Can consequences this foreseeable really be unintended?

Imagine this as an intermediate microeconomics exam question. Suppose the government were to bar firms taking government contracts from paying their highest-paid employee more than three times what they pay to their lowest-paid employee. What consequences might you expect ensue?

Here are a few, for starters:

• There would be a rapid shift towards outsourcing of tasks performed by lower-paid workers. An economic consultancy company would hire a temp service to provide secretarial services and would contract with a janitorial services provider rather than have secretaries and janitors on staff. A construction company would have a rather tougher time - they'd be more likely to split into several component parts all selling services to a central agent who contracts with the government. So there could be a shoveling services company, a truck driving company, and a project management and procurement company. You'd have fairly flat payscales within companies, but large differences in salaries across companies. This would be inefficient, but it would likely be the best they could do given the rule.
• Universities running consultancy arms for contract research by academics would have to run those as more explicit external shells. The government throws millions of dollars at the University of Otago for ban-everything studies under HRC grants. If they can't disguise the hourly rates in the contracts to make it look like the researchers are just putting in tons of hours, they'd have to put the contracted lecturers and profs onto part-time contracts with the University, where salary scales would range from the guys who mow the lawns to the people who teach brain surgeons how to be brain surgeons, and have a separate consultancy company where everybody earns a lot. 
• If we think that Universities are under contract for government already in the whole teaching-students business, then they'd just have to run the same outsourcing arrangement suggested above. Or, think of it this way: would YOU want to have your brain surgery conducted by somebody trained by somebody earning three times what you can make mowing lawns? 
• Now suppose that the policy were more comprehensive than I've suggested: they also work hard to look through these kinds of contractual setups and bar firms from putting in tenders for government contracts where it looks like they've done this.
• It would be almost impossible to police. Some companies already find it optimal to contract with a professional maintenance services company rather than do things in-house; others like doing things in-house. Who's to say which organisational decisions were motivated by the rule and which derived from other considerations?
• If they could do it, then you'd effectively have the end of government contracting-out for services except on very minor scale. The whole thing seems designed to kill private-public partnerships like:
• Having specialist companies tender to construct roads rather than having some Ministry of Public Works do all the construction for the government (and losing the efficiencies of competition and private tendering);
• Contracting in external experts for assistance rather than keeping a bunch on government staff. This sucks in a small country where you might need particular kinds of experts only infrequently.

That's just a start; other very foreseeable rather bad consequences are left as an exercise for the reader. For starters, think about incentives to acquire human capital.

Nobody would be daft enough to suggest such a thing though, right? Nope.

The Government should stop giving contracts - and knighthoods - to companies that pay their bosses more than three times their lowest-paid workers, an economist has suggested.

Who? Maybe some crank consultant? Nope. The University of Victoria at Wellington's Geoff Bertram. 

I caught this over the weekend but hadn't gotten around to blogging it; glad to see David Farrar and Matt Nolan caught it too. Matt only thinks Bertram's being "reasonably disingenuous"; I'm less charitable. 

To advocate policies like this, as an economist, and to pretend that a great big bucket of awful wouldn't ensue pretty directly, is worse than disingenuous. Bertram gets to grandstand about what a caring guy he is, let his followers believe that horrors wouldn't ensue, and just trust in that no government would be batty enough to implement the policy. This kind of policy advocacy smells more of charlatanry than of economics. I really really hope that the Herald has quoted him incorrectly as I can't believe that any economist could seriously think this a desirable policy. Care about inequality all you want, but the appropriate levers are tax and redistribution policy, not wage mandates.

If Bertram weren't misquoted, I've a few questions for him.

1. Salary differences within government are often well in excess of the 3:1 ratio he recommends. The Prime Minister doesn't make a lot of money in the grand scheme of things, but he makes well over three times the lowest-paid government worker. Even if the lowest government salary paid anywhere in the system were $40,000, that would constrain the highest salary to $120,000. The Prime Minister earns $419,000. I expect a substantial part of the higher echelons of government earn well in excess of $120k. The base salary for a backbench Member of Parliament is $144k. Should we extend his preferred 3:1 rule to all of government, or just to contractors? 
2. If he only wants it to apply to contractors, on what basis does he make that distinction?
• Note that, if it applies only to contractors, the main large effect of the rule would be to end outsourcing of government work. We'd have a massive expansion of the civil service and an end to what benefits come from competitive tendering. I would put 20:1 on that Bertram's rule, in this interpretation and if enforced, would have this consequence. It is so obvious an effect that it kinda has to be something that the policy proponent wants to have happen. So, Geoff, if this is how you want it, why didn't you just call for a ban on outsourcing and an expansion of the civil service?
3. Private hospitals provide services under contract for government. This would end pretty quickly under Bertram's rule if it applied only to contractors. But suppose it's comprehensive and applied also to government hospitals. Geoff, do you prefer:
1. That the people who cut the grass, and the cashiers at the cafeteria, get salary increases so that nobody is earning less than a third of what the country's top brain surgeons earn? This may have consequences for the overall health budget and the overall quantity of services that the health system can provide. Or,
2. That the people who fix the brains get pay cuts so that none of them earn more than three times what the people who cut the grass earn? This may have consequences for the quality of brain surgery. 

