zealand counterfactual. I'm not even sure we really can quantify things: there was some possibility that we could have drawn in substantial American tech investment, but I couldn't possibly tell you what that probability was. But imagine you had a lotto ticket that only paid out if you got all 7 numbers right. Five of the numbers have just come up in your favour. Do you tear up the ticket before finding out what the last two numbers are? Entries on Slashdot and Boing Boing about how we're turning GCSB into a low-rent client of the NSA are a great way of ripping up that lotto ticket.

And think that New Zealand would be above the petty thuggery that the UK today imposed on Glenn Greenwald's partner? We can hope so, but there were a couple of worrying stories last year about hassles for people thought to be Kim DotCom's friends.

There are also a few longer standing issues that have contributed to today's ratings warning.

• New Zealand's version of civil asset forfeiture kicks back seized funds to drug enforcement. We're certainly not as bad as the US on this one, and there's strong likelihood that the policy gets fixed before really bad stuff happens. But downside risks are substantial. 
• Our revised censorship legislation is fully "Inside the Asylum" stuff. See here and here. Justice Minister Judith Collins says it's all about the kiddie porn, but the definition of "objectionable materials" includes marijuana growing guides and a bunch of pornographic materials involving homosexuality that were deemed objectionable in the 70s and continue to be banned. A pile of comic books are banned. An online vendor, Fishpond, copped $4,200 in fines for distributing a couple of movies that are widely available in the United States. Our whole film classification regime is nuts. You have to pay $1000 to get a ruling from the film classification office on whether a movie meets the NZ guidelines. This kills legal distribution of long-tail films here. At the same time, failing to get a film classified can risk your getting years in jail if the Censor's Office then deems it objectionable. 
• The Christchurch earthquake was February 2011. Since then, the rebuild has been substantially hindered by regime and regulatory uncertainty caused by the government - both local and national, and the various acronyms now running the place. More worrying, very substantial problems both in the earthquake insurance scheme and in the regulatory regime around unsafe buildings have yet to be resolved for future earthquakes. This contributes to a ratings downgrade because, if you move to a part of New Zealand likely to be hit by substantial quakes while you're here, there are pretty substantial, foreseeable, preventable things that are going to happen despite their being substantial, foreseeable, and preventable:
• Buildings with unreinforced masonry will fall down and kill people. Deaths from earthquakes are pretty much unavoidable. But the combination in New Zealand of a zero-faulty liability regime for unsafe buildings combined with a regulatory regime giving building owners decades to get them up to scratch mean that, in the event of a quake, many people will die whose deaths could have been avoided at relatively low cost. And even if you've brought your property up to spec, you can still have problems if the absence of either liability or regulation encourages your neighbour to fail to take due caution. 
• You will have been compelled to pay for Earthquake Commission insurance with your private property insurance. The ability of EQC and private insurers to fob responsibility off on one another, combined with EQC's demonstrated incompetence in dealing with the volume of claims inherent in any large event, combined with the reinsurers' and government's need to constrain the total cost of claims regardless of whatever they promised to provide you in the insurance contracts you signed, mean you can't avoid having things drawn out for years and still wind up with less than your due. If you think that a government-run insurance company will not have every incentive to pretend that new damage is really a pre-existing condition, well, you haven't been paying attention to Christchurch.
• With no change to underlying riskiness, the government may decide after an earthquake event that the risk of rockfall facing your house in the event of additional earthquakes is too great for you to bear, even if you think the risk is eminently bearable and even if it would be cheaper to put in place earthworks or fencing to mitigate that risk. Or they could just faff about for two and a half years without telling you whether you're allowed to live in your house.

If the GCSB and TICS legislation pass without substantial amendment, I'm moving New Zealand from a "buy" to a "hold". If worries about surveillance state issues weigh heavily in your utility function, and you're considering emigration from America because of it, parts of Europe are in much better shape than we are. Most importantly for those who consider the NSA mess to be a reason for leaving the US, it now looks like, whatever America does on surveillance, New Zealand will basically follow along. Maybe with fewer resources, maybe a bit less enthusiastically. But if you think that surveillance in America will get worse before it gets better, you should expect New Zealand to follow in lock-step.

But on plenty of margins we remain much more free than the United States. Our airports remain exceptionally sane: I can show up at the airport 20 minute before a domestic flight and, so long as I'm not checking luggage, just walk on up to the gate and board. Home brewing and distillation are legal. Prostitution is legal. Same-sex civil unions have been legal for years and the first full same-sex marriages were celebrated today.

And, even with the new GCSB legislation, I doubt we'll be worse on surveillance than America. We'll just all have to be far more diligent about secure computing.

Reader mailbag: censorship edition

Loyal reader Lliam Munro sends me the following:

Hi, Eric.
I know you periodically blog about censorship so I thought I’d alert you to this in case you’d not seen it.

http://www.stuff.co.nz/business/industries/9018880/Retailer-fined-over-banned-movies 

I wondered what sort of movie would get banned in NZ so checked IMDB for the two films that generated the fine, which were Megan Is Missing and I Spit on Your Grave.

