Tuesday, 27 January 2015

Online GST revisited

While pretty much all goods and services consumed in New Zealand attract GST, imported goods under $400 are GST-exempt; IRD generally reckons the cost of collecting the tariff to be higher than the taxes collected.

As Australia's debates around reducing or abolishing its GST-free threshold have sparked renewed NZ-retailer pushes for its removal here, I wrote a short piece for NZ Retail, the local retail trade magazine. Their news story is here. Here's the op-ed. A snippet:
Does this create an uneven playing field for New Zealand retailers? Yes, as compared to a world in which tax could be collected costlessly. But consider the real world!
Ordering higher valued products from abroad means they will be held up at Customs until GST is paid. The quickest payment option is the online credit card service which attracts a 2.5 percent convenience charge. Internet bank transfers are cheaper, but require the customer to take the separate step of logging into online banking, making the payment, then waiting for Customs to notice that payment has been made.
Or, you can drive across town to your nearest Customs office. All of these methods also attract a separate Import Entry Transaction Fee of $29.29 (including GST) and a biosecurity levy of $17.63, regardless of the value of the import. That hundred dollar import that was undertaxed by $15 suddenly would attract not only $15 in GST, but also $47.29 in transaction charges.
...
It often seems like local advocates of a lower GST threshold really just want importation of foreign goods to be such a hassle that customers give up on trying. That world is the one I lived in in Canada in the 1980s, when I would stare longingly at American computer magazines and know that getting anything across the border involved at least $200 in brokerage fees.
I worry that too many local retailers focus on the GST issue when the underlying issue is rather more troublesome. New Zealand simply is not large enough to be able to achieve the economies of scale that foreign warehouses enjoy. Even if GST could be applied on foreign imports, today, with zero hassle-cost imposed, the foreign cost advantage is not likely to decline over time. The problem really isn’t the GST, or at least not in cases where consumers can easily save at least a third by shipping goods in from abroad. Domestic retail of easily shipped goods that do not require specialised local advice is not going to get easier. Recognising that rather than blaming the GST will be an important part of a reality-based reassessment of retail opportunities in the coming decade.
Previously:

Saturday, 24 January 2015

Costs, benefits, and apartments

Yes, the Motu report on the costs of Auckland's urban planning regulations does not include a measure of the benefits. In some cases this will not matter much; in others, it might.

Andrew Geddis focuses on building height limits which impose about $18-32k per apartment and chides me for ignoring the benefits of those for the potentially otherwise shaded. But look at the main cost categories in the list. Floor-to-ceiling height limits impose $21-$36k per apartment. There is absolutely no offsetting benefit of floor-to-ceiling height limits that is not fully incorporated into the price of the apartment. Sure, the eventual residents will get some value out of the higher ceilings, but there will be plenty of buyers who'd have wanted to save money and to have a lower ceiling. The costs have to be in excess of the benefits for these things. There is no external benefit that comes into play.

And same for balcony area regs that tally $40-$70k per apartment. The only people benefited by these regs are the ones buying the apartments. In the absence of this regulation, they could either buy an apartment with no or small balcony, and save $40-$70k, or one with a big balcony and pay the extra. Some people will be made no worse off due to the reg, as they'd have bought a big balcony anyway; others are being forced to buy a Mercedes when they really wanted a Toyota.

These were two of the biggest per-apartment cost items, and there is no way that benefits can possibly exceed costs unless we think people buying apartments systematically err on the side of buying ones that are shorter than they really want and with less balcony than they really want.

In all these cases, the ideal measure would be a net cost one that said "Ok, so we forced you to buy a Mercedes instead of a Toyota and so you're going to be paying a pile more in mortgage interest than you otherwise wanted, and it's going to cost you more in fuel too. But let's think about how much more fun you'll have driving that Mercedes and count that against the extra price we forced you to pay. And let's think too about how much nicer the place looks when we don't have a bunch of Toyotas driving around."

