How to knobble Pharmac

The fate of Pharmac under the TPPA is of enormous public concern. Pharmac gives kiwis a degree of market power over foreign drug companies. As the single public-sector buyer of drugs, it can make good use of legally produced generic drugs made from expired IP.

We know that big-pharma hates it, and one of the USA's goals for the TPPA is to gut it.

But how could our government get away with doing that? How would they try to sell it? I got a clue on twitter last night after I corrected Matthew Hooton's claim that "everyone" would benefit from the TPPA. Here is are the lines...

@smalltorquer no suggestion it would be "killed" but currently (for good fiscal reasons) NZers don't have access to all new treatments
— Matthew Hooton (@MatthewHootonNZ) October 26, 2014

So, hell no, we love Pharmac. There is no suggestion of killing it. We just want to enhance it a bit so that "everyone" is better off.

@smalltorquer if it happened, taxpayer may pay more because consumers would have access to more drugs (that pharmac would be forced to buy)
— Matthew Hooton (@MatthewHootonNZ) October 26, 2014

Think for a tick about alternatives to Pharmac. One is that DHBs etc buy their own drugs, so there are multiple buyers. That could still work out OK because each of these buyers would still have a bit of market power, and it'd give NZ a solid response to any claim that Pharmac was unfair under world trade rules (if we felt the need to respond). But this would be perhaps even worse for big-Pharma - all those individual buyers to schmooze.

Far better, for big-Pharma, to have one "regulator" and make it utterly captured. So keep Pharmac but remove its ability to make it's own choices. Brilliant.

On the hosting of worm orgies

Nicole Masters ran a biological farming workshop yesterday, hosted by agricultural innovator Doug Avery at Grassmere. There were about 40 people, mostly sheep & beef farmers from Marlborough and Canterbury, lapping up scientific findings about how all the soil critters (nematodes, cilia, worms, bacteria and fungi) interact with the soil, the plant and each other. We also swapped ideas, shared our experiences, dug holes, tested plant brix and did a slake test. 

The basic idea we are chasing is that, left to their own devices, plants and soil critters really work helluva well together. Plants create sugars through photosynthesis, and share it with the soil critters. In return, the soil critters supply nutrient harvesting and storage services to the plant. For example, they unlock bound up Phosphorus and store Nitrogen harvested from the atmosphere.

Farmers can foster this natural exchange of services or buy substitute services from the fertiliser companies such as bagged Nitrogen and soluble Phosphorus.  

It has long been known that the physical structure of the soil is crucially affected by a chemical balance between calcium and magnesium. Tightly bound soil with few air passages can be loosened up by adding calcium, helping them retain moisture and providing habitat for soil critters. There is a lot more to soil mineralisation than the Ca:Mg balance, but its an important starting point. 

There is an analog to this in soil biology: the balance between bacteria and fungi. When soil building is just starting (eg from rock) bacteria dominate and fungi are largely absent. Eons later, under mature forests the reverse is true. Every time we cultivate, we slice and dice the soil critters which sets back the fungal elements. The balance can be restored using fungal-promoting additives like fish oil and humates.

When a soil is well mineralised and in biological balance, there is an absolute hive of activity going on down there, all working symbiotically with the plants. The soil becomes more sponge-like, and drought-resistant. Carbon is being sequestered and humus being built. It is also warmer: farmers in snowy regions notice that the snow melts far quicker in places with good biology. That's partly because of heat generated by all the worm sex going on.

Several of the farmers we met had never been exposed to these ideas before and were pretty excited about the prospects. We all came away re-energised and keen to try out some new practices in an effort to get these worm orgies happening.

Welfare reform margins: income or wealth?

As I understand it the main reason we need welfare reform is to 'encourage' people back to work.

We think that if these people just applied themselves a bit, they'd find work alright. But they don't so we need to encourage them.

Let's assume this is correct. It is basically an attitude problem - right? 

The economic logic of the target group goes like this: why bust my balls in a nasty jobs market if I can survive OK and keep the bureaucrats off my back with much less effort. This is just our old self-interested friend, homo-economicus. Which makes these people the smart ones, aware of and responsive to the incentive structure.

There is another group who are actually incapable and vulnerable, not ruthless calculators. We want them to have a reasonably OK life, so we set benefit levels that achieve that. 

