Tuesday, 15 August 2017

Labour's water policy

Previously on this blog, I used the Greens policy proposal of a 10c/litre royalty on water bottlers as an excuse to witter on about how water is currently managed and describe some of the relevant economics.

Labour has now released its water policy, headlined "clean rivers for future generations". It talks about the need for "more sophisticated farming methods that rely less on ever higher stocking levels and are more focused on value-add". I strongly support these objectives.

The bit attracting most attention though is that "a royalty on commercial consumption of water will assist with the cost of keeping our water clean". Farmers are grumpy, as you can imagine. One Canterbury dairy farmer estimated that at 1c/cubic metre, his water royalty for the year would be $26,000. To put that in perspective, he is currently paying $90,000 per annum for the electricity to pump his irrigation water.

Anyway, as a farmer and an economist, I'm also a bit grumpy. Not because I object to water royalties as such, but because I think the proposed policy, as it affects agriculture, misses the mark in an important way.

A future Labour-led government would want to spend public money cleaning up waterways, and there is a logic in raising the funds for that clean-up from polluters. However cleaning-up is not a long-term solution if the polluters continue their current behaviour, and the policy is clear that it seeks different (more sophisticated) farming methods.

If we want to change farmer behaviour, new environmental taxes on farming should be designed to be (more or less) equal to the cost farmers impose on society as a whole. This is known as a Pigouvian tax. It'd be extremely difficult to argue against taxes set on this basis, because they are simply telling farmers: pay your own bills. Notice that Labour is already almost selling its policy on this basis ("assist with the cost of keeping water clean").

My concern is that water royalties are a poor proxy for the environmental cost of intensive farming (including horticulture, cropping, orchards etc). Dairying is a huge water user but that doesn't really matter in places where there is plenty of water. Nitrates are the main problem with intensive dairying, so that is what should be taxed.

Some examples might help understand this point.

  • In our area, we are blessed with pretty decent rainfall (too much right now!) so irrigation is used far less than in Canterbury. Many of our neighbours are serious urea addicts though, because that's how high stocking rates & production are maintained in the standard dairying model. 
  • Wine growers in Marlborough have very modest water needs compared with dairying. Pesticides and fertilisers used by wine growers are having a serious impact on the health of local waterways.

Tuesday, 25 July 2017

Irony overload at the NBR

Please have read of this piece, posted on the NBR website yesterday (I believe it's ungated, but if not NBR has a free 30day trial).

The article starts & finishes with quotes from Peter Gluckman and unobjectionable statements about the role of science in a post-truth world. You'd think this would be fertile ground for the author, who is EPA's chief scientist.

But between those bookends, what do we have?
  • an argument that neonicotinoids do not harm bees, supported by information supplied by
    • USA beekeeper, blogger and information analyst Randy Oliver.
That's it. No reference to any of the recent scientific or regulatory information about neonicotinoids which you might think would be relevant. [several irrelevant straw-persons are brutally murdered though]

This might be excusable if it were from a junior reporter who stumbled across a single source, though even then I'd have expected an editor to notice. No such excuses for the actual author though, who is the EPA's chief scientist. Jacqueline Rowarth must be aware of the science that weighs against Mr Randy Oliver's opinion but chose to not disclose any of that, much less to discuss the evidence herself, or even point us to someone that had.

Worse, Rowarth assumes the cloak of an honest-broker scientist while promoting an obviously partial theory and strongly implying that there is no contrary evidence. I tried to comment but failed. The NBR later explained why on twitter.
So it's not just me. Readers at the "meeting place of intelligent business" have spoken. I don't condone personal abuse, but can understand how anger at this article might either spill-over into personal abuse, or be interpreted as such. Especially since Rowarth has a history of getting science wrong and attacking people without due cause.

Sunday, 23 July 2017

Water allocation & pricing in NZ

The Greens water policy proposes a 10c/litre royalty on the "sale and export of water, including bottled water", and cracks open the debate over water allocation & pricing policies by signalling that further measures are under consideration.

