02/05/2013 § Leave a comment
The Ministry of Business, Innovation & Employment released a new report a couple of days ago — the Regional Economic Activity Report. Let me recommend it — it’s a useful, easy-to-read summary of, well, of economic activity in the regions. A lot of the information can be found elsewhere if you know where to look, but this puts it all into one tidy, 82-page package. People are interested in how their cities and regions are doing — I often get questions about local economies — so I expect this will be a good resource.
Canterbury gets a couple of extra pages for the earthquake impacts. Very sobering to see tourism and education series just plummet.
Here’s one graph I felt like sharing. It appealed to me, thinking about the New Zealand economy like a Fibonacci sequence:
28/03/2013 § 1 Comment
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.
26/03/2013 § 5 Comments
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.
- 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.
21/03/2013 § Leave a comment
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.
04/03/2013 § 4 Comments
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.
28/01/2013 § 2 Comments
Blogging is often just mouthing off in public. Informed, well constructed mouthing off, to be sure. Which means that the accuracy is about that of all forms of mouthing off — hit or miss.
So it is with pleasure that I report that the Government finally agrees with me.
Two years ago, I explained that Government policy was divided in two. Austerity for most of the country, and a generous, insurance-funded rebuild for Christchurch. The two parts fitted together. Although the economy wasn’t strong, the Government could back its zero budgets because of this other pot of money.
It was like a trust-fund kid, ‘living off’ the meagre wages from an internship, except that the car and apartment were provided by the family.
It wasn’t a bad plan, really. The financial position of the Government was strongly dependent on how the rest of the world reacted, which suggested a cautious approach.
However, it relied on getting the rebuild going. By forming Cera and making Brownlee the Minister for Saving Christchurch, the Government set the rebuild to one side, as something running in parallel to all the other functions. This approach masked the importance of the rebuild spending for the rest of the economy. The two parts of the economic plan — austerity plus rebuild — had to run in tandem.
But as I pointed out, it wasn’t working. Each quarter, the numbers suggest that Christchurch is providing a small boost, but nothing like what was needed. We had austerity without the trust fund. We discovered that living within our means in a worldwide recession isn’t that much fun after all.
Friday, the Government announced a few measures. The 10,000 to 14,000 apprentices is clever — injecting money into the economy while addressing jobs and the rebuild all at once. But the main thing was Key’s comment that they were knocking it off with the zero budget thing. That was the signal that the Government is looking beyond austerity and thinking about what it might really take to build a strong economy.
And that’s a good thing. Nice to see them coming around to my way of thinking.
22/01/2013 § Leave a comment
Don Brash gave the nation his ideas for improving the Christchurch rebuild. I’m not entirely clear why he has received any news coverage. Brash, you will recall, was pushed out of the leadership of not one but two political parties. The last election — they got 1% — suggests he may not have much of a following.
Brash’s idea is that the government should take a relaxed approach to labour laws for the rebuild:
The Government should turn a blind eye to illegal migrants working in Christchurch’s rebuild because the city needs all hands on deck, former high-profile politician Don Brash says.
Generally, I’m not too worried about ‘illegal migrants’. I’ve worked in California. Undocumented workers get vilified there, but they are absolutely vital to the economy. We need these workers but can’t admit it.
But that doesn’t make Brash’s comments sensible. Of all the problems Christchurch has, enough labour isn’t the main one. In economics speak, construction labour is not the binding constraint preventing a faster rebuild. Brash is looking to solve the wrong problem. Promoting illegal migrant workers wouldn’t speed things up.
I’ve just been down in the South Island and met up with friends from Christchurch, including business owners. They shared lots of horror stories. If I had to pick two things to sort out, it would be housing and insurance payments.
Lack of housing — The supply of housing is tight for all the residents plus all the temporary rebuild workers. Adding more migrants would, of course, only make the situation worse.
This lack shows up a few ways. First, potential workers are staying away. The Otago Daily Times reported that Dunedin workers are choosing not to shift to Christchurch, for example. The cost of living — especially rent — is too expensive.
Secondly, the city actually needs a surplus of housing where people can live while their own houses are being fixed. It isn’t a lot — an extra 5% or so of housing stock would do it — but that’s some 8,000 houses or flats that need building. Some interesting background is in this Market Economics report. Offsetting Behaviour has been tracking some of the housing problems and potential fixes — here is a sample.
Insurance woes — I don’t know the ins and outs of what the insurance companies and EQC are dealing with, but it’s pretty clear that (a) they are being difficult, (b) they are trying to hold onto their money as long as they can, and (c) more money flowing more easily into Christchurch would help the rebuild.
Here are some of the stories I heard over the summer holiday. Insurers have paid out money and then demanded it back. Assessors have visited properties over and over again without coming to a decision about whether to repair or rebuild. People have been told to vacate their properties, and then left in rental accommodation for over a year. The insurance money runs out, and they are left out of pocket.
The point of this sort of insurance is that when an asset is damaged, you swap one bit of wealth (the damaged asset) for another (the insurance payout). Instead, people are relying on income to pay for the damage, which puts a crimp in the Christchurch economy. Plus, the associated uncertainty leads people to save rather than spend or invest. That’s not a good way to get the economy moving.
The number of construction workers isn’t the problem. There is nowhere to house them and no money to pay them with. But maybe Dr Brash already knows that, and that’s why he suggests using undocumented workers for the task.
13/12/2012 § 1 Comment
The Insurance Council of New Zealand (ICNZ) issued a press release that the Dominion Post turned into a piece on the op-ed page (but hasn’t loaded on the website, to my knowledge). The main message is that complaints about insurance companies in Christchurch aren’t accurate.
