Monday, January 15, 2018

Recent changes in the NZ CPI Basket

New Zealand lifestyles are changing and to reflect this a number of items have been deleted from the Consumer Price List Basket and replaced with more commonly purchased items as per this article from Scoop:

Statistics New Zealand has rejigged the consumers price index basket in its latest three-year review, adding body massages, Airbnb and Uber and removing DVD and Blu-Ray players.

"People are spending more online to rent a taxi, or a house for a night, and less on in-car satellite navigation and DVDs," Stats NZ said. The basket is a reflection of New Zealand society and how it has changed over time, said prices senior manager Jason Attewell. Stats NZ has added 15 new items and removed 23.

"More people are going online to buy shared ride services, such as Uber, and shared accommodation services, like home-rental operators Airbnb and BookaBach," Attewell said.

Among other things, people are spending more on craft beer and massages, so these are joining the CPI basket, he said.

"New Zealand used to be called a country of rugby, racing, and beer – but spending patterns are changing and Kiwis are increasingly keen on craft beer, body massages at beauty spas, and football club memberships," Attewell said. According to consumer prices manager Matt Haigh, Kiwi households spend about $100 million a year on body massages.

Other newly included items are olives, flavoured tea and bicycle helmets as well as accessories for cellphones like headphones and cases.

Items that have been removed include in-car satellite navigation systems, DVDs and Blu-ray discs and MP3 players, as well as luncheon meat, cottage cheese and antacids, together with soft toys, prams and pushchairs.

Within some items that remained in the basket, changes were also made. For example, within the new cars an electric vehicle has been included and within international flights, five additional destinations were added. Under taxi fares, the sample now includes ride-sharing services.

Sewing machines were removed but clothing alterations are now in. "People don't have as much time to do things themselves and are prepared to pay others to do jobs for them," said Attewell.

Housing and food continue to make up more than half of what goes into the CPI basket.

Stats NZ collects around 100,000 prices each quarter, visiting supermarkets, departments stores and clothing shops. It surveys 2,500 businesses including construction firms, medical centres and used car years. It also uses data from websites for things like streaming services. There are 701 items in the basket.

Friday, October 20, 2017

The Nudge Effect

If Anyone Is in Need of a Nudge, It’s the Politicians

By Ryan Bourne

This article appeared in The Telegraph on October 13, 2017.

Imagine a school canteen. There’s a full array of food on sale, from healthy salads through to chocolate fudge brownies. But the canteen deliberately puts the salads in the children’s eye-line at the front of the counter. Economists describe such a choice as a “nudge”. Behavioural evidence suggests food placed here is more likely to be purchased. The canteen is encouraging healthy eating with this information, but without coercion. The children are, after all, still free to buy chocolate fudge brownies, should they wish.

Richard Thaler, this week’s Nobel Economics Prize winner, has made a career observing how humans deviate from perfect rationality and how applying “nudges” can alter economic decision-making. He has presented compelling evidence that humans tend to be biased towards the status quo, value things more when we already own them and are influenced by the framing of decisions.

Nudgers aim to alter our “choice architecture” to influence decisions but without restricting our freedom to choose. The UK Government has a whole unit working on this. The new policy of auto-enrolment in company pensions, requiring an active opt-out, is a “nudge” attempting to help people meet their stated desire for more saving towards retirement. Participation in workplace pensions has increased by 37 percentage points since it was introduced. Provided they are based on good evidence, do not use heavy-handed bans or change the payoffs to choices, Thaler advocates such nudges as a form of “libertarian paternalism” - guidance in ­decision-making, which does not restrain individual free will.

But the concept is controversial among economists. Just because some individuals are not rational does not mean regulators and politicians have better information on their circumstances or preferences. Some now auto-enrolled in pension schemes, for example, would need and prefer more cash today, but the same bias towards inertia prevents them from opting out.

Nudgers aim to alter our “choice architecture” to influence decisions but without restricting our freedom to choose.

In many markets regular feedback, repeat decisions and competition allow people to fulfil their preferences whilst overcoming individual-level biases. Regulators and politicians have their own motivations, too, and can be prone to groupthink and capture by vested interests. The lines between nudging and shoving are quite often blurry. Auto-enrolment might be a nudge for the employee, but it seems one hell of a shove to obliged employers threatened with fines for non-compliance.

