Is Picking Winners With Subsidies Efficient?

Is picking winners with subsidies efficient? Any review of either the literature or the evidence would you you in the direction of answering no to that question.

It’s not really plausible to argue that it’s efficient in the economic sense of the word. If people are employed at their highest valued use, will they be working in the public sector, picking winners with taxpayers money?

To ask the question is to admit that there are perhaps 100 to 200 people in venture capital firms on Sand Hill Road who are world-class at venture capital investment selection.

It might however be a way of achieving a political goal – add jobs, subtract competition, deliver votes, repay political favours, or something of that nature.

To dress up what is a political device in the language of economics or finance, using words like “investment” is an abuse of the English language.

It really is dissembling to suggest that if one company gets something from taxpayers and another does not, that there does not exist a state of affairs where the state has favoured one company over the other.

Structural reforms in the 1980’s delivered substantial gains for New Zealand in many areas, while incurring some very real social costs that have not fully been appreciated by those for whom that experience is alien from their day-to-day reality in policymaking bubbles.

But it seems that some sections of those structural reforms have been rolled back quietly over a long period of time by different governments in the guise of picking winners through subsidies, investments and free hits built into regulatory regimes.

It’s not clear what the overall strategy of the state is, nor are there any clear intellectual arguments in favour of such a selective application of state assistance for one part of the economy but outright disavowal of the idea that the state can provide assistance for other policy problems.

Is cognitive dissonance and no coherent strategy the new normal?


The Irony of Post-GFC New Zealand

The irony of post-GFC New Zealand is that a Keynesian fiscal stimulus characterised by enormous levels of deficit spending and infrastructure spending has driven a reduction in unemployment in the context of a low interest rate world that has not triggered that much inflation outside of clearly politically highly-regulated areas like housing, education and healthcare.

Despite the media focus on inequality, that’s not really connecting with many “average New Zealanders” because an awful lot of them have made some quite tidy capital gains on their houses and are doing alright as evidenced by retail spending and record high new auto sales.

Plummeting per-capita GDP growth and abysmal overall productivity rates that simply attract rationalisations and “smoke and mirrors” style explanations should be the perfect opportunity for a Loyal Opposition to hold a government to account.

Labour has failed totally to achieve anything concrete in its years in opposition whilst simultaneously drifting further and further away from things that the “average New Zealander” or “median voter” cares about.

I wouldn’t be surprised if a 5th term is on the cards for National, let alone an almost assured victory next year for John Key, a reflection on his sensible approach to government and perhaps greatest example of incrementalism in New Zealand history.

Having spent a bit of time this year interacting with people outside of my Wellington bubble, it’s clear that John Key will be able to deftly defuse any attempt to reclaim the centre. There is no credible alternative government and it’s debatable whether any of the populist style reaction observed in Britain with Brexit and the United States with the election of Donald Trump will water down his ability to form a government.

I’m skeptical that NZ First will expand its share of the party vote much more – Winston Peters may be kingmaker indeed but I wouldn’t be surprised if National starts releasing policy that cuts into his traditional market! Interesting times in New Zealand for sure, focus on family and friends and stop buying into the idea that politics will be able to solve anything anytime soon when so many young people don’t even bother to vote.

Alan Greenspan book explored on Alphachat

FT Alphachat is a really good podcast – you can get it on iTunes. They recently interviewed Sebastian Mallaby, the author who wrote “The Man Who Knew”, one of the most thoroughly researched books on former Federal Reserve chairman Alan Greenspan.

Some brief thoughts:

  • Greenspan’s intellectual and personal journey over the course of his life is fascinating, his involvement with Ayn Rand and the Nixon campaign as a polling analyst and effectively a key campaign operative close to the likes of Pat Buchanan particularly so. I wonder how his internal dialogue changed over the years given he was essentially active at the highest level of economic thinking from the 1950’s through to the mid 2000’s.
  • Alan Greenspan’s thesis basically argued that central bank inability to respond promptly to asset price bubbles was an argument for a return to a gold standard – i.e arguing against the idea of central bank controlling inflation through monetary policy. He also understood the clear links between investment and consumption through firm and household responses to changes in asset prices i.e. the wealth effect. I wonder how he looks back on all of the booms and busts he observed and whether he’d change how he reacted in the moment. Was keeping interest rates low really the biggest deal? Was the GFC really inevitable? What about the global savings glut theories?


What can local government really achieve?

What can local government really achieve? Not much, if their collective track record around New Zealand is anything to go by.

Local body elections are an interesting political exercise. Voter turnout is quite low, and the most likely voters are ratepayers – older, wealthier.

There’s no doubt that the decisions local government makes are really important for productivity growth. But they’re so constrained by central government.

