Friday, April 7, 2017

Neo wowsers and Regulation

Alcohol Bans in India and the United States

by Alex Tabarrok on April 6, 2017 at 7:29 am in Economics, Food and Drink, Law, Travel | Permalink

The Indian Supreme Court has just banned sales of alcohol within 500 meters of a national highway. The ban affects not just liquor stores but tens of thousands of restaurants and hotels. In response, the Rajasthan Public Works Department announced that they would now recategorize highways in urban areas as roads! Other states may follow suit. (David Keohane at the FT has further background on the India ban.)

Lost in the shenanigans is that even if the ban were implemented perfectly it’s not at all obvious that it would reduce traffic accidents. Alcohol can be easily stored and if you are thirsty driving 500 meters doesn’t seem like very far to go to buy alcohol.

Entire counties in the United States have banned alcohol but that doesn’t seem to have reduced traffic fatalities. It may even have increased fatalities because residents of dry counties drive to a wet county to find a bar and then they drive drunk for longer distances as they head home.

Wednesday, March 15, 2017

Something has to give

Money Illusion

This misalignment is serious. Lights orange to very pink indeed. As ever – when ??!!

From The Economist – Buttonwood -  March 4th 2017:

Interest rates and investment returns

Low rates usually mean low returns; so why are markets so buoyant?


IF THERE is one aspect of the current era sure to obsess the financial historians of tomorrow, it is the unprecedentedly low level of interest rates. Never before have deposit rates or bond yields been so depressed in nominal terms, with some governments even able to borrow at negative rates. It is taking a long time for investors to adjust their assumptions accordingly.

Real interest rates (ie, allowing for inflation) are also low. As measured by inflation-linked bonds, they are around -1% in big rich economies. In their latest annual report for Credit Suisse on global investment returns, Elroy Dimson of Cambridge University and Paul Marsh and Mike Staunton of the London Business School look at the relationship between real interest rates and future investment returns. Very low real rates have in the past been associated with poor future equity returns (see chart).

That may come as a nasty shock for state and local-government pension funds in America. They have to assume a future rate of return on their investments when calculating how much they need to contribute to their plans each year. Most opt for 7-8%, a level that has prevailed for years. That return looks highly implausible at a time when ten-year Treasury bonds yield just 2.4%.

There is a strong incentive not to change these assumptions. CalPERS, a Californian state pension fund, has cut its assumed return from 7.5% to 7%. But even that small shift will cost the state $2bn a year in extra contributions.

Why should low real rates and low returns be linked? One reason is that very low real rates are associated with times of economic difficulty, and thus periods when corporate profits are under threat. But a low real interest rate also means a low cost of capital for companies, which ought to be good news. Indeed, central banks ease monetary policy to try to drive down interest rates, and thus encourage business investment.

There has been some recovery in business investment since the last recession. But that recovery has not been as robust as might have been expected, given the low cost of capital. In a recent speech, Sir Jon Cunliffe, deputy governor of the Bank of England, noted that “in the 40 years to 2007, business-investment growth averaged 3% a year. In the eight years since the crisis it has averaged 1.5% annually.”

A number of possibilities could explain this decline, including a lack of access to finance. Banks have been boosting their capital ratios in recent years and have been more reluctant to lend. But another factor relates to the “hurdle rate” companies use before they decide whether to invest. A survey by the Bank of England indicates that firms are still using a hurdle rate of 12%, around the average of the rate of return on investment they have achieved in the past.

In other words, despite the big fall in the cost of borrowing since the crisis, the hurdle rate has not come down. Since the risk-free rate is in effect zero, the bank says British firms are now looking for a 12-percentage-point margin compared with one of seven points before the crisis. This could be a version of “money illusion”, when people fail to adjust their expectations for nominal returns as inflation declines (in this case, both real and nominal expectations ought to have fallen).

There is an alternative explanation for the failure of expectations to shift. Both businesses and investors, realising that the economic outlook is uncertain, may be demanding a higher risk premium for starting new projects or buying shares. That explanation is a little hard to square, however, with the repeated new record highs being scaled by stockmarkets or with the high valuations afforded to American equities.

Since the market low in March 2009, dividends have risen by 48% in real terms and real share prices have risen by 167%, according to Robert Shiller of Yale University. The cyclically-adjusted price-earnings ratio (or CAPE), which averages profits over ten years, is 28.7, its highest level since April 2002. In the past, very high CAPEs have been associated with low future returns.