Without debating the artistic merits of the films, neither of which score very well on IMDB, I did think it noteworthy that one of the banned films Megan Is Missing, which is apparently a found footage film about two girls being murdered by a psycho they meet online, is endorsed by a father whose daughter was murdered by someone she met online and who has become an advocate for online safety.  He thinking it should be required viewing for teenage girls.

So, I thought it was interesting that in New Zealand, Fishpond are being fined $4,200 for providing access to a film that the father of a murdered daughter thinks could raise awareness of safe online behaviour.  Admittedly, by the sound of it, you’d be just as likely to scar your daughter for life, but I still found it noteworthy.

Cheers,
Lliam Munro

I'm not likely to watch either. But I hate that I can't watch either. This is entirely inside-the-asylum kind of stuff. How much better are we really than parts of Alabama that ban sex toys?

Earthquake-prone buildings

Owners of earthquake-prone buildings now have a bit more time to bring them up to spec. The owners are mad because they say it isn't long enough; people who experienced Christchurch are mad because buildings will still fall on people and kill them in another quake. They could both be right.

It is perfectly plausible that there are buildings that need never be compelled to be brought up to 33% of new building code. Imagine a building in the middle of nowhere, with no nearby pedestrian traffic, and occupied only by those who know about the risk or who are well-advised about it by a sign at the doorway. There is no reason for the government there to get involved, or at least no reason that comes from economics. People can trade off cost and beauty against risk - that's allowed. And so a national rule that forces the owner of such a building to make costly investments to bring it up to code imposes cost in excess of benefit. The owner either will sink money into the building where it isn't warranted, or he will demolish the building that he otherwise would prefer to keep.

On the other hand, imagine a building in downtown Wellington with an unreinforced masonry facade. Everyone in the building knows about the risk and accepts it in exchange for lower rental rates or enhanced amenities on other margins. And that's all fine. But passers-by on the sidewalk and buses driving by on the street have uncompensated risk forced upon them. While the owner will there rightly claim that it does not pass his cost-benefit analysis quickly to bring the building up to 33% of code, he is not accounting for the costs he is imposing, probabilistically, on every passer by. It can easily be the case that, when accounting for the risk of death he is imposing on each person walking past his building, upgrading the building or demolishing it would pass cost-benefit. But he does not care about the costs imposed on others. The new rule is too lax in this case.

What then is an optimal rule? We'd need some way of accounting for the true risk that a building imposes. That risk depends not only on structural features of the building but also on the building's surroundings. And it would be pretty hard for central government to be able to come up with a clean rule. As we saw in Christchurch after the September quake, City Council had a rule in place requiring the closure of footpaths adjacent to risky buildings; Council interpreted the rule in perverse ways. Instead of blocking busy Colombo Street, Council decided that the engineers must have meant that 605-613 Colombo imposed risk instead on tiny alleyway beside the building. And then the building fell on a bus and killed a bunch of people and left Ann Brower to work out the series of spectacular regulatory failures that led to her being the only survivor on that bus.

There's an easier way. Honestly, we do not know when another quake will come or which buildings will collapse. Engineers can put up widely varying assessments of the true structural risk imposed by a building. What do we do when faced with this kind of uncertainty? Impose a liability rule. Instead of giving building owners 15-20 years to get their buildings up to 33% of the new building code, give them five years to get an engineering assessment, to put a safety letter grade prominently at the door, and to get liability insurance. At the end of the five year period, have every building owner liable for damages for every person killed or injured if their building falls down on passers-by. There should not be liability for deaths and injuries incurred by persons inside the building: we can and do voluntarily assume some risks, and we should not prevent people from taking on those kinds of risks. But if your building falls down and squishes a bus, you should be liable for the deaths of each of the people inside of that bus.

The Ministry of Transport currently sets the Value of a Statistical Life in New Zealand at $3.77 million. That's arguably too low, but it's a great benchmark: arguing about $3.77 million versus the $5 million or so you'd get from a back-of-the-envelope application of revealed-preference measures from the United States to New Zealand, accounting for the income elasticity of safety preferences and differences in income across the two countries is second order. First order is getting a consistent benchmark across different regulatory and liability sectors.

A building owner potentially liable for $3.77 million in damages paid to the estates of those who his building kills will adequately take their interests into account in deciding whether to fix up his building. It would not be that hard to require that building owners carry insurance sufficient for paying such liability claims, or to prove assets sufficient for covering the potential liability. If you've got a building in the middle of nowhere with no passers-by, your insurance premiums will be very small. You then will make the optimal choice and not upgrade your building. If you've got a brick-facade building in downtown Wellington, you'll have to weigh up the costs of insurance against the cost of fixing the place up.

Right now, we are in the worst of all possible worlds. Building owners face neither liability for the risk their buildings impose on those outside their buildings, nor any sufficient regulatory regime to ensure that owners are making appropriate investments in ensuring that their buildings do not impose excessive risk on passers-by. This is why Wellington scares the hell out of me. It's pretty, and I love seeing the old buildings that we no longer have, but they terrify me. I have absolutely no confidence that even really rather dodgy buildings are getting the attention they deserve.

