Preferences for avoiding death

Slate blogger Matthew Yglesias has been getting flak for his post that appeared quickly after news of the factory collapse in Bangladesh. In it, he explained that economics was all about diff’rent strokes for diff’rent folks:

Bangladesh may or may not need tougher workplace safety rules, but it’s entirely appropriate for Bangladesh to have different—and, indeed, lower—workplace safety standards than the United States.

Reactions in Western corners of the internet have been fierce and occasionally funny:

Corey Robinson questions whether Yglesias is right about the collective preferences of Bangladeshis:

‘Hundreds of thousands of garment workers walked out of their factories in Bangladesh Thursday, police said, to protest the deaths of 200 people in a building collapse, in the latest tragedy to hit the sector.’

Would it not be easier for Matt Yglesias to dissolve the Bangladeshi people and elect another?

Justin Zachary at Daily Kos points out that the factory was in fact in violation of local safety laws:

What happened in Bangladesh was the result of the safety standards that are currently in place not being enforced. As Kalpona Akter, executive director of the Bangladesh Center for Worker Solidarity, told Democracy Now!, Bangladesh “already has some rules and regulations for safety,” with which some politically powerful owners are not complying.

Maha Rafi Atal at the (UK) Guardian tries to walk a middle ground of increased safety but continued employment for Bangladeshi workers:

that should be about making a distinction between wages, which do not have to be the same everywhere, and workers’ rights, which should.

It may look on the surface like Yglesias is being all ‘realist’ and ‘sensible’, but in fact he gets the economics wrong. He forgets three things:

• preferences are only half the story. The other half is the choice space in which preference can be expressed. It is the combination of preferences and available options that lead to the choices made. Ascribing the choices to preferences alone gets the theory wrong; one can just as legitimately point to the limited options
• the market theory that Yglesias uses to underpin his ideas — that there are market transactions deciding the prices of garments and safety — assumes freely available and perfect information. A large economic literature then explores the impact of relaxing that assumption. But that’s the post-grad course, and Yglesias is stuck in 101. Here’s the thing: we could make it perfectly obvious to Western consumers how their garments were made, what the working conditions were. Then we could talk about a market solution. Let me put it another way: is Burger King going to launch a horse-burger because people were buying them before they found out what was in them?
• supply and demand do not exist outside the institutions that help shape the economy. An analysis that doesn’t account for politicians who can override police edicts and flout safety regulations is incomplete. We should recognise that, for example, agreements and regulations help set the conditions in which the market is operating. So, there are trade agreements around clothing that promote its production in poor countries, but much less international recognition of professional qualifications for doctors, lawyers, accountants, etc. (On that front, economics is like the Wild West — anyone can hang out a shingle.) It is at best disingenuous to throw your hands up and say

in a free society it’s good that different people are able to make different choices on the risk–reward spectrum.

In a free society, it’s also good that people can express different opinions. Even when they haven’t got a clue what they’re talking about.

Kiwisaver account fees

I complained a while back that the information from my Kiwisaver provider was opaque. The results — whether the annual report or my personal statement — didn’t actually tell me the critical number: what was my return? If I want to compare Kiwisaver with, say, a five-year bond ladder, I need to know what the percentage return on my money was. That information would allow me to make decisions at the margin about whether to put more money in Kiwisaver or in some other investment.

My provider, when asked, did provide a *.pdf of all the transactions in my account. All I needed to do is get the data into a spreadsheet (really?! a pdf?) and then do some analysis. At the time, I had other things to do, and then the data got old, and, and. So I never did it.

The latest annual report (2012) had some interesting figures that give an indication. In a table on page 9, we learn that total income of the scheme was $16m, on assets of somewhere between $150m (starting balance) and $191m (ending balance). That’s an average return of about 9.5%.

The management and administration fees, however, don’t appear on that page. They appear on page 4, not in a table but in the text. Total fees were $1.6m. That is, roughly 10% of account earnings went to paying the fees of the scheme.

On the one hand, this is a problem. Making a good return on investments is hard. I looked at the research 10 to 15 years ago, and I don’t imagine much has changed. Most schemes perform worse than the benchmark indices. Schemes that do well in one or two years revert to the mean. The critical thing is to control the things you can control, and one of the top things is account fees. If 10% of earnings are going to pay the managers (and more in bad years), that’s a big lump of money that isn’t staying in your account, compounding the years away.

