Correcting the Dom Post

24/02/2014 § 1 Comment

The Dominion Post published an article on US/New Zealand tax negotiations. The US is trying to get New Zealand to have the IRD and banks release information about ‘US people’, whatever that means. The article was scare-mongering about poor Kiwis who will suddenly be targeted by big bad American tax agents. I wrote the following to the reporter, Ben Heather:
Hi Ben –

Your article, ‘American tax grab may target Kiwis‘, contained important errors, and I am writing to correct them.

– US citizens are subject to US tax on their worldwide income. This is true regardless of where they live. Thus, any actions by the US government to have those taxes paid are simply ‘enforcing the law’, not a ‘tax grab’.

– A child born abroad to a US citizen does not ‘automatically’ become a US citizen. He or she has the right to citizenship, but the parents have to apply, and the right lapses once the child reaches a certain age (18 years of age, I think). Thus, the couple in your article had to apply for citizenship for their child, which means they chose US citizenship and all the rights and obligations thereof. Those obligations include paying taxes on worldwide income.

– A green card lapses once a person has been out of the US for a certain period of time. From memory, it remains valid for 2 years, and one can apply for an extension, but only for another fixed period (2 or 3 years). One can keep a green card valid by returning to the US for some period of time, the details of which I don’t recall. All of this means that your statement, ‘Under US law, any Kiwi who has a green card, or US residency, is liable to pay tax in the US, even if they have not lived there for decades’, is false. If the person has not lived there ‘for decades’, the green card is no longer valid and the person is not subject to US tax laws.

In this situation, there are essentially four classes of people:

– People subject to US tax laws, that is, US citizens and permanent residents. They are legally obligated to pay their taxes. The US is asking for New Zealand’s help in enforcing US tax law.

– People tied up somehow with US citizens and permanent residents. These are, e.g., New Zealand spouses of US citizens. The New Zealand government is obligated to protect their privacy and not obligated to share anything about them with the US. They will need to work out what to do about things like bank accounts held by the non-citizen spouse.

– People who once held green cards (or US citizenship) and no longer do. They are no longer under any obligation to the US government, and New Zealand should ensure that their details are not sent to the US.

– People who do not fall into any of the above categories. New Zealand should ensure that their details are not shared, either.

You would be able to check the details of tax obligations and citizenship with the US embassy or consulate. Much of the information is also on official websites.

Kind regards,

We’re alright, actually

15/11/2013 § 7 Comments

There is much gnashing of teeth and rending of garments over New Zealand’s economic performance. It’s a staple of political and economic commentary. We have low per-capita incomes, we need to be in the top half of the OECD, we need to catch up to Australia, brain drain is killing the country, business owners need to focus on their businesses rather than buying motorboats, etc.

I’ve been looking recently at Legatum Prosperity Index. What it says is, we’re alright, actually:

  • 5th overall out of 142 countries
  • 1st in education
  • most efficient life satisfaction of the top ten countries (satisfaction / income).

Back to basics. The point of economic activity is utility/satisfaction/welfare. We aren’t playing with these little pieces of coloured paper to make them happy — it has already been conclusively established that they are fine. So what we really want to know is whether we are producing satisfaction.

Now, yes, GDP does correlate with a whole mess of other indicators. Money gives us the ability to pay for healthcare, to make environmental improvements, to pay for digital watches. But it doesn’t perfectly correlate, and there appear to be diminishing marginal returns to GDP gains (natch’). So if GDP doesn’t measure what we are really interested in, can we do better measurement?

That’s where the Legatum Index comes in. There are a number of these alternative indices — this just happens to be the one a colleague sent. It uses 89 variables to create 8 sub-indices, which are then combined into a single aggregate measure. The method is described in brief, and then in more detail (pdf). I’m still not sure that I could replicate it from the available information, but it’s reasonably clear what they’ve done. Instead of using one statistic — GDP — they’ve taken a whole lot of statistics measuring different things and run them through a blender. We can quibble over the weightings applied or the inclusion of this or that statistic — and sensitivity analysis would tell us how important those things are — but they are trying to get a better, more complete picture.

Is more data better? Well, it changes the story. Instead of performing poorly because of low incomes, New Zealand performs well because of the other 88 pieces of data. Our health performance suffers — a worrying 20th. Safety and security is 15th, again a bit of a concern. But overall, y’know, we’re alright. There are worse places to be. Which, of course, makes sense given the number of people here who are from elsewhere.

