The Price of Wool and Economic Growth

You know how most comments sections are, well, terrible?* Not this one. Gerald Silverberg blogs on the New Zealand 1951 GDP data point and the Reinhart-Rogoff mess. I'm going to leave refereeing on Reinhart-Rogoff to Justin Wolfers. But just look at the depth of wonkery that goes into a single cell in an Excel spreadsheet. Careful data collection and distribution is ridiculously undervalued.

Gerald tries working out New Zealand growth rates for 1946-1952, contrasting Maddison's data with others. The Reinhart-Rogoff data doesn't look like Maddison's. Then commenters, likely including at least one data maven from the bowels of the NZ bureaus, start helping out.

Commenter Oscar first points to an FT piece showing that Maddison uses calendar years while the Stats NZ series uses March years. Then Silverberg starts wondering whether 1951 was due to the waterside lockout or to the wool price boom, quipping:

Who would have thought that you would have to become an expert on NZ wool exports and labor relations in 1951 to decide if public debt affects economic growth.

It gets much much wonkier from there. Mark Sadowski provides a short history of the waterfront dispute and the wool boom:

I was convinced from the start of the HAP/R&R controversy that the New Zealand part of this story was explained by the 1950-1951 New Zealand Wool Boom and not the 1951 New Zealand Waterfront Dispute.

The 1952-53 New Zealand Yearbook shows that wool sales were 47.1 million NZ pounds in 1949-50, 107.5 million NZ pounds in 1950-51 and 52.7 million NZ pounds in 1951-52.

Most of this was caused by a change in price, not a change in output. The average price of wool rose from about 38 NZ pennies a pound in 1949-50 to 88 NZ pennies a pound in 1950-51 and fell back to 40 NZ pennies a pound in 1951-52. (There were 240 pennies to a New Zealand pound.) Production was about 298 million pounds in 1949-50, 294 million pounds in 1950-51 and 315 million pounds in 1951-52.

According to the HAP/R&R dataset New Zealand's nominal GDP (NGDP) was 1.101 billion NZ pounds in 1949, 1.396 billion NZ pounds in 1950 and 1.446 billion NZ pounds in 1951, so that was a substantial proportion of New Zealand's economy.

A good paper about the New Zealand Wool Boom is here.

I can't locate a free copy, nor can I save a PDF file I can cut and paste but I would summarize the episode as follows.

Demand for wool had been strong since WW II ended but supply had been unresponsive to elevated prices. When the Korean War started in June 25, 1950 there was an immediate elevation in the price of wool. Between that date and March of 1951 the price of wool went up two to three fold depending on grade (lower grades went up more, mainly because that was the kind of wool the military was buying). Demand wasn't simply driven by US military stockpiling as retailers actually used rising prices to induce even higher sales.

In January 26, 1951 the United States Office of Price Stabilization (OPS) imposed a general price ceiling measure designed to freeze the pre-war price-wage structure. The price ceiling on wool brought trading in Boston (the central US wool market) to a standstill and caused US participation in New Zealand wool auctions to more or less cease. This led to falling New Zealand prices until February 7 when an emergency exemption was granted to the US military through April 1. This caused prices to recover but once the exemption expired prices fell sharply. By June 1951 they had fallen by 50% and by March 1952 they had fallen a total of 70%.

Now, my sense from reading the history of the Waterfront Dispute is that it was less a strike than a lockout. The government brought in 3000 troops an unknown number of scabs to keep the dockyards running, and thereby crush the union.

The 1954 New Zealand Official Yearbook shows the Cargo Manifest Tonnage "cleared" (exports) fell from 1,163,934 tons in 1950 to 1,129,629 tons in 1951. It rose up to 1,173,577 tons in 1952.

In other words the mass of cargo moved fell by only 2.9% and rose by 3.9% the following year.

What about the actual value of exports? Exports *rose* from 183,752,000 NZ pounds in 1950 to 248,127,000 NZ pounds in 1951, and fell back to 240,561,000 NZ pounds in 1952

Wool exports rose from 74,653,000 NZ pounds in 1950 to 128,176,000 NZ pounds in 1951 and fell to 81,998,000 NZ pounds in 1952. Note that wool exports increased by over 70% in 1951 and amounted to nearly 52% of all exports that year.