This post outlines the main economic issues arising from water-using industries in NZ: bottling, hydro-power, and farming particularly dairy. I'm going to start by assuming that most people would support policies that:

  • don't cause undue depletion of the water resource;
  • don't strand capital investments; and
  • ensure that water polluters pay fair prices. 
After discussing these points, I'll return briefly to the water bottling issue.

Depletion is generally managed by setting minimum flows for rivers and maximum off-takes for groundwater (from aquifers). In a river setting, rights to pump water are typically shut-off when the river level falls to some trigger point. Minimum flow levels are set by Councils in consultation with freshwater scientists, anglers and other interested parties. This works best when the flow is measured downstream from the off-takes: otherwise you need to predict how a low flow at an upstream point will affect the river below the off-takes. Ground water (in aquifers) is much more difficult to measure. The raw data comes from water levels in monitored wells but its not easy to map the aquifers or their connections with rivers and other aquifers.

This issue is not completely sorted out, but the 2014 National Policy Statement obliged Councils to get cracking to ensure that water resources are not over-allocated, and to claw back over-allocations where they exist. My impression is that it has been effective in getting Councils to focus on these issues.

In some cases over-allocations have been notional rather than real: e.g. Marlborough wine growers have collectively been allocated more water than the aquifers can stand, but they're not using their full allocations. The proposed solution is to regulate allocations so that wine growers have enough water in almost all years, which frees up water for allocation to other people at the times of year that wine growers don't need it.

Asset Stranding
The basic point is that if we want revenue from water users then any pricing will need to be at a level that allows them to remain in business. Otherwise we get no revenue. My guess is that a royalty of 10c/litre on the "sale and export of water, including bottled water" would not kill off the bottled water exporting business. If so, people who've sunk capital into wells, pumps, filters, and bottling plants will continue to earn profits that help recoup the capital invested, just at a slower rate. This particular goose would then remain healthy enough for ongoing plucking.

However the same royalty rate would probably stop all hydro-power generation, and agricultural/horticultural irrigation over-night. Any firms owning un-depreciated assets used for this stuff would have to just write them off: those assets would be "stranded", unable to earn because of the water price. End result: dead goose = no revenue & much less productive capacity.

So if you're after revenue, don't set tax/royalty rates so high that they strand assets. More generally, remember these wise words from Jean-Baptiste Colbert 
The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing

Polluters Pay
The Greens are targeting the export of bottled water and seeking a contribution to the public purse from these firms. A different motive for tax is to send a price signal to polluters. Ideally, these Pigouvian taxes would be set at a level that recouped just enough cash to compensate for the damage costs that polluters impose on the broader community. Farming is where this issue bites, because the way we farm pollutes our water, imposing a cost on everyone else.

Basic welfare economics suggests we should investigate taxes on bagged nitrogen (urea). If dairy farmers used much less urea, our rivers would be much cleaner and we'd also stand a much better chance of sequestering carbon in our soils rather than emitting it.

Like tobacco, the urea business is highly profitable, so urea suppliers will probably absorb a fairly high percentage of any tax. This means that a relatively small % of any tax will be passed-through into retail prices. And since farmers are addicted, they won't be very price sensitive. So, ironically, even if our aim in imposing a urea tax was to send socially efficient price signals, it would end up raising a fair bit of revenue.

All of the above is very mainstream economics, meaning it is based on the pursuit of (social) efficiency. The water bottling royalty/tax is clearly not aimed at efficiency objectives. I expect it will get some support as a political move, but it's not ideal as a leading measure to address our broader issues around water allocation and quality.

Wednesday, 12 July 2017

GMO Hypocrites

Previously on this blog, I argued that David Runciman failed to convert his excellent analysis of the role of scientific consensus in the climate change debate into a useful tactical recommendation: you can't credibly accuse anyone of hypocrisy if your only evidence is stuff that you think they think.