The main issue with behavioural economics, though, is that we appear to be applying its insights to the wrong target group. The book Nudge has a whole chapter explaining the conditions under which they are likely to be effective: when the consequences of choices are delayed, choices are difficult, the choice is made infrequently, and when it is difficult to predict how the choice might affect our lives. These seem to apply most aptly to decisions politicians and regulators make all the time on our behalf.

Yes, individuals have their biases. But politicians do too. They put the status quo on a pedestal, suffer groupthink, seek to bribe the electorate, have a bias for budget deficits, continuously complicate the tax system and grow the size and scope of government. Absent a constitution that constrains them, why not change the “choice architecture” they face?

We could, for example, make mandatory five-year sunset clauses the default on new regulations to try to curb the growth of the regulatory state. Politicians would have to rubber-stamp the continuation of each regulation, enabling them to assess and reflect on their effectiveness. The same concept could be applied to all repatriated EU law.

To stop taxation by stealth, we could pass a law so that all tax thresholds rise automatically each year in line with the growth rate of nominal GDP. If politicians want to raise taxes by playing with income thresholds or through fiscal drag, they would have to do so explicitly and transparently, facing the political heat.

The opportunities to apply this thinking are endless. To deter cronyism, large political donations could be anonymised through a central clearing house, leaving complete freedom to donate to a party but dampening the incentive for politicians to appease specific donor interests. An option for politicians’ salaries to be tied to economic growth as default could be added to their contracts too, with the freedom for them to “opt out” and maintain current arrangements should they wish to signal their lack of faith in their own policies.

On the spending side, zero-based budgeting should be the norm in any comprehensive spending review. Any new policy that raises net spending above a threshold amount should trigger an OBR analysis on how much it will add to national debt over the coming 30 years, which must be read out by the relevant minister in Parliament.

“Tax trigger laws” could be passed too, meaning when revenue is much stronger than expected, the default would be to cut tax rates so revenues are simply maintained to meet government spending. This would deter the perceived “windfall” effects the Treasury can obtain from growth before budgets, often used to bribe the electorate, and would highlight the trade-off between spending and taxes.

Despite Thaler’s interesting work, history suggests bad government policy can be far more damaging to our welfare than individuals’ biases. So why not apply the insights of Nudge where it is most needed, and frame politicians’ choices to encourage the salad diet for government?

Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.

Monday, August 28, 2017

In Defence of the Dismal Science

Economists have gotten a bad rap in recent years, but their devotion to data still offers the most practical, bias-free way to assess our most pressing problems


By Greg Ip

Aug. 25, 2017

Earlier this month, a Greek court convicted an economist for what amounted to doing his job. In 2010, Andreas Georgiou took over Greece’s statistical agency and revised upward the figures for the country’s debt, which had long been suspect, in order to meet European Union standards. Ever since, Greek officials have tried to blame him for the austerity measures and economic hardship that followed. This month’s verdict, which came after Mr. Georgiou had been repeatedly exonerated, was met with dismay by outside experts who call his work exemplary.

Mr. Georgiou’s case is only the most extreme instance of public vilification of economists around the world. After Bank of England Gov. Mark Carney warned last year that leaving the EU could harm the British economy, one pro-Brexit member of Parliament demanded that he be sacked. When the Congressional Budget Office said this year that replacing the Affordable Care Act would swell the number of uninsured Americans by millions, President Donald Trump’s staff called the nonpartisan agency’s work “fake news.”

Many voters share these politicians’ contempt. More than 40% of Americans completely or partly mistrust federal economic data, according to a poll last October by Marketplace-Edison Research.

The backlash can be traced, in part, to the global financial crisis nine years ago, but the ire doesn’t just stem from anger over the failure of economists to predict or explain that catastrophe. Today, there is a growing chasm between how economists and the public (and its elected leaders) think.