So it would appear that the 1951 Dockyard Dispute had little effect on actual exports. [note: links tidied from source]

And all of this over one cell in a rather large Excel table. Raise a toast tonight to the wonks whose work provides every cell of every spreadsheet on which we rely.

* Except at Worthwhile Canadian Initiative, somehow.

Can tax and subsidy incidence really be negative?

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

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

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

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

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

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

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

Breakfast

A few months ago, Social Service Providers Aotearoa asked me to review the literature on school breakfast programmes and provide an assessment of whether public funding of school breakfast programmes offered value for money. I spoke on the issue in Wellington and in Christchurch in February. As the government seems to be looking at the Mana Party's proposals around food in schools, it seems worth posting things here as summary.

I was only looking at school breakfast programmes, and so I can't here comment on school lunch programmes. I'm not sure why we'd expect results to vary greatly, but it's worth having the caveat.

Anyway, on my best read of the literature, it's hard to make a case for that we'd get any great benefit from the programmes. Rather, we often find that they don't even increase the odds that kids eat breakfast at all. Many shift breakfast from at-home to at-school, but among those who hadn't bothered with breakfast before the programme, not many wind up starting when schools provide it. You can then get kids reporting that they're less hungry as consequence of the programmes, but it's awfully hard to reject that the main thing going on is that kids are eating at 9 at school instead of at 7 at home and are consequently less hungry when asked at 11.

You can get some substantial results from school breakfast programmes in third world countries. But even there we need to watch for displacement effects: the benefit of the programmes is often the implicit income subsidy provided. In those cases, we can see evidence of families cutting back on food expenditures for the kid getting breakfast at school in favour of spending on the other kids; in the link provided, there's reasonable crowding out in a UK lunch programme. And if that's the benefit, cutting a cheque to the families instead just might be better.

In all the studies, I wish that there were a control group where the parents were just given cash equivalent to the per-student cost of putting on the programme. All of these kinds of programmes should be assessed against that kind of counterfactual to establish whether we're getting benefits from the programme, or from the implicit income transfer.

Here are a few typical pieces.

Devaney and Fraker, 1989, found that school breakfast programmes did not increase the likelihood of kids' eating breakfast at all. It did increase calcium intake and reduce consumption of cholesterol and iron - breakfasts provided at school differed from those they'd be getting at home.

Gleason, 1995, similarly found that school breakfast programmes did not influence the likelihood of students' eating breakfast.

Alderman and Bundy, 2011, concluded that food in schools isn't a great investment but could complement other investments - they focused on developing countries.

Bhattacharya, Currie and Haider, 2006, seems to be the touchstone for those advocating school breakfast programmes. They found improved nutritional outcomes in blood serum tests of kids participating in school breakfast programmes compared to the same kids during school holidays when they weren't getting the school breakfasts. But they also found no effect on the likelihood of eating breakfast. And I worry a bit about their identification strategy: because it's poorer schools who got school breakfast programmes, we might expect that there could be relevant differences in how parents respond to school holidays that might affect the difference between school/not school outcomes for reasons other than the programme.

Waehrer, 2008, in an unpublished study funded by the USDA's RIDGE programme, found that school breakfast participation reduced the likelihood of eating breakfast. We could imagine this happening where the kids don't really want breakfast anyway, the parents stop making them eat it at home because there's the programme at school, and then they skip it when they get to school. The study could have similar identification issues to the Bhattacharya piece noted above; they identify on weekday-weekend differences, but cohorts might respond differently to weekends.

Shemilt, Harvey, Shepstone et al, 2004, found pretty mixed outcomes in a messy randomised control trial. They wound up abandoning the RCT part of the analysis and just going for regressions. They found some evidence of worsened outcomes of having attended school breakfast programmes on a few behavioural measures, but I'm again not convinced that they've pinned down causality. What they seemed most sure of was that school breakfast programmes had kids eating more fruit, so I guess there's that.

There were a couple of pieces claiming reasonable benefits from school breakfast programmes too.

Powell, Walker, et al, 1998, ran a really nice randomised control trial in Jamaica. Kids in the programme got breakfast, those not in the programme were given a small piece of orange. So they're able to isolate socialisation effects from breakfast effects. They found that the treatment group saw small increases in nutritional status, achievement, and attendance; they suggested that "greater improvements may occur in more undernourished populations." I'm not convinced that we're in that category.