Before that post, my old friend Grant Jacobs had already taken to the electric twitter machine to:

endorse exactly this tactical error in Runciman's piece
and lodge a very strong claim
Note the sudden shift of topic from climate change to GMOs.

Before the NZ skeptics expelled me for heresy, they emphasised their maxim that strong claims require evidential support. The onus of proof is on the alligitor.

As a leading skeptic, Grant subscribes to this maxim. Having made a strong claim in public he is now obliged to back it up.

Monday, 10 July 2017

Science, skepticism and humility

David Runciman's recent Guardian piece carefully examines how and why a political constituency emerged for skepticism about human-induced climate change, and then drops the ball right at the end with the try-line in reach.

The main thrust is that the oil majors and other large firms have commercial incentives to cast doubt on human-induced climate change, so funds are available to influence public opinion, which demand is met by various scientists, lobbyists and politicians.
 ExxonMobil alone has spent more than $240m on public relations in this area in the past two decades. Many of the leading Republican candidates for president in 2016 (though not Trump) took campaign funding from the Koch brothers, who have been at the forefront of the fight against the scientific consensus on climate change.
Runciman does a good job of exploring the way commercial incentives affect the supply of perception-management services. Absent a commercial motive, there would be less doubt conveyed to the voting public and the apparently quality of the doubt would be lower. So on the supply side of the doubt market, climate change looks a lot like tobacco: in both cases, substantial and well-established commercial interests purchased scepticism from scientists.

Motives matter, but so do methods. Runciman argues that it can be easier and more effective to label your opponent as a hypocrite than a liar. Some tobacco science shills smoked their own product but you can almost always accuse a climate change activist of not doing enough...
Hypocrisy is hard to avoid when it comes to the politics of climate change, since it is a collective-action problem. It’s far from clear what difference any individual action will make. What matters is what we do together. This makes it practically impossible for any one individual to match words to deeds. Yet the failure to do so provides the perfect stick for the climate cynics to beat their opponents with.
We're all familiar with these cheap cynical jibes: oh you have a plastic bag / flew here / own a flat-screen TV, so you don't personally really care about climate change. Runciman reckons this kind of bullshit is effective at shifting public opinion against climate change scientists, and that climate-change-deniers have converted skepticism for their own commercial ends.
Twitter is a vast hypocrisy-generating machine that is corroding democratic politics. Scepticism, which is a democratic virtue, is giving way to cynicism, which is a democratic vice, across the board.
I think many people would broadly accept most of the above and, notwithstanding the odd complaint, be broadly on board with Runciman right up to his last couple of paragraphs, reproduced below.
We live in an age when mistrust of politics has spilled over into mistrust of expertise, and vice versa. To respond with ever-greater certainty in the name of science is a big mistake. Expertise doesn’t just need humility. It also needs to reclaim the idea of scepticism from the people who have abused it. Experts need to find a way of expressing uncertainty without feeling it undermines their expertise. Voicing doubt has been allowed to become a synonym for admitting you were wrong. The way out is to stop insisting that you were right in the first place. 
Lots to agree with here. We definitely need humble scientists rather than arrogant ones, so uncertainty needs to be honestly appraised and clearly communicated. I'm also keen on reclaiming skepticism from those who have abused it, but the skeptics and I have very different opinions about the scope of this problem and the culprits, so lets just set that aside for now so we can focus on the ball-dropping final paragraph.
The scientific consensus on climate change is real. But by insisting on its merits for the purposes of politics, its champions have exposed it to ridicule. Political arguments for climate science – indeed, for any science – in the age of Trump should not keep saying that the populists are lying about the consensus. They should say that they are hypocrites about the doubt: they do not practise what they preach because they think they know the answers already. Climate change deniers argue they are only trying to discover the truth. We should all be sceptical about that.
Where did that come from?  Even though the other side is lying about the consensus on climate change, and has strong commercial incentives and the ability to generate doubt, Runciman wants us to ignore all that and instead argue that they are hypocrites. Which they can easily deny by simply claiming to be open-minded.