And sure, you can get some non-crazy benefits from things like viewshafts that wind up putting in height limits. But prior to the Motu report, planners were operating in absolute ignorance of the costs these things imposed. Nobody had any clue; the Auckland stories I've heard suggested that they then didn't put much weight on that there could be any cost. Now they can at least look at the existing viewshafts, tally up the costs they impose, and start thinking about whether it's really worth tens or hundreds of millions of dollars to maintain particular views from particular places.

Geddis is right on this though:
Because irrespective of its source, the value conferred on a property by restrictive planning rules is perceived by the home owner as being "theirs", which then creates the problem for RMA reform that Rob Salmond outlines here:
Per unit apartment costs in high-demand areas line (sic) Parnell would certainly be lower if the developer could build 30 or 40 stories of apartments there, right. And the homeowners of Parnell hate the RMA and its requirements for consent before making a greenhouse, right? But I'm willing to bet the homeowners of Parnell aren't at all in favour of having their tomatoes' sun blocked by a series of large apartment blocks. Dilemma, dilemma.
Which actually is a part of a wider dilemma. Because everyone wants "affordable housing", so long as it doesn't cause the current value of their home to go down. Which, in a housing market that in Auckland is looking more and more like a bubble, poses a real problem for policies that are aimed at increasing housing affordability. 
There is a way around this. Upzone EVERYTHING, make everything tall be subject to notified consent, but restrict standing for objection to directly affected neighbours. And, make it easy for developers to buy options from neighbours saying "Ok, I don't know whether I want to put an apartment building here. I'm paying you $1000 now for the following deal: if I build it, I pay you $50k compensation and you don't object; if I don't, you keep the $1000."

If standing for objection is limited to those directly shaded and incurring real effects rather than made-up stuff, this can work.

Friday, 23 January 2015

RMA changes and council incentives

Me in The Initiative's weekly newsletter:
If councils are determined to commit absurdities, they’re going to do it regardless of fixes to the RMA. After whatever legislative tweaks are enacted, and new Environment Court rulings come through, it will take councils a little while to figure out how to restart the micromanagement that pushes up costs and helps make New Zealand the seventh least affordable place to live in the world.

Councils don’t care about the effects of their planning rules on the macroeconomy, what it does to Reserve Bank policy, or whether it utterly ruins the economy. For them, that’s all under a great big Somebody Else’s Problem shield of invisibility. Councils’ problem is making sure that councillors get re-elected. That means not hiking property taxes too much (and so loading costs onto new developments) and making sure that the short term interests of current voters, and of the loudest voters, are prioritised over the interests of those who might be in town after the next election, if development were allowed. Dumb rules that hike costs could be the desired outcome, not an unintended consequence.

This basic calculus will not change much until councils’ incentives are fixed.
Read the whole thing, or, better yet, subscribe to Insights!

Thursday, 22 January 2015

Auckland SimCity

Some reports make you want to find a city planner and beat it with a heavy muddy stick.

Arthur Grimes and Ian Mitchell's latest MOTU report is the latest. They demonstrate just how badly Auckland Council has wrecked housing affordability. Stupid "it was a good idea at the time" rules compound on one another to make it impossible for developers to innovate in providing affordable housing.

Read the whole thing. But Table Two has the main effects.

Every one of these things would have seemed like a good idea to somebody at the time, but nobody stopped to think about the cost.

  • Height limits appeal to NIMBYs, maintain viewsheds (the notion that there's infinite value in being able to see some mountain in Auckland from some point on the Harbour Bridge), and appeal to idiotic planners who reckon nobody would want to live that high up anyway.*
  • Floor to ceiling height limits appeal to planners who think that it's not fair that poor people's apartments would have low ceilings; they ignore that tenants could otherwise choose between higher ceilings and higher rents and lower ceilings and lower rents. Some people prefer the cash in hand; planners imagine this stuff's costless.
  • Minimum balcony area regs appeal to planners' sense of aesthetics; they ignore the cost and cannot imagine that others might prefer the cash.
  • Delay is costless to planners, who imagine the costs of a poor (ie, not what they like) design to be huge because buildings last a long time. 
Grimes writes:

In some cases, developers felt that they may even face additional challenges gaining planning consent if their proposal includes innovative solutions that are not typically included in other developments. Specifically, developers considered that being innovative in order to reduce cost heightens the risk and uncertainty when trying to obtain a consent, both in terms of the time required to work through the consenting process and the ultimate outcome in terms of the number of dwellings. Developers commented that urban designers do not like small uniform dwellings which are easy to produce and which reduce costs.