Economists pride themselves on being the most scientific of social scientists. This leads them to reduce all human motives and behavior to quantifiable variables such as utility, welfare and income. But people are not by nature quantitative, and their motives often have no economic basis. Today’s most divisive issues, from fairness and inequality to national identity and culture, don’t have economic solutions.

Greece’s statistics chief, Andreas Georgiou, stands outside his agency’s headquarters, Athens, July 22, 2010.

Greece’s statistics chief, Andreas Georgiou, stands outside his agency’s headquarters, Athens, July 22, 2010. PHOTO: PETROS GIANNAKOURIS/ASSOCIATED PRESS

Thus, when economists preach the virtues of globalization, market solutions or cost-benefit analysis, they sound to critics on the left like corporate shills lacking any moral anchor. To critics on the right, they sound like globalist elites who despise patriotism.

Yet it is precisely their love of numbers that makes economists invaluable. By stripping the emotions from pressing problems, economists can often illuminate the most practical ways to tackle them—but only if ordinary people and their representatives are prepared to listen.

Economics emerged in the 1700s as an offshoot of moral philosophy.

Economics emerged in the 1700s as an offshoot of moral philosophy. Known then as political economy, its pioneering practitioners—such as David Hume and Adam Smith —believed that liberating individual self-interest, rather than following religious or political authority, maximized society’s well-being.

Smith made this case most memorably in “The Wealth of Nations” (1776), in which he famously invoked the benevolent “invisible hand” of the free market. But for today’s economists, David Ricardo’s “The Principles of Political Economy and Taxation,” published in 1817, was even more of a breakthrough.

Most people aren’t surprised if a doctor, who could be a better caregiver to her children than a nanny, chooses instead to spend that time seeing patients and pays a nanny out of what she earns. Thanks to Ricardo, economists know that the same principle applies to countries. The average American worker can probably make more tires than a foreign worker, but his edge at producing grain is even greater—and thus the U.S. should export grain and import tires. This theory, known as “comparative advantage,” is both counterintuitive and powerful.

Engravings of pioneering economists David Ricardo (left) and Adam Smith.

Engravings of pioneering economists David Ricardo (left) and Adam Smith. PHOTO: GETTY IMAGES

Ricardo went further, extolling the pacifying power of free trade: It “binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world,” he wrote. Most economists still agree that globalization fosters political stability and cooperation.

Non-economists have always found this emphasis on material interests and motives somewhat distasteful. In 1790, Edmund Burke, who was friends with Hume and Smith, wrote in “Reflections on the Revolution in France,” “The age of chivalry is gone. That of sophisters, economists, and calculators has succeeded; and the glory of Europe is extinguished forever.”

The influence of economists truly blossomed in the 20th century. The Great Depression gave birth to macroeconomics, the study of how consumption, investment, income and interest rates interact in the aggregate.

In search of better tools to manage the economy, the federal government commissioned economists in the 1930s to calculate gross national product. Convinced that the economy could no longer be left to its own devices, Congress passed the Employment Act in 1946, which established, among other things, a Council of Economic Advisers to provide the president with the necessary expert guidance.

The next year, Paul Samuelson’s seminal book, “Foundations of Economic Analysis,” used mathematics to formalize the key axioms of economics. He touched off a revolution that equipped economists with ever more powerful methods for explaining and analyzing economic behavior. They increasingly adopted the trappings of the physical sciences, hoping to achieve a similar degree of objective truth and predictive power.

Math did clarify economic thinking, but it didn’t improve its forecasting accuracy, which remains dreadful. Virtually no economists predicted the financial crisis of 2007-08 and the recession that followed. Nor has economics rid itself of bias. Economists who advise presidents and prime ministers routinely shape their analyses to validate particular political views.

In recent decades, the stature of economists has taken a beating from two critiques in particular. The first, popular especially on the left, argues that economists are slaves to the assumption that individuals act rationally and in their own best interests. These critics point to psychological and experimental evidence that shows how often people violate the axioms of Econ 101: Our spending and investment habits are often driven by emotions, rules of thumb, ignorance and shortsightedness. The financial crisis seemed to be the ultimate proof, as highly paid bankers and traders, armed with state-of-the-art economic techniques, took on so much risk that they nearly destroyed the global financial system.