Were the Government to have any interest in implementing a regime such as that described above, I'd recommend one further change. Flip the heritage building regulations around such that heritage boards have zero regulatory power but instead get an annual budget. Owners of risky heritage buildings should be free to demolish them if that's what make sense, given the risk they impose and the cost of upgrading them. Heritage boards' main role should be the payment of annual stipends to owners of heritage buildings for the provision of heritage amenities. Give them a generous budget, funded partially by local Council, partially by central government, and with ample provision for voluntary donation from the public. Let them decide, within that budget, where they can do best by spending money. And then just let go of the rest.

I will absolutely hate saying "I freaking told you so" after Wellington gets a big quake in which unreinforced masonry winds up killing a bunch of people needlessly.

And, in anticipation of the likely critique: yes, I am here absolving building owners from liability for those who chose to be inside their buildings. But current policy absolves them of that liability for those both inside and outside.

Previously:

• In praise of liability
• Worst of both worlds
• VSL and earthquakes
• Heritage preservation

Cashing in the chips

There comes a point when you start wondering what the point of a small-l liberal party is if it won't step up when it could really make a difference.

Politics always involves compromises and trade-offs. Usually, no small party can really achieve much. You can get some policy concessions after the election, and especially for the kinds of policies that your partner kinda likes anyway but on which it doesn't really want to lead the charge. After that, things are set. You know you don't have the leverage to do much else, and reneging on your partner spoils your chances of getting minor gains in the next coalition arrangement.

But sometimes an issue comes up that speaks to your party's core values, that wasn't anticipated at the time of the coalition arrangement, and that's coming through on a very thin majority. Thin enough where a one-vote defection from the coalition could actually change the outcome.

New Zealand is updating the legislation around its spy agency, the GCSB. At the same time, it's considering legislation around telecommunications providers that would make it harder for New Zealanders to use strong encryption and impose burdens on New Zealand internet service providers to ensure that GCSB is able to hack into any communications channel.

I do not doubt that there were problems in the 2003 legislation and that a redraft was necessary. But surely there is no crisis so pressing that we cannot take the time to get this right. And it's important that we get this one right.

Supporters of the Bill assure me that the Bill actually strengthens oversight on the GCSB relative to the status quo. The Law Society seems to disagree, and everyone who knows anything about tech seems to be screaming blue murder. I weigh those pretty heavily. If the actual deal gives more power to GCSB with more nominal oversight, I'm pretty sure that's a bad deal.

But even if the Bill does strengthen things relative to 2003, it also forecloses the option to come up with something better. Sometimes, the best should be the enemy of the merely ok. At the same time as New Zealand is moving to expand the powers available to the GCSB, we are getting daily updates on just how bad things are in the US with the NSA. There's growing pressure there for reform. Today we read that the NSA may have been funneling tips over to DEA about drug smugglers. It's scandalous there, but this is the exact kind of capability that John Key wants to give to our GCSB: he wants to make GCSB's spying apparatus legally available to the police and to the SIS for law enforcement purposes, supposedly to save on some duplication of capacity costs that have never anywhere been specified. There's an oversight procedure for it, but it isn't a normal limited judicial warrant for specific specified purpose and limited duration. We're also hearing reports from the UK that the NSA and the UK have been using their part of the partnership to route around each country's regulations against spying on its own citizens. The looser regs in the UK were valued by the NSA. I've been assured by someone who should know that this sort of thing doesn't happen here, but we were also assured it didn't happen in the UK.

The time pressure seems to have come from the Government's desire to retrospectively legalise the GCSB's illegal surveillance of Kim Dotcom to cleanse itself of that embarrassment. When I complain about this stuff to people I know in Wellington, they just can't see what the big deal is. We trust the government in New Zealand, the GCSB wouldn't do anything nasty, so what's the issue?

Well, we can't simply run a spy agency on trust. And we especially can't run it on trust when the Executive here seems determined to prove that they view journalists as the enemy. They've built such a culture within Parliamentary Services that folks there just automatically hand over reporters' phone records over to inquiries. I doubt that the Prime Minister's office directed them to do it, but look at the culture that our Prime Minister has encouraged within GCSB and Parliamentary Services and NZDF. They bend over backwards to do that which might please, legal or not. Those on the right who oppose this legislation like to point out that we might not like what happens when Labour gets its hands on a more powerful GCSB; I don't like it with John Key running it either!

ACT emphasizes the importance of law and order. They're often right to do so. But the rule of law requires that the agents of law enforcement also be bounded in their powers lest they become tyrants.

A few patches to the legislation via a nullity preamble seem inadequate to the task here. The whole thing needs to be re-done, ground up, with substantial input from the New Zealand tech community. Instead of aiming for a good-enough patch, set up something we can be proud of. If the 2003 legislation is flawed, we've lived with it for a decade. Another six months isn't a big deal. The lost opportunity is a big deal.

