The case for unilateral recognition

Bilateral, plurilateral, and multilateral are words that New Zealand's civil service love. There is nothing that can't be improved by doing it in concert with others. 

Sometimes there's good reason for just doing stuff. 

New Zealand made the right decision when it unilaterally slashed all of its tariffs. It also progressed all the other trade agreements that helped make trade easier. But it didn't wait for those lengthy processes. Just cutting tariffs earlier was just fine. 

A couple of weeks ago in Newsroom, I made the case for doing the same thing with standards recognition. We already do it with automobiles. We don't need bilateral or any other agreements between New Zealand and other places to make sure that the cars we import are safe. Instead, there's a long list of standards that New Zealand considers to be good enough, whether the standard-setting countries like it or not. Pretty unlikely that they'd object though. 

New Zealand is part of FSANZ - a bilateral standards-setting body for food-labelling. NZ and the Australian States jointly set the product labelling rules. But it also means that imported foods that aren't labelled for the NZ-Oz market have to carry the stupid little stickers that add cost but no real value. 

Like it did with cars, New Zealand could unilaterally say that products labelled for the American, Canadian, Singaporean, UK, Irish, or EU markets (so long as the labelling includes English) is good enough for here too. We don't need bilateral, multilateral, plurilateral, or any other kind of -lateral agreements to do it. We could just do it. 

Sure, it would be even better if those countries all said that FSANZ labelling is good enough for their markets. But getting that agreement seems impossible for Canada, and probably hard for the rest. And much of the market-access benefit can be achieved through unilateral recognition. If NZ unilaterally said that products labelled to Canadian standards were good enough for NZ, then a NZ producer targeting the Canadian market could just label everything to the Canadian standard and sell that version here and there. 

First best would be everyone just agreeing that everyone has been stupidly precious about all of this, and that the labelling for any of these markets is good enough. Then nobody would have to set country-specific labelling runs. And if it were likely that NZ could have agreements with piles of countries to accept each others' labelling, then an NZ producer wouldn't have to decide which of those markets it was targeting. NZ labelling would be good enough for all of them. 

But bilingual labelling in Canada is best viewed as a religious commitment. 

MinReg this week put up an excellent report on the costs of this kind of labelling nonsense. It makes the case for, among other things, mutual recognition of international labelling standards with trusted jurisdictions. 

I don't disagree, conditional on those agreements being feasible to achieve in finite time and not precluding NZ acceptance of other country standards as well. 

But unilateral recognition should also be on the table. Having UK-labelled stuff on the shelves here would be just fine. And it'd make it easier for a UK-based supermarket to open stores here, if it wanted to.

Migration or Stagnation

Michael Clemens shows that a rise in noncitizen worker prevalence in Korea from 3% to about 14% over four decades would offset the effect of Korea's demographic shift. 

The Republic of Korea (ROK) faces an economic crisis driven by rapid population aging, approaching negative economic growth. I quantitatively examine the full range of policy responses and find that enhanced temporary labor migration is necessary, sufficient, and feasible to offset demographic drag. It is necessary because no other policy channel (including capital accumulation, artificial intelligence adoption, elderwork, education, or pronatalism) has the clear quantitative potential to meaningfully offset aging in the best available forecasts. It is sufficient because a rise in noncitizen worker prevalence from 3% to about 14% over 4 decades would offset most of the demographic drag on economic growth in the ROK. And it is feasible because this trajectory resembles that already experienced by Malaysia and Australia. Many advanced economies will follow in the ROK’s demographic footsteps and have much to learn from its decisions.

I'd run some rough figures earlier in the year. If NZ maintained net migration of around 1.8 young net migrants for every person turning 65, you could maintain the current under-65 to over-65 ratio. The absolute number of migrants would have to go up as resident migrants age. If other ways of changing NZ Superannuation are ruled out, this would be an alternative.

Potential deregulations

Cato's Handbook on Affordability provides a set of policy recommendations for reducing unnecessary government-imposed costs. 

There's the usual stuff you'd expect, much of which is US-focused.

But a few bits are worth thinking about here too.

In the chapter on healthcare, Cato suggests automatic removal of prescription-only requirements from medicines. They write:

• Eliminate prescription regulation. The FDA makes medicines less affordable by requiring patients to obtain unnecessary and costly prescriptions. Adults can safely self-medicate with many medicines—including birth control pills, HIV prophylaxis, and GLP-1s—for which the FDA currently requires a prescription. Overall, prescription regulation increases prices, increases the nonprice costs of obtaining medicines, reduces access, and ironically reduces patient safety. While direct-to-consumer platforms such as TrumpRx, Cost Plus Drugs, Amazon Pharmacy, and GoodRx can theoretically reduce prices by injecting transparency and competition, the more effective reform would be to strip the FDA of its power to require prescriptions. 
• Remove unnecessary prescription requirements. If Congress cannot take prescription regulation power from the FDA, then Congress should enact rules that automatically remove prescription requirements after a certain period of time, which would allow consumers to purchase more medicines directly. Greater over-the-counter access would reduce the price and nonprice costs of medicines. 

John Key made pseudoephedrine-based cold medicines prescription-only. It seemed unlikely to substantially affect access to methamphetamine. Within about four years it was very clear that the policy failed. But it took about a decade more before that prescription-only status was removed. 

New Zealand could schedule review of longstanding prescription-only classifications, with a presumption favouring equivalent access where trustworthy overseas jurisdictions allow non-prescription access. Maintaining prescription-only status would require published justification that takes into account the added cost and burden imposed by prescription requirements.

In the chapter on childcare, Cato recommends expanding the supply of au pairs on the J-1 visa, simplifying the administrative burden facing households employing in-home care, broadening visas for childcare more generally (noting that a 10 percent increase in low-skilled immigration may reduce childcare costs by 2 percent), easing degree requirements for childcare workers, and subjecting car seat mandates to cost-benefit review.

A lot of those recommendations could carry over to here. 

The benefits of car seats for older kids aren't that big, and the costs are real. 

Immigration NZ guidance says that a niece or cousin visiting for six months to help with childcare is likely to count as working, with consequent need for a work visa. And if that work tallies to more than 30 hours per week, the relatively-simple IR56 isn't available. Surely a simplified visa and tax process could apply. 

The rest of the report's worth looking at - but mainly focuses on US issues or things that I've already covered otherwise. 

For a sense of proportion: datacentre water use

I like this chart, from Andreas Heuser and Phil Whittington's excellent piece making the case for datacentres.

Nobody has a sense of perspective on industrial-scale water use. 

Disappointing - Updated

The ACT Party has announced a new policy that would:

• Remove the existing Permanent Resident visa category;
• Require all Resident Visa holders to receive a 5 year travel facility, replacing the current two-year initial travel condition;
• Require all Resident Visa holders to be physically present in New Zealand for at least 730 days within any rolling five-year period, with exemptions for those working overseas for NZ employers, accompanying family-members, military personnel serving overseas, those with a citizen-spouse, or other compelling humanitarian reasons.

I have questions. 

• Are existing Permanent Residents to be grandparented to that status, with the category only closed to new entry? Or do we all lose Permanent Residence?
• If existing Permanent Residents lose that status, are we punted into the resident category or does something else happen?
• Many countries forbid dual citizenship, or make dual citizenship really hard. Some will withdraw your existing citizenship if you take up citizenship in a second country. Anyone who is a citizen of one of those countries and is resident in NZ would be forbidden from splitting time between the two countries without taking up NZ citizenship, which would mean the loss of that other citizenship. Would this count as a humanitarian reason for an exemption? How much red tape will be involved in getting that kind of exemption? What would be the associated regulatory burden both on those required to jump through the new hurdles, and those required to process the paperwork?
• The Active Investor Plus visa provides a path to residence in which those investing at least $5 million can be eligible for residence with 21 days' presence over three years, or by investing $10 million and spending 105 days here over five years. Investors in that pathway, who will have invested millions of dollars, are promised that they can obtain Permanent Residence after meeting those requirements. They are not listed as an exemption. And you have promised to abolish the category that formed the basis for their investments. Many of them will be managing investments across multiple countries, and New Zealand's general not being giant jerks to migrants pitch has been part of the deal. Will you provide them with a grandparented right to the Permanent Resident visa category? If not, will you compensate them for any losses if they liquidate NZ investments where you've broken the deal? 
• To what actual problem is your proposed policy the most cost-effective solution, and do you really think the benefits exceed the cost? There are going to be a whole pile of unintended consequences if you go ahead with this. 

