Monday, 22 June 2015

Gabriel's Choice

Treasury Secretary Gabriel Makhlouf gave a widely reported speech at the Mystery Creek Fielddays about choice, on which topic the kiwi vernacular is closely aligned with standard economics: choice is definitely choice. More choice is better than less choice.

Anyway, Gabriel reckons we're being offered "false choices" and being "denied" choice and need to "reclaim" choice. He starts with three "false choices" and proceeds to bust the myth:

  • prosperity vs sustainability. This is a false choice because "the premium on ethical, sustainably produced, healthy goods continues to rise."
  • high technology vs New Zealand's primary industries. This is a false choice because of all the GPS guided farming stuff we do to improve on farm productivity.
  • protection vs use of natural resources. This is a false choice because the tourism industry relies on our outstanding natural beauty.
Next comes the punch line...
Instead of accepting these false ‘choices’ we have an opportunity to focus on ensuring our system gives us the freedom to make the choices we actually want. 
One example is in the space of bio-technology.
I am not going to get into the question of genetic modification specifically. What I will say is that when new technologies come along - both GM and non-GM – our current system denies us the choice over whether we want them. Meanwhile, our international competitors do have this option.
Got that? We're being denied choice. The regulatory system is so screwed up that we can't choose because we don't have the freedom to choose.  

Except that we do actually choose - that's what we pay the EPA for. Gabriel just doesn't like the choices they're making. 

I can see where he's coming from and I'm not anti-GM. Bio-tech sellers would love looser laws, so obviously we need to review them. Let's just make sure we're thinking clearly and fairly about this public choice. 

We should really start by looking at the actual proposal but it is still secret so we can't. We just know that the aim is to materially increase the number of new organisms we admit. Biotech investor William Rolleston is reportedly keen on the idea.

Kiwis know something about new organisms already. We have some good ones like kiwifruit, ryegrass and trout, and some duds like stoats, gorse and ragwort. 

None of the people spruiking those old new organisms knew how things would really turn out and that uncertainty is an essential feature of new organisms. Stoats, gorse and ragwort all seemed like a great idea once, a long time ago before the HSNO Act started denying us choices. 

Since we can't really know for sure in advance how any particular new organism is going to affect us, it's always something of a gamble: sometimes we win (kiwifruit) and sometimes we lose (stoats). 

Gabriel obviously wants much more gambling, presumably because he expects more kiwifruit than stoats in the future.

His argument is much more aggressive though, suggesting there won't be any more stoats if we allow a lot more new organisms, that this is another one of those "false choices" we need to "reclaim". We can have lots more new organisms and all that prosperous sustainability capturing the rising "premium on ethical, sustainably produced, healthy goods".

Latin scholars know that the root of the word "decide" means to cut off - something is always foregone and economists refer to that thing as the opportunity cost. Gabriel seems to argue there is no cost in this case, which is pretty difficult to believe. I think he should play his own part in "setting the conditions for a more informed debate" by:
  • showing us the plan for this radical change to the HSNO Act;
  • admitting that it will increase risk; and
  • estimating the potential cost of those extra risks.
It's all very well to point to the latest productivity dream like the mythical drought-resistant grass that we've had vapour-ware about for ten years and has never quite arrived. How exactly do we protect against commercial disasters like what has recently happened to the Canadian flax seed industry in Europe and US corn industry in China?

Friday, 19 June 2015

dairy resilience

I've been rude in the past about DairyNZ and I took some dragging along to Havelock the other night to one of their events. It was interesting though.

We started with a great overview of international markets from Nathan Penny. After that, we had John Roche's talks on resilience and transition cow diet, both of which were excellent.

The resilience part appealed to my inner economist, arguing for systems that use a moderate but flexible amount of bought-in feed, so you can flex from season to season, riding the markets. The farmer in me saw the cost of engaging with those external markets and was very happy that we are aiming for full self-supply of food. Markets can bite you.

John Roche was excellent on transition cow diet - Lynne and I learned a lot even though Rob (our new manager) knew all this already. We all came away impressed at how scientifically driven John was, and simultaneously distressed at how shitty DairyNZ's agronomy service can be.

There are two ways to think about dairy resilience. John Roche showed data suggesting that with today's technology riding the markets works ok. But his data also showed that we get worse at growing and using grass as we buy in more feed. So growing your own cow food could be a great alternative strategy, right?

Unfortunately, the agronomy department at DairyNZ is out to lunch, usually with product suppliers I reckon. Certainly they don't know anything at all about biological dairying. I've been doing the old legume - urea test on DairyNZ's website for a while and figured it'd be fun to add brix to the mix. Here are the results:
  • Urea           : more than 10 pages of hits
  • Legume       : 4 hits
  • Brix            : 1 hit at most
Does this look like the website of an open-minded farmer-funded research organisation? Not to me. Resilience comes from growing your own cow food in a sustainable way and farming the soil biology is as promising as any other future prospect.

Just don't expect any help from DairyNZ. If they're not lunching with the fert companies, they'll be off selling you herd homes.

Monday, 1 June 2015

Social Impact Bond predictions

Well that escalated quickly. Social Impact Bonds (SIBs) went from an interesting new idea less than 5 weeks ago to actual government policy today. This background paper (pdf) is worth a read. While obviously positive about the concept the backgrounder also points to some pretty serious contract design issues which make SIBs undesirable for R&D projects, for things that might be canned for political reasons, and also for the following two categories:
  • status quo programmes, where it is difficult to attribute outcomes to individual programmes; and
  • new and unproven services, where it may be difficult to obtain investor ‘buy in’.
The process starts with the government identifying a measurable social outcome it is willing to pay for. Then a complex deal is struck involving at least three parties: the government, investors, and service providers. The investors back the service providers financially and the government pays both of these groups if and when the measurable social outcome is achieved. This is said to be good because the investors take the financial risk.

Here are a few predictions.
  1. The investors will generally make profits. This will be partly because they'll do their due diligence and try hard to only back winners. But they'll be helped by political aversion to pushing investors under the bus when things turn bad, as is currently happening with the Charter Schools experiment.
  2. Cherry picking will be endemic. The easy way to make money in this business is to restrict the scope of your services to people that are more likely to succeed. The government officials running the bonds will need to be very vigilant.
  3. No-one will examine the counterfactual. The situations where SIBs might work are also exactly the situations where sharper contracts could be written with existing agencies, which would also have cost-effectiveness and risk reduction benefits.