Monday, 30 December 2013

Symbolic of their struggle against reality

Thanks to the NZ Herald and the Economist for reminding me to take another look at how the libertarian communists are getting on. These are the guys wanting to establish new societies where people can be finally be free.

It's such an inherent comical idea that you just have to stand and applaud the effort to get very selfish people to agree on voluntary collective action. Not an easy task and many have failed, as this handy table shows.

Good things take time though and the latest mob, known as the Seasteading institute, remain upbeat about the fact that they now have "a practical plan" for their dream, just 5 years after getting started. Sadly its all about floating platforms and solar power rather than the more interesting social engineering.

There is a bit of information(pdf) about social decision-making for seasteaders though, and the basic idea is very simple: if you don't like the rules, piss off. Literally. Get a tug boat in, pull your seastead away, and hitch it up to some other commune "cluster", or just float around by yourself.

This is how seasteading will harness the power of markets to develop better systems of governance. They reckon. They also tell themselves that once they've evolved this superior system, the rest of the world will gradually realise how cool it is and start copying.

There are a few startup problems of course, but once large numbers of people are paying lots of money to participate in these experiments, the evolutionary process will be able to get started. You won't be laughing then.

Saturday, 28 December 2013

Trust issues - petrol station edition

We met our new riding buddy Colin at Pokeno this morning and rode down to New Plymouth. Over coffee & meals we got to know each other a bit better but the bonding moment came when we stopped for petrol on the way home from dinner.

We pulled up on either side of the same petrol pump at the Caltex station, both saw the "pumps on pre-pay" signs and quickly agreed we could do without that hassle, so we nipped along to the easily visible Mobil station and spent our money there.

Turns out that this is Colin's standard practice, as it is for us, and the Mobil guy indicated there are many more like us. 

I wonder how many petrol thefts the Caltex guy thinks he is preventing by forcing his customers to walk into his shop twice.  

Wednesday, 25 December 2013

Uber rational, but not uber here

Uber is a recent startup from San Francisco has built a platform designed to match smart-phone users with "sedans" which are a notch more upmarket than taxis. Its obviously pitched at customers with a bit of coin, but is also working on the supply side of its platform to finance cars for its drivers.

Like all transport services, Uber needs to be scaled for peak demand. You can either do that by having huge capacity sitting around waiting for the peaks (think gas pipelines & power transmission), or by calling it as required which can work with taxis. Uber uses spot-market pricing to help this process along - prices increase when there are more customers than cars, bringing more drivers onto the road and rationing demand. All very sensible, but it annoys the hell out of their customers, despite those customers presumably being reasonably well-educated.

It will be fascinating to see whether this pricing model changes, or whether the customers end up getting trained to understand the market. One obvious change would be to give customers the option of booking ahead of time, before the price spikes.

Meantime, I note that while Uber is available in 25 countries including Australia, NZ is not one of them. Put this alongside the fact that there are regulatory barriers to entry in many US taxi markets plus Australia, and it makes me wonder whether deregulated taxi markets like ours might not have the kind of gap Uber is filling. Or maybe our markets are just too small to be bothered with at this stage.

Saturday, 21 December 2013

The Feds' meat menu

As you may recall, the meat sector is plagued by excess capacity, and lots of time & effort is going into sorting out the mess. I've been a tad critical of some of the ideas being floated.

Now the Feds have worked up a set of reform options, which will be released in "the New Year". Based on the teaser, it seems that their report considers 4 ways forward...

  • just copy Fonterra, which is rightly panned as silly;
  • Tradeable slaughter rights (TSR), which is also quite silly;
  • Toll processing, which would leave the marketing to someone(?) that isn't the processor; and
  • Total value transparency (TVT).

It sounds like the Feds prefer the last, which they describe as a "truly innovative concept" and add that it
... merits discussion as it could drive a material change in behaviours at the marketing end. It is one means to improve coordination, collaboration and in-market behaviour while generating value and demonstrating where that value is being added." 
I have no idea what that means but hopefully the full report will explain all.

Good on the Feds though for having a crack in this way: lining up some options and putting them out there for discussion. I'm keen to see the report - actually I wish they'd just release the whole thing now instead of making us non-members wait till next year.

Hopefully the report also tackles the higher level questions about whether there is any collective market power available to NZ meat farmers in international markets, and about what that implies for organising the industry here.

Friday, 20 December 2013

Compensating investors for regulation

Bryce Wilkinson has an NBR article that expands on his recent NZ Initiative email about telco regulation. He argues that NZ started down a slippery slope by regulating telecommunications in 2001, against the advice of "critical economists", that the Chorus mess is a consequence of doing so, and that its a long hard road back to "respect for private property rights and the rule of law".

He points to productivity growth in a group of industries that includes telecommunications, which was 2.9% p.a. from 1987-2001 under "light-handed regulation", but fell to 1.7% p.a. from 2001-11. The reader is invited to conclude that regulation caused this productivity slump. It didn't.

Here are the relevant data as reported by StatsNZ.
The ICT, media and telecom sector (the one Bryce cites) has always had higher productivity growth than either the goods producing sector or the service sector as a whole, both before and after 2001. I can't see how you could reasonably blame telco regulation for a general productivity slow-down.

There has of course been a monumental stuff-up over UFB, but its a bit rich to blame that on regulation when well informed adults signed up to those contracts voluntarily, knowing full well how the regulation would work.

Bryce's main theme though is a broader assault on regulation, because it is disrespectful of property rights. He recognises that Parliament has the ability to regulate but says a civil society, respect for private property rights should provide some protection against the politically expedient use of the Crown’s coercive powers. First, the Crown would have to demonstrate that a taking of rights in private property was justified in the public interest; second, it would have to consider the issue of compensation.
I agree 100%. Where we disagree is on applying these principles. For example, Bryce thinks NZ shouldn't have regulated Telecom's market power in 2001, because that market power was acting as an incentive for competing investors rather than a deterrent. This paper from 1998 (pdf) is a good example of his thinking at that time - the executive summary alone is worth a read.

Bryce argued that Telecom should be fully compensated for the entire stream of future profits that were being lost. This same argument was run in the context of unbundling in 2006.

Lets just follow that logic for a minute. If you somehow end up with an unregulated investor-owned natural monopoly, then regulating it is definitely a "taking of rights in private property". Bryce says it might be OK for a country to do that, but only if investors are fully compensated for their loss.

In the 1990s, investors in electricity distribution networks enjoyed a dream run. They racked up hundreds of millions of dollars a year by simply writing up the value of their assets, and then increasing their prices to "compensate" for all that extra "capital". This wasn't illegal - far from it. It was in fact a direct consequence of the "light-handed regulation" that Bryce advocates, which also conferred on those investors a property right to keep doing it. By his logic, when this game was finally stopped we should have paid out those investors for all the future write-ups that were being taken from them.

I think there is a counter-argument that Kiwis had a right to not be charged excessive prices for basic services, and that those rights were breached by this ridiculous form of "regulation". This approach is tricky though. For example it leads to questions about which of the previous status-quo positions should be selected as the dawn of time, from which point compensation should be calculated. There is also a practical problem of the leaky-buildings type because many of the perpetrators have moved on, closed down their legal entities, etc.

To summarise, I am a firm believer that compensation should be paid for unjust takings, that we should assure investors this will occur, and stick to those assurances. Nevertheless, there certainly are cases when it is entirely just to dispossess investors without compensation, and to ignore the inevitable outrage. The revaluation rort is a good local example and I'd put this classic in the same category.