Some local government functions should probably be amalgamated into national functions with far lower levels of discretion in terms of policy making enforced.

Local government can make a difference, but there are so many constraints placed on them, what is the cost of having a severely constrained junior partner that just gets blamed for problems when central government has just as much culpability?

How does society benefit if you have two levels of government pointing the finger at each other instead of working collaboratively to solve problems and deliver actual solutions instead of long term plans that will take decades to implement and still rely on numerous stakeholders sticking to the plan for the duration?

A Median Voter Refresher

The median is the middle value, the 50th percentile of a distribution. The median voter model is the idea that people will elect governments whose policies reflect those approved by the median voter.

This is why the phenomena of middle class welfare is so commonplace around the world – the mortgage interest tax deduction in the United States, interest free student loans in New Zealand or tax free savings accounts in the United Kingdom. It gets you votes and keeps you in government.

People who want to be elected don’t often get to talk about what they really believe in. They assemble a package of policies that won’t rock the boat. Incrementalism rules the day, and the policies preferred by the median voter have moved further and further to the left over the course of the past few hundred years so this is why you see many parties like National propose things in 2016 that would have their caucus revolt 20 years ago.

The fact that reactionary or conservative movements are on the wrong side of history is often missed by liberals or progressives. They forget that conservatism has nothing to offer under the onslaught of continual policy concessions in the face of people questioning why certain “sacred truths” must be respected anymore – witness the collapse of the Republican establishment in the United States in the face of a reality television candidate spouting things that are actually not far from the beliefs median voters in many parts of the United States suffering from political ignorance or anti-foreign bias genuinely believe!

It is amusing that Andrew Little dismissed Helen Clark’s comments the other week about appealing to the centre in New Zealand politics because most New Zealanders are middle of the road sorts of people. Talking about a coalition of constituencies is fascinating because it highlights how he is clearly surrounded by advisers who think he is a South Pacific Sanders i.e they are completely out of touch and unable to communicate clearly with the people they need to in order to sell a potential replacement government.

John Key has demonstrated with his support of Helen Clark’s unsuccessful campaign for UN Secretary General that he, and his advisers, are far more sophisticated in their understanding of the New Zealand electorate and what matters to swing voters across the country. New Zealand’s political class doesn’t really interact with many people outside of their bubble.

John Key can get away with saying he meets a broad cross-section of people at Koru Lounges because relative to many other politicians he is far more in tune with the mood of the country than perhaps any previous Prime Minister.

Danyl at Dim Post hit the nail on the head with this quote:

It’s conventional wisdom on the left that Key et al are morons, and the left is morally and intellectually superior, and I’m not sure how this squares with Key and his party constantly doing very smart things, and the left’s parties and leaders mostly, consistently being pretty dumb

This can all be reconciled with the median voter model. The left clearly cannot be “intellectually superior” because they are losing. And losing really badly, and for good reason. A lot may have gone wrong in the past few years in New Zealand, but an awful lot has gone right, and pragmatic incrementalism has helped that outcome.

Other millennials should have figured out by now that the median voter is also a home owner, so don’t expect any action on housing affordability until New Zealand is perhaps 70% renter households and it makes sense under a median voter model to propose those sorts of policies!

New apartments on Gilmer Terrace?

A 24 hour a day concierge service, and a doorman who knows everyone’s name.

Former Museum Art Hotel owner Chris Parkin is planning to transform a high-rise office building in Wellington into a “sophisticated” apartment block.


There is a dearth of apartments in central Wellington. The more that are built over the next decade the better. It is quite unfortunate that several otherwise nice buildings have a reputation as “party buildings” and are thus unsuitable for professionals seeking relatively quieter neighbours or young families.

When you walk around the Wellington CBD, particularly south of say, Dixon St, it really is amazing how low the levels of intensification are. There are many well integrated retail/residential buildings, 3-6 stories high, but so many light industrial and single storey retail buildings within the flat land of the city, that it couldn’t be clearer that one of the reasons so many people struggle to find suitable accomodation is that there really is nothing much that has been built.

When you add in the non-trivial number of young people and young couples earning decent incomes, it’s clear that there are some supply-side issues with Wellington Central accomodation.

Interesting China Column from Peter Thal Larsen

Xi is often described as the most powerful Chinese leader since Mao. But he sits atop a system with many weaknesses. Entrenched factions are resisting economic reforms. Meanwhile, increased state control is hard to reconcile with fostering the innovation that China needs to achieve the next stage of its development. Authoritarianism is also unappealing to the country’s elites, who are increasingly voting with their feet and their wallets. Two-thirds of Chinese who win places to study abroad do not return.


