Thursday, 24 November 2016

C, E, F & P

Rachel Stewart is at it again, criticising the dairy industry. And here I am again, basically agreeing with her despite being a dairy farmer. Dairying is indeed a very powerful industry in NZ, to the point where the 'C' word (cow) just was never mentioned by officials commenting on the water contamination in Havelock North.

The power of the dairy industry & Fonterra in particular is sometimes useful. Fonterra is currently helping to repel the mad scientists who want NZ to embrace GMOs for example. It has also been strong on excluding stock from waterways (sheep & beef farmers are waay behind on this) and is ramping up efforts to limit the use of palm kernel as a feed. These are market-driven positions of course.

But you will never catch Fonterra advocating a massive reduction in dairying in NZ, which is Rachel's position.

My own view is that from long-run perspectives on the environment and the economy, the output of NZ's agriculture is less important than the inputs. As an agricultural exporter, NZ has comparative advantages in our climate, our land/population ratio and our isolation. As a country, we have never really thought strategically about how we should exploit these assets, because that way lies communism, we're told. The markets will guide efficient investments, right?

No. They won't. Markets are socially defined constructs. We make the rules that give the incentives that are acted on in the markets. John Key's first pile of do$h was made by the *government* changing the rules.

This is why, while I applaud Rachel's focus on the 'C' word, I think we also need to address the 'E' word, the 'F' word, and the 'P' word, where

E = externalities;
F = fertilisers; and
P = pesticides.

To understand the point, imagine a world in which NZ dairying was massively reduced as Rachel suggests. The replacement land-uses will still damage our environment unless we force farmers to internalise pollution and rewarded them sequestering carbon (E). Done properly, that can lead to highly efficient changes in the way we use fertilisers (F) and pesticides (P).

Tuesday, 1 November 2016

Minority Rule

Nassim Taleb has a great post on how quite small minorities can win over the majority in social matters:
It suffices for an intransigent minority –a certain type of intransigent minorities – to reach a minutely small level, say three or four percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer would be under the impression that the choices and preferences are those of the majority. 
Taleb's argument is not that minority rule is generally true (a plethora of oppressed minorities know differently), but rather that it can happen if the minority is intransigent, for example for religious reasons (kosher, halal), and the majority is flexible (i.e. we don't mind if its kosher and halal), and it's not much more costly. In that case, food suppliers might well find it most efficient to cater to the minority. Economic rationality, right there.

This could explain why huge food companies like Nestle and Danone are now very publicly moving away from GMOs. There is a significant minority of people who will go out of their way to avoid eating GMOs, whereas only extreme GMO fanatics could object to eating a non-GMO. So in an industrial food system, non-GMO might be the least cost means of meeting market demand.

These food examples arise in competitive markets: when competition is working well, capitalists often do the most efficient thing, even if it is a major change. These commercial outcomes seem basically efficient on the available evidence.

Taleb doesn't discuss policy issues though. It seems to me that inefficient minority rule often occurs in making social/public policy choices. It's almost inevitable really, despite the best efforts of the decision-makers. A tiny minority of officials (ministers and civil servants), are charged with acting as agents on our behalf. We put these few people up as our agents, and then they are pressured by large commercial stakeholders seeking outcomes favourable to them.

Efficient innovation works fairly well in competitive markets but is notably slower in areas where public policy needs to change, such as on climate change, agriculture and drugs. Minority rule has so-far prevailed in these areas, pushing back hard on changes that would hurt shareholders or reduce investor confidence. The lobbyists involved don't pay much attention to the huge economic and social benefits that reform could deliver.

On these policy issues, our well-meaning agents are facing the minority rule problem very directly. The majority interest is clearly in favour of major policy changes on climate change, drugs and agriculture. But Taleb's intransigence/flexibility framework is still in play, only this time intransigence shows up as the relentless pounding of really detailed/sophisticated arguments in submissions from those opposing change, against a large number of much less complete or sophisticated submissions from a diffuse group of well-intentioned, basically correct, but somewhat unprofessional individuals, each of whom has only a small stake in the outcome.

Not many of us can drop $50k on a major submission to an official inquiry about some important policy/legal/regulatory proposal. Ordinary citizens generally can't match that level of sophistication, but for a firm whose profits are threatened it is fully rational conduct. So our agents, the officials and ministers, need to supply the counterweight on our behalf. Most of our agents are smart and well-meaning and basically understand these points. But we still make no real headway on serious policy problems.*

So my conjectures are:

  1. minority rule is pretty common, and Taleb's intransigence/flexibility framework is a useful way of examining when & why it occurs;
  2. minority rule is generally efficient when it arises from competitive markets, because in those cases it reflects individual preferences; and
  3. minority rule is generally inefficient on matters of public policy (because it doesn't reflect individual preferences) and is indeed a major roadblock to beneficial policy reform.
* Economists will recognise these as "regulatory capture" ideas.