Indeed, having analysed the data, Messrs Dimson, Marsh and Staunton reckon global investors are expecting a risk premium of 3-3.5% relative to Treasury bills—a level that is lower, not higher, than the historic average. So something does not add up. American pension funds are optimistic. Businesses are cautious. Shares are trading on very high valuations. Not all these assumptions can be proved right.

Wednesday, March 1, 2017

Where Rashid and Juliet can’t wed

Many countries make it hard to marry someone from another religion – change is needed

Around two dozen countries have no provision for civil marriage

ARMAN DHANI, an Indonesian journalist who is Muslim, broke up with his Catholic girlfriend of five years when he reached the heartbreaking conclusion that they would never be able to marry. Indonesian officials refuse to register inter-faith marriages because the law does not mention them. “My mother said: ‘If you want to marry her she must convert to Islam,’” he says. “But I didn’t want to make her betray her religion.” He felt he could not change religion either. “If I converted to Catholicism I would become dead to other Muslims.”

Indonesia is one of about two dozen countries with no provision for civil marriage. Others include Israel, Jordan, Lebanon and almost all Arab states. Only unions conducted according to the rules of officially recognised religions can be registered. In Indonesia children of unregistered unions cannot get birth certificates, without which they struggle to receive health care or schooling.

Some couples of differing faiths, or none, go abroad for a civil ceremony. Each year about 3,000 couples from the Middle East get married in Cyprus, which brands itself the “island of love”.

Campaigns to introduce civil marriage are afoot in many countries. But governments often fear angering politically powerful religious groups. In Lebanon marriages and other matters of family law, such as divorce and inheritance, are left to the religious courts of 18 Muslim, Christian and other sects. This allows politicians to sidestep the tricky task of crafting family laws that would be acceptable to leaders of all those faiths. In Indonesia, says Mr Dhani, both Muslim and Christian leaders fear that an inter-faith marriage would inevitably end up with one of the partners converting.

In many places, anyone who dares to wed across religious lines faces ostracism—and perhaps even violence. Getting rid of legal barriers would not remove all the risks. But it would help, a bit.

As published in The Economist 18th February

Monday, February 20, 2017

USA–Really 11 separate ‘nations’

This map shows the US really has 11 separate 'nations' with entirely different cultures


11 NationsColin Woodward and Tufts/Brian Stauffer

In his fourth book, “American Nations: A History of the Eleven Rival Regional Cultures in North America,” award-winning author Colin Woodward identifies 11 distinct cultures that have historically divided the US.

“The country has been arguing about a lot of fundamental things lately including state roles and individual liberty,” Woodward, a Maine native who won the 2012 George Polk Award for investigative reporting, told Business Insider.

“[But] in order to have any productive conversation on these issues,” he added, “you need to know where you come from. Once you know where you are coming from it will help move the conversation forward.”

Here’s how Woodward describes each nation:


Encompassing the entire northeast north of New York City as well as parts of Michigan, Wisconsin, and Minnesota, Yankeedom values education, intellectual achievement, communal empowerment, and citizen participation in government as a shield against tyranny. Yankees are comfortable with government regulation. Woodward notes that Yankees have a “Utopian streak.” The area was settled by radical Calvinists.


A highly commercial culture, New Netherland is “materialistic, with a profound tolerance for ethnic and religious diversity and an unflinching commitment to the freedom of inquiry and conscience,” according to Woodward. It is a natural ally with Yankeedom and encompasses New York City and northern New Jersey. The area was settled by the Dutch.


Settled by English Quakers, The Midlands are a welcoming middle-class society that spawned the culture of the “American Heartland.” Political opinion is moderate and government regulation is frowned upon. Woodward calls the ethnically diverse Midlands “America’s great swing region.” Within the Midlands are parts of New Jersey, Pennsylvania, Ohio, Indiana, Illinois, Missouri, Iowa, Kansas, and Nebraska.


Tidewater was built by the young English gentry in the area around the Chesapeake Bay and North Carolina. Starting as a feudal society that embraced slavery, the region places a high value on respect for authority and tradition. Woodward notes that Tidewater is in decline today, partly because “it has been eaten away by the expanding federal halos around D.C. and Norfolk.”


