Why Another Big Stadium For Christchurch Is A Stupid Idea

I have held off on having a go at the utterly ridiculous big spending plans of the Christchurch City / Government boondoggle alliance.

I have also held off on smashing the insanity of the compulsory purchase program and trying to turn the Christchurch CBD into some centrally planned nirvana that will offset the capital flight that has occurred.

But I can’t hold off on criticising the absolutely insane, stupid, uneconomical, money-losing proposition that is a $506 million dollar covered stadium that “may still be on the cards” according to the NBR.

If the government contribution to a new (uncovered, $253 million) stadium really is $37 million dollars, where the hell is the discussion of the tens of millions of dollars they threw into the bottomless money pit that was the AMI stadium Deans Stand? You know, the stadium that has to be destroyed completely because it got written off after two earthquakes?

You can’t recover sunk costs of stupid sports-related ventures that have costs shifted away from those who benefit (which is only those who like sports aka not the majority of the population) towards helpless ratepayers and taxpayers who already are suffering from insurers, EQC, contractors and the government.

If you’re a stadium supporter, have you looked at the literature? The NZ economics blogosphere has done a hell of a lot of work exposing the nonsense around the economics of stadiums.

Eric Crampton has a whole category devoted to stadiums:

Sam Richardson has a goldmine of information:

As an aside, we really shouldn’t be surprised that such a rugby related boondoggle is on offer. There are strong links between rugby officials and the government. The NZRU is on the same level as Federated Farmers in terms of ability to extract rents from government and councils around New Zealand.

Here’s a suggestion for the government and Christchurch City Council – how about you fix all of your infrastructure and rebuild problems first before throwing money down the drain on an expensive capital project that will lose money hand-over-fist for decades.

Here is a bone I’m throwing to an intrepid New Zealand journalist “trained and skilled” – do your job, instead of relying on the blogosphere for tips, and dig into how much money Christchurch has spent on stadium related projects over the past 20-30 years including the accumulated losses at Vbase etc before it got rolled into council. That’d be some good journalism right there. Get to it.

VFX Industry Worker Rights (The Real World Comes To Creative Workers)

This morning on my way into university I listened to a very interesting piece about VFX industry worker rights. There wasn’t much discussion of why Hollywood needs to squeeze margins of contractors whenever it can, and why it constantly looks for government handouts around the world. If there is one industry that displays the very worst behaviour in terms of rent seeking in the form of subsidy / tax credit shopping it is the film industry.

But why do big Hollywood studios have to make a dollar any which way they can? Well, it’s because contrary to popular opinion they lose money hand over fist. Hollywood studios are enormous money losers. They are playing a numbers game where they incur substantial upfront costs on a chance that a movie becomes a hit and not only pays for itself, but pays for the studio’s other losers that season.

The success of Disney has been in realising that movies are loss leaders for massive merchandising and alternative revenue streams. Think about the Pirates of the Caribbean and how they will milk that franchise just from the merchandising alone. In the real world, when your business model depends on your winning hit movies paying for all the losers and the administration costs of running a studio and all of the interest on the short-term financing you use to rollover your monthly cash flow requirements while waiting for a hit, squeezing the lowest person on the totem pole is not surprising behaviour.

Apparently every other part of Hollywood has a guild operating on its behalf – directors, writers, cameramen, makeup artists – they all have an organisation lobbying on their behalf and hooking them up with pension and health care support in exchange for their dues. This also means that it is hard to squeeze labour costs here, so of course studios will squeeze labour costs elsewhere which means outsourced VFX workers.

This isn’t good or bad – it’s simply the real world, moving up the socioeconomic ladder from the working class to the creative class. And Radio New Zealand workers would have been absolutely furious listening to how big bad studios don’t offer any job security to VFX industry workers. They might even be awarded contract extensions as late as 1 week before a contract expiring. Quelle horreur!

All I have to say to VFX workers trying to soften up people for supporting your industry is welcome to the real world. Because of globalisation and the ease of outsourcing, your labour is interchangeable with lower labour cost countries. There is no such thing as rights when there’s a temporary contract involved.