On the other hand, I have some sympathy for the Kiwisaver schemes. Revenue of $1.6m actually won’t buy you all that much management. There are thousands of members and thousands of transactions to administer, and then there is all the work trying to manage the investments. Scale and systems are required, and I’m not sure we have achieved that.

In the end, what makes Kiwisaver work for investors is the government contribution. It represents in part a transfer to the investments firms, sure, but at least I get a piece of it. Without it, I would probably be better off paying down our mortgage. Not that I can tell for certain, since they won’t tell me what my return really is.

Manufacturing the market we want

A lot of economic theory is about markets. We then add government in as something that moves the market away from equilibrium. Subsidies, taxes, quotas, regulations, etc. — these are all ways in which government moves the market away from our assumption of what have happened otherwise. We never observe the counterfactual. We end up working backward from what we observe to what we think might have been.

And then we get situations like the affair with Rio Tinto/Meridian/Mighty River. The basic story is:

• the Government is trying to sell part of Mighty River as the first of its State Owned Enterprises sell-offs
• the sagging market for aluminium and high New Zealand dollar has led Rio Tinto to put pressure on Meridian to sweeten the deal around electricity prices
• Meridian doesn’t want to give the shop away, and is resisting Rio Tinto’s negotiating tactics
• the Government is concerned that lack of a deal will drop electricity prices, which would affect the market value of Mighty River shares.

I think I’ve got the story right, although I might not, so please feel free to set me straight in the comments.

The core problem for an economic analysis is that there isn’t really a market operating. The Government intervenes on the supply side of the electricity market through the SOEs. The Rio Tinto smelter as well as all the country’s households and other businesses make up the demand side. Now, the Government wants to step into the demand side to prop up demand from the smelter, rather than letting the two companies negotiate an agreement.

The intervention will be artificially inflating electricity demand above the level expected, given world prices and the exchange rate. This extra demand will boost consumer prices (and will cause more use of coal- and gas-fired plants, leading to more GHG emissions). That is, consumers will be paying a hidden transfer to Rio Tinto via power prices.

On the other hand, inflated demand will allow the Government to receive higher prices for the Mighty River share float, and then also for the planned Meridian float. That’s good for taxpayers and the public finances, but it’s bad for investors (and electricity consumers). Of course, an individual might be a taxpayer, investor and consumer all at once — are they better off?

The other worrying thing is that the Government intervention looks very much like ‘channel stuffing’. This is a business practice of artificially (and temporarily) increasing the sales figures in order to make the business look better than it really is. In this case (follow the bouncing ball), the Government would borrow money to raise Meridian’s sales figures to inflate the value of Mighty River to raise the value of the share float to pay off the borrowing.

This doesn’t require a market analysis; it needs a Rube Goldberg diagram.

Dear Mr Staples:

I have been following with interest the recent news regarding an email you received. Yesterday, I received my own email from EQC — delivered to the correct address — to the effect that you were demanding full payment from EQC in return for building services rendered. In return, you have pledged not to pursue your interest in a certain spreadsheet any further.

It occurred to me that you might have access to information that I would find valuable and useful. I have had several assessors come through my house, making comments and jotting down notes. However, no one has given me a complete record of the work to be done and the estimated costs. Now that I have opted out of the Fletcher programme — due to their complete inflexibility — I am being asked to buy a ‘pig in a poke’: an unspecified repair job to an unknown value. It would be very nice to know something about said pig.

It also occurred to me that you are having trouble with the authorities. EQC has now laid a police complaint. The situation described in the email that I received from EQC did sound a bit like blackmail: ‘Do as I say and I won’t show anyone this little spreadsheet.’ (Wasn’t that the plot of a Tom Cruise film?) But then, certain allegations made about you earlier in the week sounded a lot like libel, so I fear my understanding of legal nuances is not equal to the situation.

I would suggest that we may have what economists call a double coincidence of wants. I would like to propose a possible arrangement between us. If you could see fit to send me just one row of a certain spreadsheet — I can advise you the row — I would happily contribute to any legal defence fund that may be required to extract you from the current difficulties. At a pro-rata amount of $100 per household affected, your fund could be over $8 million. From my perspective, it would be money well spent.

