Monday, December 30, 2013

New Year 2014–Raison d’etre

As the last parts of many beneficial reforms I was involved in over the years fall out of the bland shredder which is timidity and MMP I struggled to find motivation for another year – especially an election year.

I should have looked, as always, to my betters. Steven Landsburg pointed out Milton Friedman’s wisdom:

“Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

And so none escape another year or more of my efforts.

Thursday, December 26, 2013

The fruits of…. ???

Three numbers worth considering as you approach the New Year:

    1. annual share price performance Synlait                 +44%
    2. annual share price performance A2 Corporation   +42%
    3. annual share price performance Fonterra Fund     -18%

Monday, December 23, 2013

Romantic nonsense about family silver is costly to the poor

Excluding both the profits and the assets of Meridian, Mighty River Power and Air NZ, the NZ Govt portfolio of $45bn in assets produced a net profit of $20m in the year to June 30 2013.

A return of 0.04% on assets. That's zero point zero four percent.

The strongest returns came from:

  1. Transpower – a statutory monopoly which the High Court has just ruled operates under an indefensible regulatory regime costing consumers millions a year – around $150m in fact.
  2. Airways Corporation – another statutory monopoly and the only company empowered to sell air traffic control services. Justified of course but guarantees the company a profit,
  3. Asure Quality – which until September 2012 (i.e. after balance date) held the statutory monopoly for meat inspection in NZ.

So all of the strong performers were strongly assisted by being legalised monopolies. Grand.

The worst performers were:

  1. KiwiRail – $174.6m loss (we paid over $600m for the pleasure)
  2. Solid Energy – $335.4m loss
  3. Learning Media – $9.0m loss

Those losses mean:

  • less to spend on everything else… surgery, drugs, hip operations, young peoples’ education, Maori health, pensions – you name it… and the biggest losers are the poor – the people desperately in need of these funds, and,
  • the Govt bears risk. Risk which drives up the cost of funds for all of us.

All of us pay for some of us to indulge romantic dreams about trains or to feed fanciful beliefs that the government owns these “assets which are valuable”

This stuff is not silver its rust… the best performers can’t perform without laws which force revenue into their pockets, the worst performers are a receivers dream.

Genuine concern for the poor would not see government owning commercial assets.

Saturday, December 21, 2013

How not to allocate scarce resource?

Last night, the 20th of December, the Ministry of Transport breath tested 2,584 drivers in pursuit of drink driving offenders. Result? Zero – no cases found at all.

Yes – part of the reason a zero result turned up is likely to have been the incentives created by the fact that drivers “might” be screened. However it is equally likely – and road toll trends support the hypothesis – that the message has and is sinking in.

The cost of such a mission can only be guessed at. Given scarce resources a reasonable question becomes “is large scale breath testing an optimal use of the time, energy and funds.”

Wednesday, December 18, 2013

Personal Liability… Len

It is clear from the shambles that “is” Len Brown, that the sanctions and remedies around Mayors – perhaps especially Executive Mayors - are a pointless sham to the extent that they exist at all.

They fail both in respect of any given event – such as non disclosure even as a breach of contract – and they fail to prevent repetitions… see Manukau and credit cards re-visited.

A simple remedy would be to attach liability, personal liability equivalent to that every director of a company in NZ from the tiniest to the largest faces, to the role.

Why on earth not? Why on earth do shareholders who vote for their directors get this protection while the voting community of the 1.5 million or so in Auckland do not?

Minimal to fix this and surely a no brainer.

Tuesday, December 3, 2013

Cliff Asness on Data Mining

Opposition politicians digging around in others’ budgets should remember that:

“It is generally churlish to be to be horribly disappointed when your monkey who typed Hamlet produces only Coriolanus next time.”

(FAJ 70(1) 2014 Ahead of print)

Wednesday, November 27, 2013

The utterly idiotic as a guaranteed policy success

The notion that a couple of vicars have figured out that there is such a thing as a living wage, have gone on to sort out what that “number” is and further opined that it should apply freely to one and all regardless of consequences is utterly idiotic and bizarre.

So much so that no one bothers to summon up the energy to take it to pieces and advise these Gents to stick to their arguably easier to justify belief – that God is a good fellow and to be followed… at least that is their core business.

Since no one serious (those who believe in free lunches are not serious) takes this particular sermon seriously, no one takes the need to demolish it seriously and – thus – it meets no serious opposition (apart from the almost single handed Farrar blog).

Result? A number of institutions such as the Auckland City Council decide they will implement it. Various other nut bars, as one of my esteemed legal colleagues refers to such persons, leading various other (presumably) nuthouses are keen to follow suite.

Somewhere someone did say – if you are going to tell lies – make them big lies. Apparently the advice is sage.

Policy by idiocy is a dangerous process – we would do well to beware.

Friday, November 22, 2013

Energetically Russ ty

Not for the first time Russell Norman’s struggles with logic hit again this week as he claimed that the sale of Mighty River power had lost  hundreds of investors squillions of dollars and thus the asset sales programme was a disaster.

He might ponder the possibility that:

  1. Had he and friends not threatened to centralise energy sales in a government run bureaucracy thus scaring the bejeebus out of even modest historians of the the 20th centuries centralising powers the Soviet Union, China, Cuba and so on, they might have lost a good deal less; and,
  2. Since the shares had been sold to the public it was the private sector investor not the tax payer who bore 49% of the pain emanating from his ill thought out scheme. Asset sales then saved the precious state and its long suffering taxpayers from the risks imposed on them by him and his ilk.

Sometimes even a glancing blow with logic would help.

Wednesday, November 20, 2013

Dangers of “Talk Back Research”

A recent article by Mathew Dearnaley of the NZ Herald (see below)reports on some conclusions from the coronial inquiry into 94 cycling deaths since 2007.  The findings are noteworthy in the following:

- contrary to “submissions'” the majority of cyclist deaths are not caused by cars.

Moral: Submissions are typically opinion, based on small  samples and frequently just wrong

- of 13 deaths, in 12 cases cyclists were wearing helmets

Moral: A regulation forcing action on one aspect of a complex process is typically of no great use

- 3 of 5 people dying wore hi-viz clothing. A small sample as well but in these cases at least bright tacky colours were of limited value – look elsewhere for safety

Moral: Do not make hi-viz compulsory, it creates illusory perceptions of safety.

And the article itself………..

Middle-aged men appear to be the group most at risk of being killed cycling, and wearing high-visibility clothing is no guarantee of survival.

Those are among conclusions of a coronial inquiry into 13 cycling deaths, which also took account of 81 others since mid-2007 - representing an average of more than 15 a year.

The victims ranged in age from 6 to 93, with an average of around 46 years, and more than three-quarters were male.

Coroner Gordon Matenga said he was surprised to find that 58.5 per cent of deaths were the result of cyclists' errors, which was "contrary to every submission to me which suggested that motorists were deemed to be responsible in most cycle crashes".

He noted there were no other vehicles involved in 35 of the deaths, but motorists were responsible for 57.6 per cent of 59 fatalities in which they collided with cyclists.

Of 13 deaths since 2010 which Mr Matenga was asked by Chief Coroner Judge Neil MacLean to focus on, 10 involved collisions with vehicles, whose drivers failed to see the cyclists in five instances, despite three of the five cyclists wearing high-visibility clothing.

Cyclists also wore helmets in 12 instances, the exception being an intoxicated man who was run over after tumbling off his bike.

Mr Matenga noted submissions from the Cycling Advocates Network that making high-visibility clothing compulsory would become a barrier to people cycling, and that the more riders on the roads, the safer they would be.


Saturday, November 9, 2013

The melting of logic

What exactly is the value of this little effort:

Much of northern New Zealand, including Auckland, and parts of the South Island would be almost wiped out by rising sea levels if all the world's ice melted, according to new mapping by National Geographic magazine.

I’m sure that is the case just as there is absolutely and without doubt a positive probability that you will die if you are born.

