Monday, 30 September 2013

Broken machinery

We all know that feeling when we go to use a tool or vehicle or other bit of machinery and find that its broken.

Even if its not actually a flat tyre we feel deflated, cheated even, by something that was supposed to be all set up ready to go.

That's kind of how I feel about our government: its a broken machine. Distasteful as the whole corporate welfare thing is, its really just a symptom of a dodgy control module, or something.

Its not that surprising really - we've always been vulnerable to hijack by the PM and a few close pals. In a way, we're lucky that it doesn't happen more often.

I don't know how to fix this, but I'd settle for a firm commitment to analytical rigour. You want a road? OK, then prove its a good idea and you can have one.

That would be a great outcome, but how do you enforce it?

Saturday, 28 September 2013

Vote for Tom

DairyNZ taxes dairy farmers and spends the proceeds on "industry good" projects.

Our biological farming friends regard them with disdain because they seem uninterested in researching this approach. Here is a rough indicator of the way DairyNZ thinks about "industry good" research as revealed by searching its website.

Search results for "urea" : 521
Search results for "legume": 8

While our agricultural scientists studiously avoid working on these issues, those trying biological methods are frequently denigrated as being anti-science and/or asked to provide the science that supports their approach.

That's why we are voting for Tom Walters who is standing in the elections for DiaryNZ directors and advocating
more research into how we successfully farmed per and post second world war. We advocate biological farming simply because it is proven. For todays farmers we need further research and scientific debate around proven chemical free methods of the past to satisfy the question around "where is the science?"
Good luck Tom.

Thursday, 26 September 2013

Dynamic efficiency of pre-distribution

Andrea Vance reckons that David Cunliffe's team will be working up some pre-distribution policies, an idea that has reached these shores from Yale via the Policy Network and the UK labour party.

The main objective of pre-distribution is to increase disposable income for the least well-off, leaving less "work" for the welfare system to do. Unless you can find price cuts for essential stuff, that basically means higher wages.

I agree with Neil O'Brien that pre-distribution is an interesting idea but will be hard to do in practice. Certainly its very easy to scoff at proposals to put a floor under wages, even if they are now supported by a former employers' advocate. We all know the drill: higher wages result in lower levels of employment, which is bad for those that lose work but good for those who get higher wages. For workers in aggregate, that could be a good or bad thing, depending on the shape of labour demand curves. More on this below.

Meantime, what about the firms? The interesting firms are those that shed labour in response to higher wages. Put yourself in the position of a savvy business owner who is laying off staff in response to the wage increase. That is not the end of the story. You also need to adjust to doing business with less labour, which gives you two basic options: invest or shrink.

If business is good, you would presumably want to maintain output with less labour. That requires investment in new capacity to replace the sacked workers, such as automation or streamlined processes. That investment raises the productivity of the remaining workforce, helping justify higher wages and making them more affordable.

Alternatively, if business is bad you might reduce output. Get started on that first long, looping circle around the drain.  

Net result: good firms get better and bad ones head for the exits. It sounds like the kind of thing that might finally kill off some hopeless firms, or shock them into improvement. Either way, it qualitatively improves the stock of firms in the economy. That looks like a dynamic efficiency benefit to me. Higher costs do impose a productive efficiency loss, but there is at least an open question as to whether they might be outweighed by the dynamic efficiency gains.

That doesn't mean wage hikes are a free hit. Even if you agree with my analysis of the effect on firms (and I'm keen to hear other views), its obvious that you could take wage increases too far, driving lots of perfectly sound firms out of business.

Where is the sweet spot? Not sure, but here are a couple of ideas. One option is to use the impact on aggregate wages as the guide: increase wages provided that those remaining in work get enough extra wages to fully compensate for the wages of the newly unemployed. Another is to do the same thing from the perspective of the government's tax & welfare accounts.