Murphy, Pagano et al (1998) found that moving from selective to universal school breakfast programmes had some benefits, but also had some odd results. Before intervention, "hungry and at-risk children were slightly, but not significantly, more likely to participate in the school breakfast program than nonhungry children", and that more than half of the hungry and at-risk kids rarely or never participated in voluntary school breakfast programmes. So stigma associated with voluntary programmes can substantially affect uptake. But, when the programmes were made universal, hungry and at-risk kids were only "somewhat more likely to increase their school breakfast participation than non-hungry children... although this difference was not statistically significant." So what do we then make of results showing some improved average outcomes at school but no particular increase in breakfast-eating among those who are hungry? I wonder if all the effects here point to that eating later in the morning rather than earlier is better. I'll talk more about this below.

Dotter, 2012, finds that universal in-class school breakfasts increase the number of children eating breakfast at school compared to voluntary programmes that could have stigma effects, but I couldn't see that the paper measured whether there was an effect on total breakfast consumption. And while Dotter finds increased school performance in schools with universal school breakfast programmes, I can't see how the paper distinguishes between an "eating at all" and an "eating later" effect. Why does this matter? Imagine an alternative policy where schools allow a designated morning tea break at 10:30 where kids bring in their own snacks. This would be cheaper than full school breakfast programmes and just as effective, if the main channel of effectiveness is having a fuller tummy at the time of instruction because breakfast was later.

Frisvold, 2012, found that state mandates requiring schools to provide school breakfast programmes increase availability of those programmes and consequently increase test scores: the paper reports math score increases of nine percent of a standard deviation and reading score increases of five percent of a standard deviation. Again, there is no significant effect on the total days per week that a student eats breakfast, suggesting substantial displacement of breakfasts that would otherwise have been eaten at home. The paper claims that the effect is through a nutrition channel, with kids eating healthier breakfasts. But I can't see how they're distinguishing the nutrition channel from my suggested "they're eating later in the morning and so are less hungry at 11" channel.

So, some bottom lines:

• School breakfast programmes really don't seem to increase the likelihood of that kids eat breakfast at all;
• To the extent that they improve outcomes in some studies, we really can't tell:
• whether the effect is from changing the timing of breakfast, in which case we should instead have a morning tea break;
• whether the effect is any better than just giving those families an equivalent cash transfer.

I spent an hour in Wellington and Christchurch walking through these findings. I hope we don't throw a pile of money at school breakfast programmes; the money could well be better spent. That also seemed to be the conclusion of a New Zealand study: Mhurchu et al, 2012, who found that the only effect of a randomised control trial of school free breakfast programmes here was that kids self-reported being less hungry.

Update: Lindsay Mitchell points to a presentation on the New Zealand trial. She also points to data showing child poverty rates have been dropping.

Staying outside the Asylum

Dairy's great. But long term, New Zealand's ticket, I've reckoned, is being islands of sanity as the rest of the world entrenches the Asylum. The physical limits on dairy increase can't be that far off: we eventually run out of water for irrigation or hit a wall where we need a step-change in effluent dispersal technology before increased dairy density is tolerated.

We found New Zealand really attractive because it didn't seem to be doing all of the dumb things that the US and Canada were doing. Airport security was reasonable; flying is actually enjoyable. If you want to be a hairdresser, you hang out your shingle rather than have to submit to nutty occupational licensing regimes. The police remain, by default, unarmed; Armed Offenders Squad call-outs are rare enough that they'll make national news. Asset forfeiture has only recently been introduced; hopefully, we avoid its worst effects. Tariffs are low and on their way to zero. The GST makes sense. Though the government was tempted to implement software patents, the techies made a good case and the government changed course.

New Zealand keeps ranking at or near the top of the various indices of economic and social freedoms. We could do well by encouraging greater immigration of American techies fed up with that the American government seems to be archiving and storing just about everything for later searches. Just show them Novopay as example of how we couldn't, even if we wanted to.

Alas, we're not immune to the shenanigans going on elsewhere. Our NSA, the GCSB, is getting a legislative redraft. Thomas Beagle of TechLiberty summarises; NoRightTurn has a few additional comments. I'm not a lawyer - maybe things aren't as bad as they seem. David Farrar is considerably less concerned.