Wednesday, 18 December 2013

Popenomics doesn't exist

I didn't read all of the Pope's 224 pages, or any of them actually. My normal media diet has been enough to pick up on the main point, namely that the Pope said that laissez faire economics will not inevitably lead to economic justice. That upset some economists.

I am no papist - far from it. I was raised catholic but have been happily lapsed for decades. I quite like the multi-theistic approach and if forced to choose a god I'd probably go for Ganesh, remover of obstacles and mischievous happy dude despite being lumbered with an elephant's head - that's him on the right.

I've also listened to the Dalai Lama a couple of times and I credit our friendship with Ahmed Zaoui for disabusing me of a previous prejudice against muslims.

But the pope? He (& its always a he) has usually been irrelevant at best. And at worst? Well it was pretty disturbing that the last one, after hanging around the nazis as a youth, came away with the idea that people should just do what they're told. If you think that way, any normal person would seem like a dangerous radical.

The interesting thing about the current guy's pronouncement on economics though, is it succeeded dramatically in the most important domain: the news media. If you want to examine the economics, read Mankiw and then Avent who concludes, correctly in my view, that
Growth often creates significant injustices which are ameliorated when popular outrage demands change. 
Popular outrage is not easy to spark-off, because by definition it seeks to change the existing order and is therefore challenging to the powerful. Their entrenched structures have a strong in-built resistance to change, so getting a clear message out is essential to making progress.

Economists tend to celebrate creative destruction at the micro level, and the profession has definitely been a force for good.  But the profession is a broad church and seems as divided as the wider population on the questions of poverty and economic justice that the pope was tackling.

We economists can amuse ourselves for ever, examining trade-offs and presenting nicely posed questions to politicians and other decision makers, but there is no real point unless someone will ultimately put a stake in the ground with a clear decision, and even then we may be disappointed. I've certainly advised decision makers and then been at least slightly disturbed by their thought processes. Even when they agree with me (yes, I do offer opinions), I worry that they haven't appreciated the real reasons (yes, I am trying to get over myself.)

So anyway, at this point I'm pro-pope. He's shaping up as a somewhat revolutionary leader (if that's not an oxymoron) and now that Nelson Mandela has passed on, the world could do with another one of those. I'm not going to quibble about the details of whether/how to apply popenomics, because there is no such thing and even if it becomes a thing there will be plenty of scope for concrete policy analysis & debate on actual applications.

Tuesday, 17 December 2013

Not all bullshit is smarm

Bullshit season is back, right on cue. A year ago my colleagues and I sent out a pile of hard-cover copies of Harry Frankfurt's masterful "On Bullshit" essay in place of Christmas cards. It was a nod to the shared experience of having to contend with so much bullshit in our professional lives.

And now Tom Socca's new essay On Smarm is set to play a similar role this year. Socca is no Ivy League philosopher but what he might lack in rigour is repaid through a wealth of examples. And he does have a classification system in there that looks a bit like this (I think). 

Bullshitters in the Harry Frankfurt sense are people who are simply trying to make an impression and have no regard for the actual truth. Socca regards smarm as a type of bullshit because it involves 'moral and ethical misdirection', but it does so in a uniquely greasy way that is
"unctuous or flattering, or smug. Smarm aspires to smother opposition or criticism, to cover everything over with an artificial, oily gloss..."
If someone triggers your bullshit detector, you need to decide how to react. Socca suggests any response that challenges, or even just overtly notes the existence of the bullshit, is direct enough to be labelled snark. Smarm is a passive form of aggression, and your options are to either call it out (which is snark), or allow the oily smarm to spew forth and then just take a shower later.

This all rings true for me, and it reminds me of a twitcident from last month. It started with an observation that the TPP could kill entire sectors of NZ's economy, so those planning to ratify it in secret had better know a lot about whether and where that is a risk. Federated Farmers (who hope to benefit from the TPP) replied with this tweet:
an asteroid may also wipe out all life too, or as FDR put it, "the only thing we have to fear is fear itself" 
What is this saying? "oh, you poor misguided fools, don't fret or oppose or criticise; rest your fevered imaginations, for everything about the TPP will be covered over with a gloss so beautiful you won't even notice its a bit oily".

That's pure smarm. Its also self-serving and devoid of any actual argument. But if you call it out (as I did) then umbrage will be taken, and you will be called snarky or something similar. Because you went negative, which broke the smarm spell, and negative is bad mkay?

So there we have it, a new concept for the new year, and perhaps something of a challenge also. Next time you hear someone being brave enough to call bullshit, maybe try engaging them on the subject of whether its just ordinary bullshit or actual smarm.

Update: new wonkblog interview with Socca

Monday, 16 December 2013

That sucking sound...

If growth is the measure then 2013 must have been the year of Xero. The firm's stock price really shot away over the last few months as its market capitalisation blasted past Telecom, becoming the forth biggest on the NZX. Here is the price chart from the ASX.

Xero is a great example of a platform business. It wants to attract several different types of patron, and as this happens Xero becomes more attractive to everyone else. The main groups seem to be:

  • final customers, mainly SMEs looking for an easier option for accounting;
  • investors in the very sexy SaaS sector; and
  • app developers looking for opportunities to sell add-ons to Xero customers.
Think about the connections between these groups: investors want more customers because that means more profits. They also want more app developers because that builds the 'ecosystem' and helps to add customers. App developers want more investors and more customers because that gives them confidence that the business will endure and they'll get a decent return on their investment.

As for customers, well these days when people want me to switch to Xero, they often mention its sharemarket success as evidence that it must be a good thing. I don't buy that story but suspect others do. Anyway, Xero has very wisely decided to contract out large chunks of the customer side of its business by recruiting accountants to sell the service to their clients. Which incidentally also tells us that this model is modifying but not supplanting accountants.

The most interesting point though, is that we are watching a massive network effect in operation here. It is stimulated by Xero marketing itself to several different groups at once, and by each group wanting more of the others around. As the buzz grows, more patrons of different types get sucked into the Xero ecosystem. Its a truly wonderful thing, even though it does confound the hell out of valuers.

Saturday, 14 December 2013

Are we there yet?

It feels this week as if NZ's monopoly regulation regime might finally be "in place", 14 years after we started down this road. Whether we have indeed now reached the exhalted nirvana of "certainty" will be decided by regulated firms who still have an option to appeal the High Court's 657 page decision (pdf) on their appeals, released on Wednesday.

Here is a brutally brief backgrounder.

In the 1990s we didn't really care what natural monopolies did provided they disclosed a set of information. We called it "light-handed regulation" and kidded ourselves that NZ was world-leading (no-one followed). Firms had a lot of discretion over how to "disclose" and what they defined as "information", so it was hella tough for outsiders to figure out what was going on. Insiders knew though: the revaluation racket involved ratcheting up asset values, and then increasing prices to "compensate" for the revaluations. About $300m of such ill-gotten gains were booked each year for a decade in the electricity lines sector.

The 1999-02 government started to stop this, but regulation was still a dirty word in Wellington, so something fairly tame and non-intrusive was required, ruling out regulatory regimes used elsewhere. The answer was called a "thresholds" regime for electricity lines companies (n=40ish). These firms were clustered into a few groups and each group got a "threshold" which was the annual rate of price change that the Commerce Commission would be comfortable with. Pains were taken to signal that breaching a threshold could lead to actual detailed regulation, but it might not because there could be a good excuse.