Colonised by settlers from the war-ravaged borderlands of Northern Ireland, northern England, and the Scottish lowlands, Greater Appalachia is stereotyped as the land of hillbillies and rednecks. Woodward says Appalachia values personal sovereignty and individual liberty and is “intensely suspicious of lowland aristocrats and Yankee social engineers alike.” It sides with the Deep South to counter the influence of federal government. Within Greater Appalachia are parts of Kentucky, Tennessee, West Virginia, Arkansas, Missouri, Oklahoma, Indiana, Illinois, and Texas.


The Deep South was established by English slave lords from Barbados and was styled as a West Indies-style slave society, Woodward notes. It has a very rigid social structure and fights against government regulation that threatens individual liberty. Alabama, Florida, Mississippi, Texas, Georgia, and South Carolina are all part of the Deep South.


Composed of the borderlands of the Spanish American empire, El Norte is “a place apart” from the rest of America, according to Woodward. Hispanic culture dominates in the area, and the region values independence, self-sufficiency, and hard work above all else. Parts of Texas, Arizona, New Mexico, and California are in El Norte.


Colonised by New Englanders and Appalachian Midwesterners, the Left Coast is a hybrid of “Yankee utopianism and Appalachian self-expression and exploration,” Woodward says, adding that it is the staunchest ally of Yankeedom. Coastal California, Oregon, and Washington are in the Left Coast.

San Francisco City and Homes

Shutterstock / prochasson fredericSan Francisco is a natural fit for Woodward’s Left Coast.


The conservative west. Developed through large investment in industry, yet where inhabitants continue to “resent” the Eastern interests that initially controlled that investment. Among Far West states are Idaho, Montana, Wyoming, Utah, Washington, Oregon, North Dakota, South Dakota, Colorado, Nevada, Utah, Nebraska, Kansas, Arizona, New Mexico, and California.


A pocket of liberalism nestled in the Deep South, its people are consensus driven, tolerant, and comfortable with government involvement in the economy. Woodward says New France is among the most liberal places in North America. New France is focused around New Orleans in Louisiana as well as the Canadian province of Quebec.


Comprised of Native Americans, the nation enjoys de facto independence by being far in the North. Woodward says the territory of the First Nations is huge, but its population is less than 300,000, most of whom live in the northern reaches of Canada.

Woodward says that among these 11 nations, Yankeedom and the Deep South exert the most influence and are constantly competing with each other for the hearts and minds of the other nine nations.

“We are trapped in brinkmanship because there is not a lot of wiggle room between Yankee and Southern Culture,” Woodward says. “Those two nations would never see eye to eye on anything besides an external threat.”

TEd Cruz filibuster

APIn 2013, Ted Cruz infamously held the Senate floor for 21 hours in an attempt to filibuster Obamacare.

Woodward also believes the nation is likely to become more polarised, even though America is becoming a more diverse place everyday. He says this is because people are “self-sorting.”

“People choose to move to places where they identify with the values. Red minorities go south and blue minorities go north to be in the majority,” Woodward explains. “This is why blue states are getting bluer and red states are getting redder and the middle is getting smaller.”

The Business Outsider Australia

Friday, February 17, 2017

Foreign Drivers and Driver Testing

Is the number of accidents caused by foreign drivers increasing? No. It has been fairly constant at around 6% of all accidents for the last decade.

In that time tourism numbers have increased 30%.

So would requiring tourists who are here more than three months to undertake a driving test make much of an impact. The data suggests next to nothing.

In 2016 there were 1,817,136 tourists here and only 40,336 stayed for more than three months. That's 2.2%.

So this measure would impact just 2.2% of tourists in NZ. If tourists cause 6% of all accidents then you might expect a 0.13% reduction in the road toll.

And that is only if you make the generous assumption that having them sit a NZ licence test will mean they are guaranteed to have no accidents.

So the proposal, while well intentioned, will achieve basically nothing.

Thanks to Kiwiblog for putting these numbers together.

Friday, January 27, 2017

Why free trade is good and hence the irrationality of protectionism

This new post by Mark Perry – a post titled “2009 tire tariffs cost US consumers $926K per job saved and led to the loss of 3 retail jobs per factory job saved” – is excellent.  Here’s Mark’s closing paragraph:

To paraphrase Thomas Sowell: The first lesson of international economics is that free trade makes us better off and protectionism makes us worse off. The first lesson of politics when it comes to trade issues is to ignore the first lesson of international economics. And that pretty much sums up what we’re getting from the “first authentic protectionist to win the White House since the 1920s” — 0% economics and 100% politics.

