Tuesday, 30 September 2014

Status update

Our own golden boy Graeme Hart has been in the news a bit lately. First his old super yacht (left) was put up for sale, then he launched the new one and then yesterday the Royal NZ Herald printed this lovely piece about how much better he is than other billionaries (younger, richer etc). I don't know much about the guy, but he seems like a real risk-taking entrepreneur to me. Most people who make $100m don't go straight out and borrow several times that much to sink into another company. 

Against that background, this paper(pdf) from the US Federal Reserve caught my eye. The authors studied the spending patterns of households and linked them with their neighbourhood income distribution. It turns out that people with incomes towards the top end of their local income distribution spend a lot more on high status cars, are more indebted and have riskier portfolios. 

So what? This is just how entrepreneurs behave, right? Well not really, because it turns out that this effect varies across neighbourhoods. The authors report 
a large positive association between income inequality inside a county and the fraction of high status cars sold. And consistent with the household level results, we also find higher levels of consumer leverage in more unequal counties.
So income inequality does seem to result in conspicuous consumption as Veblen argued in 1899 after observing the last gilded age.


Friday, 26 September 2014

Farm boundaries

Before we blundered into dairying 5 years ago, I had the idea it was basically about growing grass and selling milk, but right from the start we've been paying for grazing and extra feed.

Which is really a pain in the arse. Hay and baleage sellers don't want to contract ahead because they're always hoping the market will be tight. Graziers aim for high prices and modest feed regimes. Palm kernel (which we never use) looks like a horrible market for buyers. Large feed bills are bad enough but these extra hassle costs just suck all the fun out of it. 

We ended up taking on debt to buy our own support block in response. This pushes out the farm boundaries so we grow our own silage, hay and replacement grazing. On the Dairy NZ scale, we are transitioning from system 4 to system 1.

Now we're considering a similar move with replacement calves, using a modified version of the Madre method. The basic idea is to leave the selected calves with their mothers - they say for 10 months, but that seems a bit excessive to me. The Madre method avoids a lot of work and supplement costs (moozli etc), but more importantly it must give you better quality heifer calves. Over time, that improves the herd quality. 

These low-revenue seasons are a reminder that d-i-y has real value. At times like these, we all need to think carefully about the scope of operations. It might well be better to exit some markets entirely.

Thursday, 25 September 2014

Competitive exchange rates

This is a non-concept apparently, and I'd really like to know why.

Economics is my day job and I'll tackle just about anything but definitely not macroeconomic theory, because I know almost nothing about it for reasons we don't need to explore.

From this position of utter ignorance, I'd really love to know why we shouldn't care about the exchange rate. Because my very crude argument suggests there is at least an arguable case for the RBNZ to lean against the exchange rate. It goes like this.

  1. Suppressing the exchange rate is feasible. We would go bust very quickly if we tried to pump up the $NZ, but we could keep it low for an extended period if we wanted.
  2. It would expand the scope of the non-traded sector. At the margin, there would be more kiwis doing productive work here, because they'd be more competitive with foreign producers.
  3. The tradable sector would benefit, for obvious reasons. 

The price of imports would rise of course. That is a negative. But its not a-priori obvious why it exceeds the benefits.


Balls and Players

Dirty politics was the main reason I voted against the government at the election. I just didn't trust National to undo, dismantle or otherwise prevent the systematic corruption of our political processes. It seemed it'd be too hard to resist the temptation to keep using such a successful innovation. That view seems vindicated by Keith Ng's post, especially his links to the ratfuckers, and by Nicky Hager's commentary on the election.

This poses a problem for those of us opposed to dirty political methods. We might be assisted by various inquiries but that's a slim hope given the scope of executive power in New Zealand. So what can we do?

A recent post by Giovanni Tiso starts to explore some options for people who feel this way. My contribution here is about clearly defining what is and isn't a dirty ratfucking smear.

The easy answer is that personal attacks are bad, mkay? In sporting parlance, we should attack the ball (i.e. the issue), not the player. But applying this simple test is not so easy, because two types of error are quite easy to sell and the culpable are usually pretty good at selling misinformation.

  • False positives are when someone is wrongly accused of being a ratfucker. For example, it was common for National and its allies to describe Nicky Hager in these terms: he had orchestrated a smear campaign against the PM's integrity.
  • False negatives are when actual ratfuckers are wrongly defended. Thus, Mr Slater is just someone who runs his own ship, Jason Ede talks to lots of bloggers, and Paul Henry's casual racism is just "saying what everyone thinks".

The false negatives can be fought in a straightforward way - provided evidence is available - but the false positives raise an extra conceptual issue. Sometimes, personal integrity is actually the issue. This was obviously the case with Judith Collins, and many consider it also applies to the PM.

In these cases, how can we simultaneously argue that personal attacks are bad and that person X has no integrity and is unfit for office? I think there are two options.

  1. Avoid the point. Don't say: "person X lacks integrity and must be fired". Say: "these Y cases involve serious errors by person X which collectively show that X is ill-suited for their current role". 
  2. Refine the rules. When someone fails at their job, calling out that failure is a professional attack, not a personal one. For example, if the fullback is missing tackles we should say so, but her sexual preferences are irrelevant.  
The first of these involves a passive aggressive form of language that will be familiar to anyone who has made poor choices when employing others. It sounds slippery and disingenuous and gets close to Harry Frankfurt's definition of bullshit.

So I reckon we should continue to oppose personal attacks and be very clear about the distinction between personal and professional failures.

Tuesday, 9 September 2014

Insider Trading

As a self-confessed competition geek, I've been puzzling over the business of politics.

We like to think of politics as being highly competitive and in normal markets that would lead to innovation. Commercially driven innovation is usually aimed at developing market power of some form, such as a scientific or procedural discovery that takes rivals some time to mimic.

I think that's exactly the kind of innovation embodied in the business model exposed by Dirty Politics. National's aim was always to gain more control, more power in the (political) market. By succeeding, it has imposed three really big costs.

  • First is the opportunity cost. Political innovation should be aimed at developing a contest of ideas - an active and disciplined search for beneficial policies. But we never quite get around to this bit though, because the competing politicians are busy seeking power rather than progress. 
  • Add to that the direct costs of running the character assassination business itself, in the form of innocent people being trashed and good people being slowly corrupted. 
  • Then there is the incentive effect on other politicians. This is obviously a very successful innovation so (reverting to market analogies) you'd expect it to be copied. Then we're all at it, and its just the new way we do stuff, so rinse and repeat these costs ad infinitum.

If this makes sense as a problem definition, then we should respond by trying to kill the business model. Which means recognising the source of the market power that John Key's government has acquired: access to inside information. That is the scarce commodity being traded.

Insider trading is banned in financial markets because it corrupts the market and diverts activity/resources in the process. We should ban it in political markets too, though I'm not sure how we go about that in practice. My sense is that we need much better controls around the use of information by politicians and their staff.