This has been the situation in the construction sector for the past few decades. Risk is shifted down the totem pole to those least able to bear it. High volatility in wages and difficulty obtaining prompt payment lead to enormous strife and second-order effects. Sadly, you won’t find Kathryn Ryan getting so worked up about the inability of a builder in Petone to put food on the table after getting screwed over by a contractor even after protecting himself as best as he could under the Construction Contracts Act and prudent practice in the construction sector.

It is things like this that make me laugh. The creative class are being brought down to the level of insecurity that the working class have had foisted upon them over the past few decades, and they don’t like it one bit. But sadly, because they are essentially a branch of the government, they are more likely to hear their pleas heard and get something done whether it be subsidies, tax credits or other forms of government support.

The guys on the interview talk about how studios send the easy shots to India and the hard shots to places like New Zealand, and then whittle down the VFX margins because they can’t put much markup on a time intensive VFX process. It sucks if you are a VFX worker, but please, complaining about a few months delayed payment from a corporate is a whole different kettle of fish compared to a few months delayed payment from a developer or local construction firm – the studio is several orders of magnitude more reliable, they’re just managing their cash flow extremely well because their business model loses money most of the time.

Now, I’m not unionist, but as an economist it would be remiss of me to ignore the role that unions play in exercising collective bargaining rights and other sorts of behaviour some on the right would call blackmail. In a way, the myth of the independent bargaining agent is that some people actually think that, by themselves, they will be able to achieve a bargain better than they would under a union arrangement.

In theory, contracting is a fantastic way of doing things. But in the real world, it sucks. It is a winner take all competition, not an auction for skills. Many contractors have essentially bought themselves a job – think of the Chorus linesmen made to buy their vans and gear who are now making a pittance on what they used to.

The trend in the labour market over the past few decades has been away from stable employment relationships towards unstable employment relationships. Yes, it makes sense for an industry that works on a project-by-project basis to use contractors. It saves the cost of paying someone to do nothing while there is no work to be had. But it also incurs other costs, as VFX industry workers are finding out.

The creative class used to think that they were above the costs of competitive markets. They thought that they were special, that they deserved privileges and that their role as the anointed ones set them in such a position in society that they are somehow worthy of government assistance if their privileges are attacked or whittled away through maximising behaviour of those they enter into contracts with freely.

The working class have been pushed towards contracting arrangements for a long time now. They got no support. They’re internalising the costs of their situation, and for VFX industry workers, who earn more when they actually are working than many working class contractors, to have the chutzpah to have a moan and ask for mummy & daddy taxpayer to make things better for them is hypocritical in the extreme.

Why Kiwisaver Won’t Cover Your Retirement

Kiwisaver is unlikely to cover the cost of your retirement. But it’s very likely to cover the retirements of Kiwisaver providers, fund managers, bankers, accountants, lawyers, public servants and everyone else connected to the growing Kiwisaver industry.

Before I discuss the specifics of Kiwisaver, I’m going to share with you the basic maths of retirement. Like an economist, I’m going to build a basic model that ignores the real world and makes some simplistic assumptions. I’ll then share with you why this standard model of retirement is extremely risky.

The basic model goes like this:

  • You work from age 25 to age 65
  • You earn the median income ($560 / week) for that entire period with 4 weeks off.
  • You contribute 2% to Kiwisaver with your employer matching that
  • The Sorted.org.nz calculator assumptions apply

Selection_068This is where the fun begins and I can destroy the silly assumptions made by this model, upon which most people are planning their retirements. What is scary is that I chose the median income – 48 weeks a year @ $560 a week. That’s just $27k a year and 50% of the population earn less than that and probably can’t even manage the 2% Kiwisaver contribution.

Furthermore, I am assuming a regular income. There is no option for people who can’t get full time hours or anything more than a string of casualised positions. How will they accumulate any sort of Kiwisaver account balance that can help them in old age?

The next hurdle is the option that Kiwisaver has to withdraw your account balance to put a deposit on a house. Putting aside the reality that buying is almost always a worse idea than renting, how many people who take money out of their Kiwisaver accounts will start their contributions back up again?

Again, once they have sacrificed their retirement on the altar of home ownership, exposing themselves to the risk of negative equity and working as a debt slave for an Australian bank, will they ever be in a position to “save” again?