Even the National Geographic tells us that this melting would take 5,000 years. A little longer than a long term Government bond then.

I’m sure the cartographers at National Geographic had a “big time” doing the mapping and since its paid for by consenting subscribers that’s cool. It was a dead easy story to fill a hole in a newspaper or two and it passed the time for people to read it…

As for anything else? To the extent that there are serious issues to discuss regarding climate change this sort of self indulgent, speculative nonsense merely threatens to stop people taking the discussion seriously. Editorial judgment in publishing this 2/10 (the 2 is because the map may be colourful).

Wednesday, November 6, 2013

A spot of insurance reality might assist....

Has anyone in the Opposition twigged to the fact that without the Australian insurance industry the vast majority of Christchurch earthquake claims outside the EQC would never have been paid out? The tea coupon and kumbyaar company failed just when it was needed most - when its long suffering policy holder owners made claims. Ditto beyond Christchurch as well.

Monday, November 4, 2013

What Politics is Always About

Asked on National Radio what he thought of the Oppositions newly announced housing policy, former Party President Mike Williams replied “It should appeal to young people.”

Not “it will help address housing problems” or “it will be an excellent start to solving some problems” or even “poor”. None of those – just straight for the political jugular – will it appeal in the vote grabbing game.

This serves as a curt reminder that politics and politically derived policy has little to do with problem solving and everything to do with “appeal” and votes.

This is neither peculiar to Williams – he is one of the best at this game . It has everything to do with the remembering never to rely or even depend heavily on politics, political processes and politicians to solve anything much that matters.

Thursday, October 24, 2013

12% of us prop up 76% of all spending.....

Bill English released some figures this week which certainly show who bears the greatest tax burden in New Zealand.
Finance Minister Bill English says lower income households are paying a smaller proportion of net income tax than they did in 2008, indicating that the tax system has become more progressive since the Government’s tax changes in 2010.
“This should contribute to improvements in income equality in New Zealand, contrary to the Opposition’s completely false claims that lower income households were disadvantaged by the tax changes,” he says.
“Estimates of net income tax, as paid by income bands, indicate the tax system has become more progressive since 2010.”
In particular:
  • Households earning less than $60,000 a year, which total around half of all households, are generally expected to pay less in percentage terms towards total net tax in 2013/14 than they were paying in 2008/09.
  • Conversely, households earning more than $150,000 a year – that is, the top 12 per cent of households by income – are generally expected to pay more of the total net tax than they were paying in 2008/09.
  • And only 6 per cent of individual taxpayers earn over $100,000 a year, yet they pay 37 per cent of total income tax. This has increased from the 2010/11 tax year, when those taxpayers paid 29 per cent of total income tax.
Mr English says this raises questions about Opposition calls for the top tax rate to be increased.
“They need to explain to New Zealanders why that should happen when higher-income households are already paying a larger share of total net tax, since the Government’s tax changes three years ago.
“At any particular time, a large number of households effectively don’t pay tax.
“The income tax paid by these households is exceeded by the amount they receive from welfare benefits, Working for Families, paid parental leave and accommodation subsidies.” So 12% of taxpayers are funding 76% of the net income tax take.

Tuesday, October 15, 2013

Economics Nobels–for tangible contributions

The great contributions of personal hero Eugene Fama along with Lars Peter Hansen and Robert Shiller  are acknowledged in the Nobel Committee’s latest awards…
Fama’s work on efficient markets in particular changed the way we think about valuing assets forever.
These awards are long overdue.

Friday, October 11, 2013

Mr A Little: Knows how to do better but refuses

Andrew Little continues to call for a “Living Wage”

If we assume

  1. He has a good brain, is well experienced and has led his union – one of the better thinking amongst unions – very successfully;
  2. he knows that his hard working members who have worked long and hard to reach $18.40 an hour or better through education, training, and experience will not be happy to be trounced by $13.75 workers suddenly getting $18.40 at the stroke of a pen;
  3. he understands relativity better than most in the country;
  4. he knows that any serious attempt to allow employment only at a rate of $18.40 an hour or better would  render thousands jobless in an instant; and,
  5. he knows that a rough guess by a couple of priests at what it takes to live in NZ is not an objective or scientific basis for anything,

he therefore knows that – the entire “living wage” concept as conceived at present is simple silly, not to be taken seriously by serious people of the left or the right and that it damages his hitherto good credentials.

Two questions arise

  1. Why would he advocate the policy? And at the same time drag others to whom much of the above also applies into supporting it; and,
  2. why does no one hold him to account for not using his considerable brain and good sense to useful purpose.

Failure to use your brain is forgivable if you haven’t got one.

Failure to understand the policy and having to have it pointed out to you by the Greens (that Civil Servants are not the target) is at least humorous and typically Cunliffian.

BUT: Pretending you can’t think and that you support policy you know is demonstrably harmful is irresponsible.

Some accountability for using your brain would be handy.

Thursday, October 10, 2013

Finally some data showing that, indeed, things ain’t what they used to be……

It is no stretch to speculate that the situation in England’s former colonies is exactly the same or worse….. modern teaching unions take a bow.

The culture that is England

by Tyler Cowen on October 9, 2013 at 1:00 am in Data Source, Education, History | Permalink

England is the only country in the developed world where the generation approaching retirement is more literate and numerate than the youngest adults, according to the first skills survey by the Organisation for Economic Co-operation and Development.

In a stark assessment of the success and failure of the 720-million-strong adult workforce across the wealthier economies, the economic think tank warns that in England, adults aged 55 to 65 perform better than 16- to 24-year-olds at foundation levels of literacy and numeracy. The survey did not include people from Scotland or Wales.

The OECD study also finds that a quarter of adults in England have the maths skills of a 10-year-old. About 8.5 million adults, 24.1% of the population, have such basic levels of numeracy that they can manage only one-step tasks in arithmetic, sorting numbers or reading graphs. This is worse than the average in the developed world, where an average of 19% of people were found to have a similarly poor skill base.

When the results within age groups are compared across participating countries, older adults in England score higher in literacy and numeracy than the average among their peers, while younger adults show some of the lowest scores for their age group.

- See more at:

Wednesday, October 2, 2013

Tuesday, October 1, 2013

No You’re Not Worth it – Nor You Mr Cunliffe

One imagines that upon reading of the “plight” of Labour’s embattled young 23 year old IT consultant wishing to buy a $500,000 house in Auckland and being thwarted by the LVR regulation that says “no you can’t lever up to do this and shove the prices up further in the process”, the Reserve Bank Governor is likely to say “this is exactly the sort of total nonsense the regulation is designed to stop”.

He would be right in that this seems less a case of screaming poverty than it is of screaming “because I’m worth it” (BIWI)disease. A bit of “expectational adjustment” would seem to be in order.

Unfortunately, regulation is such a blunt instrument that in dealing with the aspirant IT property entrepreneur (who is obviously to be applauded for his efforts and needs no help from any regulators) the Reserve Bank is imposing widespread collateral damage on much less well endowed people looking for loans to finance housing and the property which acts as security for numerous small businesses.

I understand why the Labour opposition’s PR people can’t quite get the analysis done, spin not logic is their trade after all. That ought not to be the criterion for aspiring Prime Minister.

Wednesday, September 25, 2013

The Sheer Brilliance of Central Bank Intervention….

Venezuelan Arbitrage

by Alex Tabarrok on September 24, 2013 Marginal Revolution

Flights out of Venezuela to anywhere are 100% sold out, months in advance. Yet many planes are flying half-empty. Why? The official exchange rate is 6.3 bolivars per dollar but the black market rate is more like 42 bolivars to the dollar. Few people are allowed to convert bolivars to dollars at the official rate but there is an exception for people with a valid airline ticket. As a result people with an airline ticket can convert bolivars to dollars at the official rate and then sell the dollars at the much higher black market rate. Reuters has the story:

“It is possible to travel abroad for free due to this exchange rate magic,” said local economist Angel Garcia Banchs.