Economists consider national borders and sovereignty annoying obstacles to the free flow of goods, capital and people.

The second critique originates from populist, nativist and nationalist movements in the world’s more prosperous countries. Economists consider national borders and sovereignty annoying obstacles to the free flow of goods, capital and people. The new movements of the right see them as essential preconditions for national identity and cohesion. Many Britons voted for Brexit because control over immigration and their laws mattered more to them than the pecuniary advantages of the European common market.

These trends have fed a broader mistrust of experts and elites. During last year’s election campaign, Mike Pence, Mr. Trump’s vice-presidential running mate, dismissed statistical evidence of the U.S. economy’s health by saying, “People in Fort Wayne, Indiana, know different.” In the months after Mr. Trump’s victory, his team wondered whether it should even appoint a chairman of the Council of Economic Advisers. (The administration eventually nominated Kevin Hassett, a highly regarded economist from the conservative American Enterprise Institute.)

In Greece, economists aren’t simply mistrusted; they’re prosecuted. During the 2000s, Eurostat, the EU’s statistical arm, had repeatedly questioned the accuracy and political independence of Greek statistics. Soaring deficits in 2009 triggered a crisis and forced Greece to seek a bailout in 2010. Mr. Georgiou, a Greek native who received his Ph.D. from the University of Michigan and spent 21 years at the International Monetary Fund, took over Greece’s statistical agency that August. Officials had already shown previous debt and deficit figures to be understated. He revised them further upward and earned for his agency a clean bill of health from Eurostat.

A customer searches for groceries at a supermarket in Caracas, Venezuela, July 25.

A customer searches for groceries at a supermarket in Caracas, Venezuela,

Politicians of the left and right accused him of inflating Greece’s debts to justify its creditors’ demands for austerity. Prosecutors charged him with making false statements and improperly disseminating statistics without his board’s approval. Courts acquitted him, but the second set of charges was reinstated, resulting in this month’s conviction. Mr. Georgiou, who now lives in a suburb of Washington, D.C., plans to ask Greece’s supreme court for a retrial.

Mr. Georgiou says that his real offense, in the politicians’ eyes, was breaking from the past practice of “resisting” and “negotiating” with outsiders, such as the EU, over what official Greek data would show. The politicians needed a scapegoat to preserve their own “political narratives,” he says. He calls the implications of his case “terrifying” for other professionals responsible for economic statistics.

Economists bear some blame for the public and political backlash. Their disagreement with populist policies has often colored their predictions. British economists, including Mr. Carney, thought that Brexit would unleash so much uncertainty that markets and the economy would tank. American economists foresaw similar swoons if Mr. Trump became president. Both were wrong, at least thus far: Economies in both countries have chugged along, and stock markets in particular have soared. There may be long-term costs, of course, but those may be hard to detect.

Economists didn’t predict the financial crisis, but they did help to arrest it.

But such misjudgments don’t justify the charges leveled at economists. Take, for example, their inability to predict financial meltdowns. Crises almost by definition are unpredictable. In a recent essay, Ricardo Reis, an economist at the London School of Economics, argues that failing to foretell a financial crash is no more an indictment of economics than failing to predict when a patient will die is an indictment of medicine. Economists didn’t predict the financial crisis, Prof. Reis notes, but they did help to arrest it by applying theory and experience: “The economy did not die, and a Great Depression was avoided, in no small part due to the advances of economics over many decades.”

Another caricature of economists is that they try to emulate physicists, fetishizing elegant, abstract mathematical models disconnected from economic reality. Paul Romer, the chief economist at the World Bank, derisively calls this approach “mathiness.” The critique is certainly fair in some corners of academia, but it is increasingly untrue of the profession as a whole.

In 1963, roughly half the papers published in the top three American economics journals were theoretical, according to a tally by Daniel Hamermesh, now at Royal Holloway, University of London. By 2011, that figure had shrunk to 28%; the remainder were empirical papers based on public data, on data gathered by the authors or on experiments. Economic debates these days are won not by the best theory but by the best data: Statistics are more important than calculus. Economists are far more obsessed with measurement than with math. When public discourse is plagued by innumeracy, this capacity to count is no small thing.