It’s unlikely. That’s because the standard models forget about something stock standard in the modern New Zealand lifepath. Divorce! Separation! This means that many people will get hit with payouts and recurring monthly obligations (child support, spousal maintenance) that lower their ability to save.

Even if you have accumulated a healthy Kiwisaver account balance, you’ll have to share it with your departing partner. Most of the reading I’ve done around this topic shows that neither partner typically recovers from the cost of separation. They’re both screwed for at least a decade. On the back foot. Struggling.

There’s another massive assumption that the Kiwisaver model doesn’t take into account. That you’ll have employment consistently from 25 to 65! Just ask old guys who have 20+ years of experience in IT and have kept ahead of the curve but can’t find work in their late 40’s / early 50’s how life long employment worked out for them.

With Great Depression 2.0 likely to result in a jobless recovery and future prosperity unlikely to result in marginal workers getting hired to do “make work” stuff any time soon, the Kiwisaver account model of regular contributions has no relationship to how the modern labour market is working out.

The only group of people likely to benefit from Kiwisaver accounts are highly paid public servants. Even professionals who earn partnership income won’t benefit – they need to have access to the cash to cover their upper middle class lifestyle when finance companies go through and their firm writes off a lot of receivables!

I would go so far as to say that if the Kiwisaver model can’t work for a person earning the median (50th percentile remember) income, it is nigh on impossible for it to work for the bottom 50%. And with rising living costs and stagnating incomes, the next few deciles (60th, 70th, 80th) are unlikely to benefit from the model either.

This means that Kiwisaver accounts will cover the retirement only for people who earn really high incomes and would be saving with or without Kiwisaver anyway.They’ve opened accounts for all of their family because they can earn quick 100% return on investment from depositing $1,040 a year for the past few years.

Because of the power of compound interest, little Johnny who gets that Kiwisaver account from birth will end up with a Kiwisaver account like Mitt Romney’s 401(k) by the time he’s eligible to access it.

Kiwisaver accounts are going to be the target of increased lobbying over time. Because they’re going to become a wealth vehicle for high income / high wealth New Zealanders. They’re going to reinforce wealth inequality and make people connected to the Kiwisaver industry extremely wealthy.

Kiwisaver won’t cover your retirement because the fees will eat up most of the returns your account earns. If your fund makes 6% and you’re paying a 1.5% management, trustee and custodial fee along with a 15% performance fee that’s a net 3.6% return before inflation!

6% – (6% * 0.15) – 1.5% = 3.6%

When I read that most Kiwisaver members haven’t changed the default account they were allocated, I despair. If you can find a non-scammy Kiwisaver provider, you still can’t touch the money until you’re 65. Try asking people in genuine financial strife who tried to get money from their Kiwisaver as a last resort. Watch for more complaints around this in the future.

All of this stuff comes back to basic maths. If you want to replace your income in retirement you need to accumulate between 20 and 30 times that amount in liquid or income earning assets.

If you want to replace $50,000 in income that’s at least $1 million in income earning assets. That’s rental property, commercial property, bonds, shares, term deposits, whatever. If you don’t hit that target you have to spend your capital.

When you think about the cost of retirement that way, it’s easy to see how so many people jumped at the high returns offered by finance companies. It’s easy to see how so many people fail to do their due diligence on investment opportunities that finally offer a way out of mathematical impossibility.

But remember folks, this is an affliction mainly suffered by people who have lived above their means. A lot of “boring” people who kept their living expenses reasonable and avoided flashy stuff will be quite happy living off NZ Super and an extra $10k a year from their investments.

Simple living is the simplest way to cover your retirement. But that’s not sexy, and that’s why baby boomers will experience a whole world of pain and adjustment when their post-retirement lifestyles resemble those of the sorts of Kiwis they can’t stand and have discriminated against through the polling booths over the past couple of decades.

Instead of contributing to Kiwisaver, I’m working on small side businesses that will bring in regular but modest income streams. That’s a smarter retirement plan than transferring your hard earned cash to someone whose incentives are completely different to yours.


Entrepreneurial Trial And Error

The entrepreneurial process involves a lot of trial and error.

The reason the economy won’t recover is that it’s very difficult for non-wealthy people to start the “trial” part of the process and New Zealand’s sick culture punishes the “error” part of the process far too much.