Yours sincerely,

Asymmetric information, EQC edition

It turns out that EQC knows exactly what it’s doing. It knows exactly what damage has been done to our properties, what the engineers’ assessments are, and a whole lot more. And all the data is available in a handy spreadsheet. You and I just don’t get to see it.

Information is power. In this case, power over people’s house and lives.

Three thoughts:

• This is the problem with the public agency insurance model. Is it an insurance company? Is it a government department? It’s neither and both. They are screwing down the claims as much as they can, like a private company, but they get to set their own rules, like a government department. And us, the consumers/citizens? High and dry, baby.
• One of the clients of the man who incorrectly received the spreadsheet, Bryan Staples, was paid only $30,000 when EQC knew there was $55,000 to $59,000 of damage. How is a homeowner, a non-expert in building matters, supposed to know how much damage has been done and what it’s worth? EQC is using its expert information, rather than dealing with claimants in an honest and open manner. Last year, another state-owned insurer, ACC, had bonuses for cutting people off. That is, bureaucrats were paid to screw down claims. Is this happening in Christchurch?
• I’m not so concerned about fraud — I think Eric Crampton’s right about that. I’m more angry that EQC has produced a handy guide that only insiders get to see. An enterprising individual could go around the city with inside knowledge of houses and assessments and figure out which houses are underpriced and overpriced. Or, some variation on the ‘nice little house, shame about the earthquake damage’ could push prices down artificially.

The story isn’t about someone accidentally sending the wrong email. The story is the spreadsheet and the secrecy. And the damage being done to the people of Christchurch.

Devoy-d of self-awareness

Let’s start this by laying my cards on the table. I am racist. I apologise for that, but it’s true. It was unavoidable, growing up as I did in Virginia just a few miles from the Manassas battlefield, at a time when overt racism was socially acceptable. ‘You’ve got to be carefully taught….’

I have learned over the years to be aware of my racism, to try to see when it is operating and get in front of it. I also understand that racism is part of something larger, the privilege of being a white, able, hetero, middle-class male in societies designed by and for people just like me. I’ve done Women’s Studies courses at a liberal arts college; as a grad student, I TA’d a paper on privilege. Hey, you can write me off as indoctrinated, or PC, or a latte liberal, or a victim of liberal guilt — but I know that I have benefited from unearned privilege, and I don’t fool myself by thinking I would have made it anyway.

From that perspective — my perspective, that I am owning — the comments of Dame Susan Devoy, the new Race Relations Commissioner, are just awful. The total lack of self-awareness takes my breath away.

Let’s look at a few of the comments:

‘At the end of the day I have a really good moral compass. I don’t go to bed wondering or worrying about what others think or say about me….’

This is an odd view of a moral compass. Morality is about an ideal against which you measure yourself, and then reflection about whether your distance from the ideal is too great. Going to bed without wondering or worrying suggests absolute conviction in your own rightness. This may be fanaticism or hubris, but it isn’t morality.

As part of a regular column she … suggested Waitangi Day should be ditched as New Zealand’s national holiday.

Yesterday she described Waitangi Day as ‘extraordinarily important’ but ‘it isn’t New Zealand Day, is it?’ she said.

I’m not a native-born New Zealander, so I don’t know what my rights are in this conversation. The country’s founding bi-culturalism (British + Maori) is problematic for people from elsewhere. However, the Treaty of Waitangi is the founding document, the agreement that brought the older immigrants and newer immigrants together. The fact that the Treaty is considered as much as it is, is also part of what makes New Zealand what it is. The relationship is still contested — what are the rights and responsibilities on both sides? Demoting Waitangi Day would be an attempt to put the disputes in the background, to manufacture a unitary identity that doesn’t actually exist. It would be an act of cultural hegemony.

‘But I think in this role I have to be the voice of reason…’

This is the most disturbing comment of all, in which Devoy puts her crown on her own head. Interestingly, she positions herself as a ‘voice’, a disembodied manifestation of an abstract concept (reason), rather than an individual with physical and historical specificity. She is pure authority. Logically, all who do not agree with her are ‘unreasonable’. This framing puts those others in the position of children or hysterics, as less-than-full-people to be managed by authority. Devoy tells us here that her decisions will be made from a position of privilege.