Monday, 19 September 2016

About that Elephant / Where's my Money?

Ganesh, the Way-Clearing Man-Elephant
We get several "free" newspapers each week, as do all farmers in NZ. They're entirely sponsored by advertisers, with bits of farmer-friendly content around the ads to attract our eyeballs.

My impression is that for most of the year, these papers have carried a steady trickle opinions that appear to favour NZ farmers growing genetically modified organisms (GMOs). A classic of the genre is this piece (see p10, but note the front page promo) by Ian Proudfoot of KPMG. Ian reckons that we must stop ignoring the GMO elephant in the room, because people keep talking to him about it, though he has "no clear view on what the right course of action is".

Less than three years earlier, he was much more confident, arguing that NZ "should be creating a premium market around being GE-free and charging a premium for GE-free product". This raises a few questions about what's changed since November 2013 and, as an economist, my questions concern both sides of our agricultural markets.

  1. Has the demand for NZ's agricultural products become more accepting of GMOs?
  2. Has the potential supply cost of NZ's agricultural products been reduced by GMOs?

I've looked but found no evidence to support either of these propositions, so I'm still firmly in the camp of the November 2013 Ian Proudfoot: we should play to our GMO-free strengths.

But I agree with Ian that there is an elephant and that we should talk about it. That elephant is the millions of taxpayer dollars are still being poured into engineering GMOs for NZ farmers, even after many many years of failure by the scientists, not to mention that our customer don't want it (as 2013 Ian Proudfoot noted).

I've been asking William Rolleston about this on Twitter for some time without any response. He keeps arguing that case-by-case evaluation of GMOs is the way to go (a point I agree with) but ignoring the supply-side question about where are these great new GMOs in which we taxpayers are investing all this cash. Here's what happened over the weekend.

Today I received what could have been a response but was instead designed to exclude the above thread and funnily enough it again ignored that exact same elephant.

So, now I'm feeling like Caspa: Where's My Money?

Saturday, 17 September 2016

The New Liberal Economics

Vox has a new broad-canvas piece by Mike Konckzal on the tectonic plates of economic research. You really should read the whole thing, even though it is (inevitably) bound up in the horrors of the US election cycle.

Every now and then, groups of economists develop new ways of understanding the world that are sufficiently distinct that they need a label. For example, there is a "new institutional economics" and a "new economic geography", both of which offered valuable new insights into how the world works and how economic policy, including regulatory policy, should react to the problems that the world throws up. These new paradigms are now widely accepted, because they added to our understanding of how the world works, to the point where the "new" part looks like the historical relic that it is. only emerged.

Mike's piece is suggesting that there is now a sufficiently distinct body of liberal economic thought that we should call it the "new liberal economics". He identifies and provides evidence for three claims in particular:

  • Inequality is a choice. It is not a regrettable but inevitable byproduct of an efficient economy, nor a temporary, self-correcting trend. Different policy choices can reduce inequality, and need not compromise growth (pdf).
  • There are structural barriers to full employment, including a global savings glut and a reluctance by private firms to invest, and these are not self-correcting.
  • Direct government supply is a useful option. There is only so much that can be done by "nudging" the private market. 

Down here in NZ, our mainstream does not yet accept any of these points, though we are dabbling around the edges of this new liberal economics.

Obviously, we don't accept the fact that inequality is a choice (give us another five years I reckon). We are somewhat into job-creating infrastructure spending, but ours is often low quality spending(pdf) and at the end of the day we're mainly about government budget surpluses. And we are of course still madly in love with nudging the private market rather than making sure the public option works well.

I hope we start facing some of these facts sooner rather than later. 

Monday, 12 September 2016

Captured Politicians - Thugby Edition

Rugby is not just a game in New Zealand, it's definitely a religion.

Face it: there are gods like Richie, reincarnation allows gods to beget other gods, plus there are rituals, dressing up, arcane rules, and of course priests are involved. So all the trappings are present.

I think this is why conservative politicians are so captured by it. Rugby is a big and popular business in New Zealand, which is why aligning with rugby brings in the votes. I get that.

What I don't get is why a Minister would abdicate rather than criticise a portfolio-relevant major screw-up by the rugby industry. That's what Louise Upston is doing right now over the sordid Chiefs scandal: she's abdicating her responsibility to advocate for women. Nothing to do with Louise.

So, can we get a refund please, Louise? Nah, didn't think so, eh? Never admit, never apologise, never give an inch.

And if I might Trotter slightly, this does all very much remind me of the Springbok Tour shenanigans, when Muldoon (in the John Key role) knowingly caused a civil war over the same sport for the (successful) purpose of being re-elected. Louise Upston is effectively using this classic Muldoon fig-leaf as her guiding principle:
“In New Zealand we see sport as totally separate from any aspect of politics”.
Just to clarify, I'm not suggesting there will be a civil war against the heinous misogyny currently being swept under the carpet. Hell no. There should be, but our democracy is being run by a different management team now. They're very good.