Update:

An ACT Party spokesperson has provided a few additional details. What they have in mind is not as bad as the worst-version.

The policy is not retrospective, so existing Permanent Resident Visa holders would not be affected.  Nobody who already holds a Permanent Resident Visa would be moved onto another visa, required to reapply, or subjected to the new 730-day requirement. ...

The Active Investor Plus Visa is exempt, so the existing arrangements for those investors, and future ones in the same category, would remain.

I still really do not like any of this. But at least it is not retrospective. And at least those coming through the Active Investor Plus category will not be affected. I don't know whether they'd achieve that by voiding the days-test for residents who came through that pathway, or by closing the PR pathway to everyone but those coming through specific channels. 

Conditional on there having been some decision to create a wider differential between residence and citizenship, I think it would have been better to also maintain a PR channel for residents whose passport-country forbids or makes dual-citizenship onerous. 

Hating trees

New Zealand's Zero Carbon Act sets net emission targets. 

This is sensible. The atmosphere does not care whether the next tonne of CO2-e is not-emitted or removed. They amount to the same thing. 

It also aligns with the ETS's design, which requires surrender of an NZU for putting CO2-e into the atmosphere and awards an NZU for pulling a tonne of CO2-e out of the atmosphere. 

Arguably NZ ought to have had a carbon tax in the first place and a subsidy for removals, but it's hard to see it's worth the switching costs. 

There are things I would improve in the ETS. 

I would legislate the quantum of *unbacked* NZU that can be auctioned or allocated between now and 2050. That quantity, plus any existing stockpiles of unbacked NZU still held in reserve, would represent net emissions from the covered sector from now until forever. 

I would replace the price cap with one that tracks global weighted average carbon prices in credible systems. If prices here ever hit that cap, the government could purchase units in the cheapest country in the bundle that defines the average, retire them, and issue an equivalent quantity of NZU. Those units are backed by reductions elsewhere. NZ carbon prices would never exceed international carbon prices. 

And I'd rejig industrial allocations to ditch the 'reduces by 1% per year no matter what' with 'scales down commensurately with emissions intensity in carbon-leakage-relevant markets'. And look closely at CBAM mechanisms to make up differences. I think one was likely warranted in cement.

But none of those would take forestry out of the ETS. Trees sequester carbon. It's removed from the atmosphere as trees grow. The ETS deems all carbon immediately returned to atmosphere on harvest, which is clearly wrong, but the averaging used for credit award might be a bit too front-loaded - I've not gotten deeply into the weeds on that. Maybe it could use some fine-tuning. And there's a defensible case for surrender-or-replant liability falling onto the land on which a carbon forest sits if the company awarded NZU while trees were growing has folded before the surrender-or-replant obligation hit. 

Those are all just tweaks. The bones of the thing are fine - other than the 'not having a durable intertemporal cap' part, which is eminently fixable. 

The system finds its own balance. When it's cheaper to harvest carbon from the atmosphere than to prevent its emission, people will plant trees and generate NZU. The more that that happens, the higher the NZU-price necessary to draw the next hectare from whatever other use into carbon forestry. The land with the lowest combined opportunity cost and conversion cost converts first, then the land with the next-lowest cost, and so on up the track. And tech for reducing gross emissions keeps improving. Hard to see combustion engines continuing for much longer at the pace of battery development, so long as trade with China can continue. 

Simon Upton wants to ban trees from the ETS and perhaps only allow them for offsetting agricultural emissions. 

Describing the 18 year-old emissions trading scheme (ETS) as “rudderless”, Upton released new modelling with insights on how excessive reliance on forestry plantings leads to a collapse in the scheme’s NZ Unit price on a tonne of carbon by the mid-2030s while achieving very little at present.

Ok. Recall that NZUs are durable and don't expire. And that people investing money to plant carbon forests aren't idiots. If a carbon forestry conversion only makes sense if you can sell NZU for a particular price, you won't invest in conversion if you expect the price to be below that. 

No carbon forester has to sell their NZU when they receive them. They can hold them. That means the carbon price path ties to the interest rate. If I expect that NZU will be worth 8% more next year than this year, and selling an NZU today to invest in a bond only gets me 4%, then I'll hold the NZU. Carbon prices today go up relative to future NZU prices. The price path should wind up roughly following the interest rate. 

And, if carbon prices *did* unexpectedly collapse, carbon foresters have another option. Suppose you planted a while back and have already harvested NZU that you've then sold. If the price of carbon credits drops substantially, you can fell your carbon forest, sell the timber, and buy cheap NZU to meet your surrender obligations. 

“The modelling shows that New Zealand’s net emissions would drop below zero around 2040, meeting the first leg of the 2050 domestic target of net zero early.

“However, net emissions are projected to only stay below zero until the mid-2050s. That means that the second leg of the domestic target – that net zero is maintained ‘for each subsequent calendar year’ would not be met,” the report, tabled in Parliament today, says.

Titled “Adrift: What future does the ETS have?”, the report makes numerous recommendations for reform, all with a focus on changing how forestry is treated.

“There will be a cry from the (forestry) sector to make it stable and certain but what we are seeing is that without change, it won’t work,” said Upton.

If people hold NZU and redeem them after 2050 rather than before 2050, that isn't any kind of problem. So long as the government is not issuing or allocating unbacked NZU after 2050, and NZU surrendered after 2050 are either ones generated through sequestration, or ones that someone held onto rather than redeeming before 2050. And it is strictly better for a net tonne of emissions to happen later rather than earlier. Carbon accumulates. An NZU surrendered today is more years of higher net emissions than an NZU surrendered in 2070. 

Upton identified permanent forests as particularly prone to abandonment and limited management since they stop producing ETS revenue when they are mature. However, they remain a major fire risk and have to be maintained in perpetuity if the carbon they store is not to be released.

If you have a registered carbon forest and it burns down, you have two options. You can surrender NZU to cover the carbon that was released to atmosphere, or you can replant. If you replant, you do not get credit for re-sequestering the carbon that your forest had just released. 

It's fine, unless the surrender obligation falls on no one, carbon prices are high, and replanting has become expensive. But that is also solvable. For new forest registrations, require that surrender obligations follow through to the land if all else fails. In that case, the land's owner picks up the obligation. 

It feels like a whole lotta folks really wish that we did not have legislation targeting net emissions or an ETS targeting net emissions. That they think gross emissions are the sin, and sequestration is some form of sale of indulgences. And that because it turns out that planting trees is a very cost-effective way of sequestering carbon, we're somehow enabling sin. 

But this isn't and shouldn't be a religious mission. It's a tech problem that eminently solvable. Target the ETS at its one big job of reducing net emissions in the covered sector, make sure that it's as strong as possible, and use other policies if you want to target other stuff. 

An economics without trade-offs

One reasonable definition of economics is the study of choice under conditions of scarcity, or choice under constraint.

When getting more of one good thing requires forgoing some other good thing, what do people do? How do they decide? 

Ganesh Ahirao (was Ganesh Nana; last name changed - I think because a historic error in NZ systems was finally more recently corrected) proposes an Economic Governance Act to replace core parts of the Public Finance Act.

Jack Tame asked how part of that would work. If the Minister of Finance were deciding how to spend the last billion dollars of available funding and were choosing between a hospital infrastructure project and a wetland restoration project, how would the Act guide that choice? 

Both projects would be supported under various parts of his proposed principles of responsible economic governance. The hospital would count under both the 'being a good ancestor' provision's 1(a)(ii), physical infrastructure and facilities, and under the 'social floor' provision's 1(b)(iii) access to health. The wetland project would count under 1(a)(i)'s 'healthy natural environment and associated eco-systems'.