The profit is realized from an arbitrage process known locally as “el raspao,” or “the scrape.”

Credit cards are used abroad to get a cash advance — rather than buying merchandise. The dollars are then carried back into Venezuela and sold on the black market for some seven times the original exchange rate.

The large profit margin easily absorbs the cost of flights and accommodation for a trip.

“I’ve been able to buy new clothes and give some cash to all my closest family members!” said one delighted Venezuelan lady, just back from a trip to Europe.

…Some Venezuelans do not even bother leaving the country, but merely send their credit cards to friends overseas, who swipe the cards and send the cash back to Venezuela.

“This is the reason many airlines are sending half-empty planes,” Ricardo Cusanno, head of a local tourism council, told Reuters, saying the government should cross-reference flight lists with those requesting foreign exchange to outwit the no-shows.

Hat tip: Carl Danner.

Friday, September 20, 2013

Don’t try to diversify me…. read some history

Recent statements by the Deputy Leader of the Opposition and the Leader of the green Party claiming that the Government has failed to diversify the N.Z. economy are revealing of at least two concerns:

  1. The lingering notion that is the government’s role to “diversify economies” and that they should, forthwith, diversify. Worrying enough but likely to mean little more than the fact that the statement was made and endorsed for the usual petty reasons that seem to amuse politicians and make them feel better, but much more worrying is the possibility that:
  2. These people and their followers believe that it is possible for the government to diversify the economy, that government “knows” how to do that, that having chosen to diversify it would be able to and that its a good idea.

These ideas are especially loathsome in N.Z. where we have had considerable and bitterly costly attempts to macro and micro manage  economies in areas such as electricity production, fuel production, forestry, motor assembly, shoe manufacture, food manufacture and banking. In each case the result was heavy losses, eventual joblessness and high human costs as well as the imposition of high fiscal costs on generations.

Those struggling with the principles, the evidence and the experience simply need to do some serious – not politician’s – but serious study of history.

Monday, September 16, 2013

Saturday, September 14, 2013

Your Kidman(ing) me

Seemingly, a “snapper” as the Australians are want to call paparazzi, fell off his bike recently and in the process dented Nicole Kidman’s shin. Our sympathies Nicole. She is considering suing.

As she ponders how much to sue for, the local Court are hearing the charges against the aggressive photographer for:

  1. Riding on the pavement (ok…. understood);
  2. Causing harm to a pedestrian (ok… understood); and,
  3. Failing to wear a helmet.

Good on mother state – this boy’s availability to dent more shins means he has to be protected against his own stupidity.

Monday, September 9, 2013

You Don’t Say

The latest monthly property value index shows that nationwide residential values continued to increase in August. Values have increased 8.5% over the past year, with an increase of 2.9% over the past three months.  Values are now up 8.3% over the previous market peak of late 2007.

Latest News from

Wednesday, August 28, 2013

Normanomics and Mighty River–Mightily wrong

It is no doubt highly predictable that the our friend from Queensland would find the MRP result – a profit increase of 69% on last year – an outcome he couldn’t resist having a poke at. And he’s all over it – money denied the taxpayer, dividends they “really” own and so on.

Of course he fails to note:

  • that as an SOE it never produced a growth result like this;
  • that last year was probably the toughest yet to sell energy in;
  • that sales grew only slowly;
  • that generation was down; thus,
  • productivity and the MRP diversification paid off in spades.

The taxpayer does in fact still own 51% of MRP and numerous of the investors both institutional and individual are in fact NZ taxpayers.

Biggest killer was the share price being spooked by the threat of Control Freak Central running all over the electricity market in a reform which would have Stalin clapping.

Tuesday, August 27, 2013

Minimum Wages

Australian experience with a policy many in NZ argue is “humane” and “only fair” and “civilised”. Read about the civilising influence of minimum wages in Western Australia and Australia more generally.”

John Stossel looks at the evidence on Australia's minimum wage:

IA guest on my show once said that Australia shows high minimum wages work. After all, Australia has a much higher minimum wage (about $15 U.S. dollars per hour) and lower unemployment (5.7%.)

I responded on my blog that Australia's teen unemployment rate is bad -- 16.5% -- and that maybe it's because employers don't want to hire inexperienced workers for such a high wage.

But I was wrong to cite that number the way I did, as a writer at the (usually clueless and far left-wing) Columbia Journalism Review points out. First, the U.S. teen unemployment is even worse (24%). Second, the Australian minimum wage is actually set at less than $15 for teens. For kids under 16, the minimum is lower in Australia ($5.50 USD) . Older Australian teens, though, have a higher minimum wage than Americans, as the Australian minimum wage increases by age until it hits about $15 at age 20.

Just a few months ago, New Zealand followed Australia's lead in lowering its minimum wage for teen workers. American politicians should do the same.

Or should they? If minimum wages kill jobs, then why is Australia's unemployment rate lower than America's? It could be because of a huge mining boom, which drove salaries for truckers up to $150,000. Or because Australia is relatively close to China and benefits the most from that country's booming economy and trade. Or something that I have no clue about, but that the market has already figured out.

What I do know is that a higher minimum wage kills jobs. It does that in the U.S. and in Australia. In a 2004 study published in the Australian Economic Review, economist Andrew Leigh looked at what happened after Western Australia increased its minimum wage compared to the rest of Australia.

He found: "Relative to the rest of Australia, the [percentage of people employed] in Western Australia fell following each of six [minimum wage] rises." (Study here, update here.)

Another Australian economist, John Humphrey, summarizes the findings this way:

"[Leigh found] that for each 1 percent increase in the minimum wage we can expect... [to lose] 96,000 jobs" in Australia.

In his paper, Leigh cites many other studies that find similar results in the United States, and concludes:

"Australian minimum wages do 'bite', but it is not clear that they bite more fiercely than in America."

From the Future of Capitalism blog.

Sunday, August 11, 2013

Keep your “nudges” to yourself thank you….

There is more than a bit of “nudging” goes on in NZ. Nudging is based on the idea that a little gentle persuasion – for instance enrolling people in KiwiSaver “as the default” and into a “default provider” is “ok” since they can “get out” or change (in the case of a disliked default provider).

Various behavioural economists have used the research to justify this “with a gentle push” approach as being sound (on paternalistic grounds – mother still knows best, she’s just more gentle these days so that’s ok).

Leaving aside the questionable ethics of this sort of arrogance, Prof Don Boudreaux of George Mason University explains below why the policy process involved is flawed and dangerous…..

I don’t have the book readily at hand, but in Cass Sunstein’s 2013 volume Simpler– which I reviewed here – he uses his “libertarian paternalist” thesis to justify Uncle Sam’s resort to ever-stronger “nudges” to prevent people from smoking cigarettes.  The increasingly large and explicit warning labels, the significant restrictions on advertising, and the extraordinarily high ‘sin’ taxes on cigarettes have not – in the view of Sunstein and most other “Progressives” – worked sufficiently to prevent smoking.  So stronger “nudges” are justified.

It’s fair to point out that even within “nudge” theory a particular real-world nudge can be insufficiently strong.  But what are the criteria for deciding whether or not a “nudge” is sufficiently strong?  Sunstein’s happy justification for ever-stronger government efforts to “nudge” us away from using tobacco use reveal – to me, at least – one of the weaknesses of “nudge” theory. 

That weakness is that the only practical criterion for judging whether or not the strength of the nudge is adequate is whether or not the activity sought to be reduced has in fact been significantly reduced by the nudge.  If that activity hasn’t been significantly reduced, the libertarian paternalist would say, “Ok, in this instance people in fact exercise their freedom to ignore our nudges; so although these choices are not the ones that we planners wish people would make, we must accept these revealed preferences as reality and leave people be.  No nudging people any further on this front.”  In contrast, the libertarian paternalist would say, “Our nudging must get stronger because people are still behaving in ways that we disapprove of.”

At least with plain dictate we can see transparently who is pushing who around.