He also specifically cites Grey Lynn people as part of the problem around NIMBY activism.

While I broadly support Nick Smith's look at how the RMA might be fixed so it stops enabling this kind of Council ridiculousness, I doubt it goes far enough. Underpinning all of this is that Councils have zero current incentive not to behave this way. The RMA was never intended to enable this kind of mess; planners used it to set rigid district plans and to fob off blame for lengthy processes. If Councils instead had better incentives, so that growth were in their interest instead of just NIMBY-appeasement, we'd have better outcomes. 


* I'm not exaggerating. That was one of the reasons behind Christchurch CBD height limits. Never mind that it's developers' money on the line if they're the ones wrong about what customers might want. 

Wednesday, 21 January 2015

Needs a diff-in-diff

I'd love to see somebody else head into the Stats Datalab and do a bit more digging into recent declines in teenage fertility rates.

Teen fertility rates are down but we aren't entirely sure why. The new report commissioned by the Social Policy Evaluation and Research Unit notes increased use of contraception but doesn't have any clear reason why contraception use has increased. They note the link between deprivation and higher birth rates; it would be interesting if they presented results sorted by income cohort.

The time path has a sharp drop from the 1970s through the early 80s, then a slow decline, then a sharp rise from '05 to '08, then a reasonable decline since '08.

I wonder whether changes under National restricting the generosity of benefits paid to single mothers who have an additional child while on benefit have had an effect on teen birth rates.

Somebody with DataLab access could check:

  • differential effects on teenage fertility of the changes to benefits by comparing cohorts likely to access benefits conditional on childbirth with higher-income cohorts unlikely to do so;
  • differential effects of easier morning-after pill access in Auckland, later rolled out to other cities, as compared to regions where it's more difficult to access pharmacies;
Please go and make this your thesis and report back.

Tuesday, 20 January 2015

CEO pay and inequality

The ODT's Eileen Goodwin asked me for comment on CEO pay in New Zealand; I'm quoted briefly in this story. Here's what I'd sent her; the ODT story wasn't able to include any of it but did quote from our prior phone chat. I wish she had made some use of the data I provided on top-1% earnings for context though.
We should start by looking at whether there actually has been any great increase in earnings in the top 1% relative to others, just so we have the data right.

I created this chart from the World Incomes Database. You can check my numbers at http://topincomes.g-mond.parisschoolofeconomics.eu/#database . The only difference between those figures and mine is that I averaged incomes between 1999 and 2000 for everybody, because the change to the 39% top marginal tax rate had a pile of people bring forward income to 1999 from 2000, making 1999 look super rich and 2000 super bad. Best is then just to average the two. I set everyone’s income in 1953 to be equal to 100 to get an index score, then looked at growth from then onwards relative to the 1953 baseline. That makes it really easy to compare income growth in different cohorts. Note that these are real inflation-adjusted figures. 

As you can see, there is zero evidence of any blow-out in top 1% earnings in New Zealand. Since 1953, real earnings in the top 1% are up by 50%. But real earnings for the bottom 90% doubled.

This is further confirmed by the Ministry of Social Development’s recent report. You can check it at the link; I’ve pasted the relevant table below.
"Overall, there is no evidence of any sustained rise or fall in inequality in the last two decades. The level of household disposable income inequality in New Zealand is a little above the OECD median. The share of total income received by the top 1% of individuals is at the low end of the OECD rankings.  
Income inequality in New Zealand, 1984 to 2013 HES