What's the lost opportunity? In the midst of the biggest and most salient crisis of confidence in American cloud computing courtesy of the NSA disclosures, we seem to determined to absolutely kill any chance that hosts could wish to relocate to New Zealand and base services here. The American tech sector seemed to have a bit of a warm spot for New Zealand. We've got a great base foundation: decent patent law without software patents, free trade, easy migration for skilled individuals, and a time zone that makes working with California pretty easy. It's a great place to live with decent civil liberties. There's a civil libertarianism among the American tech community that makes New Zealand a pretty appealing place.

When we should be throwing out the welcome mat, putting up legislation demonstrating that while we take international security concerns seriously, we also put strict controls on our spy agencies such that NSA-style "we spy on everybody, all the time" could never ever happen here, we instead push hard to make our security apparatus at least as bad as that in the US. It's nuts.

I know that ACT's leader, John Banks, is far more conservative than liberal. But parts of the party, and especially the party's youth wing, have been able to pull him in liberal directions before.

I know there are people in ACT who'd say that the legislation isn't as bad as is made out and that the critics don't understand the law. I know I don't understand the law that well, and especially the incremental changes relative to 2003. For that, I look to the Law Society and to lawyers who care about civil liberties. They don't seem to think that the legislation improves things. But even if they were wrong and the governing coalition were right that nobody except for the governing coalition understands the law, that doesn't much help things where the very strong perception is that the legislation basically is a way of letting the NSA spy on everybody in New Zealand. What's the point of a tech firm's relocating to NZ if they believe that we're basically part of the NSA? Fix it from the ground up, with substantive input from the tech community, so that the legislation both protects civil liberties and is seen to do so.

If the strategic thought within ACT is that sticking with National gets them support to come back in 2014, just look at the betting markets. ACT is already predicted to die in the next election. There's a 61% chance that ACT returns zero electorate MPs in the next election. Unless they move from an expected 1.2% vote share to a 5% vote share, the Party has greater than a 60% chance of dying in 2014.

If you're going to die in 2014 anyway, jump on this grenade while you're doing it. Die in a blaze of liberal glory, killing the GCSB legislation at third reading and forcing them to take the whole thing back to the drawing board. It might make it harder to get into coalition with National next time round if you do get back, but it could also start drawing in votes from that part of the electorate that cares about civil rights and tech freedom but shrinks in horror from the thought of Russel Norman being anywhere near the Treasury benches.

If you can't do that, please have the courtesy to actually die in 2014 so that a liberal party might emerge. Lead, follow, or get out of the way, they say. Absent changes, ACT does more to prevent the emergence of a liberal party than to advance liberal values. GCSB and TICS is a great place to start if you've any intentions of leading.

Previously:

• Staying outside the Asylum
• Make your list
• GCSB Redux
• Is ACT liberal?
• The depressing state of New Zealand politics
• ACT Redux

Related:

• Human Rights Commission on GCSB, TICS, and surveillance
• TechLiberty NZ on GCSB and TICS; submission on TICS.
• John Banks on the GCSB legislation. Summary: the 2003 legislation was bad, we had to do something. This is something, so we support it.
• NZ Law Society on GCSB and on TICS

Labour on Housing, RBNZ on LVR

There appears little plausible economic justification for Labour's proposed ban on foreigners' buying houses.

Let's take Seamus's logic from yesterday one step further. Recall Seamus's simple model:

Consider a very simple model of the New Zealand housing market in which there is a fixed supply of identical houses that will not change over time, and an unchanging demand. Let there be no on-going maintenance or other costs to owning a house, just the one-off capital costs. Finally, let there be a risk-free interest rate of 5%, let demanders be risk-neutral and indifferent between renting and owning for a given cost, and let rental income to a landlord be exempt from tax so that there is no tax advantage to owner-occupied housing. In this world, there would be an unchanging equilibrium rental price for housing over time, and an unchanging price of houses that would be equal to this rental price times 20.

Following on from Seamus's later tweaks to the base model, let us also change the model a bit. Imagine that demand in one year's time will double and then stay constant from then on, and that everyone knows that as of tomorrow. The process is identical to the one Seamus lays out for the case where only foreigners know that equilibrium demand doubles in a year's time given that the stock of foreign capital is large relative to the domestic market:

In this version of the model, the rental rate would continue to remain constant for a year before doubling, but foreigners would bid up the price of houses now to the point where the capital gain between now and in one-year’s time was sufficient to exactly offset the fact that current rentals are insufficient to cover the capital cost of the house.

We can get a disconnect between current rental prices and current house prices where the market expects a future increase in demand relative to supply. That rental rates have not gone up lock-step with Auckland housing prices simply isn't automatically evidence of a bubble or anything irrational. Rational, forward-looking investors could easily be looking at the current Auckland market, the current plans for expanding housing supply in Auckland, and concluding that there's no way that supply will increase quickly enough to keep up with increases in demand. We can't guarantee that this is what's happening, but we cannot simply look at the purported disconnect between rental costs and property prices and conclude BUBBLE.