Tuesday, 24 September 2013

Running on the spot

Some ugly truth from in a recent Productivity Commission report(pdf). The chart shows annual growth rates in labour productivity by major sectors in NZ.
The report also notes that relative to an OECD average kiwis are working longer hours (15% longer) to produce less valuable outputs (20% less valuable). Something is seriously wrong here.

There are other nuggets in the report giving some clues as to what might be going on. For example, it seems that when the reforms of the late 80s and 90s forced workers to change industries, those shifts reduced labour productivity. Also, deep in the appendix is an interesting table that I've graphed below.
That bold line is at 45degrees, so sectors below the line are dragging overall labour productivity down. The vertical dotted line divides the sample into sectors with small and large shares of total paid employment. Note that none of the smaller sectors are below the 45degree line, and none of the larger sectors are above it.

The worst performer is retail, closely followed by construction and the non-mining primary sector. These are all big employers, accounting for 1/3 of paid hours between them. Accommodation & food is pretty hopeless also.

With these sectors in the frame, my conjectures are as follows.

Retail and accommodation/food seem very competitive with low entry barriers. I'd guess that lots of the value-added is probably being captured in property rents. These are also public-facing and cash-oriented, so declared revenue could be eroded by tax "management" as I suggested earlier, which would make things look worse than they are. What to do? One approach would be to find a whole lot more demand in a hurry (immigration, tourism etc) so we can put more volume through what must be under-used facilities. Another would be to try to change the perception of potential entrants - if these sectors are over-supplied perhaps its because they look like the kind of thing anyone can do, which leads lots of people to have a crack, but they can't all be winners because the market is too small.

Construction might not seem so competitive to anyone who has tried to get quotes from builders. But it certainly has low entry barriers, and in the past it has been flooded with new workers as trade builds up. So my working assumption is that the labour component of construction is pretty competitive. However there seem to be some parts of the construction value chain where significant rents are being scooped off, and that will contribute to low productivity by increasing input costs. That seems like the obvious area for policy focus.

What about agriculture? This needs a lot more work, but my hunch is that there has been a fair bit of cost inflation (land prices most obviously) and that farmers have lost some of their food-growing focus, particularly in dairying. Symptoms include huge growth in the volumes of bought-in feed and urea as fertiliser. A quick comparison of the national dairy budgets for the 2000 and 2012 seasons suggests that feed costs increased by a multiple of 2.4 over this period, on a per kg of milksolids basis. More attention to what is below ground level would help I reckon.

Monday, 23 September 2013

Something stinks here

Wanna get rick quick? Sell infant formula to China. They can't get enough of it apparently and some people are just buying it at NZ supermarkets and sending it over. That's naughty though, so you shouldn't do it that way.

What you should do is get yourself registered as an exporter, then fill your boots. That way the government will protect you, by cracking down on unregistered exporters, and helping to pay for your trips to China.

Don't worry about ethics or marketing codes or liberal whingers - there is money to be made here! If the Chinese government doesn't care about replacing free food with imported milk products, why should we?

Lets just stay focussed people. This is a booming market and if we don't get in there and persuade those young mothers to start paying us for stuff that they can produce for free, then someone else will.

Saturday, 21 September 2013

What's going on with our tail?

There is something of a puzzle over the much larger spread of intra-industry productivity in New Zealand than other places notably Denmark.

It seems that firms with very low productivity (relative to others in their industry) can survive in NZ. Aaron picked that factual gem from Roger's(pdf) analysis, as Eric noted.

I agree that weak competition is a prime suspect in this puzzle but I wonder if there are also some measurement issues. 2 things.

  • productivity is measured as the ratio of the value of output to the volume of input. There are lots of things that could affect this ratio
  • we're puzzled about low values of this ratio - firms with low output value compared to input volume.

The denominator is just hours of human work whereas in the real world labour quality varies. It turns out(pdf) that using the wage bill as a proxy for labour quality explains some but not all of the puzzle.