This didn't work at all well. Firms breached and the Commission didn't lower the boom but threatened to. End result = UNCERTAINTY! Complaints, tension and lobbying ensued. By now the labour government was in its 3rd term and in need of answers. MED convened a small group of externals (including yours truly) and cooked up the Input Methodologies (IM) plan, the main purpose of which was certainty. We agreed on the basic idea that more pre-commitment would be useful and that an IM-like process would be useful. The end results were baked into Part 4 of the Commerce Act in 2008.

<BTW>  Two basic tensions are relevant to this backstory
1. Firms quite rationally hate being constrained, it takes time for them to adjust to new regimes, and they have strong incentives to haggle vigorously over the rules.

2. Regulation wouldn't be needed if we could specify everything in legislation. Flexibility is useful but we don't want these regulators running amok, do we? So there is a trade-off between the 'certainty' of laws and the discretion delegated to specialist regulators. The Australians addressed this by dividing regulatory roles between different entities for rule-making and rule-enforcing. We did it by requiring a single entity (the Commerce Commission) to first make the rules (IMs), then subject them to merits review in the courts (hence the appeals that have just been decided), then enforce the results. </BTW>

What are IMs and where have we got to?
The IMs required the ComCom to decide in advance how to regulate. It had to determine "input methodologies" that explain in detail how the discretionary bits of the regulatory model would be assessed. That would give CERTAINTY, because firms would fully understand how the regime would work. But the ComCom might stuff up the IMs, so we required it to consult with regulated firms, and gave firms a one-time appeal right to the High Court. But that might become bogged down, so we limited the appeal to material that was already on the record, and required firms to show that some other decision was "materially better" than what the ComCom had determined. The sectors affected were electricity lines, gas pipelines and AKL, WLG and CHC airports.

So the ComCom embarked on this massive pre-commitment project to design the IMs in consultation with the regulated firms, with everyone knowing at the outset that the whole process would end up in the High Court (because of the $@risk) before it was actually a commitment, ie before CERTAINTY.

The first discussion paper was issued in December 2008 and was followed by issues papers, draft views, and conferences that stretched on for another 2 years, until the IMs were finally determined in December 2010. I assisted the ComCom, participating in conferences, reviewing ComCom reports, and writing a paper on asset valuation with three British economists. It was a fascinating experience, not least because lawyers for the regulated firms were constantly trying to trap the ComCom experts into saying silly things that would enter the record and be available for submitting to the High Court.

Sure enough, 58 appeals were filed. The High Court delegated the job of hearing them all jointly to Justice Denis Clifford, who I have never met, but who surely deserves a badge of honour for ploughing through literally thousands of pages of detailed record and emerging still sane. He was assisted by two Australians, recruited as lay members of the High Court especially for this task. Their decision dismisses all but two appeals. Dismissals of appeals on the big ticket items of the cost of capital and the initial valuation for the asset base are particularly important.

So now the big question is whether we are certain enough yet.

Wednesday, 11 December 2013

Optimisation fetish strikes again

In an ironic coincidence, the day after I wished that optimised replacement cost (ORC) valuations would die in telecommunications, its effects show up in cowsheds across the country.

The gDT index of dairy commodity prices is at record levels and Fonterra watchers have been tipping that the farmgate milk price would be increased in the scheduled December announcement. Here are prices for the last five years for whole milk powder.

You can see why people were excited. But instead, farmers were told today that while the milk price manual justified a price of $9.00/kgms, it was holding its forecast payout at $8.30.

Confusion ensued: if the milk price manual says $9, why restrict the payout to $8.30? Answer: the manual is a fiction, and Fonterra can't actually afford to pay $9.

The manual/model starts from the world price of a set of commodities X, which are the ones Fonterra & its rivals compete over. Fine. But from that point onwards, the manual/model is assumption-central. Three assumptions are particularly important, and none of them is correct.

  • All of Fonterra's NZ milk is made into a product from a set we'll call X
  • Every site has a standard-sized equipment installed to make X products
  • Every month the world prices are used to decide how to divide the milk between the products in X

The manual's price is the difference between the revenue and costs arising from these assumptions.

It is the first assumption that has tripped Fonterra up. According to today's announcements, this assumption is 30% wrong - ie, 30% of Fonterra's NZ milk does not get made into products from X. It goes into less profitable stuff like cheese and casein (this is new information btw).

Normally, Fonterra likes this fiction, because by pretending to not make that less-profitable stuff it can pay higher milk prices, which makes life a bit harder for its rival processors. But there are limits to how much it can afford to artificially support the milk price, as we have seen today.

In related news, Fonterra also cut its projected divided by 22c to 10c. Predictably, the share price tanked and no doubt we will shortly hear complaints from external investors in those shares. The things to remember here are that

  • those investors supplied around 6% of Fonterra's capital, which was only issued to provide liquidity;
  • other things being equal, Fonterra would prefer a low share price (ie a low dividend) because that
    • limits the cash its farmers will get if they sell their shares and jump ship to an investor-owned processor; and
    • makes it easier for its farmers to buy the shares required to back increased production.
I think Fonterra supplier/shareholders will be happy, if they understand what's going on. But I wonder whether a less optimised milk price model might be better.

Tuesday, 10 December 2013

My Christmas deathwish for TSLRIC

The government is reported to be reviewing "Commerce Commission laws" in the wake of the Chorus debacle and following concerns expressed by a grumpy foreign investor (who, incidentally hasn't been interested in NZ for some time).

This is worrying because it seems rushed. However there definitely are improvements that could be made, so in the spirit of constructive engagement here is what I'd be thinking about. For simplicity I'll refrain from considering the s36 problem and stick with telecommunications.

A good start would be to admit that TSLRIC is a silly concept for pricing access to a monopoly network. Investors and consumers would both be better off if it was scrapped. Here's why.

TSLRIC is a way valuing network assets at their replacement cost. To make it work, you first decide how the network would be rebuilt (architecture, equipment, installation, commissioning etc) if it was destroyed (yes, it really is fictional). Then you estimate the cost of doing that rebuild today.

This is hugely time-consuming and expensive. Last week, the Commission got started on a TSLRIC process for copper network services that "international experience suggests...can take some years".

It's not just slow and costly though: the outcomes are also very uncertain. For example, if the Commission decides to (notionally) rebuild the copper network, it will need to pick a price for copper wire. As the graph shows, copper prices are not exactly stable.

So we have hard-wired into the Act some very significant risks for both investors and consumers. This is a recipe for very big and expensive fights, not to mention political lobbying around the fringes.

Why do we have such a thing embedded in our Act? The best reason is that some of the services being regulated (UBA for example) can be supplied by competitive firms. In that case, regulating at replacement cost preserves an incentive for competitive investment. So it is not always utter madness.

But for most of what Chorus sells, there is a cheaper, less risky and more stable alternative form of regulation. It goes by a few different names (RAB, building blocks, rate of return regulation) but the key point is that the assets are not valued at their new build cost. Instead, we strike an asset value at the start of the regime and stick with it, updating each year in line with extra capital investment and depreciation. Then, when arguments arise, it doesn't take years to estimate the asset's value. And there are no massive risks to consumers or investors from volatility in things like the price of steel, exchange rates and other things that would be needed to build a new network.

This is still regulation and so its still difficult to do it well, but it is a much better approach for monopoly network assets. The Australians saw the light a few years ago, and its about time we admitted they were coughrightcough.

And now I'm really going to tempt fate. There has been a massive regulatory effort going on in NZ to design "input methodologies" for regulating monopolies like electricity power lines, gas pipelines and a few big airports. This seemed like a good idea in 2008, and it probably still is. One of the big changes that the Commission is making in this process is to abandon replacement cost valuations for these monopolies. What I'm suggesting here is simply the extension of that model to telecommunications monopolies. [This is tempting fate because we are still awaiting the High Court's judgement on appeals to these methodologies.]