But then the ruthless bastards pretend to be incapable/vulnerable. So we get angry at them and spend money hassling them, which also hurts some of the really vulnerable. Welfare reform basically involves more spending on hassling beneficiaries.

It's only 'needed' because of the incentive traps built by welfare targeting. As the 2001 tax review(pdf) put it:

More targeting means more people facing high effective marginal tax rates as they try to move out of benefit dependency.

The alternative is some kind of universal basic income (UBI) support. This was considered by the 2001 tax review and rejected on grounds of excessive cost. Gareth Morgan later argued otherwise. I'm not sure where this argument lies currently.

But I suspect we have not thought enough about the U in UBI. The motivation for universality would be to reduce the effective marginal tax rate (EMTR) faced by beneficiaries contemplating work options. These tax issues are entirely income-related: a UBI is a government guaranteed income level for all adults irrespective of their income.

Why couldn't we cut or abate the UBI according to wealth though? That would eliminate payments to a large number of well-established people who have no need of a state subsidy. It would allow people to collect the UBI until they had accumulated wealth of some agreed amount, such as $250,000. Maybe it'd abate after that point. Perhaps it'd become a point of pride to be having one's UBI abated away.

The economic rationale for this approach is that the elasticity of labour supply is likely to be much higher relative to income than wealth. If this is true, we should allow people to collect all their wages at the margin (keeping EMTRs low), but wind back that privilege as they become more wealthy. Then we have pretty much zero need to hassle people into the job market.

We would of course need to monitor asset levels more closely, as we currently do for old folks. 

Child Poverty, Housing & the RMA

Eric Crampton's argument connecting child poverty with the RMA has given the government a terrific angle. Bill English miscued it though, claiming that

"our planning processes have probably done more to increase income inequality in New Zealand than most other policies" 

and was rightly skewered by Max Rashbrooke noting that inequality is an old problem in NZ, whereas rampant housing costs are relatively new. English would have been on safer ground if he'd either referred directly to child poverty directly or to increasing inequality of disposable income.

But enough with the backward-looking stuff: we should at least welcome the new focus of the government and the NZI on inequality and child poverty. Let us look forward then, to what can and should be done about inequality and child poverty in New Zealand.

We should start with the split in household budgets between the income and cost items. The income side of this split is left largely unexamined by the government or the NZI - the market rules here, and that seems fine by them.

But even if we want to ignore labour market contracting issues (don't mention the minimum wage!), we can't think about the impact of RMA/housing costs without considering at least the location of jobs. At which point it is much less obvious that the RMA is to blame. Instead, it seems to me that

• manual jobs have largely migrated out of city centres as have manual workers, and
• apparently more productive sectors such as FIRE have displaced them - jobs and workers both. 

These movements show that/how markets adapt to changing values. All workers want the best pay close to nice & affordable accommodation and all employers want happy workers. But why, even after following their jobs to the edges of cities, do manual workers still struggle to avoid poverty?

I'm also uneasy about assuming that removing environmental protections and consultation opportunities from the RMA will reduce housing costs. Even if it does lead to more housing being built, market forces are likely to allow them to be sold at current prices. Unless there is a very big surge in construction, we are not going to see significant house price reductions.

So the best we can hope for with housing policy is that it might stop making child poverty a lot worse. That's not nothing. Major changes to the RMA might, if we're lucky, help stop or reduce future growth in child poverty, but it will not address the problem we currently have.

A tale of two lemons

At first glance, you might think these were not both lemons: one definitely looks more like an orange. Having them both in the fruit bowl reminded me of a wee story about the importance of feeding plants.

A couple of years ago, we went to a biological farming course run by Arden Anderson. Among the many gems was the idea that all plants have the ability to produce oils/waxes, and that we can get them to do this by careful feeding.

It sounded slightly OTT to be honest. We tend to think of oil-producing plants as being special things, like avocados, sunflowers and jatropha. So the idea that you might get oils or waxes from just any old plant sounded a bit weird.

Then we remembered our back yard. We were living in Auckland at the time and had a big lemon tree which produced quite well but had recently started to really excel itself. Lynne had taken to dosing it with worm castings from the compost and the lemons had changed very noticeably. After slicing in half and squeezing your hand was covered in an oily wax.

If a lemon can be supercharged like this, perhaps Arden is right. Maybe we can also do it with other plants, including the pasture on which NZ's agriculture depends. I doubt that the industry standard fertiliser practices will get us there though.