It's a bad idea tactically because nothing can be proven, which makes it a very bad idea strategically for the non-shills.

Friday, 7 July 2017

NZ Initiative on Competition Law

Previously on this blog, views were expressed about the NZ government's recent announcements regarding competition law. Two decisions have been made:

  • to give proactive "market studies" investigation powers to the Commerce Commission, and 
  • to punt debate over s36 as far into the future as possible. 
Today, Roger Partridge published the NZ Initiative's view in the NBR. It is the exact opposite of my position: Roger supports the punting of s36 issues and opposes the new "market studies" power. I know, like and respect Roger, so I'm explaining below why I disagree with these views.

While I agee with Roger that "New Zealand's small size means that many markets have only two or three participants", these market structures have only occurred because the Commerce Commission has waved through many mergers on the basis that they will reduce costs. We've operated a permissive merger-screening regime for many years now. Our highly concentrated markets are a consequence of this approach.

This is not necessarily a bad thing. Rock solid economics has exposed the concept of a sustainable industry structure, crudely summarised as the number of firms that can be supported by the size of the market, assuming each is operating at cost-minimising scale. We have smaller markets (demand) than more densely populated countries, so fewer firms can achieve the scale/size needed to minimise costs.

But if we only cared about minimising production cost, why would we ever have regulated natural monopolies such as power line companies? Why didn't we just let them enjoy the quiet life, the best of all monopoly profits? After all, this is the cost-minimising sustainable industry structure for power lines: a monopoly. What was our rationale, as a society, for imposing upon these firms the compulsory burden of complying with costly demands for information, and then, after about three years of careful deliberation actually properly regulating them?

I have no real insight into the provenance of the balls grown by the government that pulled this trigger. It definitely was the Clark/Cullen crew though, aided by Paula Rebstock as Commerce Commission chair, that finally put a stop to further extensions of the shameful revaluation rort that is embedded in consumer power bills, now and forever.

So this is our history on monopoly regulation: only in the last decade have we even started to regulate natural monopolies, and even then we respected the property rights of the earlier bandits by baking-in all the billions of dollars of super-profits banked by Eric Watson and his mates.

Against this background, lets now shift the focus a bit further up the scale, to the natural oligopolies that are so prevalent in NZ. In some cases (mobile phones) these market structures have emerged from entry. In others (grocery retailing, general insurance) the Commission has allowed oligopolies to form, at the eager behest of Roger's firm and its rivals up there on Shortland St.

The policy questions are about how to constrain this market power, having allowed it to be formed. Or indeed whether to constrain it at all. So we're talking about firms that have substantial market power (SMP) either individually (s36) or jointly (market studies).

Section 36
As noted previously, before it became defunct, s36 was the only legal constraint on the use of substatial market power (SMP). The only reason we're talking about s36 is that it is defunct. So the question is whether to ignore this "problem" or to fix it somehow.

The debate seems to be boiling down to "purpose vs effect". The current defunct test is based on "purpose": a firm with substantial market power (SMP) is not allowed to use that SMP for the purpose of restricting competition. However, rather than inquiring directly into whether this was a purpose of the conduct, our courts have been persuaded to focus on a contentious and unrealistic "counterfactual" test, the weaknesses of which approach have been known for 4 years at least.

This is why ComCom has basically given up trying to prosecute under s36. No one fancies the prospect of arguing that firm X did this thing for the purpose of lessening competition.

The situation has seemed unsustainable to me for several years. If the police are on strike because the law doesn't work: sack the police or change the law.

Roger's view is that we shouldn't change the law, because it would cost the big guys, the ones with SMP. Read his statement carefully and tell me if you see any discussion of the "long-term benefit of consumers" which underpin the purpose of the Commerce Act. It's not there.

I'm not certain that an effects test is best for NZ, but I am certain that Roger is dodging the core question, as is the government.

Market Studies
New Zealand has a productivity problem and insufficient domestic competition is a major driver of our weak productivity outcomes.