China is still really hard for anyone outside of China to figure out. That isn’t going to change anytime soon. There are so many complex internal processes at play, that perhaps applying our stock attempts at explanation aren’t going to add any value.

I am amazed at the total lack of investigative reporting by New Zealand journalists into the “hot money” flowing into New Zealand, particularly into the property market on the part of student and temporary visa holders. There are surely some interesting stories in there.

Do facts and figures matter?

Do facts and figures matter? Did they ever? It seems that logical people project onto illogical people the same thought processes. This will never end well.

If you think that making decisions based on data is logical, rational and clearly the better way to arrive at a decision as opposed to deciding what feels right, you are very much in the minority.

I think this realisation can help people understand why the broader population reach conclusions that dismay and confuse these logical people, who were indoctrinated into elite opinions at university and have never questioned why the supposed benefits of many structural reforms didn’t actually occur outside of theoretical constructs of how the world has changed since they were first implemented.

There is a reason why most people ignore the self-appointed elites. It’s because most people simply don’t live in the bubble they inhabit. The cosy world where almost everyone earns reasonable salaries, has fringe benefits through work and frequent overseas travel is a world away from how most non-elites live their lives.

Using facts and figures to back up an argument is second nature to the educated. It’s simply an outgrowth of writng essays, writing briefing notes, writing emails, writing theses or academic studies; this way of consolidating thinking across a set of research sources is literally an alien form of thought for many non-elites.

It is all about the feels and emotions. It is all about the reckons. There is no space for facts and figures when across all socio-economic groups, the facts and figures are not taken into consideration at all outside of a small sub-set of people who genuinely care about facts and figures.

So why are we surprised when clearly logical solutions to problems are voted down, watered down by committee or watered down by the body politic by way of special interest groups elevating their reckons to the point where other people’s facts and figures are drowned out in a sea of reckons?

Household income data and house prices

Why does so much coverage of this “housing crisis” neglect to explore actual household income data and the relative economic status of those featured?

The best source of data we have for looking at household incomes is the Household Economic Survey, the latest release being for the year ended June 2015.

It’s clear that using the example of a couple earning, say, $120,000 between them not being able to afford a house in Auckland makes total sense when you can see that they’re in the 8th decile of household income.


On an individual basis, it makes even more sense when you look the relative position of such a household in the context of actual IRD individual income data.

Based on my calculations from that data, if they’re both earning $60k, they’re not individually in the top 20% of individual earners based on the IRD data. Thus, it makes complete economic sense that they can’t afford to buy a house in Auckland in the suburb their tastes and preferences might lead them to believe they deserve.

There is a seeming reluctance to acknowledge that it’s not really foreign buyers if they’re only 9% of property transactions (Source: Generation Rent estimate). It’s well-educated and very high earning couples teaming up, splitting fixed costs and being able to save for deposits in a couple of years if they budget well. Add in Kiwisaver and a non-trivial proportion of the households buying $1m plus houses aren’t even stretching their finances.

This “housing crisis” coverage is fascinating given that there are also stories currently running about rental warrants of fitness and the inability of lower income households to afford decent rental housing at all. This really is a story of first world problems.

What you need to know about hindsight bias, luck and house prices

Behavioural finance has made some great contributions to our ability to understand why people make decisions. A lot of the findings are around the rationalisation of outcomes in people’s lives. As people succeed or fail, they are increasingly likely to either blame others for their failures or point solely to their hard work as the determinant of their success. They basically make up a story that enables them to live with themselves.

Hindsight bias is sometimes called the “knew it all along” syndrome. The ability of many to point to house prices and compare two data points (price paid, current market value) without accounting for any of the explicit costs and more importantly compare the opportunity cost across a feasible set of alternative investment options throughout the holding period are a great reason why people should tune out of the “home truths” and “housing crisis” nonsense journalists are writing about.

I’m finding this whole thing quite amusing because one of my favourite economists Robert Frank was interviewed by Russ Roberts on Econtalk the other week talking exactly about this sort of stuff! The interview is obviously a good boost for his book “Success and Luck: Good Fortune and the Myth of Meritocracy“.

The premise of the book is that a lot of people totally ignore how lucky they actually are and deny that good fortune played any part in their success. This affects their attitude towards people who are less fortunate than they are. Obviously, hard work is like a multiplier on good fortune, some people blow up any opportunities they are offered but other people figure out the size or scale of the opportunity and are able to leverage that into a positive outcome for themselves and society at large.

But the part of the interview that I’d link back to all of this drama and over-sharing about ability or inability to “get on the property ladder” is that the whole point – relative socio-economic status – has been omitted from the discussion. When will a journalist really dig into how these people feel? Why are they talking about their degrees instead of talking about their genuine economic value add in the brave new world where robots are coming for everyone?