The only losers would be consulting economists and lawyers who would just have to find something more productive to do :)

I should add that while TSLRIC is a dragon worth slaying, doing so would only be the first step in reform. While we do have a lot of the alternative machinery in place, it would take some time and effort to get it configured properly to apply to Chorus, and there would be plenty of potential for mischief along the way.

Friday, 6 December 2013

Farmer-led certainty & discipline

As I said yesterday, excess meat processing capacity is probably good for farmers because it intensifies competition for stock, driving up prices. Processors hate this cut throat competition, but they can’t easily escape it because none of them wants to close down factories. 

The processors are in a nasty bind. If firm X shuts a plant, it bears the entire cost while all its rivals get a benefit from reduced competition. In that context, everyone waits politely for someone else to exit first: “after you…. no, I insist, after you…”

This is why the meat industry is constantly seeking new ways to “collaborate”, a delightful term which in this sector is code for “reduce competition”.

Earlier in the year, there was an attempt to revive a much older proposal known as Tradeable Slaughter Rights (TSRs). At its heart, this is a market sharing scheme. Processors sit down together and allocate themselves the same share of animals for killing as they had last year. Then they go out and buy stock from farmers secure in the knowledge that if they don’t fill their quota (eg because their prices are too low), one of their rivals will be obliged to reimburse them. This is the “tradeable” part. 

Keith Woodford suggests that TSRs were intended to promote exit by weak firms who would sell their rights to expanding firms. But side payments like that could happen anyway, so its hard to see the merit of TSRs, and the market division aspect of it is most unappealing. I can’t see why farmers would support it, and I'm not surprised it was apparently turned down by the policy community in Wellington this year. 

Oddly enough, Federated Farmers seemed comfortable with TSRs. National President Bruce Wills didn’t share my pessimism and told me by email that the Feds support anything that brings “certainty and discipline” to the market. 

That's a worthy goal, for sure. But if the Feds and the MIE want to stimulate some farmer-led certainty and discipline, they should perhaps start by recognising that their interests and problems are very different to those of the processors. The most obvious strategy from that point would be to get a big group of farmers together and call tenders for processing and onward sale services. 

That would inevitably lead to long-term contracting arrangements between farmers and processors. But farmers would have the whip hand, at least initially. And if enough farmers joined the club then the scale of their collective business would likely force exit of some processors, which would address the core problem. Moreover, in a well-run tender process, the strongest processors should win, which is efficient.

The reason I prefer this approach to the merger route is that it focuses directly on the contract between farmers and processors, and exit of some firms is a by product that is sorted out by market forces. By contrast, having farmers try to force mergers is very difficult (as we are seeing) and even if it succeeds it still leaves unanswered two crucial questions. Which plants will shut? And then, finally, what kind of deal will the remaining firms offer farmers now that they have less competition?

Thursday, 5 December 2013

Economics for meat farmers

The red meat industry in NZ has been examining its navel for some time over how to cope with a single basic problem: excess processing capacity. That problem has become worse as farmers have converted sheep & beef farms to dairy. 

It is now dominating the rural press, and the MIE has been formed as a ginger group to push things along. It says:
MIE was formed in response to the crisis facing our industry.

Sheep and beef farming is under pressure with earnings and stock numbers declining. The processing sector is also in crisis. Dairy conversions continue at a rapid rate.
You’ll see from much of the analysis presented here that there is quite a lot of consensus about what needs to happen in the red meat sector– but no one is taking the lead.

That’s why MIE was formed – to help farmers step up to lead change and reform in our industry. We’re the ones with most at stake, and no one’s going to do it for us. (emphasis added)
The consensus referred to basically involves copying the dairy industry by seeking mergers. That is why we now see dairy guys like Henry Van Der Heyden, Andrew Ferrier and John Monaghan putting their hands up to help out their meat farming whanau. They can spot a new gig when they see one!

But here's the thing: the current situation is bad for processors, but not for farmers. On the contrary, farmers are beneficiaries of excess capacity because competition for stock is increased, which bids up the price of stock.

This is probably hard to see when (a) there is constant pressure is to push for mergers and (b) returns are lower and more volatile than farmers would like. But the crucial question for farmers is: what would change following a merger? How exactly would reduced competition for stock lead to higher and more stable prices for farmers? 

Unless this can be answered satisfactorily, the MIE is heading in completely the wrong direction. Farmers should not be "stepping up to lead change", they should be standing back and letting the processors sort out their own mess, and enjoying the benefits of intense competition along the way.

Friday, 29 November 2013

Self censorship & the corruption of science

By coincidence I've read two similarly disturbing things about the suppression of scientific information this week.

The first is from NZ and was first published in 1978 by the Timaru Herald under the title Rape of our Heritage but can still be purchased under its new title. Written by Canterbury farmer Brown Trotter, it tells of his successful experiments at using trace minerals to improve production and the health of his soil, plants and animals, and most spectacularly: himself. Trotter writes vividly of the scepticism and hostility he faced from the scientific establishment in NZ when he started this work in 1945, and reprints a few letters from an ally by the name of Fergus Hickey, who was doing research for a Waikato-based firm. A passage from a letter Hickey wrote in 1949 is worth recording (try not to vomit at the sexist parlance of the times).
The Dept of Scientific Research (DSIR), which has some 'top line' men on its staff, has a much more open mind, but the men do not care to express themselves too publicly for fear of putting the Department of Agriculture men 'off side'. Privately, I have had some very interesting views put to me.
For instance, at Grasslands, Palmerston North, the experimental pasture station of the DSIR, they have everything that money can buy in the way of improved strains of grasses and clovers, also fertilisers, yet they have told me that they would not think of running their dairy herd without supplementary minerals.
On one occasion I asked one of their leading men why it was, if they knew that supplementary mineral treatment was necessary, they did not make a statement to that effect in contradiction of Dr Cunningham, and thus help to lead 'the poor bewildered farmers out of the wilderness'. They told me that it was more than their lives were worth to come out in opposition to the Dept of Agriculture. 
Way back then, agricultural science was being corrupted by social norms that effectively prevented the truth from being heard. Self-censorship was considered a prudent and career-preserving strategy.

Scroll forward to today and we see something quite similar happening. Last year, peer-reviewed research by a French team was published in Food and Chemical Toxicology. It reported on the longest ever study (2 years) of the effects of feeding rats on Roundup-ready maize, one of the flagship GMO products, which it found to induce tumors.

So obviously there had to be something wrong with the study, because we all know for certain that this stuff is perfectly safe. Sure enough, a firestorm erupted including allegations of fraud. What to do? Well the editor quite properly "examined all aspects of the peer review process and requested permission... to review the raw data". Fair call, but the outcome seems much less fair. Last week, the editor wrote to the authors with an ultimatum to voluntarily retract or have the paper retracted by the journal. The whole letter(pdf)  is worth reading but this is the key section.
The Editor-in-Chief wishes to acknowledge the co-operation of the corresponding author in this matter, and commends him for his commitment to the scientific process.
Unequivocally, the Editor-in-Chief found no evidence of fraud or intentional misrepresentation of the data. However, there is a legitimate cause for concern regarding both the number of animals in each study group and the particular strain selected. The low number of animals had been identified as a cause for concern during the initial review process, but the peer review decision ultimately weighted that the work still had merit despite this limitation. A more in-depth look at the raw data revealed that no definitive conclusions can be reached with this small sample size regarding the role of either NK603 or glyphosate in regards to overall mortality or tumor incidence. Given the known high incidence of tumors in the Sprague-Dawley rat, normal variability cannot be excluded as the cause of the higher mortality and incidence observed in the untreated groups.
Ultimately, the results presented (while not incorrect) are inconclusive, and therefore do not reach the threshold of publication for Food and Chemical Toxicology.
GMWatch says this is "illicit, unscientific and unethical". It suggests that the editor's letter is inconsistent with the ethical guidelines that this journal (and many others) have agreed for retractions. Obviously, the "high incidence of tumors" point is irrelevant in the presence of a control group (that's the whole point of control groups), and if you're worried about the number of rats used, well have a look at what Monsanto presents as evidence in NZ. GMWatch also raises questions about the role this dude may have had in the whole process, and I note that for some reason his name is missing from the list of editorial board members on the Editor's letterhead, though he's definitely on the board.