A composite index does something else: it allows people to make their own decisions based on their preferences. If healthcare is really, really important to you, then New Zealand probably isn’t where you should settle. If your preferences line up with Legatum’s, then life’s pretty sweet. If governance, social capital and education are your main concerns, then you really can’t do any better.

So when the next round of wailing and self-flagellation starts, take comfort that it ain’t all bad.


UPDATE: A reader pointed me to the University of Otago’s Public Health Expert blog, which (on the same day) described some of New Zealand’s successes (h/t Tony):

The good news is that according to the OECD “New Zealand performs exceptionally well in overall well-being, as shown by the fact that it ranks among the top countries in a large number of topics in the “Better Life Index” [1]. What follows are a list of some of the specifics – both good and not so good.

Judgement and cost-benefit analysis

16/09/2013 § 2 Comments

The proposed changes to the Resource Management Act have the potential to increase the use of cost-benefit analysis in RMA applications and decisions. New Zealand uses the RMA to find a balance between economic claims on resources and other claims, especially environmental and social.

The results are controversial. One area of controversy is the extent to which CBA should inform decision. How important is it? Can we trust it?

My colleagues at NZIER wrote a discussion paper earlier this year on these issues. They suggested that we need better information to support more consistent decisions. They pointed out that methods do exist for understanding the value that people place on the environment. We need to apply them, however, and that takes money.

Parenthetically, I’ll note that this should be better funded by the public good science funds. Major decisions keep being made without good data, because it is never cost-effective to collect the data in any single case. It is a collective action problem, which is why we have a government.

Two lawyers, Christensen and Baker-Galloway, have written in Resources Management Journal  an article that reviews the decisions and the legal reasoning behind them. The article mainly puts some legal context around the economists’ contention that we could and should do more with non-market valuation.

One message that comes through in the cases reviewed is that judges are reserving the prerogative to judge. The talk of ‘flexible’ and ‘holistic’ decisions is in part cover for judicial discretion. This isn’t necessarily wrong on the surface. The issue is that we do have ways to include better information. If that narrows the field of discretion, so be it — it would be a net gain for society.

Specifically, Christensen and Baker-Galloway discuss the High Court decision in Meridian Energy Ltd v Central Otago District Council, in which the High Court overturned the Environmental Court decision. The article quotes the decision:

Parliament has not mandated that the decisions of consent authorities should be “objectified” by some kind of quantification process. Nor does it disparage, as a lesser means of decision-making, the need for duly authorised decision-makers to reach decisions which are ultimately an evaluation of the merits of the proposal against relevant provisions of policy statements and plans and the criteria arrayed in Part 2. That process cannot be criticised as “subjective”.

The point of having decision-makers is to make decisions. If you take away the discretion, what are they going to do?

In a 1998 article by David Pearce, an expert in CBA, I found the following:

…perhaps a cynical interpretation, CBA tends to present results in a reasonably cut and dried manner, subject to the uncertainty of the estimates. Benefits exceed or do not exceed costs. But decision-makers may place as much importance on flexibility of decision. A CBA that, in effect, removes that flexibility will not be welcome.

New Zealand case law seems to support that view.

Inequality: I’m not yet convinced

29/07/2013 § 4 Comments

I have started the book Inequality: A New Zealand Crisis. It’s slow going but want to start teasing out my reactions, so I’ll review it piecemeal. Today, we’ll look at Part One, the introduction. My apologies at the start — this is long and somewhat rambling.

The reason it is slow going is that I’m having to weigh up each sentence. I think there are logical flaws, so the book doesn’t carry me along. I’m sure some readers will enjoy the outrage and devour the book — I’m not one of them.

A major premise of the introduction is that we are all worse off when inequality increases. They rely on Wilkinson and Pickett’s The Spirit Level for this argument, even reproducing a figure from the book (see here for my take on that book).  But they know themselves that this isn’t true. On page 17, we are told

We are all worse off for having wide income gaps in New Zealand.

On page 16, by contrast, the argument is

in countries with large concentrations of income, the wealthy can use their power to argue for policies that further their interests rather than those of the economy as a whole.

When you put these two statements together, the argument is that the wealthy are working against their own interests by arguing for policies that favour their interests. Obviously, this is illogical.

I also think it’s a tactical mistake. People working to lessen inequality are trying to get other people on board, to make equality politically popular. They are doing this by saying that equality is in everyone’s benefit. But this is simply not true, and obscures the fight they have on their hands.

(There is a similar retrospective argument going on over slavery in the United States during this sesquicentennial of the Civil War. One side says that slaveowners could have been bought out and everyone would have been better off. The other side argues that this wouldn’t have been possible.)