Thursday, August 8, 2013

Its almost never as dramatic as you think–immediacy bias at work again……

Property growth rates Dec 1990 to Dec 2012. QV comment:

The current rate of increase in Auckland, at around 13%, is well below the previous two property cycles. This suggests that if we are in the middle of another cycle of growth, and if this cycle reflects the previous two cycles, then we could expect values to increase nearly twice as fast as they currently are in the coming years.

Is this any sort of justification for intervening ??????

Economy Wide Lessons as the lustre of white gold loses its shine

It is critical to understand that the issues for the NZ economy arising from the current Fonterra debacle  (as opposed to dairy farmers and Fonterra directors and managers) is assuredly not a "public relations" issue or one of "reputational management". The best PR firm in the world cannot resolve such issues through spin - nor should it try.

Calling for better "PR" is simply a form of denial.

Key problems from an economy wide perspective are:

1. Nowhere else to turn

The choice for producers has been narrowed by statute to Fonterra for some 90% of the market. There is virtually no diversity, depth or spread of processing in the industry. The statute prevents it. Dissatisfied producers have nowhere else to turn. All eggs in one basket – then we drop the basket.

2. No incentive to create somewhere else to turn

Neither is there any incentive to invest and develop processing capacity. With only a tiny part of the market available since Fonterra has 90% of it, why would anyone invest and grow. At best some niche processing - Sunlait and A2 style processors for example - might develop.

This matters...

not because Fonterra is necessarily "poor" or run poorly - it matters because reality has it that there will be mistakes and accidents in even the best of companies. When those inevitable mistakes happen economies with a diversified capacity and several choices are able to respond. At the moment we can’t.
3. Serious competition keeps firms seriously sharp

Apparently this "best of breed" firm needs the protection of a statute. Regardless of claims to the contrary it remains the case that competition spurs productivity, higher standards and efficiency. Fonterra simply doesn't face that competition. If it is as sharp as claimed it would survive and prosper in the face of competition.

Apply the same forces everyone else faces.

4. Company mistakes should not contaminate the NZ brand

Lumping "all things NZ" together and tying them to one company runs huge risks for brand NZ. NZ is not itself nor is it synonymous with Fonterra or agriculture or dairying. The mistakes and misfortunes of one company are not the mistakes of NZ and the brand should not be punished for those.

This is the fundamental flaw of the entire NZ Inc. concept. We are not a single incorporated society which rides on the fate of single companies, industries or sectors. Our economy is undiversified enough without making it worse.

It took many costly years for Americans to learn that "what is good for General Motors" is not in fact necessarily good for America.

Tragically we knew this but we granted statutory powers to the co operative that is Fonterra. That is not, demonstrably not, in the interests of NZ. If we don't want a repeat performance we need to adjust the policy settings accordingly.

What's to do? And Not do

1. Detach, once and for all, the NZ Govt from dairying. Remove statutory protection from Fonterra and in one fell swoop we create the potential for choice, competition, development of diversity in capacity and we decouple Fonterra's brand risk from NZ brand risk. It doesn't come much simpler.

2. Leave Fonterra's owners to discipline Fonterra's management. It is their job, their concern, their responsibility. It is not for the Government or the media or any other "interested party" outside the owners. Under competitive conditions this would happen with even greater steel and urgency.

3. Do not see the issue as being about "PR" or "the Chinese" or "managing reputation". It is not - it is about having the best institutional arrangements for all firms to prosper. Govt’s role is not protection of producer organisations and when it plays that role it risks several things – notably - the taxpayers' brand name.

4. Make certain that we do not have a repetition in the meat industry and elsewhere... please pay attention and keep paying attention.

Thursday, August 1, 2013

Classic analyst drivel

In typical fashion is is reported that:

“Analysts say the New Zealand dollar now appears overvalued, but there are few signs it is going any way but up for now.” (Radio NZ)

What on earth would this mean and what does it add to the net sum of human knowledge?

  • compared with what exactly is the NZD overvalued?
  • is it over valued for an importer?
  • what is its “correct” value?
  • Who exactly has got this wrong?
  • Is even one analyst short the NZD?

Even to have said “there is of course no way of knowing how far up the NZD will go or when it might reverse but in the meantime its rise favours importers but not always exporters” might have been at least closer to the truth.

But no – easier to succumb to the temptation of filling the news space with that which is easy to say, requires no thinking and is essentially cut and past from the last time one felt lazy of an afternoon.

Saturday, July 27, 2013


Probably the most poorly understood characteristic of competition is the fact that competition absolutely ensures that the strong get weaker and the weak get stronger.

The tendency to believe that the opposite happens is so strong that it is embedded in numerous aphorisms. Such aphorisms attest to an absence – not the presence of competition.

The tendency is strong because of the ease of thinking in absolute not relative terms.  Cognitive sloth then is unhelpful.

Take away competition and you go a long way toward ensuring that the weak can never get strong while the strong grow ever stronger.

Crony capitalism, crony unionism, crony regulation and crony politics is therefore always fundamentally focussed on removing or lessening competition – that is why it is harmful.

Tuesday, July 23, 2013

The Next Bubble?

Student debt in the u.s. (part 3) Guest post from Kimberly Green

This is our third entry in a three-article series about student debt in the United States; our first entry tacked the causes of rising student debt, while the second part looked at the historical connection between tuition and debt.

BWGL comment – the value of this piece is the parallels between subprime and the GFC….. interesting questions arise.

Experts continue to debate whether student debt in the U.S. will lead to an economic bubble; one which, when it bursts, will mean dire consequences for the whole economy. As tuition rises, students are simply borrowing more and more; many financial experts worry graduates won’t be able to keep up. Most income levels don’t leave graduates prepared to handle large amounts of debt; when students make their monthly loan payments, they end up with less to spend on cars, houses and other consumer goods. So could paying off student debt cause the economy to plummet? Let’s explore the debt situation today and examine the potential for such a disaster.

Current debt statistics

Debt Bubble

The last two decades have been marked by sharp increases in student debt, leading to record highs in 2013. According to a report by Mark Kantrowitz of Edvisors, the average debt per student is now $30,000. Debt has tripled since 1993 and the reason for it is simple: Colleges just keep hiking their tuition. And while tuition spirals upwards, real income for middle-class workers has essentially stagnated over the last three decades. Today’s graduates aren’t making enough to pay their loans and live a comfortable lifestyle. Analysts worry the most heavily indebted won’t have enough money to buy cars, houses, or much else. Worse yet, some may simply stop paying their loans altogether. This could lead to a severe economic downturn similar to the ones following the housing and dot-com bubbles.

What is a bubble?

Economic bubbles are cycles that lead to a steep expansion followed by a quick contraction. The triggers of an economic bubble are difficult to pinpoint, but experts believe inflation and excessive pricing of specific products and services (such as tuition) play key roles. Financial roller coasters like these are unpredictable, and lead to disasters on the individual, organizational, and industry level. They can mean financial ruin for many participants who have built their businesses and lives on the high prices that come crashing down.

Homeowners caught in the housing bubble during the period of 2006-2012 faced high foreclosure rates as property values plummeted. Participants in the dot-com bubble experienced a similar crisis during 2000-2001, as people became overly-confident in the value of high-priced stocks. Many investors bought in, hoping the high-priced stocks would continue to grow and pay off. They flooded the market, purchasing shares until people realized the numbers didn’t add up and the market crashed – those who bought into the exuberance lost millions.

Will student debt be the next bubble?

Debt Bubble

Bubbles occur when a particular market is flooded with people eager to buy in, causing prices to skyrocket. This happened with the U.S. housing market and Silicon Valley startups before that. And it’s what we are seeing today with college enrollment, which grew by 11% between 1990 and 2000 followed by 37% over from 2000 to 2010, according to the Institute of Educational Sciences.

Some experts see clear similarities to past economic bubbles like the housing crisis that brought the whole U.S. economy to its knees. The Federal Advisory Council has certainly noticed the disturbing similarities between student debt and past bubbles, calling attention to the $1 trillion student debt record the nation has reached. They emphasize that as student debt rises, colleges continue to raise the price tag on tuition, creating a vicious cycle.

