Tuesday, 7 July 2015

GST as non-tariff barrier?

Shoppers are sceptical that taxing low-value imports is a hot idea.

The NBR reports on a new Horizon poll. In this first set, respondents pick all answers they think should apply.

I'd have gone with the plurality response here (plurality rather than majority as respondents can choose more than one answer, and sum of answers is around 120%).

In the absence of a mechanism that would cheaply and efficiently apply GST at the border, we should likely stick with the status quo. If we can set up a system that works through the shippers to apply GST to imported goods at minimum cost to importing consumers, that could make sense - subject to feasibility and cost-benefit assessment.

I'm a bit curious about why second-hand items from abroad should be exempt from GST. The usual argument for second-hand goods' exemption is that tax was paid on them when they were new, but that wouldn't apply to imported used goods.

Respondents were then asked which policies they'd prefer if the tax difference resulted in closed shops or job losses, support for the status quo dropped:

The point of applying GST at the border isn't to protect domestic jobs, it's to avoid creating a distortion in favour of direct-to-consumer imports and to avoid erosion of the tax base. 

On the first count, if collecting GST at the border introduces hassle costs for consumers equivalent to or greater than the 15% GST, then it's a distortionary non-tariff barrier; this isn't hard for low-value goods. 

The second one is harder. Suppose that NZ retail is hopelessly inefficient and that everybody shifts to purchasing online from overseas for anything other than groceries because they can save 30-50% pretty easily. The effects on the tax base could be pretty substantial. You then have to weigh the distortions caused by GST on low-value imports against the deadweight costs of other forms of domestic taxation, and I have no strong priors which way that would come out. But the relevant consideration is deadweight cost of a lower GST threshold against the deadweight cost of higher income taxes; we might also worry about the effects of reduced competition in the tradeables sector.

Retail NZ's Greg Hartford didn't seem to like the respondents' urging that retail become more competitive:
“Retailers are working really hard to make sure they can deliver their products. The reality is that New Zealand is a small market and retailers are very small compared to international companies. We just don’t have the scale to be able to negotiate discounts the way Amazon can, for example,” he says.
If that's true, and if consumers can more effectively buy directly from overseas, then domestic retail should shrink.

It's worth keeping an eye on GST proposals that come up. There are some that might not be terrible; others would impose unnecessarily high costs on consumers.

Get your NBR subscription and read the whole thing. Total online retail sales are now three times what they were in 2010, and the international component has risen from about 35% to about 45%. It would be surprising if there weren't more solid proposals coming out around GST on low-value imports in the next few years.

Monday, 6 July 2015

Land giveaways?

If you counted up how much money NZ Lotto gives out to lottery winners and compared it to the amount those gamblers paid for their tickets, you'd conclude that Lotto were an unsustainable rort on the public. The government's practically giving away highly valuable assets, given the low low prices charged.

I attended Ann Brower's talk at this year's NZAE meetings on high country tenure review. The sessions are normally Chatham House rules, but I note that Chris Hutching reported on her paper in this week's NBR.

Ann and her coauthor show that high country estates that were sold to their lessees, and were then on-sold, increased a lot in value in the interim. Hutching cites Brower as reporting that 371,000 hectares were sold into freehold, with 73,685 hectares then on-sold. Some sections were on-sold for several hundred times' their initial valuation - and that that is especially true for sections overlooking lakes that became developments.

Now the problem here is twofold. First, you'll always run into trouble caused by selection bias in this kind of study. The sections where the leaseholder struck a fabulous bargain get on-sold with their values then included in the study; the sections where the Crown did far better are less likely to turnover in the short to medium term, so their lower prices don't get recorded.

But more importantly, in my view, is that the Crown was kinda selling lottery tickets. If you get freehold tenure over a section with lake views, you'll make a killing on it if you can get resource consent to develop it. But if somebody decides that those killer lake views make it an outstanding national landscape, well, you have a very beautiful section that maybe can't be used for anything.

And that's why I'm a bit worried about counting up the value of the winning lotto tickets.

It's perfectly plausible that the Crown messed up in its negotiations and charged below-market rates in some cases. It's also perfectly plausible that the Crown should be selling some of those leaseholds at below-market rates to reflect the sweat-equity contributed by the leaseholders over generations - though that's more debatable. But I doubt we can draw generalised conclusions about the process from the 20% of the land that was turned over shortly after tenure review. The other 80% might be relevant too.

Tuesday, 30 June 2015

The Planning Imperative

Urban designer Garth Falconer identifies a lot of the problems in post-quake Christchurch. But he misses, I think, the bigger point.

First, the good stuff. Falconer rightly notes that downtown Christchurch remains similar to a bomb-site. We were there during some actual bombing a few weeks ago, when they blew up the former police station. He rightly worries whether there could be enough business demand for downtown high-end offices with everyone having moved out to the burbs. And he's very right that CERA has failed.