A second issue is that equality/inequality is a muddled concept throughout the Introduction. It seems to stand in for ‘things we don’t like’ rather than having an independent definition. This was quite striking with the second personal profile in the book. It’s a profile of a family with mum, dad and four children. They moved from Auckland to Whanganui, then mum lost her job and things got tight. But ‘tight’ is a relative term. For example, the family can afford some after-school activities but not all of them. Is that deprivation or not? Most important, though, is the notion of choice:

But even though she’d almost certainly get work in Auckland, Kristine doesn’t regret the move to Whanganui. ‘Being down here enables us to do so many more things for the children. We get a far better lifestyle here, with far more time together as a family.’

So how is this inequality? This family is choosing non-monetary rewards over monetary rewards and dealing with the consequences of that choice. They know they have other options and choose not to exercise them.

Another issue is that the statistical basis for the arguments is not consistent. Sometimes, the talk is of personal income, which includes all the superannuitants. We are told, for example, that 30% of individuals have incomes less than $15,000. In the very next paragraph, we move to a discussion of household incomes, which look much less dire (decile 1, single person, no children: $16,600 or less). Further on, the discussion moves to disposable incomes (after tax) for single households, but figures for the top 1% of those earners are given as pre-tax amounts because of data constraints. In essence, the number of people at the low end is inflated, and the incomes at the high end are inflated. It would have been better to work harder at a consistent measure of income to present a fair picture of the situation.

This kind of ‘worst case’ picture doesn’t stop with the incomes figures. For example, we are told that

this country has a relatively small earnings advantage to those with degrees.

As it happens, I know a little about this topic. The footnote (ftnt 66!) to the statement correct notes that the OECD has measured returns to tertiary education. However, that includes not only degrees but also sub-degree qualifications. The composition of New Zealand tertiary education (comparatively more sub-degree qualifications than other OECD countries) drags down our average return.

This statement about a small earnings advantage also shows the incoherence of the whole introduction. In a relatively equal society, we should have low returns to increased education. The premium should cover the time spent out of the workforce but not much else. Just because someone didn’t get an education is no reason for them to be disadvantaged in the workplace.

If this strikes you as a silly argument, that’s because you are thinking about productivity and economic efficiency. Clearly, the book recognises that some inequality is okay (degree holders should make more money), but too much is not. What I want is a clear statement about where they think that line is, and how they propose to measure it.

The source of the world’s ills

17/04/2013 § 1 Comment

A colleague, a fellow economist and Lincoln grad, has this morning sent through an article by Dean Baker (also an economist but not a Lincoln grad). He points to a fascinating dispute:

The basic [Reinhart and Rogoff (R&R)] story was simply the result of them getting their own numbers wrong.

After being unable to reproduce R&R’s results with publicly available data, [Herndon, Ash, and Pollin] were able to get the spreadsheets … that R&R had used for their calculations. It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90% debt-to-GDP threshold.

So, to summarise: the problems with the R&R analysis were caused by:

  • spreadsheets
  • New Zealand
  • economists.

You have been warned.

A new leader

15/03/2013 Comments Off on A new leader

We had news this week that a group of senior people selected a new leader, someone who could help New Zealand address some of its thorny issues.

No, silly, not Francis (although, since you raised him, why have we gone from God’s Rottweiler to one of God’s Marines? What happened to the Good Shepherd?).

Callaghan Innovation, formed from the old Crown Research Institute IRL, announced the appointment of their first CEO, Mary Quin. They are touting her experience at technology companies in the US and experience at a management firm in Alaska.

She has a difficult job ahead of her, so here’s some free advice. The presser focused on her international connections and their potential for improving New Zealand’s links overseas. Sure, that’s a concern, but the job’s much bigger than that. Here’s how it breaks down to me:

  • The company — the conversion to Callaghan has been a change, and that requires management. Although IRL is one of the more industry-focused CRIs, in general CRI scientists sit somewhere between university researchers and corporate scientists. They aren’t there for the big bucks, and they aren’t necessarily focused on solving somebody else’s problems (which are notoriously difficult to see). This is a well-known issue with CRIs (see this note from 1997), but at the same time the signals from their shareholder (the Ministry) change with fads and governments while some of their staff have been around since the DSIR days. Quin will need to figure out how to get the culture she needs, but starting with the culture they’ve got.
  • The science system — they were always going to choose someone from off shore (the search company was Australian, which set the tone). The difficulty is that the New Zealand science system is run as much by personalities as by policy. Things happen because someone wants them to happen. I’m not making a value judgement here, by the way — it’s a fact of living and working in a small country that there are two degrees of separation and sometimes one degree of freedom. In addition, there are lots of moving parts to the system. Sorting out the who-what-where-why will take time and a deft touch. Quin will need to play those relationships right.
  • Industry — this is clearly the area where Callaghan hopes Quin will shine. Some CRIs have excellent relationships with their industries, and they work cooperatively to direct the science in ways that support the industry. IRL was more fragmented than some of the others, and doesn’t have the same strong industry bodies that agriculture has. But, the plan is that the fragmented high-tech and manufacturing sector can learn to work well with Callaghan. That’s going to take a lot of jaw-jawing and some obvious successes to show the way. Quin will need to get out there and talk with the companies where the Ministry sees promise, and then produce something of value within a year or two.
  • Overseas — meh. I’m not convinced that the mythical land of milk and honey called ‘Overseas’ is all that important to this job. Yes, we do sell our knowledge and science overseas. For example, IRL’s Richard Furneaux has well-publicised international collaboration with a US group. But all that does — if and when it works — is provide a few jobs for our scientists. What we really need is science that supports our other sectors — ICT, manufacturing, medtech, etc. — so that those companies can take care of the overseas part of the equation. Put another way, Callaghan Innovation shouldn’t be doing NZTE’s job. Quin will need to figure out where ‘overseas’ fits in the business plan to deliver the economic growth that the Ministry envisions.

I wish her luck. It will be interesting, if nothing else. Let’s hope it’s successful, too.

We like it here

27/02/2013 § 2 Comments

It’s a nice place, New Zealand. Got a lot going for it. Sure, we have our troubles like everybody else, but on balance it’s sweet.

Eric Crampton added another to his many posts on why libertarians should move here from North America. He pointed to a letter by Alex Tabarrok in which he decries the ‘security theater’ in production at his kid’s high school. As it happens, I grew up in the area in question, Northern Virginia. It has changed a lot in the 25 years since I moved away, but the authoritarian drive was there back then. I remember visiting a friend’s high school in Seattle and being amazed at the relaxed atmosphere and the respect with which pupils were treated.

Eric’s paean to New Zealand reminded me of another, one that was circulating on social media last month. At Crooks and Liars, a blogger called nonny mouse — an American ex-pat formerly in New Zealand and now in Australia? — set about schooling her compatriots:

We Americans like to think, and in fact have been indoctrinated for decades to believe, that we are the greatest country in the world, the best at just about everything. Sadly, that hasn’t been true for quite some time. Words patriots once gave their lives for, like ‘freedom’… and ‘patriots’… have become almost meaningless.

So if you’re curious about who’s taken our crown, you might be surprised. The latest international index of 123 countries released by the Fraser Institute, Canada’s leading public policy think-tank, and Germany’s Liberales Institut, ranked New Zealand number one for offering the highest level of freedom worldwide….

I was reminded of all of this last night. I did something I have taken to doing from time to time, mostly because I can. Something I would never do in the US.

I went into the grocery store barefoot.

Stores here don’t have the ‘shoes and shirts must be worn’ signs that you see everywhere in the States. Sure, grocery store are slightly hazardous — heavy tins could fall on your toes or there could be glass on the floor. But in the grand scheme of daily risks, those things rank fairly low. And so, reasonable New Zealand doesn’t make a big deal of them.

Personal freedom is a lot of things. Some days, it’s just bare feet.

Will students learn?

24/01/2013 § 5 Comments

A couple of days ago, the Government launched a new website that allows students to compare potential earnings from different university degrees. The Government said it would be a great source of information for students. Student representatives replied that it didn’t tell them anything new.

A word about methodology — this data was made possible by the new types of data and ways of handling it that have been developed over the last few years. By linking actual earnings data from the tax department with tertiary qualifications data, researchers have been able to determine how much students earn after graduation. This data is gold for research on the impacts of tertiary education.

The website allows you to make pairwise comparisons between different levels of study and degree options. Thus, you can find out that earning a Bachelor’s in a foreign language (that was me) makes you twice as likely to be on a benefit a year after graduation than earning an accountancy degree (that was my brother).

In one sense, the students are right. We already knew this. Many studies have shown which degrees earn the most and the least. I’m currently working with a couple of people on a report on returns to tertiary education. It’s been shown that agriculture or humanities degrees have returns between 40% and 90% below average (Psacharopoulos, 2009; Machin & McNally, 2007).