Both of these stories point to the same basic problem, which is that powerful groups in society have a very keen interest in suppressing inconvenient science. That should not be even slightly surprising, though it is very disappointing when scientists cave in to pressure from vested interests.

Thursday, 28 November 2013

Good riddance to the copper tax

Celebration is in order this evening following the announcement today by every party in Parliament except National that they will not support legislation to increase the price of copper broadband services.

We are often forced to just put up with bad policy, but in this case an effective coalition was formed, resourced and managed. It has prevailed for three main reasons:

  • the counter-argument was very sound - this was a very bad idea from the start, so right was on our side;
  • resources were available - while all consumers would have been harmed, there were also fairly significant businesses that were affected; and
  • the campaign was very well managed - even if you're right, its easy to stuff up the execution.
I think there are lessons here for would-be future campaigners, and I hope someone goes to the trouble of documenting the campaign process in more detail - it'd make a great subject for a masters thesis. I certainly learned a lot myself about the role of public relations / communications in public discourse, and it was a pleasure working with such a great bunch of people.

Sunday, 24 November 2013

Electricity competition - still a way to go

The great irony of New Zealand's wholesale electricity market is that, while we are all intensely proud of it, no-one wants to be exposed to its spot prices. That's why the vast bulk of electricity is generated and sold by vertically integrated firms: the gentailers.

None of these firms wants to split itself, because there is no ready market for the contracts that'd be needed by separated retailers and generators. Market forces are not about to change this structure anytime soon.

A vertical separation would almost certainly be more competitive though, if only because barriers to entry will fall, because its easier to enter one market than two. The lack of independent competition is most obvious at the retail level, where the very idea died in 2001 in response to the spectacular financial hemorrhage that killed On Energy when it ran out of contracted supply.

Mandating a vertical split has always been in the too-hard basket, but reforms that have a separating effect have been considered on-and-off since 2002. The Ministerial review of 2009 (pdf) also pursued the theme, using that typically Kiwi approach: delegate the solution to the industry. The relevant decisions were as follows.
All major generators (with over 500 MW of capacity) to put in place by 1 June 2010 an electricity hedge market with the following characteristics:
– standardised, tradable contracts
– a clearing house to act as a counter-party for all trades
– low barriers to participation and low transaction costs
– market makers (offering buy and sell prices with a maximum spread) to provide liquidity. 
An assessment to be made by 1 June 2011 of satisfactory market liquidity, defined as 3,000 GWh of ‘unmatched open interest’ (contracts without matching offsetting contracts).
Nice idea, but it didn't work, and was never going to according to EnergyLink whose June 2011 report to the EA says that interest has grown steadily until it now sits at about 600 GWh. However, this is well short of the Government‟s 3,000 GWh target, and it is clear that this was never going to be achieved through organic growth.
The EA has since been chasing the gentailers along, trying to get them to make this work and staying upbeat about the project. But the latest report admitted that they're still short of the target
...record trading volumes, and sustained levels of UOI approaching 3,000GWh. Forward prices also continue to respond to market developments in a manner that appears mostly rational.
Mostly rational? That's a bit scary. And two years after the nominated date they're still "approaching" the liquidity target.

So anyway, lets review...

  1. More retail competition would be very good.  
  2. We've never seriously considered a vertical split to make that happen.
  3. Another option is for the incumbent generators to set up and supply a market for hedges.
  4. We've been asking them nicely to do that, for a few years.
  5. Its not going so well.

None of this is at all surprising. The gentailers don't want or need a hedge market: its only function is to help other firms to eat their lunch. The big question for me is over how long the EA will be content to stand on the sidelines cheering.

Saturday, 23 November 2013

Weird cows & lucky birds

My home office looks out onto our front yard which we sometimes use for cow grazing. A few weeks ago the cows spent a day there in a fairly small area of very long grass. This is what it looked like afterwards.

If you look closely, you can see a relatively green patch right in the centre of the photo. Its longer grass because the cows didn't eat it. Neither did any of them stand there. I know that because when I went to investigate it turned out to be a pukeko nest with 4 eggs, all intact.

How did this happen? Every other part of the available area had been chewed down and walked over. I'd noticed the mother bird flapping around among the cows, so for a fair bit of the day (perhaps all of it) she had been scared away from the nest. And there are some nice tasty looking plants around those eggs.

We have two theories. Maybe the pukekos pissed around the nest and that deterred the cows. But why didn't they stand on it? Possibly just luck I suppose. The only other explanation we could think of is that somehow the cows recognised it as a nest and deliberately avoided it, which sounds too weird to be true.

Anyway, the even better news is that the eggs didn't die while the mother was off the nest. Two have hatched and I managed to get a snap of the younger one this morning.

Wednesday, 20 November 2013

10 rats

What did our EPA know about the risks when it approve the spraying of grass with Roundup before feeding it to cows? That's what I wanted to know after I discovered what was going on.

So I used the truly wonderful FYI website to lodge an OIA request. Fonterra had already told me they'd run into a brick wall getting this information, and the nice man from Nufarm had also said that the scientific studies submitted to the EPA were "obviously" confidential for commercial reasons. So I tried to cover off that angle in my request, pointing out that there was nothing to lose commercially because Roundup Transorb is not generic glyphosate so purveyors of the scummy generic could not rely on Monsanto's expensive research.

The EPA noted that reasoning but did not respond to it. They with-held the studies because Monsanto had given them "in confidence" and Monsanto didn't want me to see them. Brilliant.

On the other hand, they did release the application form and it makes interesting reading by itself because it summarises evidence on six types of toxicity testing. Here is each toxicity and the test group used:

Acute oral            10 rats
Acute dermal        10 rats
Acute inhalation    rats (unstated number)
Skin irritation        rabbits (unstated number)
Eye irritation         rabbits (unstated number)
Sensitisation         20 guinea pigs

Those don't look like big samples to me. One rat died on the acute oral test, but that was acceptable. For the acute inhalation test, they used two concentrations. No rats died at the low concentration but 80% of them died at the high concentration, so the critical level was said to lie between these two dosages. Get the idea? Full details here.

Then, immediately following the little potted accounts of these tests is a Summary which begins
"Results from several investigations establish that the acute toxicity and irritation potential of (glyphosate IPA formulation) in humans is low" (emphasis added)
That's quite a leap of faith in my opinion. Put it alongside the fact that confidential research was also allowed to be submitted, and you might be forgiven for thinking that someone doesn't give a rat's arse about transparency or normal standards of scientific inquiry which require disclosure.

Monday, 18 November 2013

Another job for KiwiAssure?