However, others are not so convinced we’re facing an economic bubble. Professor Robert Archibald from The College of William and Mary does not see the connection between student debt and a looming bubble. Professor Archibald explains student debt is different from debts of the recent past, since bubbles occur when an overpriced product suddenly drops in value. Instead, Professor Archibald contends the price will never come crashing down; students will simply be burdened with ever-growing debt and tuition costs each year.

Other consequences of the crisis

Yet even if prices don’t come crashing down and the bubble never bursts, graduates will face stagnant salaries and potentially long periods of unemployment. It’s difficult to envision an upturn in spending if graduates continue to leave higher education with unmanageable loan payments. Analysts are especially worried about the housing and automobile markets, which won’t see growth in purchases so long as students struggle. As students cut their budgets, rely on rentals, and use public transit, it remains unlikely that automobile and home purchases will rise. In lieu of a crisis, a depression in these key industries could indicate student debt will drag on the economy for years to come.

A true student debt crisis could arise from factors like inflation and the rising price of tuition, to name only two. If things continue along the current course, massive debt will not be a sustainable part of education for new generations of students. Something’s gotta give. The only question is whether student debt will be a hard and fast crisis or a drawn out burden we must shoulder.

Sunday, July 21, 2013

The toughest policy option–leave it alone

The debate over LVR regulation has become needlessly complex – the utter farce is that there is very widespread knowledge of the lunacy involved.

  1. If you prevent banks lending someone else will lend. Likely at a higher interest rate thus adding to the “risky housing debt” problem you set out to solve. Fail. And likely made things worse. Just don’t.
  2. If the object is to lower house prices and you assist someone to pay the price via an exemption or like workaround you just failed in your objective – worse everyone pays the price of the failure since workarounds are not free to administer.

If you do nothing, either:

  1. People conclude life is tough and adjust their aspirations down to their budget in the current market; or,
  2. People think more broadly in adjusting and think beyond living in Auckland or inner Auckland; or,
  3. People do borrow at excessive rates for their budget, get burned – nay fried – and learn a lesson nothing else will teach them; but,
  4. You do not impose the cost of their learning on all other investors and buyers; and,
  5. You have the satisfaction of being able to say “I used my brain, didn’t react on a short term ad hoc basis, and did what I know is correct in the long term.”

Just as an aside - imposing an LVR regulation will likely increase fiscal instability because of the higher variability of credit and default performance in non bank lending – that may be a breach of the Reserve Bank legislation which calls for the RB to maintain stability.

Testicular fortitude in this policy area please….

Thursday, July 18, 2013

How unfortunate… we’re not as unequal as some want to think

Brian Fallow’s recent article on inequality in NZ is a worthwhile read. Fallow could hardly be described as “right wing” or particularly a promoter of any hard line stance. He can be almost irritatingly neutral.

This is a well balanced assessment based on recent and relevant data. The conclusion – which being a journalist he opens with:

The idea that New Zealand has become one of the most unequal societies in the developed world is just not supported by the data.

is therefore worth noting.

Sunday, July 14, 2013

Brent Wheeler Group–site makeover

We have thoroughly stripped back, re built, made over, re thought and otherwise upped the ante with our corporate website Do take a look – there are some new features and plenty of new information.

Friday, June 14, 2013

Denial of reality for no good reason

I am struggling to understand the learning process – or perhaps it is the “benefits to denial” - as I watch the Reserve Bank go through the final motions of regulatory design as they prepare a scheme to prevent banks lending below certain loan to value ratios.
I am unconvinced that each and every economist and official involved is not aware that such schemes:
  • fail in their objectives
  • generate unintended consequences
  • distort price signals
  • raise the cost of lending
  • generate perverse incentives
and that’s just the main efficiency effects. On the equity side they
  • penalise those least able to afford housing
  • deny the poor access to capital markets
  • drive such capital as we have into the arms with lesser need for it.
We have done all this before. We have seen all these effects. We know the policy idea is flawed. Being in denial is unhelpful. So why? These guys get paid even if they don’t do it.
A better idea – for Auckland at least – would be to recommend strongly that the government gets rid of the school zoning regulations which drive several millions (which parents evidently are prepared to spend on education) into housing stock in favoured zones tying up capital, pushing up the price of housing all across the market and distorting prices.

Wednesday, May 22, 2013

Your deposit–guaranteed by a stamp–possibly

There is a certain delightful irony in S&P sounding warning notes about the famed KiwiBank (the policy and concept not the people or the board) and its relationship to Stamp Shop – NZ Post Limited (same caveat).

The NZ Post balance sheet proved a wonderful hoist in setting up AnderBank – a balance sheet not to be trifled with and a capital structure plus the ability to become a retail bank (and in recent years then some) appeared as if by magic.

Groans of “if only” from private sector banks who have to rely on a rather more conventional set of disciplines than those provided by an SOE with significant market power and political owners with deep pockets.

Handy asset backing for deposits since NZ Post is the guarantor for depositors.

So it seemed.

The market for sticky labels to drive snail mail has though…. come unstuck. The plethora of new rapid communication media – email, text, Skype – even ever cheaper cell phones – is leading to significant challenges for the posties.

S&P quite rightly perceive that if the mothership turns dog on the KiwiBank the guarantee may be found to have gone no address. Moreover the signal from the owner seems to be (as it should be) that “return to sender” is not an option either.

The once valuable asset has become at least a potential liability.

At which point the instruction – “find people with an appetite for the risks you are taking if you want to run a competitive bank” may have to be issued – just as it should have been prior to the birth of this much heralded people’s saviour.

Tuesday, May 7, 2013

The Underground Economy

The impact of recent regulation and re-regulation in NZ is likely to be leading to the same effects in our economy – see this post on the Future of Capitalism blog:

The New Yorker has an interesting article by James Surowiecki about "the underground recovery":

Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March). Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you'd expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we're stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. "It's typical that during recessions people work on the side while collecting unemployment," Baumohl told me. "But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer."... Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table.

Left mostly unexplored in the article, aside from the glancing though significant mention of unemployment benefits, is the way that regulation and taxes encourage this cash, off-the-books work. The more regulations the government heaps on employers and employees — health insurance mandates, payroll tax, minimum wage, and other reporting requirements — the more tempting it is for both parties to cut the government out of the deal and just reach a contract on their own.

Monday, May 6, 2013

The Economics of Social Status

Excellent prognostications from:

KEVIN SIMLER on MAY 1, 2013  ( Melting Asphalt.)

In economics, a good is anything that “satisfies human wants and provides utility.” This includes not just tangible goods like gold, grain, and real estate, but also services (housecleaning, dentistry, etc.) as well as abstract goods like love, health, and social status.

As an economic good, social status is a lot like health. They’re both intangible and highly personal. In proper economic terms, they are private goodsrivalrous and mostly excludable. And the fact that they’re hard to measure doesn’t make them any less valuable — in fact we spend trillions of dollars a year in their pursuit (though they often elude us).

But status differs from health in one very important respect: It can be transacted – spent as well as earned. It’s not a terminal good, but rather an intermediate good that helps us acquire other things of value. For example, I can trade some of my status for money, favors, sex, or information — and vice versa.

Health, if it’s possible to spend at all (e.g. in pursuit of career success), is extremely illiquid. But as I will argue today, status is so liquid — so easy to transact, and in real time — that it plays a fundamental economic role in our day-to-day lives.

Before we dig into the transactional nature of social status, let’s ground ourselves, briefly, in its biology and sociology.

The biology of status

No one plays status games in Heaven. Why bother? Souls have no want for food, sex, or smartphones — and thanks to His omnipresence, God even takes the fun out competing for an audience with Him.

Meanwhile, here on Earth, we (embodied primates) engage in all manner of status games. It’s one of the ways we compete over access to scarce resources like food and mates. And it’s something we share with a lot of other social animals — chickens, dogs, chimps, etc.