Economists are also instinctively skeptical of simple explanations. They are trained to look for equilibrium, which is another way of saying, “When you change one thing, how do other things respond? Where do things settle once all interactions have occurred?”

Advocates for a higher minimum wage extol the benefits to workers. Economists ask: Will it change employers’ demand for workers who earn the minimum wage? Or what they pay workers who earn just above the minimum? Or the prices they charge, or how much market share they lose to companies that don’t face the higher minimum or how much they invest in automation? Does it reduce turnover and thus make workers more productive?

Advocates of tariffs on imported steel focus on the benefit to domestic steelmakers and their workers. But economists ask: What happens to steel-consuming companies that now face higher prices, as well as to their workers and customers? Does penalizing imports boost the dollar and hurt U.S. exports?

The more data economists collect, the better they can map such complex interactions. Seemingly simple questions seldom have simple answers. A higher minimum wage helps workers in some circumstances but hurts them in others. Tariffs help some workers but hurt many others. Global warming will do some economic harm, but not enough to justify banning fossil fuels.

Sometimes, this attachment to numbers conveys a false precision. Critics say that the Congressional Budget Office overestimated how many people would get insurance under Obamacare and must therefore be overestimating how many will lose it if the law were to be replaced. But the CBO always warned that its estimates were highly uncertain; what no economists doubted, including those working in Mr. Trump’s administration, is that the number would be large. Economists could confidently predict that price controls would lead to shortages in Venezuela, though not how severe they would be.

Non-economists see all this as hopeless equivocation, but it is actually the way that evidence drives science. Economists still have their ideological leanings, but data has helped to restrict these biases. Surveys of top academic economists by the University of Chicago show considerable agreement, even among liberals and conservatives.

For example, the scholars almost all agree that fiscal stimulus reduced unemployment after the last recession and that trade with China benefits Americans by providing them with cheap goods. A study by Gordon Dahl and Roger Gordon of the University of California, San Diego, found that disagreement among economists was greatest where the empirical research was most sparse, as with the issue of whether natural-gas fracking helps U.S. exports.

Though economics remains an imperfect science, it has come a long way in 200 years. Its greatest challenge today isn’t the quality of the analysis it supplies, but whether there is still sufficient demand for it.

Appeared in the August 26, 2017, print edition.

Sunday, August 20, 2017

Election Risk


A fundamental difficulty with democracy – all democracy – is the tension between vulnerability to rent seeking and freedom to appoint your own leaders. Typically the result is some level of unavoidable exposure to governments and therefore elections.

In NZ this is for the most part relatively low, reasonably foreseeable and can be managed. There are plenty of reasons to believe that is no longer so.

Visiting the Tales of the Distribution - The New Normal?

The outcomes over 2016 / 17 tell the story. Brexit, Trump, Corbyn, Macron and, here, Ardern (to date). These are not results plucked from anywhere near the middle of any bell curve. They are a bunch of outliers from the tails of the distribution we have come to manage around.

Turnarounds and surprises are a better bet than the results most indicators tend to turn up. Scrambling media, commentators, experts and forecasters reinforce their role of making astrology look good.

In N.Z. the Middle May be Even more Scary

Some sort of ‘hung’ situation or weeks of ‘Winston wrangles’ are a strong possibility post 23 September.

Centre left and centre right, no matter how civilized the labels may sound are also synonymous with at least two words which are perhaps more accurate and certainly involve more risk – ‘muddled’ and ‘timid’. The combination is even worse but currently seductive.

Things to consider

Probably most businesses and the boards that govern them already plan for Election risk. If they don’t they know they should. Typically Plan A is some sort of BAU assumption with actions under a change of government being Plan B. This election I suggest, a very real requirement is Plan C – what to do if under a Pea Soup Scenario – as close as it gets to ‘no government’.

Basic Prudence – anticipating horror shows

At the very least the board should look at these spreadsheet scenarios (if it takes longer than 2 hours to run these up re-visit your summary reporting – fast):

P&L with a two year 15% sales drop

Hike your payroll by 20% (that’s less than a move from min wage to ‘living wage’)

Up your cost of capital by 300 basis points and look at the interest bill

Drop at least two growth projects out of the next two years plan

Slow your receivables collection rate by 20% (add 10% to 90 days and drop 10% off your current)

Run your purchases at an exchange rate of $NZD:USD $0.80 for 18 months.