What should we make of David Parker's soothing message to the insurance industry? Labour recently announced policy for a new state-owned insurance company (KiwiAssure) but now insurers are told that it'll be no real threat.

Parker had a semi-solid back-up story. The initiative was said to be aimed at bolstering the NZPost/KiwiBank group and helping to keep insurers on their toes, both of which sound like reasonable objectives.

A desire to get/keep the business community onside is the obvious reason for the messaging. This group has always had huge influence over governments (not just in NZ) because investment strikes are hard to stare down once the media join their advertisers in protest. Best to keep them sweet if possible.

As for the policy itself, I'd like to think that KiwiAssure would have an extra rationale: to learn about the industry. I say that because it is one of several critical financial sector industries that have diffuse and potentially weak oversight (payment systems is another).

As the franchise sector knows very well, a good way to keep tabs on an industry is to own one or two suppliers. That helps you understand normal practice, cost structures, margins etc. Armed with inside knowledge, franchisors can design contracts that are "better" from their perspective.

In the same way, a smart government/public service could potentially use information gleaned from KiwiAssure to design public policy towards insurance that is "better" for society. Somehow I doubt that this is part of the plan though!

Wednesday, 13 November 2013

The slippery slope argument

The other day our neighbour asked if he could borrow a shovel. Despite the risks, we agreed. Now we're getting 5 or 6 people a day at the door every day wanting to use our shower, borrow the car for a week, camp in our yard etc. Its ruining our lives, but obviously we have to agree. We are the ones that knowingly headed down this slippery slope so we can hardly stop now. Who knows where it'll end? We should never have loaned the shovel.

It turns out that loaning stuff is just like doing drugs. Fortunately, we already knew that story. You start out thinking a cup of tea or coffee sounds pleasant. With sugar? Oh all right then. But once you start saying yes to such things, well logic takes over doesn't it? Next thing, you're accepting beer, then wine, whisky and pot and then, well how could you possibly say no to mainlining heroin? That's why we've never ever tolerated tea or coffee in the house.

My point of course [swings sledgehammer] is that the slippery slope is a logical fallacy. It simply does not hold water as a generic argument because it can be refuted by silly examples like the ones above. It works OK as a joke, but we shouldn't take it seriously in a debate.

Unless a plausible mechanism is clearly described by which doing A makes it more likely that B will also occur. But even then, all that's really happened is that another potential consequence now needs to be factored into the decision. So, yes, there is a risk that if I start drinking tea I'll end up all the way down at the bottom of the slope as a junkie. But if the subjective probability of that is quite low, I might just take the risk.

Tuesday, 12 November 2013

Silage time

Big excitement here today with contractors on site to make silage. The pit was just finished a few days ago. The pic shows it in progress - that's a tractor & trailer down there in the hole. With luck, it should be about half full by tomorrow evening, all rolled down to exclude the air, covered with a plastic sheet & weighed down with old car tyres.

Pit silage is the cheapest and most sustainable way to store grass between seasons. But this is our first
serious crack at it. Up till now we've been using baleage, which are those round plastic-wrapped bales you often see along rural roadsides. Baleage is easy to transport so it dominates the market for buying & selling such feed. But its expensive to make & buy, and then you have a huge pile of plastic to get rid of.

It feels a bit risky to be dumping a whole crop of nice long grass into a big hole in the ground, but we are working hard to "manage those risks" as the management consultants would say.

Monday, 11 November 2013

What to do with Chorus?

Is anyone else surprised by the Chorus nationalisation speculation? The first mention came on Tuesday when the PM refused to exclude it as an option for solving the tricky problem of how to give Chorus shareholders more money. A few days later the DomPost was complaining that Telecom should never have been privatised and perhaps we should nationalise Chorus.

Its easy to agree with the DomPost that the privatisation of Telecom was stupid because ideology dictated that there would be no regulation of the resulting profit-driven vertically integrated natural monopolist.  But I would take some convincing that a buy-back makes sense at this point. Three things make me prefer using effective regulation in this case.

  1. Governments often do badly on these big deals, whether buying or selling. There is no transparency, a huge amount of value on the table in one deal, and I just don't have much confidence that "we" would come out the other end feeling good about the price.   
  2. A nationalised Chorus would still be difficult to handle. The agency problems that regulation aims to tackle wouldn't go away. So we'd still need something like a regulator if we wanted to keep such a firm from running off the rails.
  3. We have a decent regulatory model already built. Now that Chorus is vertically split from the rest of Telecom, we could use the same style of building block regulation that has been developed (at great cost) for the energy networks over the last few years. 
So while I can certainly understand the DomPost's frustration, the idea of the government sitting down with Chorus to negotiate a buy-back scares the crap out of me.

Saturday, 9 November 2013

Heroes of the week

Have we changed this week? It feels like it to me. Rape culture and corporate welfare both crossed over to become mainstream, out loud concerns. That might mean that a crucial step towards eliminating these scourges has been taken. There is still a long way to go of course, but its good to notice progress.

The issues themselves are not new. Shamefully, the police knew about the pack rapists for two years, but it took a TV3 news team to escalate the issue into the mainstream last Sunday. As for helping out Chorus's shareholders, well the copper tax has been in the offing since December 2012 when the PM, after being called by Chorus's chairperson, announced that there was a problem.

Wise and courageous decisions by a few people and organisations helped tip the balance this week. On both issues the mainstream media played a huge role and deserve congratulations. TV3 told us about the pack rapists and exposed the despicable attitude of the police. Both major print media organisations covered the copper tax very well and have seemed to get more staunch over the week, with the Herald publishing questions about Chorus' dividend policy yesterday and the DomPost considering nationalisation today. Journalists get a fair bit of stick, but this was definitely a week to be proud of ours.

Two individuals also played important roles in the pack rape issue. Giovanni Tiso took the time to track down all advertisers on Willie and JT's radio slot, after they showed their bigotry when talking with a friend of pack-rape victims. By the end of the week many of the largest firms had very wisely pulled their advertising. The market spoke, eloquently, and once the trend was clear Mediaworks voluntarily cancelled all advertising on the show for a week. That superb result is basically the work of one concerned man. Take a bow Giovanni.

The other notable individual play was by Matthew Hooton who has a regular Thursday slot on the Whackoff and Dickhead show. After their appalling conduct on Tuesday, he consulted the twitterati as to whether he should keep the appointment this week, then went on and confronted them directly about their misogyny, the way young men should behave, and their association with the infamous Clint Rickards. This kind of man-to-man confrontation is essential if we are to change our rape culture. Its a guy thing guys. We are the ones that need to stand up and fight. Matthew showed the way this week. Give that man a beer.

Compared with pack rape, a bit of corporate welfare could seem almost innocent, but they are both examples of how warped power structures undermine our society. Anyone who has been paying attention should by now know that, for unclear reasons, the government has been very keen to generate extra cash for Chorus by increasing the price of copper broadband services. A determined campaign exposed this evil plot, but the government said we were talking crap, though it later agreed to wait for the Commerce Commission's ruling before carrying on with their plan to over-ride them.

This week the Commerce Commission played the issue with a straight bat, setting a price at the top of the benchmark range but still a few dollars short of what the government had proposed. Well done ComCom. Just doing your job, I know, but there was a lot of political pressure to push the price up, and I for one am very grateful that you stayed true to your analytical principles.

Then the Minister announced an independent inquiry into Chorus's finances and indicated that she intended to hold its feet to the fire. The jury is still out of course. You could also reasonably ask why that didn't happen back in December last year before the PM set the copper tax in motion. But I still count this as a brave and important move by the Minister.