I’ve made my fair share of entrepreneurial mistakes, but the lesson I have drawn from them is that New Zealand is the worst place in the world to do business.

No one wants to talk about how the theory of how entrepreneurs can create new jobs runs completely counter to how the baby boomer elite have pulled the ladder up after themselves in many industries.

When wages are low, the cost of living is high and access to credit is difficult, we’re all getting the economy we deserve.

New Zealanders hate entrepreneurs. They hate people who stick their head above the parapet. They’re like crabs trying to stop the other crabs from climbing out of the barrel.

Entrepreneurial trial and error is the only way we can catch up with Australia. While there are definitely some Kiwis doing well and delivering great product or service innovations, we need literally thousands more of them.

Until the barriers to entry are lowered and rent seeking watered down, that’s not going to happen. And we’ll keep wondering why over 175,000 are spending the holidays unemployed.

Why Wellington Won’t Become A Backwater

Wellington has a unique position within New Zealand. It’s the transit point between the North and South Islands, but most importantly it’s the nation’s capital.

Because of this, Wellington won’t become a backwater. It’s simply impossible for that to happen because of the money being made by people connected to the public sector.

The technology industry and creative industries also have a strong foothold. Whether it’s a craft brewery or technology start-up, Wellington is the place to be if you don’t want to live in Auckland.

And there’s the rub – as Wellington’s economy adds more high skill jobs and formerly secure middle income roles are automated or outsourced, the income inequality already evident will increase even further.

I think Wellington will do just fine over the coming decades. But only if you are a high skill worker, or connected to the public sector in some way, shape or form.

For the masses of people not fortunate enough to benefit from this, Wellington will become a very tough place to live and raise a family. The baby boomer elite have pulled the ladder up after themselves.

One day, enough people will become angry enough to make some changes. Until then, don’t expect anything to change. The permanent government will always think of itself before it thinks of others. And that’s their greatest flaw.

Duty And GST For Online Shopping Is Wrong

Charging duty and GST for online shopping purchases is wrong. If our retail sector was run by smart businesspeople they’d have reorganised their business model to make online shopping a less competitive alternative, but most have failed to do that.

Despite almost 20 years of knowing that the internet would destroy business models that failed to adapt, most of the retail industry has remained stuck in 1960’s thinking.

Many retailers are moaning losers. They think that they should be able to dictate to consumers how they purchase goods and have failed to realise that the entire economy is geared towards making things better for consumers.

Smart retailers are rejoicing. They’ve realised that they can’t compete with Amazon or ASOS so have focused on creating high margin products that are just as expensive through online shopping or creating in-store experiences that can’t be replicated in a browser window.

Most retailers don’t think that way though. They think they are owed a living and owed protection of their traditional excessive markup by way of making online shopping harder than it should be.

What they fail to realise is that online shopping, save for reasons of convenience, is a last resort. When we really want something today we’ll happily pay more for the privilege by going to Lambton Quay or High Street.

But retailers are so poor at delivering what consumers want at a price they can afford, they’re actually shifting consumers discount rates. Consumers who previously would never have considered online shopping are waiting 2-3 weeks for online orders to arrive by courier.

If more consumers are happy to wait for substantial savings, the main way retailers make money is on the way out. If you want to increase your purchasing power, online shopping makes it far easier to stretch a dollar than baby boomer retailers would care to admit.

That’s why paying GST and duty for online shopping purchases is so wrong. Essentially, it’s taxing customers for having to resort to an overseas supplier. It’s punishing people who have lower discount rates and rewarding impetuous shoppers who are happy to get ripped off by retailers.

If domestic retailers weren’t so rubbish at running their businesses, they’d have started their own online offerings years ago. The smart ones have – and they’ll prosper while the moaning retailers cry over the loss of their rents.

An industry that is so poorly run it changes its customers discount rate doesn’t deserve any protection. The more retailers that go to the wall because they can’t compete, the better off New Zealand is in aggregate.

Book Review: A Matter Of Principle By Conrad Black

A Matter Of Principle By Conrad Black

My interest in the Conrad Black case was sparked by an article that appeared last year in Vanity Fair. I quickly forgot it, but when the disgraceful interview conducted by Jeremy Paxman appeared on my YouTube recommended list I was keen to explore the Conrad Black case in more detail. Jeremy Paxman was completely uninformed and came across as a numpty.