Where the GCSB acts under judicial warrant, I can't see that there's much difference between a wiretap being done by GCSB and one being done by the SIS; on that, I'm with David. But Thomas warns that the GCSB's powers will go a little beyond that. On his read of the legislation, we'll have to have back doors built into everything.

I don't understand why there's any particular rush to change the GCSB legislation other than that they beclowned themselves in the Kim DotCom prosecution. Wouldn't it have been rather better to have spent a bit of time with the tech community after the Kitteridge Report came out and sorted things out while drafting the legislation? The government's initial hamfistedness on software patents, and subsequent revision after consultation, might have suggested that some ex ante consultation was the better approach.

When the US seems to be doing everything it can to convince its tech guys that the government really does want to be spying on everybody, and that the IRS wants to know everything you talk about at political meetings if you have small-government leanings, the last thing we need are headlines suggesting we're heading down similar paths if the legislation doesn't actually do that. And if it does, it does need changing.

SkyCity revisited

Auckland is to get a large new convention centre, to be built and run by Sky City, Auckland's casino.

I chatted with Radio New Zealand's panel about the plan this afternoon.

Really, not a lot has changed from when this was first proposed a while back.

We should think of this as two separate deals.

First, the government is auctioning off some gambling concessions. SkyCity has bought the right to have an additional 230 pokie machines, 40 gaming tables, assorted other gambling concessions, and, possibly most importantly, a guarantee that if some future government reneges on the deal by banning gambling or otherwise eroding the benefits provided to SkyCity under the deal, they'll be compensated. Now suppose that we opened that whole thing up to a general auction. People would then bid for those rights; the highest bid would approximate the expected flow of profits from having the concession.

Second, the government took bids for the right to build and operate a big convention centre. The high bidder, or rather the company willing to do it at the lowest subsidy, gets to build and run the convention centre.

In this case, SkyCity has to reckon that losses (if any) from building and running a convention centre are less than the gains from the gambling concession [NBR subscription, sorry]. And it isn't crazy to think that the bundle provides added value: convention centres near casinos tend to lose less money than those not so-situated; there are reasonable complementarities between the kind of facilities attractive to conventioneers and those that are in place in casinos.

Conditional on the government wishing that there be a big fancy convention centre in Auckland, this is likely the least bad way of doing it. I haven't gone through the accounting on it in any depth, but the bottom line has to be that SkyCity reckons it can make a go of it, since they're bearing the risk if they can't operate it profitably. And it isn't crazy to think that there could be some economic benefits from increased tourist traffic if we host more conventions. But whether those benefits are larger than the amount SkyCity might otherwise have bid in an open auction for the gambling concessions, where the revenues went into the general fund rather than into a big convention centre, that's rather less clear. It's possible, but it's far from certain.

Commenters at The Panel worried about social costs of gambling associated with the expansion. A lot there depends on how Auckland proceeds with gambling regulation. The cities that existed prior to amalgamation had a mix of gambling policies, with some imposing a "sinking lid" on the total number of pokie machines allowed. If Auckland as a whole continues with that policy, then much of the concession offered to SkyCity comes at the expense of the corner pubs who will see their licences killed more quickly than they otherwise would. That's really rather bad for those pubs. Whether that increases or decreases social costs depends on your view about which is better positioned to identify and exclude problem gamblers; I'm agnostic. But I'm not agnostic about that most of the measures of gambling social cost assume away the enjoyment that gamblers get from gambling. If we're happy to assume that every dollar spent on gambling by heavy gamblers is a total loss except where it results in a win, it's pretty easy to generate large estimates of gambling's social costs.

You could even make the case that the whole deal could, on the whole, be strongly anti-gambling. Here's the case. Given the SkyCity concession AND that SkyCity has bought itself immunity from other gambling regulations, what happens to political pressure against anti-gambling regs? The immunity clause means that it's in SkyCity's interest that we have much tighter regulations against gambling in other parts of Auckland; it strengthens their position. If you think that gambling is a bad, which I don't, then this deal makes SkyCity closer to a monopoly than it was previously, and makes every future regulation on gambling a pro-SkyCity regulation. If you hate gambling, you want it provided by a monopolist so that there's less of it.