Hmm, sounds familiar…

Shocked, shocked! that there is fraud here

So the Right Honourable Winston Peters is alleging widespread fraud in Christchurch, and challenged the Rt Hon Gerry Brownlee to come clean about what he knows. The Serious Fraud Office has already said that they stymied fraudsters last year, saving the country millions of dollars (tens of? hundreds of?).

Fraud was always going to happen. It happens at the best of times — employees walking off with money, false invoices, work not done, etc. Recovery after an earthquake is not the best of times, so the potential was higher than baseline.

And, of course, there’s all that money. As Willie Sutton may or may not have pointed out, you rob banks because ‘that’s where the money is’. Same principle applies to Christchurch.

There are essentially two ways to combat aberrant behaviour: social pressure and good contracts. A high level of trust and goodwill — social capital, if you will, although I know it’s a contested term — and people will tend to behave as they should. Not everyone, not all the time, but it’ll get you most of the way there.

Good contracts can substitute. Well-defined goods and services, clear provisions for variations or re-negotiation, good measurement and monitoring processes, and you’re away.

But here’s the thing: earthquake recovery is exactly the sort of situation in which good contracts are hard to write. As we’ve found out, it isn’t as simple as ‘return the house to its pre-quake condition’. Which cracks do you fix? What’s the tolerance for a sloping floor or a wall out of plumb? What quality of finish and materials is specified? The permutations are endless.

What to do? Well, you can try to make better contracts. That takes time for negotiation, which is time you aren’t spending on the rebuild. You can have looser contracts but stricter monitoring and enforcement. This could work if you can specify what the results should be — which could be easier than being precise about a process. Or you could try to rely on social capital, but that capital is going to be diluted by all the new people coming in to help the rebuild. Any time and effort you spend on fraud controls, though, take away from the actual rebuild.

All of that means that the control processes won’t be perfect. There will be fraud. Get used to it.

But…the cost of dealing with fraud can be shared out in different ways. There are different costs: money, time, effort, anxiety. The EQC and Cera have, as bureaucracies do, privileged process over people. They have focused on screwing down the process to make fraud difficult, but that makes it harder for honest people, too. To save money, they have increased the cost in time and anxiety for Christchurch people.

Think of it another way: type I and type II errors. The rebuild is focused on type I, false positives. They want to make sure that all rebuild work is exactly as it should be, to reduce the incidence of paying for stuff that didn’t happen. But the two types of errors are inversely related. When you focus on the type I, you increase the incidence of type II, false negatives. You increase the amount of time chasing down fraud that isn’t there.

Oh, and incidentally, you burn through what social capital you have. As a result, you increase your need for strict processes and contracts. It’s a vicious spiral.

Of course there’s fraud in Christchurch. But the solution isn’t to treat everyone like a crook. That’s just imposing more costs on the people of Christchurch to avoid a little embarrassment in Parliament.

Let’s get the taxes right

The ‘fury’ at the suggestion of applying fringe benefit taxes (FBT) to carparks is utterly misplaced. The only proof I need of this is that ‘Unionists and business groups have joined forces in a rare alliance to lash out at the new tax’. What better indication that this new tax is being applied even-handedly?

It’s about time, too. I have to pay, every day, to park my car in a commercial parking lot. Part of my salary — my compensation for the time I’m in the office — goes to paying for that carpark. People who don’t have to pay for their carparks are getting tax-free benefits, and that’s not cricket.

I can only hope that the Government doesn’t lose the courage of its convictions. This effort should be extended to all the little perks and compensations given people in lieu of money.

Take those cellphones and laptop computers that employees get for free. Sure, during the week they might need a cellphone to keep in touch with the office or with clients. But after hours? That cellphone is still in use, receiving texts about completely personal dinner parties, making calls about entirely private gossip. And the laptops? They are getting into Facespace and Youtelly not just during office hours but also on the weekends.

The technology is there to shut down this rort of the tax system. All that’s needed is an app to disable devices outside of business hours. Then, those electronic toys would be completely tax-compliant. If the international IT cabal won’t do it, the Government needs to step in and take its rightful share.