But he's wrong on one small issue and one big one.

On the small side, he says that residential housing in Christchurch is limited to the East by the sea. This is true, but only in the trivial sense. There is plenty of land available for housing in the east, but the infrastructure is a disaster.

Until August of last year, we lived firmly in the East - in South New Brighton. Imagine an arm where you've put on a tourniquet tight enough that it'll go gangrenous and die, but it can still move around a bit for now. The fingers don't quite know the whole score but they know they don't like what's going on. That's the east side of Christchurch. The gangrene has set in. It's not all like that, but enough of it is that the area as a whole feels pretty doomed.

The city's economic centre of gravity has shifted substantially westward, and lengthier commutes along wrecked and depressing streets appeal to few. Every time Council prioritises downtown cycleways over fixing east side bridges, they tighten that tourniquet just a little bit more. It's pretty easy to then get into self-reinforcing downward spirals: economically active people move out West to where the jobs are, and those who are left make it harder to attract either economically active people or new businesses to the area. Maybe there's still a chance to anchor something good around the Brighton Mall, but it's grim. Our house, fresh from a really rather good opt-out earthquake repair, still took months to sell and finally sold for a bit under rateable value - in the midst of a Christchurch housing crisis. Plenty of demand on the east side for lower tier housing, but not so much for places a few notches up the scale.

But that's the minor point.

Bigger picture, Falconer blames poor design - that Council and central government didn't have the right plan. He recommends (as one option) five-level residential buildings with downstairs retail. But that sort of thing was already in one of the many downtown plans - I think it had a seven-story limit. The problem rather was that for want of the perfect plan, Council, CERA and the CCDU held everything up downtown until everybody realised they needed to move the heck out of the zone of central control. They made the best the enemy of the good enough, and Falconer reckons the problem was that the plan just wasn't best-enough. Further, he complains about how the retail development is going to be too expensive for most businesses without noting that this is a direct result of the planners' efforts: they deliberately sought to restrict downtown land availability to push up prices and set design requirements to prevent lower-rent developments.

The lesson of Christchurch isn't the importance of getting the plan right; it's rather that, sometimes, you do far better with a very light planning touch. Quickly announce where key facilities will be placed so that private developers can decide where to move; facilitate lots of public information about who has decided to rebuild where so that the next folks down the line can plan around it (if you're putting up a hotel, maybe I want to put a bar nearby); make it easy for developers to make contact with land owners to facilitate site accumulation for larger projects; and, commit to what infrastructure's going to be provided really early on so that you don't have nonsense like tearing down newly rebuilt buildings because government's just decided to make Manchester Street 9 meters wider. And for the love of all that's holy light a fire under your consenting office that approvals be granted quickly and there be no regime uncertainty.

The problem wasn't that they chose the wrong plan for Sim City; it's rather that the planners figured they were playing Sim City.

Monday, 29 June 2015

Housing supply curves don't have to be vertical

I like Bernard Hickey's concluding paragraph in this weekend's column. After explaining how changes in Chinese controls on outbound overseas investment could spark greater interest in Auckland property, he writes:
A look across the Tasman suggests the flood of money coming from China could be put to good use if it is funnelled into new housing developments, in particular apartments off the plan. Australian developer Lend Lease sold 581 apartments off the plan for its latest Darling Harbour project in five hours on one weekend last month, including more than a third to overseas buyers. It sold A$600 million of property at a rate of A$2 million a minute.
If Auckland and the Government could only convince Aucklanders to allow the building of more overseas-funded apartments near the CBD then it might have a smidgen of a hope of filling that shortage of 60,000 homes. They would cost NZ$30 billion to build so that NZ$16 billion of overseas investment could come in very handy indeed, if it was directed into new homes rather than existing homes. 
The problem isn't a lack of capital - there's plenty around. Or a lack of capacity to put up buildings - that's determined by longer term expectations about whether you can make a go of starting up a construction company, expanding an existing one, or getting into trades. There can be current constraints, but those are an equilibrium that could shift if we again allowed new construction.

The barrier is instead where and whether Council allows new construction to take place. And that's a function of whether Council has strong enough incentive to overrule the NIMBYs under the current RMA processes and local government financing regimes.

Every time a NIMBY cries, an angel gets stuck in an overcrowded house.

Don't you try overturning my anecdotes with data.

Few things are more depressing than a Stuff.co.nz comment thread, even on a good day. But this one was a doozy.

Michael Daly reported on the Treasury paper showing, if anything, declines in income inequality in NZ since the early 2000s and, for expenditure-based measures of inequality, a decline substantial enough to have matched the increase that came in the late 1980s. We put out a press release on the topic along with explanatory video.