We've allowed firms to merge to concentration levels that are internationally unusual, partly because the merging firms expect enough cost savings, and partly because its easier to predict cost savings than to quantify the value of foregone competition.

This is where we are. In many industries, trade is dominated by just a few firms at best. Consumer interests appear to be compromised as revealed by the petrol margin study for example. Roger says that these oligopolists, who occupy a privileged position in our society, should not be compelled to "hand over their records, and to answer questions under oath", but

  • he has no supporting argument as to why this would be unreasonable, much less any thought of the potential benefits consumers might get from a bit more focus on such a privileged sector; and
  • refusals to supply information, as hampered the petrol margin study, is kinda dodgy in itself isn't it? 

Thursday, 6 July 2017

Dictatorial Libertarians

Previously on this blog, we encountered the proposition that a "transitional dictatorship" might be a good thing. Today's argument is that
  • all economists who appeased the Pinochet regime, or support those who did, should explain themselves; 
  • exceptions for school boards in NZ show how tightly constrained any justifiable "transitional dictatorship" should be; and
  • regional government dictatorship in NZ shows how easy it is for the "transitional dictatorship" idea to break out from its natural habitat.
It is disturbingly easy to find right-libertarians bagging democracy. Most obviously, the late sainted Hayek said that "a dictatorship may be a necessary system for a transitional period".  So, yeah, if Hayek reckons its a good idea, but you plebs will never vote for it, then he'd be up for just forcing it on you. Not to mention Hayek's fellow traveller, the recently-minted but shy of being kiwi kiwi Peter Thiel, who after much consideration decided that freedom and democracy are incompatible.  

Hayek was the founder of the Mont Pelerin Society, an invitation-only club of economists (& others) formed in 1947 to oppose government involvement in the economy. I've long conjectured that Wellington has the greatest concentration of MPS members on the planet, but its a secret society so we'll never know.

What we do know is that the MPS gave intellectual and moral support to Pinochet, the CIA-backed military dictator who in 1973 deposed the overwhelming choice of voters: Salvador Allende of Chile.

Political prisoner, National Stadium in Santiago, Chile, 1973. Koen Wessing

Some say Allende was too moderate, and he might well have made economic mistakes, but that is no reason to engineer a military coup against a popularly-elected government. Fascists are pretty brutal once they get power: the 1973 coup in Chile resulted in terrible atrocities, including the extra-judicial killing of at least 3000 people. Even transitional dictatorship fans must agree that seventeen years of Pinochet was a very leisurely transition indeed.  

Pinochet's transitional dictatorship in Chile operated from 1973 - 1990. The Mont Pelerin Society met in Chile in 1981, well after Pinochet's human rights abuses were obvious. As one who fought the Springbok tour that same year, I say that every participant at that meeting gave succour to a vile and tyrannical dictator and they should all be very ashamed of themselves.

The late sainted James Buchanan was at those meetings (that's the economist, not his namesake who was one of the worst ever USA presidents). Apparently Buchanan's paper was titled "Limited or Unlimited Democracy" and explored the idea of limiting democracy to depoliticize the state so that unconstrained market forces could guide human interaction. Anyone got a link to the full paper? Key point: Buchanan was there, succouring up to Pinochet, at a time when freedom-loving economists should have been boycotting Chile.

Local Applications
There are times when transitional dictatorship is necessary & appropriate.  In NZ, schools are governed by a locally-sourced board of trustees, and sometimes people take to squabbling and the boards get so dysfunctional that the minister appoints a transitional dictator to sort things out. Fine, IMHO, and I've been happy to serve as an appointee in such cases.

Much less defensibly, transitional dictatorships are sometimes imposed with the apparent aim of delivering outcomes for a political constituency. Back in 2010, the current government effected a coup over regional government in Canterbury, citing water issues that, funnily enough, many people in Canterbury are still pretty pissed off about.

Takeaway Points
1. Libertarian apologists for dictatorships should explain themselves
2. If dead, their apologists should do it for them