Another factor could be tax evasion. Suppose a firm is under-declaring revenue for tax purposes. On the productivity measures, it would disclose a high volume of inputs relative to its declared revenue or profit.

Tax evasion is easiest in sectors with direct personal contact between buyer and seller, so its interesting to note (pdf) that the services sector has "greater productivity dispersion" than manufacturing or agriculture where scope for evasion is lower.

Thursday, 12 September 2013

Axe the copper tax

I was at the Wellington launch of a new campaign today. It is being run by the Coalition for Fair Internet Pricing, and the catch cry is to Axe the Copper Tax.

To make a very long story short, in 2011 the government changed the Telecommunications Act to enable its ultra fast broadband (UFB) project, under which a new fibre-optic network is being laid to the doors of 75% of NZ's population. One part of this package of changes was that the wholesale price of the most widely used internet service would be priced differently in 3 years time. The service is called unbundled bitstream access (UBA) and the change was from pricing it as a discount off retail internet prices to pricing at the cost of supply. Everyone knew this would drop the price considerably.

Late last year, the Commerce Commission issued a draft determination for the new, long signalled, cost-based UBA price. The same day, Chorus went ballistic, its share price fell, and the Prime Minister described the new price as "very problematic".

Then in February, Communications Minister Amy Adams announced a review of the Act - required by the 2011 reforms but brought forward from the 2016 timing - and an extension of the UBA price freeze for another year.

Last month MBIE issued a discussion document that restricted the review scope to the pricing of copper-based services, proposed that copper prices be set the same as UFB fibre prices, and invited comment on three different ways to achieve that.

Its a shocking piece of work if you care about robust policy analysis. If you want to full story, the Covec analysis (for the Coalition) is here (pdf). The exec summary should be readily understandable.

Basically, it seems that the "problem" MBIE is addressing is that Chorus wants more money. Its not easy to figure this out from the document because (understandably) they don't come right out and say it. But that really is their objective.

The "solution" is to increase copper prices. Chorus is the owner of all the copper so it is the beneficiary of this plan. In particular, the non-Chorus firms building the network in Northland, Canterbury and around Manawatu are getting nothing.

That's why we call it a copper tax, and our conservative calculation is that it is worth $600m between now and 2020.

For other reports, see Kiwiblog and Stuff.

Monday, 9 September 2013

NZ Power

My slides for the EPOC winter workshop are here.

There was a great panel discussion after my gig, much more interesting than the IGPS event in July on the same topic where participants were strangely reluctant to fire up. A possible reason is that the other panel members in Wellington were Lew Evans and Geoff Bertram, a combo that was virtually guaranteed to produce strong and polarising views. By contrast, my fellow panelists at EPOC were Grant Read and Andy Philpott neither of whom seemed committed to a good/bad opinion.

Anyway, my views are crystalising a bit. I still think the short-run operational stuff is not too difficult to sort out: economic dispatch via a spot market can be preserved but generators would only offer volumes with the price component being struck in advance through some kind of regulatory contract. That could support the auctioning of hedge contracts by NZ Power to stand-alone retailers, which I think would increase retail competition.

In effect, NZ Power would break the existing vertical integration of gentailers, which would make it easier for new firms to enter the generation sector (without having retail customers) or the retail sector (without having generation).

The longer-term stuff still looks messy, but this event brought a few particular types of messiness into clearer view including:
  • life-of-plant supply contracts for generators sound good in theory, but there would need to be some flexibility for major refurbishment expenditure, which might make generation regulation look a lot more like standard monopoly regulation - regular resets, capex forecasts and all that stuff;
  • NZ Power would bear the risk of unexpected slumps in demand growth or actual demand, which might encourage it to go looking for new demand (aluminium smelter anyone?); and
  • a de-minimus exemption for small generators (eg micro hydro, small scale solar panels) would make sense but a threshold would need to be defined.
Political promises have a way of turning into reality. I've been comparing this one to John Key's policy on ultra-fast broadband (UFB) prior to the 2008 election. They're both large scale government interventions into an essential service industry. Part of the reason that UFB is now turning into a slow-motion train wreck is that the whole transition it envisages was never fully thought out. There is a fair chance NZPower could meet a similar fate unless it is taken seriously now.