Maybe I'm just a hopeless optimist. It looks like archaic misogynists pushed their luck too far this week and everyone noticed so the world will be different now. And corporate welfare has also been exposed to the point where Chorus now looks much more likely to be held to its contracts. Just like everyone else.

That's how I saw it after a very auspicious week.

Friday, 8 November 2013

Price matching

There was a bewildered builder on the TV news last night, being interviewed about the government's very sensible plans for stimulating competition in construction materials. His counterargument was to cite the TV ads from merchants that proclaim they won't be beaten on price.

I think he was referring to Bunnings, which promises to beat by 15% any lower price on the same stocked item (Excludes trade quotes, stock liquidations and commercial quantities).

Bunnings compete with Mitre10 for the DIY market. Despite their strong retail presence, this sector is not where most construction materials are sold. But still, the role of these adverts is interesting.

In some locations, Bunnings and Mitre10 have huge stores very close to each other, so price comparison would be fairly easy (and not just for customers). But this is really not what either firm wants.

Ironically, the price beating adverts are probably designed, at least in part, to soften price competition. The signal they're sending to rivals is: "don't get aggressive on price, because if you do it'll be mutually assured destruction".

Obviously the ads also resonate with consumers, and help to expand the market etc. But they're certainly not a reliable signal of fierce price competition.

Thursday, 7 November 2013

Stuff people want

Economists would probably agree that public decisions should be guided by open, contestable and rigorous analysis. Most would also sign up the view that we should weigh up the costs and benefits of decisions and act accordingly.
But what counts as a benefit? As a first cut, we might talk about an attempt to count everything that makes people happy. Cost-benefit analysis is normally based on the utilitarian view that we should try to add up and attach values to all of the things that people like or dislike about a potential change.

That works pretty well in market settings where we have a reasonable shot at estimating demand curves and supply costs. There is also a big literature on non-market valuation, which can be used for where there are no trading data - to estimate things like the value of open space or clean air, or the cost of road congestion.

But there are some big holes in the utilitarian approach. One is that it has pretty weak microfoundations because pleasure and pain are polymorphous. As MacIntrye put it
"the pleasure-of-drinking-Guinness is not the pleasure-of-swimming-at-Crane's-Beach and the drinking and swimming are not two different means of achieving the same end-state....consequently, appeal to the criterion of pleasure will not tell me whether to drink or swim"
Another is that it could deny basic rights that most people agree on, like the freedom to choose your life partner. There was an emotive campaign in New Zealand this year opposing gay marriage. On a strict utilitarian view, the distress suffered by those who hated the idea would count against permitting gay marriage. But if you consider that life-partner choice is a basic right, you'd classify the opponents as having what Sen (pdf) called "meddlesome preferences" and could argue that they should not get any weight at all.

I haven't yet had to deal with these issues in a cost-benefit analysis, but they're definitely out there, lying in wait for unsuspecting economists.

Wednesday, 6 November 2013

Sunlight is the best disinfectant

The Commerce Commission did its job well yesterday, determining a price for copper broadband services at the top of the range of its benchmarks. They picked the highest benchmark price
to minimise the risk to investment and to avoid the dynamic efficiency losses that could arise from incorrectly setting a price below the forward-looking cost for the UBA service
Fair enough.

I didn't expect Chorus or the government to like this decision, but the extreme nature of the response was a surprise, including these gems from Chorus
$1billion funding shortfall....
Without the proposed Government intervention, ... very negative consequences for Chorus’ funding ability.... simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.
no guarantee this proposed reduction in wholesale prices would be passed through to consumers 
Chorus is ahead in its UFB build programme....but unless the Government intervenes, it is likely that the benefits for New Zealand will be significantly compromised,

So basically: "we're screwed unless the government helps us out. Oh and by the way, the price cuts won't be passed through to consumers".

Right on cue, the government picked up these talking points with the PM noting the funding shortfall, risk to the UFB rollout and the idea that price cuts won't be passed through. The ever helpful Minister added that the whole thing was a complete surprise "No analysts or companies saw that coming, no one priced it in."

Notice the role of uncertainty here. Chorus is said to be financially challenged and this might be due to the Commission's decision. The roll-out might stall. Some of the price cut might not be passed through. Investors might have been surprised.

This is not a factual basis for legislating over the top of an independent Commission, or for the government to take an equity stake in Chorus. On the basis of what we know so far, Chorus should just get on with raising new equity so they can finish the job. New equity was always going to be needed anyway, though the board has never admitted it.

Alternatively, if the government is seriously considering such extreme actions, the first step is surely an independent, transparent and factual analysis of Chorus' financial position and the reasons for it.

Without independent and transparent inquiry, this is just a big company that has deliberately loaded itself with debt, scored a big contract from the government, trousered a $929m interest-free loan, and is now returning to the well for more concessions.

Sunday, 3 November 2013

What's for dinner?

As I suspected, the reason Eric hates the idea of GMO labelling is that he doesn't respect the eating preferences of others.

In his made up example, a new and obvious sticker is placed on supermarket apples notifying the presence of a chemical that Eric believes harmless. Sales of the stickered apples are likely to fall because not everyone will be as clever as Eric. Many doofuses (doofi?) will take fright at the multi-syllabic chemical and not buy those apples.  The chemical really is harmless, so there would end up being "too few" sold. We wise policy analysts should obviously protect those doofi from themselves by not requiring disclosure of the chemical.

The situation for GMOs is very different though. Instead of one harmless chemical on an apple, we have thousands of potential applications of lots of different GM techniques. The number of potential side effects from consuming GMOs is unknown. There aren’t nearly enough genes to do all of the things we know are done within the human body, so its pretty obvious that interactions between genes matter  But there are only so many of this vast multiplicity of risks that can be tested, and any test has some probability of type I and II errors, not to mention the whole broken science system and lots of crap published problem.

Put it this way: if there was any peer-reviewed scientific literature establishing that GMO crops in general have no unintended negative impacts then I think we'd have heard about it by now. The vague generalisations and opinions Eric is quoting fall well short of actual scientific proof, which is pretty ironic given the "bad science" slur that kicked off this discussion.

Let's face it: there is risk involved in eating GMOs and it's value is subjective. I am apparently more risk averse than Eric, and there must be others like each of us.

Feed that back into Eric's apple example and what do you get? Well, the doofi are me and other relatively risk averse people, and suddenly we're on the receiving end of the paternalism. Eric wants to stop us knowing where the GMOs are. Because he thinks knows that we over-estimate the risk.

This all seems very strange. Eric is not usually a meddlesome guy, yet here he is arguing against allowing people access to information that they want and that doesn't seem costly to provide. As far as I can tell, his sole motivation is to stop other people acting in accordance with their own preferences over what they eat.

Saturday, 2 November 2013

GMO labelling & science

I had a fascinating discussion on Twitter recently with Eric Crampton who worries that those who oppose GMOs are helping to kill people (as do the anti-vaccination crowd), and considers that there is a scientific consensus in favour of GMOs, just as there is on vaccinations and climate change. These views seem connected to Eric's opposition to mandatory labelling of food containing GMOs.

Here is why I disagree, starting with the killing people stuff, which I presume is about starvation.

1. There is no shortage of food in the world and nor is there projected to be. Famines are not caused by a shortage of food, they are caused by screwed up power structures. Effective democratic governance is the solution, as famously argued by Sen and recently endorsed by Brookings.

2. Even if a shortage does emerge (and we've been waiting since 1798), it's far from clear that GMOs are needed to solve it. Recent cross-country work by Jack Heinemann and others found "no detectable yield advantage in GM-adopting countries".