There are seven objectives across the two domains, many of them with multiple parts. And there's no ranking. So how would the Minister decide? If the Act provides no guidance, what's the difference from the status quo? If it does have a concrete way of dealing with these trade-offs, where is it?

Ganesh didn't like the question, noting "What you're saying is the country can't afford both." 

The question very specifically asked about the last billion in public funding. 

Tame went on to ask what stops the next Muldoon if the fiscal responsibility provisions are stripped from the Act; Ganesh said that's 40 to 50 years ago and now irrelevant. 

And, somehow, the credit agencies would reward NZ for tearing up the fiscal responsibility provisions that have staved off a downgrade - so long as the government could make the case to the credit ratings agencies. 

A world without trade-offs. And a world where, somehow, money and borrowing costs never matter. It starts edging toward MMT.

A couple of other things seemed a bit puzzling in his framework.

Every environmental regulatory regime has to balance environmental harms against economic costs. Both are purposes in his proposed Bill. Which section tells the regulator how much weight to put on 2(2)’s productive and prosperous economy as compared to 2(3)’s kaitiaki role? And similarly for 4(1)(a)’s healthy natural environment against social licence in places that rely on that economic activity – or both of those against aspects of 4(1)(b)’s social floor that are funded through taxes raised on those activities? How does his system deal with trade-offs other than by denying they exist?

His Act provides no limitation clause comparable to the RSB's clause saying it creates no claims at law. Without that clause, could someone without a home sue the government for failing to provide one (part of the social floor) or for preventing his building one on his own land with his own money (zoning)? If suit is possible on the former, how could Treasury account the potential liability, or have we just given up on accounting?

The defensible version of an emphasis on broader outcomes reduces to Bill English's social investment approach. Run a broad CBA across long-term effects of current initiatives, and use that yardstick comprehensively across spending areas. That version takes trade-offs seriously. 

Around the traps

A few bits I've neglected to blog.

• My chat with Adam Jarvis on datacentres. 
• A follow-up chat with RCR on the same thing, as well as a couple of bits on the India Free Trade Agreement. 
• The RBNZ's Keeping Cash Local consultation was just atrocious. The Bank threatened commercial banks via a consultation document. OIAs showed that the Bank knew it did not have the power to  just go ahead and do what it threatened to do. There ought to be an inquiry on how that consultation document got out the door. My submission on the debacle. And my piece at Newsroom.
• Bit at The Post on some very fun AI textual analysis quantifying cultures of innovation going back over a thousand years. 
• The UK's Andy Burnham promises more localism, and the policy document looks decent! My piece at The Herald.
• Treasury knows the ethnicity of 97.5% of its staff; the remaining 1.5% didn't answer the question. By contrast, Treasury does not know what proportion of its staff have qualifications in economics. And it earned a big red "weak" grade on the quality of its economic analysis in the latest PIR. My piece in The Post. I also chatted with Sean Plunket about it. 
• And, over at Newsroom, a bit on the coming FSANZ rules that add more new NZ-Australia labelling requirements for alcohol. I thought that National had promised that we were going to stop doing this and shift instead to QR codes on store shelves to make it easier to enable imports and new grocer entry. 

Reader mailbag - prediction markets

In today's inbox:

Hello Eric,

My name is [redacted].  I read your article about prediction market regulation with interest.

As a student in 2013 I placed a single $60 bet which brought down iPredict from a run on the market related to Peter Dunne, which I intentionally caused based upon groupthink and illogical beliefs in the truthiness of the insider betting ring. I knew exactly what would happen when I joined and placed the well timed bet. I knew what I would prove, and let the energies of my opponents be redirected into their own damage.

iPredict is long gone, a decade ago, RIP. It was fun, but I guess if it had lived longer it could have competed with Kalshi and Polymarket. But now I live in the United States, and there are wildfires, and people are betting on wildfires on "prediction markets". How can you endorse this.

What is big may fall, what seems consensus may be false, and ultimately: I will be watching. I look forward to your next article about moral hazard.

My reply:

iPredict was always fun like that. Folks would convince themselves that a spike was due to an insider, and sometimes it was, but sometimes it wasn’t – whether a noob trader who placed a dollar-value order without checking the book, or someone just having a lark at low dollar stakes. But the markets proved remarkably accurate overall: trades at $0.75 turned into contracts paying out at $1 about 75% of the time. 

It’s been amazing to see what Kalshi’s been able to build in a world without deposit limits. 

The main concern I’d have on wildfire markets would be whether they’d encourage a very bad kind of insider trading. I don’t think Kalshi has any wildfire markets; their natural disaster markets are all on completely exogenous events. Polymarket has had those; best I’m aware, they’re not yet CFTC-authorised. 

I don’t know how material the risk is. I mean, a slightly less direct route would be to short insurers with exposure to that risk before starting fires. Similarly for a lot of the other ‘it will encourage them to do the bad thing’ risks: there are generally already very thick financial markets where options trading could get you similar results. I don’t think Trump needs prediction markets to cash in on Trump-induced oil price volatility. Brent crude futures are enough. 

At the same time a large punt on oil futures can have many causes, including “I will need a lot of oil in a few months”. A large and suspiciously-timed punt on a prediction market can lead to questions of who made the trade, identification of the trader (you have to do your KYC to trade at Kalshi), and then inquiries. 

I really wish Kalshi would set a market on “giant Wellington earthquake”. I could pay a friend in the US to take a position for me and treat it as insurance on otherwise uninsurable local earthquake risks. I’ve long wanted parametric insurance on a Wellington earthquake, and that is mathematically identical to a prediction market contract on it. Maybe someday!

Kalshi's Natural Disaster markets are here. You can trade on:

• How many major Atlantic hurricanes will there be this year?
• How many Atlantic hurricanes will there be this year?
• Number of tropical storms in the Atlantic this year
• How strong of an earthquake will occur worldwide before Sep 1, 2026?
• Will there be an 8 magnitude earthquake in California before 2027?
• 8.0 magnitude earthquake in Japan before 2030 [39%!]
• Number of tornadoes this month
• Major volcano eruption this year?

The California earthquake market has a 5% chance of the event, and just under $400,000 in volume. But the order book is still thin at reasonable prices. You could spend $400 and buy every contract in the book up to a $0.10 price, and get a $5100 payout if the event happens. Perhaps putting a giant buy order into the book would draw out liquidity. 

Spills

A new and more rational basis for ongoing choice of party leaders in a Parliamentary system.

Step one. Set a prediction market contract. "Pays $1 if the leader of the X Party is a Minister after the election." 

Step two. Set prediction market contracts: "Pays $1 if the leader of the X Party as at the date of election is {Name}."

Step three. Set conditional contracts. "Pays $1 if the leader of the X Party is a Minister after the election conditional on {Name} being Party Leader as at the date of election."

Step four. Set a decision rule. "The leader of the X Party changes to {Name} if {Name} shows a demonstrable sustained improvement in the Party Leader being a Minister after the election over the status quo, and superior to other {Name} options."

Works for both major and minor parties; their leader only becomes Minister (or Prime Minister) conditional on being in a winning coalition.

Punters from all parties could weigh in and put their money-votes on who they think would be most likely to improve each party's chances. 

A crazy ideological campaign to try to tank the other side's chances by picking a bad leader would draw in liquidity from outcomes-based traders - that's Hanson & Oprea (2009). The 'demonstrable sustained improvement' part is to give time for liquidity to come in in response to attacks - as well as guard against blips. 

No more dramas. No more press conferences. No need to try to attempt to count to whatever the required number of MPs might be to effect a spill and trust that nobody changes their mind along the way. Just watch the prices and let the leader be whoever maximises the Party's chances of being in a winning coalition. 

Probably only feasible in a country that's sensible enough to legalise prediction markets. 

Geloso on how to think like a good economist

I really like Vincent Geloso's slide deck on market processes, market failures, and government failures.