Sunday, 8 September 2013

Just pay me, says scientist

There was reportedly a bit of a scrap at the wine industry conference last week over genetic modification.

I always enjoy reading this kind of report because the pro-GM lobby usually sound like idiots when they try to explain why we must embrace GM technology.

My favourite line is the guilt trip: we must go GM because the world's population is exploding and they won't have enough to eat without GM. That's beautiful isn't it? The sellers of GM telling us we are morally obliged to buy their patented seeds otherwise the third world will starve. Its like something a kidnapper would say: pay up or the poor little children get it.

Large chunks of the scientific community are just as keen on GM, but they often use different arguments. The hardy perennial "we'll fall behind" line got an outing at the wine industry conference.
Mr Trought said if the industry did not start doing work in the field, they would fall behind other wine-producing countries.
In the United States, most maize and soy bean products were genetically modified, and diabetics worldwide used insulin that was genetically modified, he said. 
If American scientists were to discover how to find cells resistant to various vine diseases, they would use it.
"If we don't invest in research, we won't understand the physiological and genetic processes and whether we can use GM plants or yeast," Mr Trought said.
Implicitly, this assumes that US-based corporations that gain patents on new GM technology will not want to sell it. So we will lose any hope of getting access to this technology unless we "invent" it ourselves, independently.

It sounds like self-serving rubbish to me. Think about it this way. Suppose that the technology for using screw caps on wine bottles is (a) vastly superior to corks and (b) patented by someone who invented it. Why would that person not sell or licence the technology to wine producers all over the world?  

Thursday, 5 September 2013

Milk vending

Milk vending seems to be expanding. This is the fourth vending operation I know of around the Nelson region. "Village" milk was first, in Takaka. And then the Riverside community and another farm at Moutere jumped in at more or less the same time.

There are strong incentives for farmers to install vending machines - it arbitrages a pretty big margin between prices at the farm gate and the supermarket. Farmers get around 70c /litre for bulk milk, so selling direct for $2 or the $2.50 these people charge is quite attractive and still a reasonable deal for consumers.

Consumers also get what you might think of as a "provenance" benefit. They know exactly where the milk comes from. Assuming that Tesco knows what its doing, this is worth something.

Two other interesting features from this story.

  • they are selling "lightly pasteurised" instead of raw, though one of their new machines will sell raw milk - sounds like a sensible diversification strategy and it differentiates them from the other three.
  • their natural inertia was finally overcome by Fonterra cancelling their winter milk contract - nice work big guys!

Tuesday, 3 September 2013

House price obsessions

Bernard Hickey has a terrific story about a nasty downward spiral affecting most of New Zealand, one indicator of which is falling house prices. Apparently Auckland and Christchurch are doing fine but things are on the slide pretty much everywhere else. Rural youth are migrating to town leaving the oldies behind. Plant closures hurt. So the government should think about how to reverse this vortex says Bernard.

I reckon they probably are, deep inside MBIE.

But hopefully they're using a proper evidence base, and I guess they will also realise that low house prices aren't necessarily bad.

As Aaron Schiff recently mused, it would probably boost innovation if urban housing was a lot cheaper. Certainly there are big benefits from low cost rural housing. I mostly live in the rural top-of-the-south. There are plenty of young people, a steady demand for rental accommodation, and housing costs are low. That's a big plus. We have quite a few neighbours raising families like this while also growing gardens and hunting and fishing. They don't seem to hate it and are probably doing fine financially.

Compare that scene with a typical group of Auckland house-owners obsessing about prices. Its a stark contrast.