Tuesday, 6 September 2016

The Naked Emperor

As recently mentioned, I've provided economic advice to several of NZ's local government councils on their plans to regulate outdoor cultivation of GMOs. Hastings, Auckland, Whangarei and Northland have all since decided to prohibit outdoor cultivation.

After studying the costs and benefits of their proposals, I concluded that they appeared costless because there was no commercially viable GMO that would be blocked by the councils' proposed course of action. Lots of people wanted the GMO-free branding (including some very large exporters), so the net effect seemed to be "some gain, no pain".

Not finding evidence doesn't prove it isn't out there however. Fortunately, local government processes are highly contestable, so my evidence was open to challenge, including by GMO fans who'd naturally be best placed to identify any gems I'd missed. 

There was indeed plenty of challenge, including some very unprofessional and unfounded personal attacks on my professional integrity by people employed by Scion and Federated Farmers (the Feds guy at least had the decency to apologise later). Emotions can get the better of people at times.

On the crucial evidential question though, there was complete silence. No-one ever pointed to an actual GMO, ready for commercialisation now, for which there was grower demand. Nor could those opposing these local governments even identify a GMO that is close to being ready.

This matters, because the plans only last for 10 years and there are long development horizons for new GMOs. If there was an outdoor GMO ready to go now, that local growers wanted, then there would obviously be a cost in prohibiting its use. Even if there were reasonable expectations that this would occur within a few years, it might be better to not prohibit them.

The cupboard was bare however, so the councils were not imposing any costs on their populations by proceeding as they have.   

But science is constantly advancing, so maybe new evidence has come to light in recent months? If so, the president of Federated Farmers doesn't know of it, judging from his studious avoidance of this question on Twitter today.

So at this point, the Feds' emperor looks stark naked.   

Sunday, 4 September 2016

Open Season on Local Democracy

As frustrating as local councils can be, they play a crucial role in our democracy by reflecting local preferences. Democracy is out of favour in certain circles however, and New Zealand likes to be up with the play on this kind of thing, which may be why there's so much council bashing underway at the moment.

First up, amendments to the Local Government Act that, among other things, would allow central government to create Council Controlled Organisations (CCOs) without their agreement. A bunch of Mayors turned up to Parliament to oppose this yesterday, describing it as "completely undemocratic". 

Second, genetically modified organisms (GMOs). In several parts of the country (Hastings, Auckland, Northland) councils have responded to local preferences by agreeing to control outdoor cultivation of GMOs.* Biotech producers, who have allied with Federated Farmers on this topic since biotech investor Sir William Rolleston became their president, have opposed these initiatives but lost, at council hearings, in the Environment Court, and just last week in the High Court. Interestingly, SWR wasn't too worried about being a three-time loser on this topic. Here he is on Morning Report:
"...the Court has ... said... that there are some things that the government or indeed Parliament need to do, if ah, if ah, Councils are not going to be..."  
If you think that doesn't sound like language from a High Court judgement, you're right. Sir William was getting ahead of himself. It would be another whole day before Environment Minister Nick Smith put plan B into operation, announcing that this aggression would not stand because he will change the law. Smith claimed that medical uses were being prohibited, but he must know that's a lie.

The third example is a doozy, and might well be what Smith has in mind for denying local governance of outdoor GMO cultivation. It's the "Resource Legislation Amendment Bill" which is mostly about amending the Resource Management Act (RMA). Check out this little ripper of a clause which would insert two new sections into the RMA. The first clause, which would become s360D(1) of the RMA goes like this.
The Governor-General may, by Order in Council made on the recommendation of the Minister, make regulations—
(a) to permit a specified land use:
(b) to prohibit a local authority from making specified rules or specified types of rules:
(c) to specify rules or types of rules that are overridden by the regulations and must be withdrawn:
(d) to prohibit or override specified rules or types of rules that meet the description in subsection (3)(b).
Got that? Under the proposed changes, if Nick Smith, or whoever else ends up as Minister, doesn't like something a council has done, he can veto it.

We're not fascists though, so this veto needs to be dressed up with a spiffy uniform. Which in this case looks like a sound process involving much consultation and chin-stroking. The Minister has to tell affected groups of his/her plans and establish a process that
"the Minister considers gives the public, the relevant local authorities, and the relevant iwi authorities adequate time and opportunity to comment on the proposed regulations"
Do you feel much happier that the Minister needs to be satisfied that the process he/she has created to review/challenge/amend details of the veto gives "adequate time and opportunity to comment"? Me neither, and I'm reminded of this gem.

* Disclosure: I have provided economic advice to council hearings in each of these places.