Now, consider the RBNZ's proposed LVR policy. The policy restricts banks against allowing more than some percentage of new home mortgage loans to have "small" deposits. I am not sure if RBNZ has yet indicated what the thresholds for the different speed limits will be, but it's sounded like it's designed to be binding most of the time. Under what scenarios does this rule make sense?

Start with a world like Seamus's: perfectly inelastic supply, prices 20 times rental rates under his conditions. Further, there is zero chance of bank bailouts in case of property market collapse; everything would be handled under OBR where depositors might take a small(ish) haircut. Individual investors form expectations about future demand; banks form estimates of the future price paths of housing. They're both identical in this simple case. Now, suppose that a cohort of buyers knows that demand will double next year and so start bidding up the price of housing today. The banks from whom they're borrowing money check to make sure that the buyers will be able to cover the mortgage costs and that the buyers' expectations around future rental earnings aren't crazy.

In this world, LVR restrictions only make sense where bank exposure to highly leveraged property loans impose systemic unpriced risk. Even if RBNZ knows no better than do individual banks, they might want to set speed limits where loans risk pushing into leverage levels consistent with prior cascading bank failures. I'd expect that RBNZ has run plenty of stress tests and has some idea of what level of leverage could yield cascading failures for varying levels of property leverage and plausible ranges of housing market drops.

But, in this world, you only set the speed limit to bind in exceptional cases, not in normal cases. To get a rule that binds more strictly, I think you have to assume that RBNZ knows more about the future path of relative demand (either shifts in demand, or potential moves in the supply curve) than do either the banks or investors.

I wonder whether Labour's "dey turk er houses" ban-the-foreigners housing policy shares some common assumptions with RBNZ's LVR regs. Tweak Seamus's model a little bit such that these foreign investors are all just systematically wrong about the future demand path and that there are enough of them that they can manage to affect prices at the margin. Then banning them from bidding up housing where we know that they are causing a bubble by definition avoids a bubble. I do think this requires some pretty heroic assumptions about knowledge asymmetries. But they might not be all that far from the knowledge assumptions required to make sensible an LVR policy that binds in the normal rather than only in the exceptional case.

Innovation is unpredictable

Peter Jackson's showing the world that New Zealand is a great stand-in for Middle Earth didn't just boost the local film industry and tourism, it also gave us a new building material.

I'm several months late to this party: the Financial Times caught this one back in February. Peter Jackson needed a lightweight version of chainmail for his actors and extras. His art director, Kayne Horsham, came up with a new silver-coated plastic mesh. And now it's Kaynemaile, available commercially for myriad purposes.

Though fragile and time-consuming to make (by hand), it was lightweight and gave a realistic glint. Mr Jackson opted to use it, though actors had to carry glue and tape for repairs between shots.

After Lord of the Rings, Mr Horsham experimented with the mail as fashion apparel but he was unable to manufacture in bulk, and the weak joins on each ring were a problem. “I realised that if you could mould the mesh, making it stronger, then it would open it up to all sorts of applications,” Mr Horsham says.

Using free internet software he modelled a way of injection moulding the plastic directly into a strong, seamless mesh. “Each one of those links takes the weight of a single person,” says Mr Horsham, who realised that this strength, combined with its eye-catching reflections, made Kaynemaile better-suited for architectural design and security features.
In 2007, after investment from local angel investors Movac, Kaynemaile automated production at its Wellington factory and made its first sale in Shanghai. It now makes curtains, lightshades, security screens and balustrade panels with the patented mesh. Not forgetting his roots, however, Mr Horsham also supplied chain mail to The Hobbit. But New Zealand accounts for only 15 per cent of business. Customers include ANZ Bank, Hard Rock Cafe and Trump Towers.

When it's used on the outside of buildings as shades or screens, they call it "Building Armour".

And Wellington's now using it for outdoor chandeliers.

Film imports

New Zealand is considering reducing the duration of the ban on the parallel import of DVDs. It should reduce it to zero. Why? The ban could have made sense in a world of physical film distribution; we are rapidly moving away from that world.

Background: films have traditionally taken a while to arrive in New Zealand. Film distributors used international release windows to ration a good in scarce supply: the physical copies of films that, after a first run in the US, made their long slow journey to New Zealand (complete with scratches and other assorted wear and tear). Movies could show up on planes before hitting theatres here. If everybody had been able to import VHS tapes or DVDs of films from the US when they hit the US market, film producers would have had to have printed more copies of films at the outset. This would have increased costs for everybody. One source says it costs the studios $1500 to produce and ship a film reel within the US. Maybe the benefits to consumers from earlier releases would have outweighed the increased ticket prices and the reduced producer surplus, but the movie industry's producer surplus is what lets new films be made too. Also, the US provided a testing ground letting film distributors get a handle on which films were likely to be able to make it on the international stage. If they had to produce enough copies of everything to satisfy a worldwide simultaneous release for all films that had a decent chance of making it internationally, costs could have been pretty substantial.