Fans of Trump’s protectionism (and, let me not be partisan, also fans of Bernie Sanders’s protectionism, for it is practically identical to Trump’s) should read Mark’s post carefully and ponder it again and again until they see that restricting the flow of goods and services into a country can only make the bulk of the people of that country poorer and not richer.

That such a truth is disputed has always baffled me.  No man thinks that his family would be made richer if thugs surrounded his home and drove away some of the goods and services that he ordered for delivery to his family’s residence.  No woman thinks that her household would be made richer if weapons-wielding goons forced her, her husband, and her children to pay a fine each time they bought a good or service from someone outside of the household rather than she and her family produce that good or service themselves.

But call the economic unit “country” or “nation,” and this commonsensical and correct understanding disappears.  People are, it seems, made illogical – their minds turned into mush, their rational faculties thrown into reverse gear – simply by the words “country” or “nation” or “USA.”  Use these words or their variants, and “less” comes, for too many people, to mean “more” while “more” comes to mean “less.”  “Abundance” suggests inevitable poverty, while “dearth” suggests inevitable wealth.  And those who forcibly prevent peaceful individuals each from taking advantage of the best deals that he or she can find are no longer understood to be the criminals that they are, but, instead to be saviors whose depriving actions will, somehow, make us all less deprived.

(Thanks to Cafe Hayek for the pointer to this post)

Thursday, January 26, 2017

2.3 per cent of all NZ taxpayers contribute 21.4 per cent of all the personal income tax collected

IRD have recently released information regarding income distributions of New Zealand individual taxpayers from 2007 to 2015 which makes for some interesting reading around trends.

The following breakdown was produced by The Herald:

These estimates provide a good insight into how New Zealanders pay tax, and since 2007 there has been:

• 247,000 more people are filing tax returns

• $44 billion increase in taxable incomes in 2015 compared to 2007

• $4b more in personal tax collected

• 17,000 fewer people are paying no tax at all

• Double the number of people now earning more than $150,000 a year.

The number of taxpayers has risen by 247,000 (7.4 per cent) to 3,614,000 since 2007, and the total amount of personal tax collected rose $4 billion (16.1 per cent) from $25b in 2007 to more than $29b in 2015.

It is interesting to note this overall amount of tax has increased after the effect of the income tax cuts the National-led government put into place.

Startlingly, the amount of overall taxable income in 2015 was almost $150b, up from $106b in 2007; an increase of 41.1 per cent.

There are many other good indicators from the IRD data of growing incomes and an economy in good shape.

For instance, the number of people paying no tax at all has fallen to just less than 100,000 in 2015 from 117,000 in 2007.

Also the number of people earning more than $150,000 a year, has more than doubled to more than 84,000.

Individuals earning $150,000 or more (2.3 per cent of all taxpayers) have contributed 21.4 per cent of all the personal income tax collected, and on average each paid $74,000 of income tax.

However, the average tax rate dropped from 35.8 per cent in 2007 to 29.4 per cent in 2015 which reflects the reduction in the top individual tax rate from 39 per cent to 33 per cent.

Spikes of higher numbers of taxpayers receive around $16,000 and $21,000 of taxable income, and these correspond with the amounts of welfare and superannuation payments received by those taxpayers.

There are other spikes at the change of tax thresholds, particularly at the $70,000 threshold where the personal income tax rate changes from 30 per cent to 33 per cent.

Interestingly, the number of people in 2015 earning between $69,000 and $70,000 was 6870 more than those earning between $70,000 and $71,000, so the spike only relates to a small number of people.

However, this spike is easily explained, as trusts often distribute income to beneficiaries so the beneficiaries' income is about $70,000.

This is because the trust tax rate and the highest individual tax rate are both 33 per cent; so there may be little point in distributing any further income if the beneficiary does not require any further income.

There is no tax avoidance in these circumstances as the same amount of tax will be collected irrespective of whether further income is distributed due to the 33 per cent common tax rate.

Having said that, I believe once the tax rates were aligned at 33 per cent, trustees are more inclined to distribute more of a trust's income to beneficiaries and this is another reason why the individual's amount of taxable income has increased so much.

Overall the information provided by the IRD is encouraging with incomes rising, and consequently the income tax collected is rising as well.

- NZ Herald