The Government can’t stop there, either. From my office, I can see any number of buildings with stunning views of the Wellington harbour. The sun sparkling on the early-morning ripples, the picturesque hills — those views aren’t available to everyone. Some workers are clearly receiving much more of these benefits from their offices than others. It’s about time the Treasury sorted out some non-market valuation studies of the amenity value of offices and made sure that those perks are properly taxed.

In fact, it isn’t just the views and the sunshine. Some workers get more floor space, larger desks, nicer office coffee. What we really need is a ‘defined office package excess’ (DOPE) tax. The Government can set minimum standards for office workers, and any provision of amenities in excess of that minimum gets taxed. Once the process is in place for the Auckland and Wellington CBDs, it can be rolled out to other localities and other types of workplaces.

The most egregious evasion of taxes on benefits, though, is going to require collaborative intervention by economists and psychologists to tax properly. It is my understanding that some workers are receiving an additional benefit beyond their wages and salaries, cellphones, nice office surroundings, and the like. A tax system can be properly calibrated only if it contains a PFT — a Personal Fulfilment Tax.

Priorities — the post-mortem edition

Having studied Latin America, I know that its politics and economics are complicated. Having grown up in the US and paid attention to its history and politics, I also know that its relationship to Latin America is complex and far from altruistic.

Hugo Chavez has died, so the post-mortem analyses of his administration are rolling in. I don’t know enough to have a firm opinion on Chavez, but I do know enough to be very wary of anything the Anglo media says. Put simply, they are unlikely to have the interests of Venezuelans at heart. (If you don’t believe me, look up ‘Salvador Allende’.)

And so, a post from the left-wing US media watchdog group FAIR (h/t Yann) was a welcome reminder of the different sets of priorities and how they colour our views of the world:

That’s right: Chavez squandered his nation’s oil money on healthcare, education and nutrition when he could have been building the world’s tallest building or his own branch of the Louvre. What kind of monster has priorities like that?

Once again, it’s all about the objective function.

Mau-mauing the EQC flak-catchers

In ‘Mau-mauing the flak-catchers’, Tom Wolfe describes how young urban entrepreneurs in San Francisco could get money out of the bureaucracy by mau-mauing — going down to City Hall and being so wild, so ghetto, that they would fund whatever youth group or outreach programme was being proposed as the solution.

Institutions evolve, however, and the bureaucracy developed a new appendage — the flak-catcher. This was the guy who would front for the bureaucracy, but not really:

‘Now I’m here to try to answer any questions I can,’ he says, ‘but you have to understand that I’m only speaking as an individual, and so naturally none of my comments are binding, but I’ll answer any questions I can, and if I can’t answer them, I’ll do what I can to get the answers for you.’
And then it dawns on you, and you wonder why it took so long for you to realize it. This man is the flak catcher. His job is to catch the flak for the No. 1 man.

The bars on the windows and razor wire that EQC has put on display is just the latest evolution. Sure, yeah, a few people have gone off at the flunkies behind the desk, and the police have spoken to a few people. But this is New Zealand, man. Chick pulls a knife on a plane and stabs the pilot, and still the local gate at the airport has less security than The Warehouse.

But EQC wants you to know that they are under siege. That’s the reason for the display.

Two things, though.

One — always, always, it is important to remember that EQC has not fulfilled the insurance policy that we all paid for. We paid money for many years in order to have full restitution within a year in the case of an earthquake. Two years after February, two and a half years after September, and still the earthquakes are costing the citizens and property owners of Christchurch. EQC did not sort things out and did not make people whole and never will.

Two — the spokesperson for EQC said something about not taking frustrations out on individuals, but on the organisation. This was the bureaucratic version of ‘don’t hate the playa, hate the game’. It is the fundamental tension in the modern age — individual versus collective. Who is responsible for the behaviour of the the bureaucrat? Is it the organisation, the agency called EQC who sets the rule and create the guidelines and makes the decisions? Or is it the person, the actual individual who applies the rules, guidelines, and decisions? And how, exactly, is a homeowner with shoddy workmanship or a property owner contesting the land classification supposed to challenge the organisation without making actual people uncomfortable?

EQC is hiding behind its front-line staff, who are flak-catching for the failures of the organisation. But this is an evolutionary game. EQC has just adapted — and these are serious adaptations by local standards. Next, watch as the mau-mauing turns pro.