Here are some of the concepts that govern the day-to-day biology of social status:

  • Prestige vs. dominance. Joseph Henrich (of WEIRD fame) distinguishes two types of status. Prestige is the kind of status we get from being an impressive human specimen (think Meryl Streep), and it’s governed by our ‘approach’ instincts. Dominance, on the other hand, is the kind of status we get from being able to intimidate others (think Joseph Stalin), and is governed by fear and other ‘avoid’ instincts. Of course these two types of status aren’t mutually exclusive, but they’re analytically distinct strategies with different biological expressions.
  • Fitness displays. In The Mating Mind, Geoffrey Miller argues that many of our most prized, socially-desirable qualities — athleticism, artistic skill, eloquence, intelligence, physical beauty — serve as fitness displays, i.e., advertisements for the quality of our genes. We are attracted, socially and sexually, to people with high skill and beauty, largely because these traits are honest signals of good genes. [1]
  • Hormones. There are at least two hormones involved in processing social status: testosterone and cortisol. To grossly oversimplify, testosterone is the ‘aggression hormone’ while cortisol is the ‘stress hormone.’ In a recent paper (and also a great TED talk), Amy Cuddy et al. asked participants to adopt either a high-status pose or a low-status pose for ten minutes. The researchers then measured participants’ hormone levels and their willingness to take risks on games of chance (a behavior associated with feelings of power). Participants who took high-status poses showed increased testosterone and reduced cortisol levels, and took greater risks, relative to their counterparts who were asked to adopt low-status poses.
  • Body language. Cuddy’s experiment also illustrates the role played by our bodies in mediating status. Specifically, we’re wired to interpret people’s use of space in terms of status — the more space you take up, the higher your status. Also relevant are postures of intimidation, submission, and vulnerability.

The point I’m trying to make here is that social status is not arbitrary. Instead, it’s grounded, very concretely, in the biology of honest signals – and as such, it’s subject to very real constraints. Wild swings of status are possible, but they’re mostly the stuff of stories. Our daily lives are governed by much smaller — and more predictable — gains and losses.

Sociology: Keeping (and cooking) the books

Ultimately, status lives in the minds (and bodies) of all the humans within a given community — by which I mean, primarily, other people’s minds and bodies. You might maintain a sense of your own status, but it’s not really up to you. Status is fundamentally about how othersperceive and interact with you (and what they allow you to get away with). It’s like keeping a checkbook — you might maintain your own ledger for planning and making decisions, but the official balance lies with the bank.

There are many ways to define status, but as a working definition let’s take status to be

the total amount of social influence a person has over the other members of his or her community.

There’s a lot to unpack from this definition. Here are some of the more interesting implications:

Status is defined with respect to a community. This accords with how we reason about status in the real world. You don’t have one canonical status for all occasions. You might have relatively low status in your workplace but high status at your church, with hardly any cognitive dissonance on the part of everyone involved. [2]

Status is zero-sum (to a first approximation). There’s only a fixed amount of influence to go around. Some have squirmed to dodge this conclusion, but let’s just bite the bullet and be done with it. If nothing else, this should motivate our discussion of status as an economic good. [3]

Status is not a positional good. It’s sometimes argued (e.g. on Wikipedia) that status doesn’t have a cardinal value — only ordinal (rank) values. According to this view, status is synonymous with your relative position on the totem pole — but I don’t think this is correct. You can be the highest-status member of your community by a wide or narrow margin, depending on how much influence you have. There are ‘distances’ involved, not just relative positions. Geert Hofstede’s power distance index is an illustration of the cardinal nature of status.

Status is a value that summarizes a very high-dimensional quality. The underlying reality is the set of all pairwise influence values (A’s influence over B, A’s influence over C, etc.). These values can be averaged or summed (which is how we typically think of status), but they also have a variance, a kurtosis, etc. To complicate things even further, we might consider treating status as the weighted sum of all the pairwise influences — weighted (perhaps perversely) by the status of each of the people being influenced. Additionally, some influences aren’t pairwise at all — you can have influence over an entire group, even without having much influence over any of the members in isolation. I don’t think it changes much of the analysis here, but it’s useful to know that we’re dealing in approximations.

Status is (in part) a knowledge problem. Your status is based not just on how people react to you, but also on how people think everyone else will react to you. This gives rise to all manner of higher-order effects: common knowledge issues, perception management, manipulation of consensus reality, etc.

Because of these higher-order effects, status is most reliably measured in public. We tweak our private estimates during every pairwise interaction, but reconcile those estimates during interactions that take place in front of larger audiences — because that’s where we can observe the reactions of everyone else. This explains some of our desire to watch speeches, movies, events, etc. in large crowds, despite the convenience of watching from a screen at home. Large crowds can be manipulated, of course, but the very manipulation is itself an honest signal of influence.

Basic status transactions

Now we get to the really interesting stuff: the economic properties of social status.

Let’s start with transactions, since they form the basis of an economy. Status is part of our system for competing over scarce resources, so it should be no surprise that it participates in so many of our daily transactions. Some examples:

  • We trade status for favors (and vice versa). This is so common you might not even realize it, but even the simple act of saying “please” and “thank you” accords a nominal amount of status to the person doing the favor. The fact that status is at stake in these transactions becomes clear when the pleasantries are withheld, which we often interpret as an insult (i.e., a threat to our status).
  • An apology is a ritual lowering of one’s status to compensate for a (real or perceived) affront. As with gratitude, withholding an apology is perceived as an insult.
  • We trade status for information (and vice versa). This is one component of “powertalk,” as illustrated in the Gervais Principle series.
  • We trade status for sex (and vice versa), which often goes by the name “seduction.” Sometimes even the institution of marriage functions as a sex-for-status transaction. Dowries illustrate this principle by working against it — they reinforce class/caste systems by making it harder for high-status men to marry low-status women.
  • We reward employees in the form of institutionalized status (titles, promotions, parking spots), which trade off against salary as a form of compensation.
  • We can turn money into status by means of conspicuous consumption, or status into money by means of endorsement (i.e., being paid to lend status to an endeavor).

None of these transactions is perfectly clean, and most of them are impossible to audit (arguably a feature rather than a bug, for some transactions). Paying with status is much murkier than paying with dollars, and it’s easy to get something other than what you expected. But don’t let the uncertainty or the potential for cheating distract you. There are real gains to be had from these kinds of trades — so, as humans always do, we find a way. Our emotions, for example, often tell us when we’ve been cheated in a status transaction, even if it’s hard to articulate exactly how.

In addition to participating in direct, X-for-Y trades like the above, status also functions as collateral or “table stakes.” (We often call this type of status “reputation.”) In many ways, a favor is like a loan (of time, energy, or some other resource) collateralized by the status of the borrower. It’s a weird kind of collateral, since it can’t be transfered to the creditor if the borrower defaults. But the borrower’s status can be destroyed or ruined, which provides incentive enough for most purposes. The bigger the favor, of course, the more status needs to be put up as collateral. This explains why it’s hard for a low-status person to ask a high-status person for a favor, but easy for a high-status person to make the request.

“Bidding for status” is another activity with economic characteristics. The nature of a bid is that it sets a particular ‘price’ that can be accepted or rejected. Robin Hanson suspects that speaking in public is a way of bidding for status. The very act of standing in front of a group and speaking authoritatively represents a claim to relatively high status. If you speak on behalf of the group – i.e., making statements that summarize the group’s position or commit the group to a course of action — then you’re claiming even higher status. These bids can either be accepted by the group (if they show approval or rapt attention, and let you continue to speak) or rejected (if they show disapproval, interrupt you, ignore you, or boo you off stage).