Now do some combinations of some or all of these. How are you looking? What’s the plan for this?

Cup of Tea Risk

Arguably more difficult (not least because it is ignored) is the risk of ‘sweet nothing’. What happens if there is a stalled result or ‘shared centrism’. The consensus of an oh so democratic ‘Dunno’.

At least the following:

Renewal of grants, subsidies, funding programmes and any kind of ‘assistance’ from the Beehive slows or stops or is stuck in abeyance;

Regulatory and legislative changes, reforms, alterations, approvals, extensions to rules, inclusions of this or that activity all stop or go on hold or slow to snail’s pace; and,

Submissions, lobbying, petitions, discussions, ‘socialising ideas’, explaining, pleading and other rent seeking activity grinds to a halt either temporarily or for good.

Moreover there is no one to ‘blame’, sanction, kick or otherwise motivate into approving your vital piece of action, change, budget or anything much else.

And as for ‘getting stuff done’ where bureaucracy is concerned, the key motivating driver – political gain – is stymied. Where there no clear gains there is little point in taking risks.

Boards should envisage what such a scenario might leave them. The effects too are indirect and follow knock on impacts not just naked, direct exposures.

Keynes is, for once, helpful but not as much as Friedman

In the long run we’re all dead says the Lord but the alt Lord Milton says “the long run is a series of short runs added up”. Most businesses want to add up short term successes to get a long run. Their boards want to govern businesses that do just that.

Think right through Election risk, in 2017, in New Zealand, in your business – past ideology, past the people pageant piece, past the first round - to the commercial everyday impacts. And do some numbers. Then write up (yes write it down) some actions.

Thursday, July 20, 2017

Blockchain the Transformer

Do yourself a favour and read this to “get it” about blockchain and why it matters… or try to make time stand still.

This from Kevin Cooney – ASB’s National Manager Rural:

It's vital that New Zealand's agri industry pays close attention to blockchain development and ensures we are well positioned to capture our share of new value this technology could unlock.

Mention blockchain and agriculture in the same breath, and the image of a heavy duty chain towing one farm vehicle behind another pops into my mind.

Turns out, that's a handy analogy. Like a physical chain, blockchain connects parties directly with one another to enable fast, secure, and borderless transactions.

Blockchain is often confused with digital currency bitcoin and "dark-web" encrypted networks, which means it's often thought of as esoteric and, perhaps, something to be feared.

That's unfortunate. Blockchain will transform the way buyers and sellers connect, regardless of where they are in the world. It will allow radical transparency of a product's origins and journey to end-customers, even if it becomes part of a finished product. Think fast, secure, transparent, low-cost, peer-to-peer transacting.

Blockchain's ability to record and store data makes it ideally suited for both food provenance applications and the deluge of data expected from future precision-farming applications connected by sensors and digital networks.

Its potential to eliminate inefficiency in traditional agri supply chains will also impact strategic thinking and positioning for agri industry companies. Indeed, blockchain could completely reshape the way New Zealand markets, sells and records the provenance of our produce to the world.

For this reason it's vital that New Zealand's agri industry pays close attention to blockchain development and ensures we are well positioned to capture our share of new value this technology could unlock.

The CEO of blockchain solutions start-up Kickr, David Cassidy, has summed up blockchain's inevitability best: "Those that still ask the question whether blockchain is a passing fad or will form a long-term part of business architectures are genuinely in the dark."

So what is blockchain all about?

At its simplest, blockchain forms a trusted network for buying and selling goods. The technology itself is a digital chain, of which the links are replicated databases that correspond with verified or trusted user companies or businesses.

This distribution of databases across all users is more robust in many respects than the traditional, centrally-controlled, single database that businesses use and rely on today. Its greater transparency in peer-to-peer dealings lends itself more readily to meeting growing demands for rigorous traceability.