According to the initial trial by media, Conrad Black was an entitled, pompous corporate thief in the vein of Kenneth Lay or Dennis Kozwolski. He had stolen hundreds of millions of dollars from shareholders and deserved a life sentence in US prison whilst forfeiting all of his worldly possession.

While you have to take the words of a convicted “criminal” with some caution, the case of Conrad Black and the availability of court judgments on the internet enable the reader to perform “due diligence” on the case he makes for his innocence.

At first skeptical, I am now convinced that he was the victim of a terrible persecution. It all started when a non-shareholder and former SEC chairman Richard Breeden filed a 13D form with the SEC.

It set in motion a series of events where people who had no business interfering in the private affairs of Hollinger were able to cause shareholder losses of more than US$2 billion dollars.

These hangers-on even paid themselves millions of dollars with Hollinger’s money after taking it hostage. Tens of millions of dollars was wasted on high priced lawyers who couldn’t do much more than demand payment in advance from Conrad Black and his fellow defendants.

The corporate governance crew were able to greenmail, bully and intimidate the other directors into allowing a full-blown investigation of Conrad Black and his business partner David Radler’s “wrongdoing”. They included a former Chairman of the SEC and numerous powerful lawyers who cared more about getting paid than getting to the bottom of whether or not fraud had been committed.

It turned out David Radler really was a crook. He took the coward’s way out with plea bargain, serving up Conrad Black on a platter. The actual turn of events, which can be independently verified with a few hours Google searching, was completely different from the Murdoch media narrative.

Conrad Black very clearly sets out how the plea bargain process works – in exchange for false testimony, you can bargain with the prosecutors to save your own skin. In terms of game theory it makes perfect sense. For non-sociopaths it is morally repugnant behaviour.

One of the reasons that Conrad Black was so misrepresented in the media was that he refused to plea bargain with the US Justice behemoth.
For his insolence, the FBI seized the proceeds of a New York apartment sale. They had no claim to it but stopped $10 million from going to his defence lawyers.

Although convicted on “honest services” grounds and for obstruction of justice, Conrad Black didn’t back down. His appeal to the Supreme Court led to the “honest services” clause being struck out and very stern comments on how the original judge should review his reasoning in the case.

The author of the “honest services” conviction was Richard Posner of the Chicago 7th Circuit Court of Appeal. Black rails against Posner’s megalomania and refers to his reputation on the bench for a lack of attention to detail.

The case against Conrad Black had shrunk from an enormous alleged fraud to a handful of technicalities. But despite the Supreme Court effectively overturning his convictions, Posner ignored them and issued another judgment that still incorporated the unconstitutional “honest services” nonsense.

In order to save face for the US Department of Justice, the SEC and the greenmail corporate governance activists his sentence in Federal prison was reduced to 42 months in 2010. He had to serve another 7 and a half months before he could be released.

His time in prison wasn’t completely in vain. In this book Conrad Black clearly explains how US justice is not justice at all. He rails against the plea bargaining system, civil asset forfeiture, intimidation of witnesses and the implausibly high success rate of US prosecutors.

He talks about how upskilling in prisons is non-existent, why there are major incentives for prison populations to keep on growing and with his signature style mounts a convincing argument that the entire US justice system now operates on the basis of “guilty until proven innocent”.

If Conrad Black was not a multi-millionaire with the willingness to fight and the financial capacity to do so, he was facing a life sentence for a vendetta by corporate governance greenmailers.

The cost of this injustice has been the destruction of a career, the destruction of more than $2 billion in shareholder wealth and the enormous cost incurred by the SEC, DoJ and FBI in hounding Conrad Black for almost a decade.

This book completely altered my thinking on the role that corporate governance plays in public companies. The ability for an outsider to essentially hold an entire company hostage and bill it for the privilege shocks me.

The real world evidence of regulatory capture, rent seeking, miscarriage of justice, abuse of due process, judicial over-reach and a whole plethora of other abuses makes A Matter Of Principle a solid read for anyone interested in how the US justice system can pummel even an entrenched member of the 1%.