1984
1994
2004
2009
2012 & 2013 for HES, 2010 & 2011 for tax records
Household disposable income, adjusted for household size … data from sample surveys (HES)
Gini x 100 (trend-line)
26.6
32.5
32.9
32.9
32.9
Share ratio, D10 to D1
6.1
8.2
9.1
8.6
8.3
Share ratio, Q5 to Q1
4.1
5.1
5.5
5.4
5.3
Share ratio, D10 to D1-4 (Palma)
0.92
1.21
1.31
1.29
1.27
Percentile ratio, P90 to P10
3.5
4.1
4.2
4.4
4.2
Percentile ratio, P80 to P20
2.4
2.7
2.9
2.9
2.7
Individual market income … data from tax returns – avg of year noted and the one either side
Top 1% share
5.6
8.9
9.0
7.8
7.8
Top 10% share
28
33
33
30
30
Top 10% - 1% share (ie P90 to P99)
23
24
24
22
22
 Income inequality in New Zealand compared with other OECD countries, c 2011-2012
(%)
NZ
OECD-34 median
DNK
NOR
FIN
FRA
AUS
CAN
UK
US
Gini x 100 (trend-line)
32.9
30.5
25.3
25.0
26.1
30.9
32.4
31.6
34.4
38.9
Share ratio, D10 to D1
8.2
7.6
5.3
6.1
5.5
7.4
8.5
8.5
9.6
16.5
Share ratio, Q5 to Q1
5.2
4.8
3.6
3.7
3.7
4.7
5.4
5.2
5.6
8.2
Share ratio, D10 to D1-4 (Palma)
1.27
1.18
0.87
0.85
0.93
1.18
1.27
1.19
1.40
1.74
Percentile ratio, P90 to P10
4.2
3.8
2.9
2.9
3.2
3.6
4.5
4.1
4.1
6.1
Top 1% share – tax records
8
The latest available from 2009 to 2012
6
8
8
8
9
12
13
19
Top 5% share – tax records
21
17
19
21
21
21
27
28
36
Note:  See the main report for details about the sources for the figures in the above tables.
Eric here again now.

So, top 1% earnings here are hardly high by either a historical comparison within New Zealand, nor by any international standard. And inequality in New Zealand is middling by OECD standards.

The MSD report also points out that while wealth inequality is higher than income inequality (and data on it less reliable), what we do know about it is that the top decile’s wealth share here is about on par with France and Canada, and lower than Norway and the US. Further, when we account for that much of the country’s wealth is held in the form of mortgage-free houses by the elderly who have low incomes, the joint distribution of wealth and income is far more equal than if we look at wealth alone: a lot of people with high wealth have little income.

In my view, inequality has taken on a lot of salience in New Zealand for two main reasons. First, inequality in the US has risen substantially – though not here. New Zealand is way too quick to assume that whatever’s happening everywhere else is also happening here. Please look at the data above and help people to at least base their opinions on what the data actually says about things here. Second, the ridiculous run-up in housing prices, due mostly to Council restrictions preventing new building, has made housing really really unaffordable for a lot of even middle- to higher income New Zealanders. They then blame richer people for bidding up the price of housing – and they’re especially prone to blaming rich foreigners. It’s right to be concerned about housing costs, and especially about that housing costs eat up way too much of household incomes for lower to middle income families. But that’s not a problem with inequality – it’s a “not building enough houses” problem.

With that established, let’s look at some of the evidence on CEO compensation.
Edward Glaeser finds that executive compensation in the US is strongly related to firm performance. See the first paper in this set.
Adams et al find that Swedes with higher cognitive andnon-cognitive abilities get put in charge of larger companies. Better CEOs sort to the bigger firms where their skills are more needed; CEO pay then reflects both their abilities, and the size of the firms they have to manage.
Kaplan and Rauh find that top CEOs have been gettingbigger pay packets largely because the market has gotten a lot bigger and morecomplicated: the CEO job has gotten harder at large firms, and so the gains from having the best people have gone up too.
Again, this is consistent with the view that shareholders generally do well in keeping an eye on their boards, that boards pay what’s necessary to attract top talent, and that the importance of having strongly performing CEOs has increased.
Another way of testing? What happens to a firm’s value when the CEO dies unexpectedly. Here’s Nguyen and Nielsen. In short, there are sharp drops in firm valuation (share price) on the death of a CEO. They argue that for every extra dollar of wealth that a CEO creates for the company *over and above what someone else in the job would have created*, that CEO keeps about $0.75 and shareholders get $0.25. Other papers using different measures find that CEOs keep a much smaller fraction of the wealth they create for shareholders; the high estimate here may reflect some drop in value due just to the uncertainty about who the successor will be.
If there are problems in CEO compensation, they will be specific to individual firms. If a CEO has managed to pack the Board with friendly supporters, that CEO could be getting paid far more than he or she deserves. That makes the case not for any kind of blanket rules on CEO pay but rather for making sure that corporate governance is strong: that shareholders maintain control of the firms they own, that Boards are active in monitoring performance, and that shareholders sack Boards and CEOs if they can get a better deal elsewhere.
I hope this helps.
 It's always interesting to keep track of what bits get used and which bits don't.