3. There are other avenues for productivity gains but science funders are not interested. Reversing science's shameful avoidance of biological agriculture could yield big productivity gains, but it's a GPT which makes it hard to monetise. Private money largely controls the questions studied by scientists, which may help to explain why so much science is wrong.

4. Kiwis lose little if anything by waiting. We retain the option to adopt GMOs if that ever makes sense. Meantime, we can do GM experiments in the lab while still selling GM-free food into markets that want it, like Japan (pdf) and Norway. This meta analysis (pdf) suggests a value premium of 23% - 42% for non-GMO food.

5. Its hard to claim a pro-GMO scientific consensus when 230 scientists have disputed that one exists, just in the last 10 days. Also, unlike climate change or vaccinations where there is basically one issue, there are literally thousands of different GMO technologies and the risk/reward calculus differs for each. So how can you be uniformly pro-GMO?

What about the case for compulsory labelling? Well a proper analysis would be very interesting, but at this point it seems like a low-cost and high benefit idea to me. You could argue compulsory GMO labelling is not needed, but neither is nutritional labelling or a false advertising law. What matters most is the value consumers in total would derive, relative to the direct costs it imposes on producers.

In doing such analysis, one needs to set personal views aside and focus on the things to which other people attach value. If you personally think those who don't want to eat GMOs are deluded nutters at best, and potentially even accessories to the killing of poor people by starvation, then you might be inclined to discount their preferences when weighing up the costs and benefits of labelling rules. But that would be a subjective and indeed paternalistic approach. You'd be censured by the economists club, if we had one. 

Thursday, 31 October 2013

Competition drives up insurance costs

The UK Competition Commission is investigating the vehicle insurance market, where costs are getting out of control as the Economist's chart shows.
The accompanying article notes in puzzlement that "competition abounds". So what is going on?

The UKCC's issues paper(pdf) suggested that the industry is arranged in an excessively competitive way. Apparently when your car collides with another in the UK, one of the insurance companies ends up paying for both cars. I think its the same here in NZ.

That structure gives the other insurance company an opportunity to raise its rivals' costs by getting an expensive repair job, and loading it up with generous terms for temporary replacement car hire, plus high write-off values so you're more likely to get a new car.

Its not theoretically clear how competition would play out given that market structure - maybe the firms could converge on an implicit deal to economise on repair costs irrespective of who pays. But cartel instability theory suggests that each insurer would be tempted to renege on any such deal, and that everyone might end with higher costs.

That latter story of cartel instability seems to be the UKCC's view. Investigation evidence led it to put the liability/control split at the top of its list of problems in July, and now the Economist reports that insurers are welcoming the prospect of regulation to stop them from competing in this way.

The prospect of rivals welcoming regulations that inhibit competition would normally chill me to the bone, but this one sounds like it could work.

Wednesday, 30 October 2013

Will Washington do it again?

Last year, Washington State became the first (jointly with Colorado) to legalise marijuana. They did it through an election in which 81% of those eligible voted. While the proposal was radical in an historic sense, the war on drugs has become something of an embarrassment even to the US authorities, and with respected newspapers like the Economist advocating legalisation then perhaps it was only a matter of time.

Another year, another interesting ballot proposal in Washington. This time it is to require labels that acknowledge the presence of GMOs in food which is already nutritionally labelled. The vote is next week, on Guy Fawkes day.

Unlike the marijuana issue, this time there are seriously annoyed corporates opposing the move. They have collectively tipped in over $20m of campaign funding. If you want a sense of how pervasive GMOs are in those United States, read the list of contributors and their brands.

Those promoting the move are characterising it as a fight between locals (consumers & farmers) vs big out-of-state business, and their myth-busting fact sheet(pdf) gives an insight into the way the the issues are being presented to voters. Samples myths include:

  • Trial Lawyers Will Sue Farmers If It Passes
  • Shoppers Will Pay More For Groceries
  • It Would Cost Taxpayers Millions 
From an economic standpoint, the benefits of GMO labelling come from giving consumers relevant information, which is a basic requirement for market efficiency. Offsetting those benefits, the direct costs of GMO labelling are surely quite low. Food manufacturers often change their labels so if you allow a reasonable transition time to GMO labelling it'd be hard to argue with the idea on a direct cost basis.

I doubt that the GMO sellers are genuinely afraid of the direct costs. Its the indirect costs that will scare them. These will come from the market reactions of better-informed consumers who try to avoid food with GMO content. Oh, and don't forget the slippery slope: if this gets up in Washington it could break the spell and other states might do the same thing.

Wednesday, 23 October 2013

Learning or returning?

The idea that NZ's agriculture industry should learn from the past has cropped up a bit recently. Agknowledge is clearly arguing for more emphasis on legumes for example. And according to Jacqueline Rowarth in the latest Rural News (not online yet) "winding back the clock 20 years to save New Zealand land and water" was promoted at a recent resource management law conference. She thinks it's a bad idea and does her usual myth busting thing, praising "technology", slagging off raw milk and claiming that "the dominant imperative now is cheap food from a well managed environment.....winding back the clock is not the answer". 

What interests me is Jacqueline's focus on returning to the past, rather than learning from it. That sets up a false dichotomy and implicitly assumes that newer is always better. Pretty disappointing attitude from an academic, but maybe this is what happens when business dominates science: technology becomes redefined as something you can sell. Ironic also that this should coincide with the Economist's highly critical analysis of modern science. 

Monday, 21 October 2013

Jon Morgan begs a great question

Jon Morgan's opinion piece in this week's Straight Furrow is titled "Real science is money well spent". Amen to that.

He distinguishes real science from the fringe which he defines as
"psuedo-science - the dissemination of half-truths and wishful thinking, sometimes based on poor research and incomplete trials.
Some people prefer psuedo-science. They're the antis, the ones who refuse to let the scientific facts shake them from their entrenched bigotry. They scout around for science to back them up, and when they find it, cling to it desperately without questioning its veracity.
I put campaigners against fluoride and 1080 in this camp. You can probably think of others.
Then there's a third category. This is where the scientists can't agree, where there's still doubt. I'd put climate change in this group. Others could be genetic modification and biological farming, though mainstream science seems to be swinging towards the former and against the latter."
By opining like this on where "real" science is pointing, Jon is revealing the frequent absence of a bright line between real and psuedo science. This makes it a classic text for me.

Take the 1080 point for example. There is surely no blanket case for 1080 - it must depend on lots of things that vary by location. I doubt we'll see it in Cornwall Park or Hagley Park for example. So the "antis" are right in some places even according to "real" science. Constructive engagement with opponents is therefore appropriate, rather than assuming "entrenched bigotry" .

Jon's final sentence is the real gem though. I love how it elevates biological farming to a (the?) challenger in an epic battle against genetic modification, only to slur it with a withering inference from "mainstream science". How did he form that view? Was the volume of work influential at all?

It seems to me that far more resources are being invested in scientific work on genetic modification than biological farming. GE attracts investment because it can be monetised whereas biological farming is more like a general purpose technology, a public good in which the market will under-invest.

So I wonder whether Jon has perhaps been swayed by the volume of work on GE and the big-money hype about it, and forgotten or not noticed the absence of any serious comparative analysis of GE and biological farming as alternative future visions for New Zealand's primary sector.

Still, by getting the idea out there he has exposed a question that needs to be answered. Does biological farming have the potential to materially improve agricultural productivity in New Zealand? If our future really does involve a choice between GE and biological farming, then "real" scientific work is obviously needed on this question.