Blockchain databases record and update in a synchronised fashion for each transaction that occurs on the blockchain. As no one party can change data without the others seeing and verifying it, it's said to be tamper-proof and therefore highly secure (on current technologies).

When combined with other software, such as a "smart contracts", users of a blockchain have the following benefits:

Buyers and sellers can transact directly, and instantly, rather than having to go through and rely on intermediaries (such as banks, trading and clearing houses);

Borderless transactions;

Automated contract execution that removes credit risk in real (or near as real) time;

Identity verification for counterparties;

Superior transparency with secure record trail;

Low transaction costs.

How might farmers use it?

Early trials transacting agri commodities using blockchain demonstrate its potential to sell agri outputs (such as wheat, wool, meat, livestock, wood or fruit) direct to end-buyers in a way that's fast, secure, with high confidence about origin and food safety.

Across the Tasman, Commonwealth Bank of Australia (CBA) was recently involved in a trial testing blockchain's integration with sensor technology. This saw CBA collaborate with a US bank to help a US-based cotton business sell a cotton shipment to its own marketing arm in Australia.

Instead of waiting for payment from CBA under the usual manual letter of credit arrangement, the cotton business was paid automatically with the necessary verification triggered automatically through sensor-based, physical tracking of the shipment in real time.

Here, blockchain provided greater certainty, reduced errors and accomplished in minutes what usually takes days.

Imagine the potential in the opportunity to also integrate a blockchain solution with data-gathering devices that use 'Internet of Things' technology. Buyers might have access to live on-farm and downstream logistics data giving them all details necessary to determine amounts, quality and status of livestock or produce, for verification, inspection and pricing. This sort of efficiency could lessen the information advantage some intermediaries exploit for their share of margin. Customers and end-users will embrace this technology.

Walmart Stores, one of the world's largest retailers, is harnessing blockchain to catalogue huge amounts of data for managing food recalls.

With traditional methods it can take days, if not weeks, to trace an item from shipment through to retailer following a customer complaint. But with a blockchain database, Walmart believes it can determine all necessary details how and where the food in question was grown and who it was inspected by right down to individual packages.

This enables strategic product withdrawals that companies and consumers can have confidence in, due to the detail and integrity of the data.

The saving to Walmart from tracing and recalling just a few packages as opposed to an entire product line across multiple stores is significant.

While it's still early days, excitement about blockchain is growing as awareness of its practical applications develop.

Allowing trusted groups to trade seamlessly at low cost with radical transparency has huge value potential in a world of future scarcity where consumers are concerned about food safety and provenance, and our large food customers seek lean, transparent solutions for managing food waste and supply chain inefficiency.

New Zealand's strength in agri production and commodity supply chain management give us a tremendous opportunity to lead the world in developing food and agri blockchain solutions that connect, shorten and sharpen global supply chains.

However, as for any innovation, we risk losing strategic ground if we don't invest to understand technology such as blockchain, and its potential to transform the global agri supply chain and associated services. Collaboration between industry and government and across the supply chain is critical.

Australia understands this. The Australian Government has recently released a scientific study of blockchain, which was funded in its 2016 budget. As well as highlighting Australia's claim to be a global leader in the technology, the study found supply chain management, including trade finance reform, is a "highly promising" use-case for blockchain. Pointing the way, it implores companies and regulatory authorities to work together to develop its commercial uses.

New Zealand should take note. We must strengthen our focus on developing a world-class national ecosystem to co-ordinate and engage all elements necessary to building the thriving best-in-breed agri tech industry necessary for this to happen.

Blockchain might just be the vital link that enables New Zealand's farming industry to capture our holy grail of more margin.

Monday, June 26, 2017

The Business of Tax

ONE of the hottest debates in economic policy at the moment is how to ensure companies are paying the optimal amount of tax. On the right, politicians think that a lower corporate-tax rate will lead to more business investment and thus faster economic growth. Hence the initial stockmarket enthusiasm after President Donald Trump was elected on a platform that included cuts in business taxes. On the left, the belief is that business is not paying its “fair share” of tax and that it can be further squeezed to pay for spending commitments. Hence the promise of the Labour Party in Britain’s recent election campaign to push the corporate-tax rate up to 26% (from 19%).