Lucky me, I have both.

On the other hand, the website is a great tool. It makes the information much more available (have you read Psacharopoulos (2009)?) and dynamic and fun. It also makes it more precise. It isn’t just, oh, yeah, those accountancy students will earn more. Students can see that it’s five, ten, fifteen grand a year every year for the rest of their lives.

Will students change what they study? Will they learn something from the new information? That’s the great thing about this data — we will be able to find out. In five years’ time, we can look back and see whether the composition of degrees in New Zealand has changed.

Also, that research will tell us something else: how much study is preparation for the workforce versus self-improvement or simply consumption. The more students see study as a path to higher earnings, the more the new information should change behaviour. Maybe it won’t change behaviour after all; maybe students already know this stuff; maybe students are already doing what they think best.

What’s the value of a degree, Virginia?

07/12/2012 § 4 Comments

My prima alma mater sent me a link to a Washington Post article on a new database:

a groundbreaking database Virginia published Thursday … pinpoints for the first time how much graduates from specific college programs, public and private, earn when they enter the job market.

It’s good to have this sort of information available, although a lot of it is unsurprising. I think most people are aware that psych graduates tend to earn less than IT graduates. There will be some jostling over the earnings by institution, but again, I think people are pretty aware of university rankings. As always, insert the standard disclaimer that money isn’t everything in life.

The article is titled ‘New data tells what a Virginia college degree is worth’. Actually, the data does nothing of the sort. It tells you what annual earnings are by school and degree. It doesn’t actually tell you the present value of the degree. With some calculation and assumptions, you could figure it out from the data. Also, given the costs cited in the article, the benefit-cost ratios are going to vary widely. Anyone interested in an Honours project?

The Treasury has been looking at this issue, both in terms of private returns (to the person) and public returns (to the wider economy). My former colleague James Zuccollo (now part of the NZ Brain Drain) did a lot of interesting research on this, looking at both the theory and the data. We are working on a public report, but here is a chart from a presentation on the research:


The value of tertiary education in New Zealand is comparatively low. It’s still positive, so please don’t let this stop anyone attending university. Also, this doesn’t tell the whole story (so click through on the link above).

The government has been working with data from Statistics NZ, the IRD, and elsewhere to try to get a better handle on the benefits and the heterogeneity involved. I’ve done some web browsing, but haven’t come up with any really good links for you. It would be great if we could do what Virginia has done — tell entering students what they can expect to get for the time and money they spend on their education.

Making the waka go faster

21/11/2012 § 2 Comments

Monday saw the launch of He kai kei aku ringa, the Crown-Maori Economic Growth Partnership. I went along to the launch event. It was a nice affair — lots of people trying to good things for Maori and the whole country, lots of energy and support for the new plan.

Here are some good things about the plan:

  • There is an actual plan (pdf). This isn’t just hand-wringing (ringa-wringing?) about the state of Maori. There are actual things that are planned to be done. Oh, and people who are supposed to do them.
  • There are goals, relatively SMART goals. The Action Plan takes each of the specific goals, explains why they are important, and then provides a way to measure success. Not always, and things will get fudged, etc. But still, goals like ‘Higher completion rate for Maori students studying for tertiary qualifications’ and ‘Higher retention rates for Maori students in tertiary education’ can be measured and success ascertained.
  • The plan has a sensible structure. It has six strategic goals, and then 20-odd specific goals. People can remember six goals (the rule of thumb is 7 plus-or-minus 2). They can get behind six goals — they know the bigger picture. Big laundry lists aren’t suitable for this purpose, not without structure. This way, everybody knows which way the waka is headed.
  • Education is goal #1. The gap between those with tertiary qualifications and those without is growing. We can argue the why and the equity, but it has happened and does continue. Also, getting a tertiary qualification pays for itself and then some. It’s a worthwhile investment. The relatively poor performance of Maori pupils and students has to be turned around if they want economic success.
  • There appears to be actual funding involved. These initiatives cannot happen without money.

So, I’m hopeful. The plan a good first step. Now for the hard work of doing it.

To finish this off, three things:

  1. Declaration of interests: I am not disinterested in Maori development, having a wife and children who are Ngai Tahu/Kai Tahu.
  2. When the working group presented the report to the Minister, they sang a waiata. It was lovely. I have to see how I can get that added to my research contracts.
  3. The report uses the saying, Ka tangi te kākā. And here, spotted in our yard yesterday, is a kaka (the bands are from the local wildlife sanctuary):

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