Over the past couple of months, Claude read through about four million words I've written to develop an "Eric skill". I can now give it documents that I don't have time to read, and it'll tell me what to watch for. 

When I gave it Geloso's slide deck, not because I didn't have time to read it but because I really liked it, the things it thought were inconsistent with the Eric Skill were errors on its part, and helped further refine the Eric skill to avoid those errors. Basically - look more carefully back through the corpus for the bits it thought were inconsistencies, and update the skill accordingly. 

Anyway, the slide deck's here.

The main updates to the Eric skill consequent to its reading Geloso's slides:

What changed: four additions, all sourced from Eric's own corpus, not from Geloso's slides.

• §1, endogenous excludability (line 15) — the one drawn most directly from existing material: his public-goods lectures (ECON 336, 224, 653; the public-economics notes) already state "excludability is a function of technology," with the scrambled-TV, congestion-charging, radio-tied-good, and Buchanan-club-goods examples verbatim. This closes a real gap where the skill under-represented his own teaching. Highest confidence.
• §1, statogenic failure (line 29) — generalises his gas-ban and RMA/housing positions into a standing diagnostic. High confidence on substance.
• §1, price-theory-and-discovery-as-one-investigation (line 13) — folded into the price-theory substrate as complementary layers, not a rival Austrian register, per Eric's explicit instruction this session.
• §4, item 18, interventionist ratchet — the one most worth the red pen; it's the least directly attested in his existing wording, so it's my synthesis of his second-order-dynamics habit rather than a phrasing lifted from the corpus

Age of wonders.  

Let them build: electricity and datacentres edition

New Zealand's electricity companies know how to stick a pipe into the ground in the Taupo Volcanic Zone and generate electricity. They've been doing it for decades, and there is enormous untapped potential. 

America's hyperscalers are currently willing to pay a large premium for immediacy. They are sticking expensive off-grid generators beside datacentres that would have to wait years for a connection. 

If NZ could be the place where decisions on whether a power company is allowed to stick a pipe into the ground are made in weeks/months rather than years, and a similarly fast decision on whether a datacentre is allowed, tens to hundreds of billions of dollars could drop here in a very big hurry. 

My column at Newsroom this week suggested NZ should consider being that place. And that the window of opportunity will not be open forever. 

[As always, I didn't pick the headline]

Just fix industrial allocations

New Zealand's Emissions Trading Scheme includes industrial allocations of carbon credits aimed at avoiding inefficient carbon leakage.

But the formula is wrong. 

Imagine that you're a domestic firm producing stuff that generates CO2 emissions. You correctly have to surrender NZU - one for each tonne of emissions. But if competitors in foreign markets do not face a carbon charge, there's a problem. They'll undercut you because their costs are lower, you'll scale down or shut down in response, the other outfit scales up, and their unpriced emissions go up.

It can easily result in a net increase in global emissions.

So, what to do about it - if you want the ETS to solely be about net emissions?

Identify firms in that situation. Look at the intensity of carbon emissions in their foreign competitors' products. Then, do the following.

Take the local firm's production in base year. Multiply it by the GHG-intensity of the foreign producers' products. Then give the firm that many NZU as an industrial allocation.

Simple example. 

Suppose that the NZ company produces 100,000 units of widgets. Each widget produced abroad by relevant competitors creates one tonne of CO2-e. So give the NZ firm 100,000 NZU regardless of its own GHG emissions. 

If the firm is more carbon-efficient than international competitors, it will on-sell surplus NZU. It will also have strong incentive to invest in decarbonisation-tech so long as the cost of reducing emissions is less than the going carbon price. Why? Because that means it can sell more valuable NZU for others to use. 

If the firm is less carbon-efficient than international competitors, it will have to purchase NZU to make up the difference. That will increase its costs, and that is perfectly fine. It will have strong incentive to invest in decarbonisation-tech so long as the cost of reducing emissions is less than the going carbon price, because that's cheaper than buying units. And if it cannot do so cost effectively, and international competitors take their markets, that's fine - at least as far as the ETS is concerned. It is, in that case, carbon efficient for the local firm to scale down or shut-down. That kind of carbon leakage is a-ok because net global emissions go down. 

You would regularly rebase the measure of international carbon intensity, so that firms would have incentive to keep up with what's going on in the rest of the world. 

But that isn't what the ETS does. Instead, the ETS allocates NZU based on the local firm's own emissions, on a schedule that declines over time. And you can easily then wind up in spots where a local firm that is more carbon-efficient than international competitors loses business to those international firms that do not face a carbon price, shuts down, and net emissions go up. Because the local firm winds up facing a carbon price at the margin that leaves them less competitive than overseas firms that do not face a carbon price. 

Fixing it isn't simple; running the figures on international carbon intensity could be tricky. And the thing will have to update as emission budgets reduce: either provide firms with the cash-equivalent of the NZU allocation so they can purchase credits from carbon foresters, put in a CBAM to reduce the distortion on imports, or a mix of the two. 

But the alternative is firm-by-firm bailouts. This week it's cement. Who knows who it'll be next time.

I'd had a chat with Heather at Newstalk on this earlier this week. 

KiwiSaver needs guardrails

A few weeks ago, I proposed some guardrails that I think would be needed if a future National-led government removes the option to opt-out of KiwiSaver. 

I don't think any guardrails are perfect, and I doubt that mine are even close to what is best-feasible, but they're a start. 

If Kiwis have no opportunity to opt out of putting more of their retirement savings into this regulated vehicle, the risks inherent in KiwiSaver go up. Future governments could easily decide that funds eligible for KiwiSaver status must invest at least x% in domestic assets, of which at least y% must be in {whatever the Minister thinks is a good idea}, and no more than z% in {whatever the Minister doesn't like, where z can be zero}.

The proposed guardrails are here; I also had this piece in the Herald on it, ungated here. 

I hope readers can suggest improved guardrails to accompany any removal of the option to opt-out. 

Because Albanese in Australia is making it very clear that I'm not tilting at windmills. 

Here's the AFR:

Prime Minister Anthony Albanese wants to leverage the country’s sprawling $4.5 trillion superannuation pool as a national asset, but the proposal drew sharp pushback from Westpac chief executive Anthony Miller, who urged the government against dictating the investment strategies of major funds.

Albanese argued that billions of dollars in global investments from big super funds had already given the nation a leg-up in global diplomacy, furnishing “hard money to provide soft power”, and could also be used to further local ambitions.

“There is a real potential to see these funds as a national asset that can be used more appropriately and get better returns as well, not just for individuals and for retirees, but for the nation,” Albanese said.

 

Canada stepping up

The Wall Street Journal had an excellent two-parter on Mark Carney's handling of a rather difficult situation: a century-long ally and decades-long free-trade partner threatening to invade and annex your territory, and threatening to nullify the treaty that settled the border. 

Part One (ungated) goes through Europe's slow realisation of the nature of the Trump administration.

Part Two (ungated) explains how Carney helped Europe realise the situation that we are all now in. 

His prescription in large part would lay in Europe, where Carney, a former Bank of England governor, had made his past and now saw Canada’s future. The Canadian banker who never before held elected office would emerge as an unexpected central figure in a high-stakes project to reshape the economic and military community known as the West.

Since World War II the alliance had worked like a wheel: The U.S. as the indispensable hub and the rest as spokes. Carney argued that Canada and Europe would have to build an alternative model, a “dense web of connections” that wouldn’t overly depend on any single country. His approach contrasted to that of another influential leader, NATO Secretary-General Mark Rutte, who was encouraging Europe to double down on its relationship with Trump—whatever it took to keep America from abandoning the alliance.  

They represented opposing poles of a years-old debate coming to a boil in Europe, with the U.K., like Rutte, betting heavily on its special relationship with Washington. France, conversely, was eager to build up Europe’s own sovereign defense base and technology, from quantum computing to AI systems held outside America. Carney would try to sway the outcome, without provoking the superpower that imports three-quarters of Canada’s goods.