I weep for the quality of thought on the left in New Zealand. Australia gets Andrew Leigh. We get, well, this.

Blind to others' ends

Marion Nestle's op-ed in the New York Daily News is breathtaking.

She begins:

If we want Americans to be healthy, we are going to have to take actions like this - and many more - and do so soon. It's long past time to tax sugar soda, crack down further on what gets sold in our schools, tackle abusive marketing practices, demand a redesign of labels - and extend the soda cap, no matter how controversial it may seem. This must be the beginning, not the end, of efforts toward a healthier America.

In short, we need a series of serious changes to make the healthy choice the easy choice. The soda size cap is a nudge in that direction. You will still be able to drink all the soda, and down all the sugar, that you want. The cap on soda size makes it just a tiny bit harder for you to do so.

...Most people eat whatever size is in front of them - the "default," in public health-speak - and are content with that amount. So a reasonable goal of public health intervention is to change the default drink to a smaller size. Hence: Bloomberg's 16-ounce size cap. From my nutritionist's perspective, a 16-ounce soda is still generous. Just one contains the equivalent of 12 packets of sugar. Just one provides 10% of the daily calorie needs of someone who typically eats 2,000 calories a day. Just one contains the upper limit of sugar intake that health officials recommend for an entire day. Once you down a 16-ounce soda, it's best to stop right there.

From my perspective, as someone who regularly shares a soda with his wife at the movies, having to leave a movie for a refill is more than a minor inconvenience and no longer being able to share a drink with your wife adds more than a minor cost. But Nestle either can't see the diversity of ends sought by those wishing larger sodas, or considers them irrelevant collateral damage.

So-called "nanny-state" measures - like bans on driving while drunk, smoking in public places and, now, selling absurdly large sugary drinks - help to level the playing field. Such measures are about giving everyone an equal opportunity to live a safer and healthier life.

I'd thought the point of drink-driving laws was the protection of other drivers. And that's how bans on smoking in public were sold, though that always seemed really rather a stretch when they started pushing for bans in outdoor areas.

The column doesn't get better.

At the moment, it is up to you to make healthier choices, but that's not easy in the face of relentless soda marketing. Governments have a responsibility to provide healthier environments for their citizens.

Yes, we're all helpless in the face of marketing. I think she needs some theory explaining why ads for soda are that much more persuasive than ads for milk and kale.

Here are some additional actions New York City should take, if only it were allowed to. Close the loopholes. The city does not have jurisdiction over sales of sodas in convenience stores and supermarkets. The state does. Gov. Cuomo denied Mayor Bloomberg's request to extend the size cap to those stores, not on principle but because he hadn't thought about it. He should, right now. Let's keep all sugary drinks to 16 ounces or less.

And what of larger families who like to share larger-sized drinks? Or buying soda for parties?

Fix the price differential. A 7.5-ounce can of soda costs twice as much per ounce as a two-liter bottle, and you can't buy just one; it comes in an 8-pack. Price determines sales. If a 16-ounce soda costs a dollar, a 32-ounce soda should cost two dollars.

Hey, let's extend her price control regime to everything. If a single toilet paper roll costs $0.25, there's clearly no reason that a 24-pack should cost anything other than $6.00. If a half-dozen eggs costs $4, then a dozen should cost $8. If a single drumstick at KFC is $1, then a 20-pack should be $20. If a night at a hotel is $100, then a week should be $700. There's no reason anybody might provide volume discounts except to foster addiction and overconsumption. If a motorbike with two wheels costs $10,000, then a car should cost $20,000 because it has twice as many wheels. Just put Marion Nestle in charge of the "Setting the price of everything" committee. It'll be great.