The anti-gambling folks should give their heads a shake and think about the opportunities now available to them if SkyCity can be exempted from their wildest anti-gambling fantasies. I'm glad they haven't, as I don't like monopolies and I think it's ok for people to go and enjoy a flutter at the machines or at the tables. They should consider pushing hard on sinking lids such that SkyCity winds up being the only place left with them. SkyCity will be on their side in that fight. I don't like that outcome, but that's just me.

Stadium plans

Sam Richardson points out some problems with the proposed stadium-plus-office-towers combo for Christchurch:

It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.

If people are willing to pay more for office space overlooking a rugby field than for office space elsewhere, then that can make a case for the stadium/office combination. And I can believe that there are plenty of tenants who would be willing to pay more for stadium office space than for regular office space - it isn't implausible that the project is feasible. But if that complementarity comes from tenants expecting to watch games from their offices for which they'd otherwise have to pay, then it's a trade-off against ticket revenues for the stadium's tenants - sports clubs would then be willing to pay less for use of the facility.

Lunchtime discussion in the economics staff room wondered whether we mightn't instead have hotel towers and a stadium including conference facilities. But that does start getting awfully close to Danyl's proposal from last year:

Christchurch Mayor Bob Parker and Earthquake Recovery Minister Gerry Brownlee provided more details of the rebuild blueprints for the earthquake-devastated city today, including plans to build a second sports stadium inside the new convention center to be constructed on Cathedral square.

‘The sports stadium will be a core attraction for visitors to the convention center,’ said Brownlee. It will be fully covered, provide seating for up to 2000 spectators, and will also contain a state-of the art convention center.

The sports stadium inside the convention center will complement the services provided by the main convention center. It will include business hotels, retail outlets and a covered sports stadium with natural fixed turf, which will also contain a convention center to attract business tourists who want to attend sports events during their stay.

‘We have one or two exciting ideas for what to include in that last convention center, but I don’t want to give too much away,’ Brownlee told reporters. ‘Let’s just say Crusaders fans will be very excited.’ City Council insiders suggest the convention center’s sports stadium’s convention center might house a sports stadium.

I still wonder whether it might be best to let the Crusaders own the stadium and to gift them the insurance payout for the AMI stadium. Tell them to make the best go of it that they can while writing legislation that the Mayor, Council, City Manager, and both the General Manager and Coach of the Crusaders will be shot in the face have something very bad happen to them if Council ever provides any other subsidy ever to the stadium or its tenants.

The Jedi Gap

Is there a growing Jedi gap? Or is the Canadian National Household Survey letting us down?

The CBC reports:

Once numbering in the vicinity of 20,000, the ranks of those in this country who claim to be Jedi Knights inspired by Star Wars movies have dwindled to fewer than half that figure, according to Statistics Canada's first release of data from the 2011 National Household Survey.

"A lot less this time. I think there's about 9,000 reporting Jedi," said Jane Badets, a senior analyst at Statistics Canada.

"And that was true elsewhere in other countries. A lot less than in other countries, too, doing censuses. Very low reporting of things like Jedi."

What started as a gag among friends on a British Columbia ski hill ballooned into something of a phenomenon on the 2001 census when thousands of Canadians told Statistics Canada they followed the Jedi religion of Star Wars lore.

But Frances Woolley shows some very large problems with the NHS. Either Canada's ethnic make-up changed radically since 2006, or ethnicity affects one's likelihood of answering voluntary surveys; the latter seems more likely.

Recall that New Zealand had 20,000 Jedi in 2006; we have yet to see figures from the 2013 Census. Our Census remains mandatory. While we know that while Jedi will not lie, they may refrain from identifying themselves as Jedi if it's voluntary.

This has important national defence implications. While New Zealand has been able to cut defence spending down to trivial levels, trusting in its strong cohort of Jedi in case of any emergency, Canada cannot really tell whether they really need the Joint Strike Fighter because of dwindling Jedi numbers, or whether the Jedi just failed to complete the voluntary forms.

It also has implications for ongoing negotiations in the Trans-Pacific Trade talks. If Canada can no longer rely on Jedi mind tricks to defend supply management in dairy, perhaps New Zealand's Jedi will be able to push us towards free trade.

Our daughter, born on Star Wars Day three years ago, is one of the Jedi in the 2013 New Zealand Census.