In effect, a push to make Canada America’s 51st state had lighted a fuse of unintended consequences that would play out far beyond North America, as overseas allies asked themselves whether the U.S.-led alliance could truly last.

The Wall Street Journal spoke to heads of government, their ministers and top aides to reconstruct the closed-door meetings where the alliance began to splinter. The Journal was able to review detailed notes taken by some participants. This is the second in a two-part series revealing the contents of deliberations among America’s allies over how they might salvage their alliance—or prepare for its unraveling.

Matt Gurney and Jen Gerson's discussion at The Line is also worthwhile. 

It does make me a bit nervous about this, from the Politik newsletter:

Last year’s ASEAN Summit underscored the enduring limitations of ASEAN’s collective approach to the South China Sea.

Most member states issued cautious statements and avoided directly addressing recent developments, including China’s declaration of a nature reserve at the Philippine-claimed Scarborough Shoal, its deployment of buoys, and its continued ramming and use of water cannons against Philippine vessels.

As the 2025 chair, Malaysian Prime Minister Anwar Ibrahim reiterated that disputes should be resolved within ASEAN and warned that the involvement of “outside forces” would only heighten tensions.

While Philippine President Marcos publicly agreed with this, his administration continues to pursue partnerships beyond the bloc to deter further Chinese escalation at sea.

Those partnerships are led by the United States.

Thus, New Zealand had a choice: did it side with ASEAN or the US? Clearly, it sided with the US.

The move appears to be part of an orchestrated effort by New Zealand to strengthen its alliances with countries that are seeking to build up their resistance to China.

 

Conference roundup

My column at Newsroom last week gave a roundup of the sessions I attended at the NZAE meetings where the results might be of interest to a broader audience. 

It's ungated now, so folks can catch it there. Along with the usual band of sad old grouchy leftists in the comments section who hate economics and economists. 

I think this was my favourite of all the sessions - but that'll largely be because of my own particular interests. I didn't name the presenter or the shop that did the work as they seemed to want to hold that back until the work is finally ready for public release. But credit really is due. 

There was a superb presentation on problems in cost-benefit assessment, or rather in not using it, when deciding on major projects. Here we can consider ourselves lucky not at the outcome, but that someone is checking.

Economists prefer to rely on cost-benefit analysis when assessing projects – CBA. Some others like to use what’s called Multi-Criteria Analysis – MCA. On that latter kind of assessments, projects get scored across a variety of categories.

Cost-benefit assessment tries to put a monetary value on all kinds of different costs and benefits – some of which are harder than others to turn into dollars and cents. But Treasury maintains a comprehensive spreadsheet (called CBAx) listing the costs and benefits of many things, all of which then provide a standardised basis for assessment.

Multi-Criteria Analysis does not try to do that at all. Instead, a project gets a score within each category, the categories are weighted by their perceived importance, and the project gets an overall grade.

Suppose that you wanted the government to adopt your project proposal, and you knew it didn’t do well on a value-for-money basis. It would have a tough time under CBA. But under MCA, there’s a neat trick. If you add more categories for assessment, the weighting on cost declines automatically. If cost is one of two categories, each category gets 50 percent weighting. If cost is one of 10 categories, then the project’s poor ranking on cost can be outweighed by whatever other categories are added in.

Of course it is possible to require cost to have a high weighting. But it’s rarely done. And then we wind up being surprised by all of the expensive projects that get approved. Cost-benefit assessment is underrated – or, at least, MCA should require that rankings on cost carry a lot of weight. In the assessment exercise described, fewer than 5 percent of evaluated project proposals had a robust cost-benefit assessment.

I am very glad this work is being done, and I expect to provide a more detailed column when the authors are ready to release it into the wild.

In questions after the session, I noted that I've seen a few cases where boosters have tried to claim that their clearly-infrastructure proposal is really a social-type investment warranting Treasury's preferential 2% discount rate. I was annoyed that Treasury seemed utterly indifferent to that risk when they put up their proposal, and hoped that it didn't turn out as badly as I feared. 

The presenter noted that there'd been a full slide on that issue that had been pulled so they wouldn't blow out the time constraint for the session. It is a real and bad issue. As expected. And something that prior better versions of Treasury would have been alert to. 

Pronatal policies

The Institute for Family Studies puts up a pro-natal proposal that I'd not seen before.

Most of the literature I've seen on baby bonuses suggests that the amount on offer would have to be hefty to have substantive effects. This version could harness a bit of loss aversion:

President Trump launched a small savings account seeded with $1,000 to give emerging adults a leg up in his “Trump Accounts,” passed in the One Big Beautiful Bill. The Heritage Foundation has proposed a larger investment intended to mature upon marriage. These ideas are good starts. But the most complete proposal in this regard is a recent proposal in Finland called Vauvasampo. Adapted for the American case, this proposal is simple: every child born as a U.S. citizen in 2026 or any future year would have some amount of money, perhaps $15,000, invested in their name, which we call “American Birthday Accounts,” in honor of our 250th year of independence. 

Beneficiaries could not touch these accounts until they have a child; that is, until they are the legal and custodial parent of a related child born in the United States or under U.S. jurisdiction abroad, and coresiding with that child or else deployed on U.S. government business. At the first birth (or, if preferable to avoid risks of early child abandonment, at the child’s 1st birthday, if still coresident and full custodial), they would gain access to, say, 50% of their account’s value, and the residual 50% would continue growing. At the second birth, 75% of the fund’s remaining value at that time could be claimed. At a third birth, all remaining funds can be claimed. Assuming funds are invested in something like a mutual fund, a $15,000 investment could easily lead to a married couple receiving a baby bonus worth $100,000 for a first birth, with smaller additional payments for subsequent births. Recipients could be permitted to cash out their benefit over multiple years if they preferred, and any new funds gained through subsequent births would be added to this continuing fund. 

This baby bonus money could be counted as income, which means that part of its cost would be directly recouped through interactions with means tested programs and income taxes: beneficiary families at both very low and very high incomes would receive smaller after-tax-and-benefit returns. All families of any income would be eligible, but in practice the real benefits would be most generous for middle-income married families, subsidizing fertility the most for working- and middle-class families. Because only children born in the U.S. would be eligible for the investment, concerns about subsidies for children of immigrants would also be alleviated: it would be essentially a subsidy only for U.S.-born individuals to have their own children. Because married couples would be eligible for each parent’s baby bonus, the benefit would effectively double for married couples. To avoid creating subsidies for teen pregnancy, fund accessibility could be set aside until parents reach an appropriate age (perhaps 21 for a first birth, and a slightly higher age for subsequent births). 

Bang-for-buck, American Birthday Accounts are the single best way to get more babies born in stable families than almost any other policy imaginable. In the long run, since many individuals will have fewer than 3 children (and many will be childless, thus leaving many funds unclaimed), those unused funds can be reinvested in the program to create a rolling national family trust fund, which would render the program zero-cost to taxpayers after the first eligible generation had completed their childbearing. Even without that reinvestment, the budgetary cost for an investment of $15,000 to $20,000 per child would be between $45 and $80 billion per year. For comparison, U.S. public schools spent just under $19,000 per year per student in 2021, so this program amounts to the public investing just one year of schooling worth of public resources into children’s future family life. 

Lyman Stone describes the work at the NYT, ungated here.  

Refugee sponsorship

About a decade ago, Canada's Counsellor for Immigration at the High Commission in Canberra came to Wellington to explain how Canada's refugee sponsorship programme works. 

His discussion of it at The Initiative's event is here. 

The basic deal: whenever communities can get together to raise the funds necessary to support a refugee's start, Canada will open the door to another refugee. Outcomes have been very good - or, at least, sponsored refugees have better outcomes than those arriving through the government's quota.

The previous Labour government here set up a trial programme. And it's now being made permanent. 

The Government has announced the Community Organisation Refugee Sponsorship (CORS) programme will become a permanent part of New Zealand’s refugee resettlement system.

Associate Minister of Immigration, Casey Costello said the trial of the CORS programme shows it can deliver strong outcomes for refugees in employment, housing, education, and community connection.