How do these theories translate into practice? To find out the effect on business investment, The Economist took the corporate-tax rates in OECD countries and divided them into quartiles from highest (1st) to lowest. Then we calculated the five-year average in each quartile for gross fixed capital formation as a share of GDP.


As the top chart shows, the relationship is not very strong. The countries with the highest tax rates generate less investment than those with the lowest, but there is not much difference. That is probably because the decision to invest in a country depends on a lot more than tax. The underlying growth rate of the economy and the regulatory climate also play a big part. Independent of their tax rates, for example, South Korean and Turkish companies are investing a lot. Perhaps they are catching up with mature economies, perhaps they are over-investing.

What about the tax take? The picture is complicated here, too. Lower tax rates may just work by pinching revenues from other countries. For example, Ireland, with a 12.5% rate, earns a higher proportion of GDP in revenues than France, at 34.4%. And the headline tax rate may not be decisive. Countries with high rates (like America) tend to offset them with allowances and deductions that bring down the effective rate that companies pay.

The idea of using tax levels to boost revenues does not get much support, either. Most countries sit within the 2-3%-of-GDP range (see bottom chart). The countries with the lowest corporate-tax rates receive a bit less in taxes. But the difference between the top and bottom quartiles is only 0.9% of GDP. Grabbing this extra chunk might be useful revenue, but when public spending is 40% of GDP or so, other sources of funding are a lot more important.


The countries with the highest tax takes (over 4% of GDP) tend to be those, like Australia and Norway, with plenty of natural resources. They can take advantage of captive businesses. But that is not an option for most developed nations, especially given the potential for tax competition. OECD countries are trying to co-operate to stop companies from gaming the international tax system. But it is a tricky task; one man’s tax avoidance is another man’s legitimate business planning.

Two other things are worth remembering. The first is that companies are merely legal entities. To the extent they pay more taxes, they must get the money to do so from elsewhere. Politicians on the left think the money comes from shareholders. But it is not as simple as that (and even if it were, those shareholders may represent the pension funds of citizens). For instance, a large company might not want to reduce the profits it pays out to shareholders for fear of becoming a takeover target. So it could move some of its operations to a lower-tax regime. Or it could recoup the loss by charging consumers more, or by paying workers less.

Second, countries do not just want to attract businesses for the taxes they pay but for the workers they employ and for the extra revenues they create for local suppliers. The effective tax take firms generate (on wages, sales and property taxes) is much higher than the tax on profits alone. So there are dangers in driving business away, something Britain needs to contemplate after the Brexit vote.

Some argue that the profits tax should be abolished. Governments should look through the corporate structure and tax shareholders directly. The problem is that many shareholders, such as pension funds and charities, are tax-exempt, and others are based in low-tax regimes. That would also create incentives for individuals to incorporate to cut their tax bills. So such a move should await much more sweeping tax reform. In the meantime, governments will have to make do with what they currently get. There is no magic trick for collecting a lot more.

From The Economist June 17th edition

Monday, May 22, 2017

The Paris Treaty on Climate Change

Matt Ridley notes in respect of the Paris Treaty on Climate change that:

….. the economist Bjorn Lomborg calculated how much the pledges would reduce warming, using standard models and generous assumptions about how quickly the reductions would be achieved and how long they would be sustained.

He found that all the promises made by the US, China, the EU and the rest of the world, if implemented from the early 2000s to 2030, and then sustained through the rest of the century, would reduce the expected rise in global temperature by only 0.17°C in the year 2100. That is to say, instead of rising by 2, 3 or 4 degrees or so by the time our great grandchildren are adults, world average temperature would rise by 1.83, 2.83 or 3.83 degrees. Lomborg put it this way: “Current climate policy promises will do little to stabilise the climate and their impact will be undetectable for many decades”. A different study by scientists at MIT came to similar conclusions. The INDCs add up to the square root of zilch.

However, and this is the crucial point, Lomborg also points out this invisible achievement would come at a staggering cost, somewhere between $1 trillion and $2 trillion a year: “Paying $100 trillion for no good is not a good deal”.