I’m not sure the ICNZ arguments actually stack up.
Let me start with the one that really got up my nose. The piece seems to be crying poverty — poor insurance companies having to pay out all that money:
Insurers will pay for most of the rebuild of … $20 billion, a sum far exceeding premiums paid over several decades.
Welcome to the insurance business — that’s exactly what you would expect. The earthquakes and their damage were rare events. The damage should represent decades of premiums. That’s the way insurance works.
The main argument offered against apparent delays by the companies is that there is no commercial reason to delay paying out. These are liabilities on the companies’ books, so it doesn’t help their balance sheets to retain them. The press release also says that the inflation in costs would outweigh the earnings from retaining the money. I’m not convinced. Delaying payments might not stack up from a balance sheet perspective, but businesses live and die by their cashflow. Spreading the payments over several years certainly helps that. As for cost inflation, it has been contained in Christchurch. The rebuild is happening slowly, and Fletcher and EQC are using their market power to keep costs low. In fact, slowing the insurance payouts actually reduces cost inflation by spreading out the rebuild work (technically, inflation is an endogenous variable in this system).
The piece also points out that the EQC co-insurance model was not designed for multiple events. The resulting administrative burden has complicated making payouts. The chutzpah of ICNZ on this one is astounding. One interpretation of the earthquakes is that there was one earthquake that set off thousands of aftershocks. Instead, EQC decided that several of the earthquakes would be ‘new events’. By re-setting the $100,000 limit with each ‘new event’, this interpretation saved the insurance companies money. I’m surprised they are complaining about it.
The fact that it has taken so long to settle some claims also comes up. We are told that it just wasn’t possible to settle claims within the first two years. Look, the EQC is required by the Act to pay out within one year (see this letter from Treasury (pdf), for example). They haven’t done that. Now, I can understand why — it’s a big job. The fact remains that Christchurch paid premiums based on legal requirements that were later waived. They paid for something they didn’t get.
The press release/article contains some good information. For example, it points out that 20,000 properties have more than $100,000 in damage, but New Zealand built only 10,000 houses in the past year. That gives a sense of the scale of the work.
However, if the insurance industry is trying to convince the public that they are the good guys, these arguments fall flat.
18/09/2012 § 6 Comments
Yesterday’s post on Hobbes and Locke started me thinking about a psychoanalytic mapping of the same concepts. In particular, the Christchurch rebuild is a physical manifestation of governing will. In ordinary times, social and institutional inertia put a check on the will of government to impose its vision on a city. Christchurch is not in ordinary times, so the checks aren’t there.
The new decision about Christchurch schools reveals just how much the Id is in charge. A conservative government is supposed to be guided by a few key principles, and these should form its Superego. Some of these principles are local control, smaller government, personal responsibility, and rewarding individual effort. The decision to merge a large number of schools, to develop large-scale campuses, and to push through changes over local opposition, are all contrary to such principles. The disconnect between the expectation and the practice is obvious in this quote:
Principals are also upset they still have no idea about the rationale behind the proposals to close, merge and relocate their schools.
But there is no rationale behind the proposal, because the Id is in charge. We expect the Superego to be strong with this one, but instead the government is trying to take the place of the Superego. All of this was signalled even before the earthquakes, with the take-over of ECan. That move — regardless of whatever fig-leaf of legality was artfully arranged — was completely contrary to what should have been conservative principles.
What we see, instead, is that whatever the Ministers in charge decide to do is A Good Thing because they decided to do it. That kind of behaviour — disordered, impulsive, unreflective — is characteristic of the Id.
It is also the world of Hobbes, in which I do what I want because I want. The control is from outside: a stronger Id places a limit on mine, and our Egos sort out some rational balance of power. The Lockean world has more of the Superego: we internalise the relationships and order of our society, and they limit our impulses.
All of which makes Christchurch vaguely post-apocalyptic. Instead of relying on the Superego to see the city through, the government has established a rule of the Id. Hobbes and Mad Max are united by the Avon.
21/08/2012 § 3 Comments
Someone mentioned to me yesterday that macroeconomic policy has relied on the promise of the Christchurch rebuild for nearly two years. My colleague Shamubeel Eaqub, ever the realist, called it the ‘one crutch’ recovery, and suggests that it will be slow. I suggested a while back that it was crucial to the overall economy. Since we counted on the rebuild and it has been slow, New Zealand has flatlined.
Now that we have a better picture of what the recovery will entail — 10 years, maybe more, of on-going work — the $20 billion or so rebuilding cost doesn’t seem as much of an economic stimulus. Given the national economy of around $200 billion per year, it’s only about a 1% increase.
Of course, that’s only if and when it gets spent. That’s where the micro picture is important. The $20 billion is going to be spent by people in houses and businesses arranging for the work to get done. If they can’t or won’t make the decisions, the money will just sit there. Eaqub has talked about businesses holding off on capital investments, waiting for signals that it is worth investing. I’m more familiar with the residential rebuild.
By coincidence, we also made arrangements yesterday to postpone the repairs on our house. Timing is everything, as they say. We couldn’t get the sign-off from EQC in time to get the builder to repair the house in time for a new tenant. So, we just cancelled the repairs for the moment. Better to get new tenants in and sort out the paperwork on someone else’s schedule.
On the other hand, that’s $80,000 to $100,000 (possibly more) that won’t get done this year. From what I hear, our situation is not unusual.
And so we wait…