Similarly, every request for a favor is a complex bidding process (i.e. negotiation) framed largely — and often implicitly — in terms of status. When a manager, for example, gives a task to a subordinate, many nuances are involved in negotiating the ‘price’ of the favor in terms of the subordinate’s status:

  • Does the manager frame the task as a favor (high status for the subordinate), as a request (medium status), or as a demand (low status)?
  • Does the manager lower his or her status when making the request? Please and thank you are just the two most ritualized ways of doing this; there are many others. Alternately, does the manager attempt to raise the status of the subordinate? E.g. “You’d be really good at this.”
  • Conditional verbs (would, could) allude to the subordinate’s autonomy (and high status), whereas declarative verbs set an expectation that there will be no negotiating (low status).
  • Does the subordinate acquiesce immediately to the request (low status), hint at requiring extra terms (medium status), or outright reject the request (high status)?
  • Does the subordinate accept the task happily (low status) or begrudgingly (high status)?
  • … Etc.

One-off transactions (like a favor) usually take place within the context of a relationship. Different types of relationships can be viewed as primitive ‘contracts.’ Friendship, for example, is a contract whose terms specify that the two friends are roughly equal in status (at least within the frame of the relationship) and that they’ve agreed to dispense with fine-grained accounting of every status transaction. In Impro, Keith Johnstone says of friends that they are “people who agree to play status games together.” The emphasis here is on games – friends play status for fun rather than for keeps. Other types of relationships (manager/subordinate, mentor/mentee, partnerships, client/vendor, etc.) set different terms for how status is to be transacted between the parties, which I leave as an exercise to the reader.

Status as money

So far we’ve been talking about status as a good without trying to articulate its formal economic properties. So now I’d like to propose that status functions as money. We have a few idioms that encode this idea — social capital, political capital, etc. — but the analogy goes a lot deeper than our ordinary use of language permits.

In economic terms, for a good to function as money it must serve three related purposes:

  1. A medium of exchange,
  2. A store of value, and
  3. A unit of account.

We’ve already discussed how status functions as a medium of exchange. Because it’s so fluid, it can be used to price favors and other goods at relatively fine resolutions, and it facilitates transactions that wouldn’t otherwise be able to occur. Negotiating with status beats the hell out of bartering — i.e., trading one specific good for another — thereby allowing smoother, more efficient economies to develop.

I hope it’s also clear that status functions as a store of value. It’s not as stable as gold or USD, which hold their value with much less volatility. But status can certainly be accumulated (within a given community) and it doesn’t depreciate too quickly.

Whether status functions as a unit of account is much less clear. A unit of account is what allows e.g. a firm to know whether it’s operating at a profit or a loss. And this requires, well, an actual unit – something precise and quantifiable, neither of which is status’s strong suit. Nor can status be aggregated across individuals. But where it lacks objectivity, it is at leastsubjectively measurable, i.e., across an individual’s life history. At the end of a work day, for example, you’ll have a pretty good sense for whether you gained or lost status that day. And at larger time scales (quarters or years), you can have reasonable certainty about whether you’re doing better or worse than you expected. This allows status to function as a unit of account for your individual P/L. It certainly helps you make decisions about when to switch roles or jobs or careers, or when to seek out new friends — or just try something different. It also lets you (and others) know when you’ve gone bankrupt, which is usually accompanied by some kind of formal intervention from the community, up to and including excommunication.

So: status may not be an ideal money, but it’s close enough for the metaphor to hold water. (Also encouraging: apparently money and social status are processed in the same region of the brain.) At any rate, here’s what happens when we apply monetary economic concepts to the realm of social status:

Liquidity. Status, like other forms of capital, can be more or less liquid. Status liquidity is inversely proportional to how much it is institutionalized. Institutional forms of status include titles, formal roles, positions within a hierarchy, desk/office location, parking spots, and membership in decision-making bodies. These forms of status hold their value much better than reputational status — which is why they’re coveted by employees — but they also make some transactions more difficult. If you’ve ever worked with someone who’s not as valuable as his title or role would suggest, you know how frustratingly inefficient such an arrangement can be.

Gresham’s Law. Gresham’s Law states that “bad money drives out good.” The classic example is that people will attempt to spend coins suspected of being counterfeit before they spend coins that they know to be honest. Does something similar happen with social status? Emphatically, yes. Within the economy of an office, say, we can distinguish between the ‘honest’ status earned by doing one’s job vs. the ‘counterfeit’ status earned by carefully manipulating one’s image. It’s all too easy to reach an equilibrium where counterfeit, image-based status drives out honest, reality-based status. Once an office culture allows its employees to win large amounts of status by ‘talking themselves up,’ everyone drops what they’re doing to focus on seeking credit and avoiding blame. In such an economy, only a sucker does any real work.

Status inflation. Inflation is a bit tricky because it requires that value be measured in terms of a specific unit — which can then be debased by ‘minting’ more of those units. Dollars clearly fit the bill, but we can find inflationary tendencies in almost every explicit measure of status. Companies — and sometimes even entire industries — can experience title inflation, for example. Or top-heaviness, which is basically an ‘inflation’ of the hierarchy. I don’t know of any studies that attempt to measure office inflation, but I wouldn’t be surprised to find that as companies age, they tend toward office buildings that have more windows, or just nicer space in general. Even more cynically, I wonder if the practice of hiring interns is driven (in part) by the same incentives that lead to other forms of hierarchy inflation.

Status arbitrage. I’m not sure if the analogy is perfect, but the word arbitrate suggests a parallel between status mediation and financial arbitrage. If you play the role of mediator in a community, you can earn status by brokering conflicts. A conflict usually arises when two parties disagree about their relative statuses, i.e., when there’s a price discrepancy. Since any successful resolution will involve a re-pricing, it might be possible to view mediation in terms of siphoning off some of the status that needs to be exchanged in order to successfully resolve the conflict.

Currency blocs. Previously we defined status with respect to a community, but we could also flip it around:

A community is a group of people who agree on how to measure status among their members.

In other words, it’s a group of people who share a common status currency. Silicon Valley, for example, is a community oriented around a particular way of measuring status — the ability to influence the growth of engineering companies. But Silicon-Valley status won’t buy you anything in Hollywood — unless you convert it to something that makes sense in the Hollywood economy. (Financial wealth usually does the trick).

This definition allows us not only to draw boundaries between communities (porous and fuzzy though they may be), but also allows us to discuss the strength of a community, i.e., thelevel of agreement about how to measure status. Google, for example, is a fairly strong community insofar as Googlers agree on how to measure status among themselves, butGoogle engineering might be an even stronger community.

Treating communities as “status-currency blocs” helps explain how there’s relatively free trade (at low transaction costs) within the community — and also how trade is distorted across community boundaries. The fluctuating ‘exchange rates’ and asymmetric information make cross-community interaction more difficult. When a Google VP walks into a meeting with some employees from Facebook, say, everyone will be unsure about their relative statuses, and the group will have to spend time and effort (and a lot of posturing) in order to figure it out.

The “currency bloc” metaphor also helps explain both the benefits and the costs of institutional re-orgs. Merging two organizations, for example, can increase economic efficiency (by standardizing on a single status currency and thereby facilitating more interaction/trade), but the integration will also require some ‘repricing’ — with resistance from everyone who loses out.


If status acts as a medium of exchange, then one of the most important questions we can ask is how it contributes to economic efficiency.

For simplicity, I’m going to focus on the economies that develop in mid-sized office environments. As we’ve seen, status is just one of the goods flowing through such an economy. Other goods include money (salaries and bonuses), information, favors, desk location, task assignments, and access to decision-makers.

Different types of organizations have different ways of ‘metabolizing’ status. An engineering company, for example, has limited external use for social status, but uses it internally as a currency — to account for wins/losses and to facilitate the metabolism of less-liquid resources. A relationships business, on the other hand (e.g. a wealth management firm),does use status externally, as leverage in negotiating relationships. So whereas conspicuous consumption is a liability to an engineering firm, it’s an asset to a business that runs on relationships.

Let’s define a culture’s use of status as efficient if status transactions tend to advance the goals of the community.