In general, New Zealand allows parallel imports. If some big brand wants to strike an exclusivity arrangement with some NZ retailer, the government rightly figures it's not the government's job to enforce that arrangement by banning wholesalers or retailers from other countries from shipping the same product to NZ retailers. But NZ has maintained a ban on parallel imports of DVDs until the theatres have had a kick at the can.

Now the marginal cost of another copy of a film is near zero with digital distribution. Theatres are flipping to digital projection. Worldwide simultaneous release is no more expensive to run than a staggered release, though you do forgo the benefits to local cinemas of being able to wait and see what works in the States so they can pick the winners, and you miss the chance to jet the stars around the world for the various premieres. The benefits to consumers of being able to see what's on in the States at the same time as it's there airing are also much higher now than they were two decades ago. If a pile of your Twitter and Facebook friends are all chattering about a movie you can't yet see, that really really sucks. You never say "Boy, am I glad that film didn't come here (or took 4 months to get here) because all my friends in the States saw it and said it stunk!" If you want movies to be pre-vetted that way, you do the same thing Americans do: wait for credible reviewers to see it and do what they tell you to do.

So, the benefits of staggered international windowing are much smaller than they used to be. Parallel importing of DVDs pushes distributors away from their ideal, but also circumvents the obvious alternative strategy of just downloading things, so the losses may be less than the naive model might suggest. If New Zealand abolishes the windowed ban on parallel DVD imports, it will have negligible effects on the film industry as a whole and will encourage that more films open here at the same time as the US. I'm not sure that it's in New Zealand's interest to help facilitate this particular international price discrimination scheme, or at least it would take reasonable evidence to convince me that it is.

I don't know who you are, but I like what you're doing!

Via a tweet from the Productivity Commission, I find a new NZ economics blog! I don't know who Donal is, but he's doing good work. I'm adding him* to Feedly.

Here he posts on the productivity symposium. Sectoral productivity in Oz is far ahead of us, it's mostly down to multifactor productivity and higher capital intensity there.

Geoff Mason from the UK's National Institute of Economics and Social Research, presented some highly detailed comparisons of sectoral productivity in New Zealand and Australia. For most industries, Australia is well ahead: on average we achieve only 62% of Australia's labour productivity. Geoff's been able to pinpoint how much is down to, broadly speaking, better ways of doing things in Australia ('multi factor productivity'), which explains 58% of the difference; how much is down to Australians working with more capital equipment than we do (39%); and how much is down to higher skill levels in Australia (very little, as it happens, only 3%).

If our labour productivity is only 62% of that in Oz, achieving wage parity with Oz would be rather destructive for overall employment.

Here he notes an insanity of the Overseas Investment Act: a land swap for an Auckland golf club has to route via the OIO because Fletcher's is majority foreign owned.

Here he gives a useful primer for those unfamiliar with the Stats NZ website and using Infoshare.

Here he excoriates the Greens' moneyprinting dreams. As he independently came to the same conclusion that Matt and I had, I conclude that he is very insightful.

Here he wonders why supermarkets bar arbitrage in baby formula. My working hypothesis has been that Fonterra underprices for the domestic market to avoid political pressure on other fronts; this breaks down where consumers then just ship the baby formula off to China.

Here's a wonderful anecdote about our GST.

Here he discusses firm pricing decisions in NZ. My take: maintaining parallel importing is especially important here!

Welcome to the NZ Econ Blogosphere, Donal, whoever you are! The full list, in case you've interested:

• Matt Nolan, James Zucollo and coauthors blog at The Visible Hand
• Seamus and I blog here at Offsetting
• Paul Walker blogs at Anti Dismal
• Bill Kaye-Blake blogs at Groping Towards Bethlehem
• Sam Richardson blogs at Fair Play and Forward Passes
• Aaron Schiff blogs at Aaron Schiff
• ...and now Donal at EconomicsNZ

Update: And don't forget!

• Brennan MacDonald at Reality-Based Analysis
• Brendan Moyle at Cthonic Wildlife Ramblings (beautiful nature photography interspersed with the economics of endangered species)

* Update: I originally followed the Google profile here that said "she", at least as of 5 July. Mike in comments below suggested he. I now expect that the author is Donal Curtin and have corrected the gender snafu. Update 2: Email confirmation: it's Donal Curtin. Welcome Donal!

Limit fast food outlets?

Should we blame fast food outlets for obesity?

Canterbury student Alice Robertson thinks so. The University's press release on her internship project has been picked up in a few places (Herald, Press). Alice's paper isn't yet available, but I've been promised a copy when it is. It sounds like it's mainly a literature review; she notes Day and Pearce, 2011 as particularly relevant. That paper found clustering of fast food outlets around schools. Such clustering doesn't prove an obesity link, just that the kinds of places that wind up being decent venues for primary and intermediate schools are also the kinds of places where fast food outlets wind up locating.