“Making it permanent means we can build on the skills, partnerships and knowledge developed through the pilot. This is a positive step and provides a programme that we know works,” Ms Costello says.

The permanent CORS programme will begin 1 July, with organisations able to apply to become approved community sponsors from that date. The introduction of the programme will be scaled, with 50 places available in the first year.

But there are a couple of substantial differences as compared to Canada's regime. Hopefully New Zealand's can evolve towards Canada's in time.

Canada has a high nominal cap on the number of allowed sponsored refugees. 

New Zealand will cap the number at 200.  

Canada's sponsored route sits on top of the government's route. However many refugees the Canadian government is prepared to support, communities can fundraise to support more. Those sponsored refugees are additional. 

New Zealand's will be subtractive. The total number is capped, so whenever a community gets together to sponsor a refugee, one will come through that channel - with no effect on the numbers allowed to come here. 

CORS will be delivered alongside New Zealand’s Refugee Quota Programme, maintaining an overall number of refugee resettlement places available at 1,500. Places will be progressively allocated to the community sponsorship pathway as it scales up, with the Quota Programme adjusting accordingly. This allows CORS to be funded from within existing baselines.

The Refugee Quota Programme will remain New Zealand’s primary humanitarian pathway, and any allocated CORS places that are not taken will return to the Quota Programme. 

“In the current environment, this is the best way to ensure a programme that we know works well can continue into the future,” Ms Costello says.

“The Government remains firmly committed to an overall resettlement intake of 1,500 people per year. New Zealand currently takes the third largest number of UNHCR mandated refugees internationally, behind Canada and Australia.” 

If the concern is resourcing, because the government covers some of the cost in a refugee's travel here, it could make more sense to increase the amount of funding that a community group must raise so it covers the total cost, and then allow it to be additional to the government's quota. 

During the Syrian refugee crisis, Canadian communities could work together to help support more arrivals while Kiwis instead had to lobby the government to increase the quota. I'd hoped that the sponsorship regime could provide flexibility that the government's quota can't. It will not do that job under this setup.  

Biosecurity as religion

During the Commerce Commission's market study into groceries, Coriolis Consulting put up a chart with some thumb-suck order-of-magnitude estimates on costs here. 

I was reminded of that reading this BusinessDesk piece on on biosecurity rules around blueberry imports. 

Annual revenue for the sector is about $150m. 

Peru exports a lot of blueberries to the US. Wholesale prices there are around $6.60 USD/kg, so about $13 NZD per kilo if you include GST. 

Here the things run about $10-$12 per punnet, or maybe $80-$96/kg. 

Air freight and logistics for getting blueberries from Peru to here would add a lot of cost. 

Imagine a bad-case outcome where a biosecurity failure means the complete end of NZ blueberry production and we had to rely on imports from Peru and Chile (which somehow manage to have production despite being subject to whatever NZ is worried about). 

How high does the probability of that outcome have to be for our current biosecurity rules to make cost-benefit sense? Is it really just religion?

Kalshi, and the case for bigger sandboxes

I've been following Kalshi for a while. 

I remember back in the iPredict days, Matt Burgess figured prediction markets were a billion-dollar idea.

Kalshi's now attempting a capital-raise at a $40 billion USD valuation. 

Incredible.

But it never could have happened here. Not at the sandbox-level scale authorised by the Securities Commission. 

I had a piece in the Herald on it a couple of weeks back. I'd there cited Kalshi's Series F that had a $22 billion valuation - and they're now pitching for $40b. Amazing. 

Ungated version of the piece is here. Our country's regulators need to allow a bit more ambition. 

When Victoria University of Wellington’s great little prediction market, iPredict, announced that it would be shutting down back in 2015, it had a couple hundred thousand dollars of traders’ deposited funds in the bank. It was a very small, very limited, academic enterprise.

Kalshi is a US-based prediction market. It is regulated by America’s Commodity Futures Trading Commission, the CFTC, which fully authorised it in 2023.

It is identical in principle to what iPredict was. But Kalshi’s Series F funding round raised a billion dollars at a $22 billion dollar valuation earlier this year. Their annualised trading volume recently hit $178 billion, generating annualised revenue of around $1.5 billion.

The difference between iPredict and Kalshi does not come down to the difference in scale between the US and New Zealand – though that certainly matters. The scale, the ambition, and the permissions differ considerably.

iPredict ran as a futures exchange authorised by the Securities Commission, able to quickly define contracts and let traders figure out what they were worth. Contracts like, “Pays $1 if National forms government after the next election, pays $0 otherwise.” Prices on those contracts tell you traders’ expectations about probabilities – and they were highly accurate.

Anyone could sign up to trade, and many people did – at very low stakes. Accounts with five or ten dollars in them were common.

It was small because New Zealand’s regulators wanted it that way. They were happy to let iPredict play in a small regulatory sandbox with laudably liberal rules on how it operated because nobody was allowed to put very much money into it.

And because nobody expected anyone to authorise anything more ambitious, there was no point in even asking.

At first, traders were allowed to deposit only up to $2000. That limit later increased to $10,000. If traders had larger accounts with more money on the line, regulators would not have felt safe letting iPredict run as it did. Regulation around how it defined contracts would have hardened. It may have had to start issuing a full prospectus on each one.

Issuing a full prospectus for a prediction market contract would destroy the real value that a prediction market can bring: quickly establishing new markets when they are needed. Jeremy Maletz is head of Prediction Markets at Susquehanna International Group – a substantial American market-maker in equity options. Maletz argues that where it can take a year to create a new hedging contract on traditional markets, prediction markets can do it in a day.

Suppose that your business depends on trade with Taiwan. If China blockaded Taiwan, you’d be in trouble. It’s always possible to diversify your business. But it should also be possible to hedge against that risk more directly. A prediction market could quickly list a contract that pays out if that event happens before a set date, and doesn’t otherwise. Traders on the contract set the price; organisations like Susquehanna prepared to take on some risk provide liquidity.

Being able to set contracts quickly, when they are needed for hedging, is valuable. But that value is small if deposit limits are tight.

iPredict consequently ran on the smell of an oily rag, barely able to wash its own face, and certainly unable to cover the cost of meeting anti-money-laundering regulations imposed by the Key-led National Government. Somewhat ironically, the constraints under which it operated meant it was nigh-impossible for anyone to ever really try laundering money through it. It simply did not have the trading volume to bring that risk.

The deposit limits didn’t just mean that iPredict could not afford those kinds of costs. They also meant that the thing was hamstrung from the outset. It could never take up the kind of role that Kalshi is quickly moving into in making financial markets simply work better.

Kalshi is innovative. Last month, they were authorised to launch America’s first perpetual futures contract. Normal futures contracts come with expiration dates. A perpetual futures contract simply tracks the value of a defined indicator.

Perpetual futures contracts on house prices would be immensely valuable. Contracts could track the value of the median home in our major cities. People could save for their first home by buying the relevant house price index. No matter what happened to house prices, your progress toward a deposit would be locked in.

New Zealand’s Department of Internal Affairs decided that, because Kalshi had not been authorised by the Financial Markets Authority, it must be gambling. So they sent a letter to Kalshi demanding that it not let Kiwis trade there. And Kiwis can no longer set accounts.

It does not just stop Kiwis from trading on the outcome of the next American election. It also will substantially hinder financial market innovation and hedging options. Our regulators ensured that no Kiwi Kalshi could ever emerge and now ensure that foreign innovation cannot reach our shores.

The regulatory attitude is hardly limited to prediction markets. And it is stifling.

It is very small thinking from a country that can ill-afford it.

Levies as end-runs around the Generic Tax Policy Process

A few years ago, Willie Jackson proposed levying tech platforms to fund news outlets. 

I'd warned that this kind of thing amounts to a dangerous end-run around IRD's generic tax policy process.

Levies can make sense in some contexts. If a producer group agrees to be levied to fund research or marketing that has industry-wide benefits, that's fine. Agreement tests whether those benefitted actually benefit. 