The Stuff comment thread though - folks seem to think there's some grand Treasury - NZ Initiative conspiracy to juke the data. The data that Treasury's using here's showing the same basic trend that MSD showed last year, and it would be difficult for anybody who's met Brian Perry to call him a raving right-winger.

A fair few worry about wealth inequality. Well, expenditure-based measures implicitly have both wealth and income in there as the rich will draw down from savings or have better access to credit during any income downturn. Further, what data we do have suggests New Zealand ain't too bad on that front either.

Yes, things can be bad for those on low incomes. Double-plus-emphatic-yes that the housing shortage has had horrible effects on the poor. But does believing that have to commit you to believing that Treasury AND MSD are making up the data on inequality? Give your heads a shake.

Friday, 26 June 2015

Ultra Vires?

Michael Reddell, ex-RBNZ economist, has wondered whether the RBNZ's LVR rules really fit within its financial stability mandate. I had a piece in the NBR last month wondering the same thing.

Seems we're not alone.
In a briefing for Secretary to the Treasury Gabriel Makhlouf, officials said they agreed with the Reserve Bank that a pick-up on the Auckland housing market "could potentially pose a threat to financial stability" in the coming years.

"However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ's mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices."

The comments appear to suggest the Reserve Bank is being warned that it may be overstepping its role over financial stability, a claim made in recent months by Michael Reddell, a senior adviser to the bank who was made redundant earlier this year.

Reddell said the Reserve Bank's own stress tests released in late 2014 showed the major trading banks could withstand a 50 per cent house price fall in Auckland and 13 per cent unemployment without breaching capital requirements. Some could even continue to pay dividends in that scenario. Nevertheless the Reserve Bank had imposed lending restrictions requiring larger deposits on the ground that rising prices were a risk to financial stability, something Reddell claims the bank had not laid out an argument for.

"What they haven't done is make a compelling case that there's a threat to financial stability of the New Zealand financial system," Reddell said.
Reddell hit the topic again at last night's LEANZ meeting. He blogs on it here - his full talk is worth reading. Jenny Ruth at The NBR (gated) has more.

Meanwhile, the Finance Minister reminds the Reserve Bank that they're meant to keep inflation between 1 and 3 percent; they've been running a bit low.
Mr English’s criticism of Reserve Bank governor Graeme Wheeler’s conduct of monetary policy is a major departure from the government’s customary respect for the central bank’s independence.
“He’s been out of the zone for years now, below the midpoint for quite some time,” Mr English told the Bloomberg news service late last week.
“He’s meant to be following the Policy Targets Agreement,” Mr English said.
The PTA, an agreement between the finance minister and the central bank’s governor, requires the governor to keep inflation between 1% and 3% and to aim for 2% over the medium term.
“That’s the bit I look at and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not,” Mr English said.
That's pretty blunt.

Central Bank independence means independence to choose the appropriate methods, among those they're legislatively empowered to use, to achieve the inflation outcomes they're contracted to produce and to maintain financial stability.

It does not hurt central bank independence to remind them that there are targets they have to achieve. I don't like it when Finance Ministers and Prime Ministers speculate about the appropriate path for interest rates. But they have to hold the Governor to the targets. I think that failed in 2005/6 when Cullen let Bollard run too hot for too long. But I am a bit surprised that English's comments came after Wheeler started cutting interest rates, rather than a few months ago.

Thursday, 25 June 2015

Matching markets in everything: Sugar-daddy edition

Oh, but how the internet reduces transactions costs and facilitates trade.

Today's edition: what happens when somebody needs income support through university and is willing to supply friendly companionship, and somebody else seeks the opposite? From this week's Economist:
Students who post profiles on SeekingArrangement.com know what they want, so “it’s almost like a business partnership”, says Angela Bermudo, a spokesman for the company. The site hosts some 900,000 profiles of sugar babies enrolled in American universities, up from 458,000 two years ago. Their ranks swelled during the recession and are still growing fast, says Brandon Wade, the site’s founder. A year ago nearly 1,200 students with an e-mail account belonging to an American university posted a profile on the site every day; the daily average has risen to about 2,000. The site has even stopped advertising online. Its ads used to pop up with search results for terms such as “student loan”.
The boom is fuelled by increased acceptance of “sugaring” (dating for money), says Steven Pasternack, the owner of a Miami firm known as Sugardaddie. The company’s site gets more than 5,000 new profile uploads worldwide every day. A quarter are students. Astute marketing helps. Sugardaddie’s pitch notes that it does not “discriminate against people’s desires”. Sugar babies are increasingly advised to negotiate not an “allowance”, but rather a certain “lifestyle” in exchange for dates. These arrangements can remain discreet. New Yorker Keith and the younger woman he met online, seeking a sugar daddy to pay for college, both tell friends that they met in a bar. His weekly $500 deposits into her bank account will cease, he says, if she becomes unavailable.
The article says young men are generally out of luck, as few older women are in the market seeking such arrangements.