An efficient culture, then, is first and foremost a meritocracy. Status will be awarded for skills and contributions that advance shared goals — making a big sale, meeting an important deadline, etc. And status will not be awarded for things that are orthogonal to (or detract from) the goals of the community. These include: nepotism, flattery and ass-kissing, race/gender/age, and humor/beauty/external status (unless they’re important for getting the job done). And seniority should correlate with ‘substantive contributions’; no one should be rewarded just for warming a chair.

But how status is awarded is only half of the equation; we also have to ask how status is spent. Do people use their status to pursue shared goals, or rather to advance their own, competing agendas? Executives who abuse the corporate credit card, get off on harassing their employees, or engage in certain types of empire-building, for example, are contributing to an inefficient culture.

Dominance status is an especially tricky proposition. There’s a niche for dominance in human societies, so trying to get by without it is an unstable arrangement. And it’s necessary for keeping people in line. But there’s also a real potential for abuse. People often use dominance to reinforce their status in ways that don’t advance shared goals. And in addition to being potentially inefficient, dominance also has the effect of silencing criticism. Criticism is always a threat to one’s status, but unless your goal is to maintain your own status at all costs, you need criticism to stay on the right track. No one makes perfect decisions at all times, and not everyone promoted into a position of leadership is good for the organization.

There are many, many nuances to attend to here — all of them important to maintaining an efficient culture. But in the interest of space, I’d like to call attention to two disease states in particular:

Gossip. Some gossip is necessary for moving information around, but often it’s used to lower someone’s status behind his or her back. This is especially pernicious. Because gossip can’t be confronted outright, it leads to an equilibrium where everyone needs to spread rumors and participate in the gossip mill just to maintain their position. Sticking to the economic metaphors, gossip is like a black market for shorting other people’s status in exchange for elevating your own (among your gossiping partners). Bridgewater — the world’s largest hedge fund and, I would argue, an extremely efficient culture — elevates gossip to the level ofcapital offense.

Politics. It’s hard, perhaps even impossible, to provide a neutral account of what constitutes ‘political’ behavior in an office, but here goes: Politics is any attempt to win status through actions that don’t advance the goals of the community. The economic analogue here is rent-seeking — vying for a larger share of the pie in ways that don’t increase the overall size of the pie. Rent-seeking behaviors in a status economy include: competing for access to high-status individuals, hoarding resources that could be put to better use, acting as an information broker (requiring payment instead of giving information freely), and (as we’ve seen) manipulating one’s image instead of attending to reality. Efforts spent on politics/rent-seeking represent deadweight loss in an office economy.

The macroeconomics of social status

It’s a somewhat arbitrary distinction, but traditionally microeconomics studies behavior at the scale of the firm and smaller units, while macroeconomics studies behavior at regional, national, and global scales. By way of wrapping up, I’d like to sketch some steps toward a macroeconomic account of status.

First there’s national politics, which is driven by status more than we typically admit. As Tyler Cowen argues:

Occasionally the real force behind a political ideology is the subconsciously held desire that a certain group of people should not be allowed to rise in relative status.

This extends beyond overt identity politics (like the marriage equality debate). Even an issue like gun control, for example, is driven (at least in part) by the desire to stigmatize or support not just gun-ownership, but the group of people who own guns.

Jack Balkin explores similar themes in his article The Constitution of Status (a wonderful read, by the way), where he treats status very explicitly as an economic good. But in contrast to the micro scale, where status is a property of individuals, on the macro scale status is a property of entire groups of people. As such it tends to be manipulated (a) symbolically and (b) through the making and interpreting of law.

Finally, I have a hunch that we can even use the economics of status to understandcivilizational decay. Such an account might start with the observation that status-seeking is a very powerful force. Thus, civilizations that can harness it more efficiently (toward material progress and/or military power) will grow faster. But a civilization can get in trouble when it institutionalizes a particular form of status (i.e., a particular status currency) that later becomes decoupled from the ever-shifting material economy. At that point, status-seeking behaviors that were once economically productive become counter-productive (i.e. rent-seeking), and sooner or later — or in some cases, much, much later — the civilization will fall.


[1] fitness displays. The argument for fitness displays (of both body and brain) is interesting. The body and the brain both have a large genetic (and ontogenetic) ‘surface area.’ Many genes contribute to their development, and if any of those genes are defective, something will come out looking (or thinking) a little wonky. This is compounded by the barrage of entropy from the physical environment — malnutrition, predators, and especially parasites (viruses, bacteria, fungi). When an adult ends up with a highly symmetrical face or a brain capable of wielding a large vocabulary, it’s a strong signal that his or her immune system was able to defend itself from a great many dangers that could have disrupted development. Geoffrey Miller explains this in a lot of great detail in The Mating Mind.

[2] status ~ community. In a slightly more sophisticated formulation, we could define status with respect to a given frame, which would encompass not just a particular community, but also a set of circumstances and/or concepts. For example, if the mayor of a town is cheering for her son at a soccer game, she’s a low-status member of the game (i.e. just a fan, not a player or coach or referree), while simultaneously a high-status member of the town – even if it’s mostly the same people involved. The endless reframing that goes on (and the attendant implications for status) provides much of the spice and drama of daily life. Understanding these frames and being able to manipulate them (even in the course of a single conversation) is the consummate art of the politician.

[3] status ~ zero-sum. If status is a non-zero-sum game, it’s not because you can re-define your community in order to change your status. Moving to a “smaller pond” might change your relative status, and might even change your absolute status, but it doesn’t change the size of the overall human status pool. Your increase in status comes at the cost of lowering the status of others. Instead, if status is a non-zero-sum game, it’s because communities can accord more or less influence and respect in aggregate to their members. In other words, raising the level of trust within a community is a way of creating more status/influence to spread around.

Tuesday, April 30, 2013

Telecommunications in New Zealand

David Farrar has blogged some interesting numbers on telecommunications in New Zealand.  These come from the Commerce Commission, but are nicely summarised by him.


It certainly gives a clear view of the way telecommunications choices are moving away from fixed line voice calls to mobile, text and internet connections.

Friday, April 19, 2013

Nigel Farage: Get Your Money out of the Eurozone

Years ago, Mrs Thatcher recognised the truth behind the European Project. She saw that it was about taking away democracy from nation states and handing that power to largely unaccountable people.
Knowing as she did that the euro would not work she saw that this was a very dangerous design. Now we in UKIP take that same view and I tried over the years in this parliament to predict what the next moves would be as the euro disaster unfolded.
But not even me, in my most pessimistic of speeches would have imagined, Mr Rehn, that you and others in the Troika would resort to the level of common criminals and steal money from peoples' bank accounts in order to keep propped up this total failure that is the euro.
You even tried to take money away from the small investors in direct breach of the promise you made back in 2008.
Well the precedent has been set, and if we look at countries like Spain where business bankruptcies are up 45% year on year, we can see what your plan is to deal with the other bailouts as they come.
I must say, the message this sends out to investors is very loud and clear: Get your money out of the Eurozone before they come for you.
What you have done in Cyprus is you actually sounded the death knell of the euro. Nobody in the international community will have confidence in leaving their money there.
And how ironic to see the Russian prime minister Dmitry Medvedev compare your actions and say, ' I can only compare it to some of the decisions taken by the Soviet authorities.'
And then we have a new German proposal that says that actually what we ought to do is confiscate some of the value of peoples' properties in the southern Mediterranean eurozone states.
This European Union is the new communism. It is power without limits. It is creating a tide of human misery and the sooner it is swept away the better.
But what of this place, what of the parliament? This parliament has the ability to hold the Commission to account. I have put down a motion of censure debate on the table. I wonder whether any of you have the courage to recognise it and to support it. I very much doubt that.
And I am minded that there is a new Mrs Thatcher in Europe and he is called Frits Bolkenstein. And he has said of this parliament - remember he is a former Commissioner: 'It is not representative anymore for the Dutch or European citizen. The European Parliament is living out a federal fantasy which is no longer sustainable.
Nigel Paul Farage is a British politician and leader of the UK Independence Party (UKIP) since 2010