Or if it amounts to a user-charge that can't easily be collected in other ways. It requires a tight link between what's being funded and who's being levied to pay for it.

But Jackson's proposal was nothing like that. There's no link between tech platforms and news outlets that would warrant a levy. 

The levy instead tried to use force to recreate a relationship that had been superseded by technological change. In olden-times, newspapers were the best place for advertisers to reach customers. Google and Facebook became better ways of linking advertisers with eyeballs. Since platforms 'stole' that link, it must be reforged through levies. It's a terrible approach to tax and tech policy. 

Paul Goldsmith was initially enthusiastic about continuing with that approach when he was made Minister, but it's since been shelved. 

Now Goldsmith's back with a new levy proposal. This time, Disney and Netflix will be levied to fund NZ content creation. 

Same problem as last time. There is no link that justifies a levy here. 

NZ taxpayers subsidise local content creation; it gets broadcast on by anyone willing to pay for the rights to distribute it. It's a generally decent approach because what gets created still faces a market test. NZ content creators are perfectly free to license to Netflix or Disney or anyone else who's willing to pay, and those outlets will be willing to pay if they expect the additional offerings to get or keep subscribers they otherwise would have missed. It's fine.

Irene Gardiner, president of NZ Screen Producer's Guild Spada, has views:

“The big international streaming companies operate here without any regulation. They don’t pay company tax here, they use our broadband infrastructure that the taxpayers paid for, and they have no requirement to commission any local content or contribute to the New Zealand screen sector in any way.

“We’ve been lobbying the Government for some form of legislation in this area for over two years.”

Gardiner worries that after legislation was introduced in Australia last year, New Zealand is getting “left behind” – particularly amid the “devastating” impact of streaming services and Big Tech on local media.

“If any of the big streaming companies, Netflix or Apple or Amazon, had taken a genuine interest in commissioning in New Zealand and done some significant commissions in the long time that they’ve been operating, I think we’d feel differently. 

“But the reality is that they haven’t, and so if they’re not going to do it voluntarily then here we are.”

Households pay for broadband. Their broadband subscriptions help cover the cost of the broadband network. They can choose to stream whatever over that fibre, including Netflix or Disney or Amazon or whatever else. 

If Kiwi subscribers put value on seeing NZ content on any of those platforms, those platforms would have incentive to offer it. As it stands a lot of NZ content is only available on really crappy NZ services where you can't pay to avoid ads. If Kiwi viewers hate ads more than they like seeing NZ content, then they won't watch there. You could maybe make a case that international streaming platforms, by offering a far better product, wind up meaning declining viewship for stuff only available on TVNZ+ - but that would be a case for TVNZ+ to start offering a no-ads subscription version. 

And presumably any platform seeing potential gain in it could outbid TVNZ+ or whoever else for the streaming rights. If they aren't, then the benefits they see in increased global subscriptions aren't worth the cost - even though the product's creation and consequent cost was likely heavily subsidised through existing content subsidy schemes. 

If there were a principled tax-policy basis for taxing international digital platforms, that case should be evaluated through IRD's generic tax policy process. 

This levy-based approach will prove increasingly tempting to a government that does not want to reduce spending to meet its tax revenue, doesn't want to increase taxes transparently, and wants to provide services through other funding mechanisms. 

Coming up with new tied levies is a way of short-circuiting all of that. "It's not a tax, it's a levy" to keep the Taxpayers Union from yelling at them (probably won't work) but also to keep it away from IRD analysis on whether the proposed tax is coherent with the rest of tax policy. 

Appropriation first, policy afterwards

The government has not yet announced what it wants to do in the online child-protection space. There's a member's bill endorsed by Luxon that tries to follow Australia's social media age limits. But the education select committee wound up with much broader recommendations and Stanford's tasked with responding to them. 

What that'll all turn into is anybody's guess. Australian age-gating for social media? Ofcom-style 'let's make everyone do an ID check to look at darn near anything on the internet while sending angry demand letters to American platforms that don't want to comply with UK regs'? Something else?

Whatever it is, the government seems to figure the regulatory regime will cost $8.5 million per year when it's up and running.

The budget includes this new initiative, which gets $6m in the first year rising to $8.5m in each of the last two forecast years: "This initiative provides funding to develop policy and possible regulatory options to improve children’s online safety, subject to future policy and funding decisions."

None of that makes sense if it's an appropriation for developing policy and possible regulation. It's too much money, and it rises over time rather than declining in the out-years when the policy development work is largely done.

And if you look into the Vote Internal Affairs categorisation, well, the thing's classed as regulatory services - not as policy and related services. 

It's far more plausibly an operational allocation for running a new regulatory regime.

One that, as yet, not only has no supporting legislation, but also no hint of what it's meant to be doing. 

My column in Newsroom this week, now ungated, goes through it.

All of this is pretty dumb.

Nobody has yet figured out a way of age-gating social media or potentially sensitive stuff online that doesn't suck. 

New Zealand is unlikely to be the first place to find a way of doing this that doesn't suck. 

The potential harms are real, but often overstated and highly heterogenous. 

There are existing controls that parents can use to gate access for their kids. Some of those controls are undermined by school accounts that parents cannot control. 

The government could be very helpful in providing resource to schools to help parents understand the tools that are available to them, and in helping schools to not undermine their families' choices by setting school accounts whose controls don't mirror those set by parents (or otherwise provide circumvention options on time limits or app limits by logging into the school account on their device or on a school-provided device). 

Anything beyond that, and just enforcing existing law on other bits around grooming etc, should be a watching brief. If somewhere else *does* find a way of my trilemma, great! We could piggyback on their version if voters wanted to do that. We wouldn't have bespoke compliance costs that platforms would be quick to ignore - or to use as basis for just blocking countries that are too small to be this stupid. 

And I just despair when I hear people from industries that have suffered enormous costs from legislation set to 'send a message' regardless of any cost-benefit assessment claiming to support social media bans because they 'send a message'. Crooked timber...

A weird way of slicing the stats

Ages ago I supervised a superb Honours thesis, which turned into a Masters, looking at the lesbian wage premium. It showed up regularly in the US data: homosexual women earned more than heterosexual women - the opposite of the pattern that obtains for men. 

I was curious whether the difference could in part be due to employers' expectations about the costs of accommodating maternity leave. And it looked like that mattered. Hayden Skilling did superb work on it, helped in part by Ron Oaxaca's visit to Canterbury while Hayden was writing. 

I'd wanted to use New Zealand data but that seemed to be impossible. We could, with a few clicks, get US data from the ACS without any bother. If we wanted to use NZ data, it would have been impossible. Stats New Zealand just makes it too hard to access NZ microdata. So we wind up with NZ researchers using American data and helping advance global understanding of what's going on in the US. 

Hayden's thesis was out in 2014. 

It's 2026. Stats NZ just put out a couple of releases looking at earnings among LGBT+ populations. 

I wanted to check whether the lesbian wage premium held up in NZ data. 

So I went to have a look. 

And it's just a big mess. 

First, we get a press release highlighting substantial differences in age-adjusted average annual personal disposable income between the (lumped together) LGBT+ population and the non-LGBT+ population, with the transgender and non-binary population having the lowest age-adjusted annual disposable income. 

That sounds like discrimination right? 

But then you check the second page. The one listed as a "related page" that folks might not click on. That one notes that the LGBT+ population reports disability rates of 25.6%, compared to 15.8% for others. 37.9% of the transgender and non-binary population were identified as disabled.

Disability will mean lower earnings. Stats NZ's big headline press release figures adjusted for age but didn't adjust for disability. That seems like an important omission. People might chalk differences up to identity that are at least partially differences by ability. A cross-tab so you could compare earnings by disability status across the categories could help, but this is one of those 'if we didn't pre-supply the cross-tab, it is unknowable' things. 

I downloaded the excel sheet, hoping that I might be able to check for differences in earnings between heterosexual and homosexual men and between heterosexual and homosexual women. 

But that appears to be impossible. 