Tax sodas. Most people wouldn't dream of eating candy all day, but soda companies have made it seem normal to drink sodas from morning to night. Raising the price of sodas would discourage sales, especially among young people most susceptible to marketing efforts and most vulnerable to weight gain. A one-cent tax per ounce should do the trick and raise plenty of needed revenue besides.

I rather doubt that a one-cent-per-ounce tax would satisfy her thirst.

It goes on in this vein for a while. She concludes:

Actions like these will evoke ferocious opposition from the soda industry, and it will spare no expense to make sure such things never happen. We would surely hear more and more howls of "nanny-state" from those who insist Bloomberg has led us to the brink of a public health police state. Polls say that many New Yorkers oppose the 16-ounce cap and would oppose measures like this, too.

But I can't tell whether the opposition comes from genuine concern about limits on personal choice or because soda companies have spent millions of dollars to protect their interests and gin up histrionic, misinformed opposition.

Oh, those illegitimate howls of "nanny state" against a woman who wants to ban advertising of soda (if it looks to her like the marketing targets kids), ban vending machines in schools, mandate great big calorie warning labels on the front of containers, and ban 2-litre bottles from supermarkets.

I guess I'll need a bridging loan [updated]

I'm a bit lost for words about EQC's latest rule change.

The Earthquake Commission charges a levy on all home insurance policies in New Zealand and covers the first hundred thousand dollars in damage to properties in the event of an earthquake, landslip, or other such event. There were warnings ahead of the Christchurch earthquakes that EQC was not charging enough to cover its potential liabilities and that it certainly was not well placed to manage any kind of major event; nobody paid much attention.

So anybody with home insurance in Christchurch has to deal with EQC. There's no obvious way of contracting around EQC to have a private insurer take on the things EQC normally covers. Where damage to a house is less than EQC's capped limit, you have a choice. Either you can project manage the rebuild yourself and submit the bills to EQC for payment, subsequent to their approval of a plan of works and costing, or you can have Fletcher's serve as project manager; Fletcher's is the default. While you can ask that Fletcher's use your preferred contractor in your repairs, some contractors now refuse to deal with Fletcher's. Where you let Fletcher's choose the contractors, there seems to be pretty high variance in outcomes.

We own an old weatherboard house with lots of character features; we wanted a contractor that specialises in that kind of home. We have full replacement insurance coverage. When our preferred contractor told us that he would not take on any more Fletchers-managed projects, we decided to go for an opt-out and let that contractor handle project management.

Now, EQC has changed the rules. Instead of our submitting the plan of works and proposed costings to EQC, followed by having the contractors bill EQC for the approved work directly, EQC has decided that opt-out owners have to pay their contractors directly then submit the bills to EQC for reimbursement.

EQC has a very bad history for paying on time. And if they decide, unilaterally and arbitrarily, to change the rules again mid-process, the homeowner is then stuck with costs.

We're now likely to need a bridging loan from our bank so we can handle our repair costs. And we'll have to hope EQC doesn't shaft us. But EQC is likely to shaft us.

At least we're likely to be able to get that kind of a loan. Or I expect we'll be able to; I'll have to talk with the bank.

This system stinks.

Update: Somebody called "EQC" in the comments at the Press site writes:

EQC has a number of changes to the Opting Out process with the aim of streamlining the process for customers and making it easier for them to take control of their own repairs, if they choose to do so. The flipside of EQC’s more hands-off role in these repairs is that we need to be clear about the customer’s responsibilities once they take on the role of project manager. To reflect this, EQC has produced some new customer information which including misleading wording relating to “reimbursement”. The revised wording places an emphasis on customers having the responsibility to manage invoices and EQC payments to ensure their contractor is paid on time. This is a standard part of the project management role, and it’s important customers know what is involved before taking the step to opt out of the Canterbury Home Repair Programme. As project manager, a customer running their own repairs takes on the risk that if invoices are incomplete, late arriving with EQC, or if some other complication arises, they may be required to pay a contractor upfront and be reimbursed. EQC pays on the 20th of the month following recpeit of invoice. As for Steve Brooks' comments that people not opting out will add years to the repair timeframe, the Canterbury Home Repair Programme has so far completed 18,000 full scope repairs - cusomters project managing their own repairs have completed a few hundred. But then Mr Brooks makes money when he persuades people to opt out, so he would say that.

I can't find anything on the EQC site discussing any of this.