Robertson suggests limiting the number of fast food outlets near schools.

Rachel Webb is a doctoral student in our Economics department. She's presenting some of her thesis work at this year's NZAE meetings. She hasn't sought any press releases on her work because she likes making sure everything's nailed down before talking to the press office. And so her paper still says "don't cite without permission". But she's said it's ok for me to post on what she's been up to.

She's investigating links between obesity and high birth weights. In her quest for instruments that might correlate with obesity risk but that should not have any independent effect on high birth weight risk, she thought about fast food venue concentration. There's some evidence that such venue concentration affects obesity. If if doesn't independently affect high birth rate risk, then it can be an instrument (subject to the usual validity tests).

The density of different categories of dining establishments with a particular focus on fast food restaurants within the Territorial Local Authority (TLA) area that the woman resides in comprises my next set of instruments. A significant relationship between fast food restaurant density and obesity has been a prominent finding by health researchers over recent times. Rosenheck’s (2008) systematic review of 16 studies concludes there exists a significant relationship between fast food restaurant density and obesity[21]. It is generally agreed that fast food proximity lowers the notional cost of eating high caloric food and can therefore lead to higher obesity risk though the causality of the relationship is disputed [22]. It should not have any direct effect on high birth weight risk. However, like with rurality, there are plausible factors which could correlate with both food venue type and concentration and high birth weight risk. For instance, if unhealthy food venue options tend to concentrate in areas where people tend to be less health conscious for reasons that transcend deprivation level, ethnicity, age, rurality, or wider region then food venue type and concentration may have an avenue of correlation with high birth weight risk outside of the effect on obesity that I am unable to control for and could invalidate its use as an instrument. It is also possible that food venue type and concentration may be correlated with high birth weight risk through the effect of weight gain during pregnancy. Validity tests are required to check the soundness of this instrument.

So Rachel wasn't interested in the effects of fast food restaurant density on obesity per se: she was just looking for plausible instruments. And she's found something rather interesting.

A curious finding from the first stage results was that the fast food restaurants density in a TLA did not have the expected effect on obesity measures. The majority of the fast food chains showed consistently negative coefficients in the first stage and particular chains such as Hell’s Pizza, Burger Wisconsin, and McDonalds frequently showed a significant negative relationship with the propensity to be overweight, obese, and morbidly obese. KFC and Pizza Hut were the only chains to have a generally consistent positive relationship with obesity risk. It is not clear what is driving these findings as both median income of the TLA and the deprivation level of the meshblock have been controlled for suggesting it is unlikely to be socio-economic status, nor could it be the effect of living in urban areas as rurality variables are also included. The overall number of fast food establishments per person in a TLA was generally insignificant so it doesn’t appear to be driven by substitution away from less healthy options such as fish and chips either. More research into the effect of fast food on obesity is warranted. 

So, fast food restaurant density, in her regressions on New Zealand data, tends to reduce the prevalence of obesity. When she'd first presented this to the Department, I'd wondered whether what she was picking up was that folks hitting McDonald's would otherwise have been going to a fish'n'chip shop and eating even worse food; she's checked that, as noted in the blockquote, and that wasn't driving things.

Rachel wouldn't draw policy conclusions from her thesis work. But I'll draw one: we shouldn't be too hasty to ban fast food outlets near schools. I'll draw a second one: had Rachel sought press releases about her work, there would have been less uptake. There's reasonable media demand for panics about fast food restaurants, and about alcohol, and about "the kids these days".

Unintended but predictable

Two years ago, the government proposed banning the import of used cars failing to meet the Japan 05 standard. This effectively banned the import of a large chunk of Japanese cars that, while old, were newer than the New Zealand fleet median age.

I expected that this would wind up encouraging those with older cars to hold onto them for rather longer, as relatively newer substitutes would become more expensive. Whether this wound up increasing or decreasing the average fleet age depended on how many held onto those older cars relative to the number who moved to buying rather more expensive newer cars instead of the 1998-2005 Japanese imports that had been pretty popular; that in turn would depend on the price effects. The regulation looked like it would wind up being pretty binding, at least for the first few years.

The New Zealand Herald now reports:

New Zealand car owners' reluctance to dump their old bangers is contributing to a growing national car fleet and making the roads less safe, the Motor Trade Association says.
...
Association spokesman Ian Stronach said it was the result of the large number of 1995 - 1997 registered used import cars which flooded into the country during the early 2000s. "Most of these cars are still being used and skew the age profile of our car fleet. Today, the average age of New Zealand's car fleet is 13.8 years; that is old by world standards and probably beyond the original design parameters of some models."

The average fleet age in 2010 was 12.88 years. So, since the regulation change, the average fleet age has worsened by a year. It would take more work to show that the change is due to the regulation, but we can say that the change is consistent with my prior "unintended consequences" hypothesis.

GCSB Redux

I really wish that the Law Society's submission on the GCSB bill had been available prior to the submissions deadline. I suspect that I'm not the only one who failed to submit on the Bill because the precise changes from the status quo ex ante, and whether the changes were from the de facto or the de jure status quo, were, to a non-lawyer, sufficiently impenetrable to require several days' effort to decipher.