Update: for the benefit of those who, like Keith Ng, seem to want to assume I did something dodgy in choosing 1953 as a baseline year, go and check the original source data. The basic reporting unit changed from 1952 to 1953 so the data isn't consistent; they have 'em as different data series. I chose 1953 because it was the earliest consistent year in that dataset; I chose that dataset because it's the longest term data I've yet seen on income distribution in New Zealand. Maybe Keith would be happier with a 1984 base year because then he could be all mad about income increases for the top 1% in the late 80s; maybe somebody else would like a 1999 base year so they could be all mad about income declines for the top 1% since then. The nice thing about choosing the longest possible data series is that anybody can then truncate it to later points if they want to think about alternative base years. I'm hardly hiding the increase in top 1% incomes in the late 80s; I'm just failing to hide the prior long term decline in earnings among the top 1%.

Update2: Keith's only unhappy that I took 1953 as base year, not that I included the full data series. People can use whatever base year they want. In absence of some big reason for picking one over another, I go with the earliest; you can easily run ocular re-basing to whatever base-year's desired.

Monday, 19 January 2015

Freedom of choice, but only for "responsible" choices

Freedom of speech is worthless if it's restricted to things that'll never offend anybody. 

Freedom of choice also requires that we be able to choose things other people think are dumb. Otherwise, what's the point? You might as well flip to a world where you're given a menu of permitted choices and where you're forced to pick one of them instead of carving out your own path. 

Here's Will Wilkinson at The Economist on Cassandra C's forced chemotherapy. She's 17 and refused chemotherapy, with her mother's support. She is likely to die as consequence.

Will writes:
It's simply maddening. Let's recap. Cassandra's mother does not force her to submit to an unwanted treatment, so she is an unfit mother. Cassandra is therefore held hostage by the state and allowed to return home only if she pays a ransom: submission to the unwanted treatment. Held against her will, and very afraid, so she agrees under duress. But she hasn't really changed her mind about the treatment, so she reneges. This is then used as evidence that she was insufficiently mature to be allowed to make her own decisions about the treatment in the first place. Dizzy yet? It seems that the only thing that would have counted as dispositive evidence of Cassandra's maturity, of her capacity to withhold consent, was a willingness to grant it.   
I suspect Cassandra has some dotty ideas about chemotherapy. Perhaps she inherited them from her mom. It may be that if she were allowed to act on her dotty ideas, she would die, while chemotherapy may save her (Hodgkin Lymphoma is one of the more treatable cancers). But liberty is a completely empty ideal if we are free to act only when our conception of our interests coincides with those of experts, medical and otherwise. If we are entitled to choose on our own behalf—or on our children's behalf—only when we are deemed rational, and rationality is defined to mean a consensus with the authorities, then autonomy is a bad joke. Cassandra's case illustrates the technocratic tendency of American culture and politics to nibble away at the edges of our autonomy, to deprive us of the right to make anything but the medically correct choice.
Emphasis added.

Every time I make this point on rationality, the public health brigade here insists that I'm arguing in favour of some blackboard model of perfect rationality. Rather, deviation from what public health doctors think is best, where those doctors don't seem to give a whit about the patient's experience other than QALYs, sure ain't evidence of irrationality.