In their gender splits by row in the cross-tabs, male and female include the transgendered identifying with each category. Heterosexual males (including the cisgendered and transgendered) earn more than males (including the cisgendered and transgendered) who identify with a sexual minority. That latter category lumps together people identifying as gay, those identifying as asexual, and many others. There could be substantial differences within that bundling. 

So I can't have a clean read on earnings differences between non-trans straight men and non-trans homosexual men. 

And among females (including cisgendered and transgendered), mean personal disposable income for heterosexuals is suppressed. Stats NZ does this when reported numbers are too low. But they do report earnings among females reporting as sexual minorities. Which is difficult to understand. The sample size tends to be smaller for minority groups. But even if it were not suppressed, it wouldn't be helpful. Because I wouldn't be able to get difference between cisgendered heterosexual women and cisgendered homosexual women. 

I don't know if US data has gotten any worse over the period, but NZ data sure hasn't gotten any better.

I've emailed SNZ asking whether any of this is knowable.

There could be good reasons for lumping groups together as they have; they have a lot of potential categories, and splitting out each one would just mean everything would wind up being suppressed. But splitting out the main obvious categories would seem pretty possible.  

Superannuation affordability options

Lyric Waiwiri-Smith at The Spinoff asked me what I thought the options might be for dealing with rising superannuation costs. 

Her story's here, along with comment from Max Rashbrooke and Shamubeel Eaqub. 

My most-preferred option is ongoing increases in immigration rates, coupled with shifting to CPI-indexation of super benefits and indexing the age of eligibility to healthy life expectancy.

I did some rough ballparking. If net migration were around 1.8 people per person turning 65, we could maintain current-ish ratios of 'working age' people relative to 65+. That would have to increase over time as life expectancy increases. 

But there is a real and obvious play here. NZ is aging; Europe as aged. Immigration New Zealand could explicitly advertise for young productive migrants in places where those young workers are being predated upon by their country's elderly voters even more heavily that they are here. Getting a small proportion of young and productive workers from large countries could postpone the inevitable here almost indefinitely. Remember that one big reason that NZ Super costs haven't already blown out is higher net migration than Treasury had expected in the 2000s. 

Consider the number of people aged 65+ per population aged 20-64. On that basis, NZ is around 29.5 and Germany is already at 39.8, France at 40.2, Italy at around 42. 

This kind of play is self-sustaining, on the receiving side. The more young Germans who leave for younger shores, the more who'll want to leave. And there'd be advantages to being in the first wave of leavers, because if the flow gets too large their government might start setting exit taxes. 

I asked GPT to come up with some sample Immigration NZ campaigns targeted on this basis: places where the demographics make NZ attractive by comparison. It did a reasonable job!

The top five, if this were a real campaign

I’d put serious money into:

1. Germany. The cleanest combination of size, ageing pressure, worker burden, education, and plausible NZ fit.

 

 

2. UK. Not the purest demographic case, but probably the best cost-per-success market. The sales pitch is less “escape pension collapse” and more “same language, better lifestyle, credible residency pathway, and fewer inherited fiscal messes.”

 

3. France. Strong burden story and strong human capital, especially if targeted at engineering, health, tech, science, agriculture, and public-sector professionals tired of state sclerosis.

4. South Korea. This is the big non-European play. The message writes itself: “Your country is about to experience the steepest demographic cliff in the OECD. Move before your peak earning years become the funding mechanism.”

 

5. Poland/Czechia/Slovakia. A regional Central European campaign could be very productive: educated, mobile, demographically pressured, and plausibly attracted by an English-speaking high-income destination outside the EU rat race.

 

Another non-tariff barrier

I do not see the problem here. I do see a lot of ways of creating a problem though.

Andrew Bevin writes for Newsroom:

Ministers were warned of trade implications relating to mandatory Health Star Ratings before choosing to vote against the development of the scheme.

If Health Star Ratings are made compulsory by Australasian food ministers, and New Zealand manages to opt out, Australia would likely block imports of non-compliant food.

That’s according to advice given to the Cabinet Economic Policy Committee ahead of New Zealand’s vote against developing a mandated Health Star Rating system earlier this year.

If NZ made the FSANZ health-star ratings compulsory, Kiwi firms would have to comply. So would anyone else wanting to sell food in NZ. International outfits would then either eschew our market as not being worth the hassle, run limited production runs meeting the FSANZ standard (at higher cost both because of the smaller run and because they'd lose flexibility to shift products across markets as market conditions change), or make Kiwi retailers put stupid little stickers onto everything manually. 

All of those would limit competition here and push up costs. 

If NZ did not make the health-star ratings compulsory, Kiwi firms wanting to export to Australia would have to comply. And that's fine. They can do that. They could even sell the same version of the pack in NZ. And product from other countries could come in too - if they met our biosecurity standards. 

Why create another non-tariff barrier?  

Assorted budget bits

A few minor bits I noted in looking through the budget - won't bother going through the headline stuff that will have been well covered elsewhere.

• They expect to save $1.97 billion by 2029/2030 through the public sector transformation project reducing staffing numbers. There will be pressure on that figure despite the substantial increase in public sector staffing, both in absolute numbers and as fraction of population, over the past six years. 
• Statistics New Zealand gets a large budget increase, both opex and capex, to modernise the IDI. At the same time, it will be held to baseline savings like the rest of the public sector. The Minister for Statistics might want to watch that SNZ doesn't siphon IDI money out for other activities. 
• They're fixing part of the FIF regime as it faces domestic investors, to match the fixes made for those moving to NZ. Taxing unrealised gains was always dumb; good that they're fixing this.
• The Proposal for Reducing the Risk of Online Harm to Children puts $30.75m over four years "to develop policy and possible regulatory options to improve children's online safety, subject to future policy and funding decisions". This is just for the policy development work. It seems like far more money than necessary for a project that shouldn't be being undertaken in the first place.
• They've set a Defence Technology Accelerator as part of the Defence Capability Plan. Sounds neat; only gets $16.1m over 4 years. Maybe if its first year looks promising, funds from the online harm thing could be shunted over here.
• Customs is getting $15.3m opex and $19.5m capex to respond to "increased smuggling", text says it's aimed at illicit drugs. And $35.9m in third-party levy revenue. Could affect tobacco excise too.
• A whole page of the BEFU Supplementary Materials goes through the weaker outlook for tobacco excise. They've sharply reduced forecast tobacco excise revenue as compared to the HYEFU forecast: $1.58 billion over the forecast period. They note a weakened demand profile - but they don't get into whether it's a drop in smoking or a shift to illicit markets. It's a drop in demand for excised tobacco in either case. But they do note an offsetting minor increase in forecast tobacco revenue over the same period. And this is kinda funny.
  

  "The excise rates for heated tobacco products (HTPs) were reduced by 50% on 1 July 2024. Recent data show that the decline in duty from the lower HTP duty rates has not been as large as was expected. Furthermore, subsequent research suggests that future HTP take-up will not be as large as was previously assumed."

  Remember the giant beat-up on Casey Costello in 2024 for the "Tax break for big tobacco"? It was all based on that very stupid estimate that Treasury stuck in the forecasts. Nobody should have believed the figure at the time - it was ludicrous. I don't know whether Hon Verrell actually believed it, or whether it just gave her a convenient line to beat up on the government for its changes to tobacco policy. Neither's great. My column on the stupidity of that figure is here.

• I think Treasury is likely overestimating alcohol excise returns. Recall that SNZ reports very sharp reductions in per capita alcohol available for consumption - those figures are based on excise returns. Treasury has applied a one-off drop to current levels, but then a reversion to prior pre-Covid trend growth in excise. I think Covid and GLP-1 inhibitors and general trends in youth risk-aversion have caused a structural break. Total alcohol available for consumption, on the SNZ figures, peaked in 2021 at 36.3 million litres and have declined since despite population growth - 2025 was only 31.3 million litres.  

• Overall, it'll take a heroic effort to stick to the plan they have, and that'll only get us to structural surplus by 2029.