The Law Society instead makes it all nicely explicit for us. We are transforming a foreign intelligence agency into a domestic intelligence agency with minimal effective supervision. That's what it had looked like, but I sure wasn't qualified to say so. And so I didn't submit.

The Law Society notes that the Telecommunications Interception Capability and Security Bill violates basic rights to natural justice at common law because too low a threshold is established for the Courts to be able to prevent defendants from hearing evidence against them.

Their statement on the GCSB Bill is blunter than I'd expected. A few excerpts:

The Bill is intrusive. It would empower the GCSB to spy on New Zealand citizens and residents, and to provide intelligence to other government agencies in respect of those persons. It is inconsistent with the rights to freedom of expression and freedom from unreasonable search or seizure under NZBORA and with privacy interests recognised by New Zealand law.
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Given the intrusive nature of the reforms and the fact that they prima facie conflict with established rights, they should be demonstrably justifiable, and be accompanied by appropriate safeguards. The Law Society has sought to undertake a proportionality analysis of the legislation to ascertain whether the intrusion on rights protected by NZBORA as a result of these measures is justified, and whether there are sufficient checks and balances on the powers the Bill proposes.

It is difficult to identify the pressing and substantial concerns that the Bill purports to remedy or address. It is not possible to identify any tangible or meaningful concerns from the Explanatory Note to the Bill and the accompanying ministerial press release, beyond an allusion to helping the GCSB “get on with the job of helping New Zealand public and private sector entities deal with the growing threat of cyber-attack”

David Farrar suggests that, if the GCSB legislation fails, we'll just have the Police enhancing their wiretapping capabilities when it has a warrant to engage in such things. But the Law Society notes:

Furthermore, it would appear that if the GCSB is called upon to assist another specified agency (such as the Police) by performing activities instead of that other agency, the activities performed by the GCSB in that capacity will receive the imprimatur and secrecy and immunity protections of the GCSB Act, when the same activities engaged in by the specified other agency itself would not do so in terms of the other agency’s empowering legislation. In that way, enlistment of GCSB “co-operation” may confer on the activities undertaken a protected legal status which they would not otherwise receive. Indeed, the very fact of GCSB involvement may mean that the activity in question is never disclosed to those affected. This outcome is unacceptable and inconsistent with the rule of law.

I far prefer the Police doing this kind of job under warrant. I like warrants. Again, here's the Law Society:

Indeed, the section 16 power to intercept without warrant or authorisation can no longer be
justified, given the greatly expanded scope of this warrantless power (having regard to the expansive definition of “information infrastructure” and the expanded scope of operations beyond “foreign intelligence”, canvassed above so that domestic as well as foreign intelligence is to be targeted by the GCSB). This power must now be considered as overly invasive of NZBORA rights, and/or as a disproportionate conferral of power, given the available alternatives (including the range of powers of interception already possessed by the New Zealand Security Intelligence Service and others).

Had this analysis been publicly available earlier on, and it likely would have been but for the Government's incomprehensible desire to push this through under urgency and thereby prevent public debate, I would have submitted in opposition to the Bill. I wouldn't have done it with my economist hat on, because I can't quantify any of this. It would be my Mont Pelerin Civil Rights Libertarian hat instead, though informed by the economist side.

I would have taken the Law Society's analysis as baseline, then noted that New Zealand's main apparent economic comparative advantage is in having a robust policy environment that weighs heavily the civil rights of its citizens and residents. That we're a bastion of sanity where policy doesn't over-react to perceived security threats. That we're the place that very sensibly adopted the only realistically effective airport security precaution subsequent to an attempted hijacking by a deranged woman: harden the cockpit doors against entry. We haven't gone for American airport security theatre. We haven't started having roadside checkpoints where people are commanded to present their papers and prove that they're not in the country illegally. And that this comparative advantage matters all the more as America and the UK get worse: the Outside of the Asylum is more attractive when the Inside of the Asylum gets that much nuttier.

Imagine an alternative world where, as America started seeing just what the NSA has been doing to them, we were instead implementing the kind of digital rights amendment suggested by Fab Rojas for the States:

The right of the people to be secure in their transactions made through electronic media and other forms of communication,  and in the data generated by such transactions, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized. The people will retain the right to review such warrants and challenge them in the courts.

The US and OECD have been cracking down on so-called tax-havens; would that New Zealand could be excoriated by the Surveillance States as a rights-haven: a little dark blot on their surveillance maps where you have to get a real warrant from a real judge to be able to wiretap people, and to prove that there's a damned good reason for it. And be a place of refuge for those few who care enough about those kinds of freedoms to vote with their feet.

I wonder what the tech scene here could look like, in a decade's time, if some of the folks in Silicon Valley who do care about these things saw New Zealand as safe haven.

Peter Cresswell points to what we need to do to start protecting ourselves, if we're to be inside the asylum.