Thursday, July 30, 2020

NSW Federal Financial Relations submission

Read my full submission here.

The NSW government has been conducting a review of taxes and federal financial relations. One of the main proposals to come out of the review has been to replace stamp duty on property transactions with a broad-based land value tax, or what I have called SD4LVT. 

There are many reasons to be sceptical of the political motivations of these types of reviews. Typically, you only undertake this type of drawn-out review process if you a) already know what you plan to do, or b) plan to do nothing but use the process to keep all the interested parties busy talking about something that will never happen while appearing to do something. 

I think this is a case of a). I say this because although the review proposes SD4LVT, the NSW government recently announced that it will be reducing land taxes by 50% for 20 years for corporate landlords. The reason given is to promote a corporate build-to-rent housing sector [1] which is currently disadvantaged because there are threshold values above which land taxes apply, giving a tax advantage to landlords that own few properties. 

But if the NSW government wants to expand land value taxes, why offer additional exemptions and reductions to fix the imbalance rather than remove the current exemptions to level the playing field?  

So I'm a sceptic. 

Regardless, the SD4LVT proposal has been justified with a lot of dodgy economics. I outline in my submission four main areas where the economic reasoning is flawed. 
  1. The economic efficiency costs of stamp duty are low, not high.
  2. Removing stamp duties may increase the price of housing.
  3. Lower churn of housing assets is an economic benefit of stamp duty. 
  4. Stamp duty revenue volatility helps stabilise the macroeconomy.
Please read the whole submission. Here's an excerpt about the nonsense economics that is behind the conventional wisdom about the high efficiency costs of stamp duty. 
_______________________________

The metrics of economic disaster caused by stamp duties are derived from economic analysis using computational general equilibrium (CGE) models of the macroeconomy. The below table from the Draft Report shows that multiple assessments conclude that there are high economic costs to raising revenue from stamp duty.


However, these studies all use CGE models that assess the effect of transaction taxes because there are no transactions in the models. Instead of using a better tool for the job, or admitting the limits to knowledge, modellers have simply pretended that stamp duties are a different tax that applies to a tax-base that is in their model.

There are two main approaches to this. First, in the KPMG models, rather than stamp duty being a transaction tax that is incident on the seller (and therefore incident on land values), as it is in reality, they assume this instead.
...conveyancing stamp duties are modelled as a tax on investment in residential and commercial structures (p.125)
They assume that stamp duty is not a tax on transaction where the economic incidence is on land. Instead, they assume that stamp duties raise the cost of housing to all buyers and renters because it is a modelled as a tax on construction. The model assumption requires that stamp duties raise the cost of building new houses without affecting land prices, leading to reduced new housing construction in general. This is a classic example of garbage in, garbage out.

A second approach is in the COPS model is to pretend that stamp duty is a tax real estate agent fees and legal services used in housing transactions.
Stamp duty on conveyancing or property transfers in Australia are taxes that apply to the transfer of ownership of most properties. While the duty base is the sale value of the property purchased, the resources used in transferring property ownership is usually only a fraction of the value of the property transferred. To model transfer duties on residential property ownership in this way, we introduce a new bundle of goods into the household decision problem in VURMTAX, called Moving Services. This bundle consists of goods produced by the Real Estate Services, Other Business Services and Public Administration industries, and represent the real estate agent, legal and public administration goods demanded by households when transferring property. (p17)
...we have $8,367 million of stamp duty being levied on an activity with a resource cost of only $1,881 million. This implies a tax rate on the activity of transferring property of 445 per cent (=8367/1881). (p.804)
This means that instead of the tax being a small percentage of a large base (property turnover value) they are instead suggested that the tax is a 445% tax on real estate agents and conveyancing.

If that sounds crazy, that’s because it is. Any tax at this rate is going to look costly and inefficient in a CGE model. The more bizarre part of it is that if you believe this modelling approach is an accurate representation of stamp duties, then the cheaper real estate agents and lawyers become, the more economically inefficient stamp duties are.

The claims about the economic inefficiency of stamp duty that are relied upon to justify its removal have no plausible economic basis.
_____________________________

[1] I've never understood what is supposed to be achieved by this. We currently have a rental market ownership structure of "investor owns dwelling." What is achieved with a structure of "investor owns shares of a company that owns dwellings?" On net its the same. I could be convinced that landlord professionalism could be improved. But again, most landlords employ profession property management services anyway. 

Monday, July 27, 2020

What is Gigi actually saying about COVID?



* Read Gigi's piece at The Conversation

Twitter is a mob, and the mob has a new enemy. Prof. Gigi Foster has been on a few television shows lately trying to make the case that economic lockdowns cost lives, just as COVID does, and therefore we want to make sure that we aren’t inadvertently killing more people over the long-term by crushing economic activity and livelihoods.

After all, a functioning economic system is what delivers high-quality healthcare, safe roads and workplaces, investment in public works, the ability to devote resources to research medical treatments and new drugs, and more. It delivers livelihoods and careers, leisure and happiness. It delivers quality of life as much as it delivers quantity.

However, I don’t think gotcha television and infotainment current-affairs shows are the best venues for this discussion. From what I saw, these outlets were actively avoiding putting a number on the trade-off, or even acknowledging it. A cabal of social media economists avoided acknowledging this trade-off a few months back. They then back-peddled, said there was a trade-off, and botched their attempts to quantify it.

The puzzle to me is that everyone seems to want to say Gigi is trading off lives for the economy. Her point is that a functioning economy delivers health and welfare outcomes, and hence the trade-off is about lives for lives.

For some reason, saying this is a new taboo.

Policy decisions that explicitly make this trade-off occur all the time. Should we fund more medical research? Should we install traffic lights? Should we make people wear seat belts? Should we ban alcohol and cigarettes? Should we legalise recreational drugs?

Policy analysts, particularly economists, spend careers looking at these welfare and livelihood trade-offs in all sorts of policy domains.

When she says "man up" she means that we need to face up to the fact that we cannot create a pre-COVID world. There are going to be losses of life quality and quantity, either from the virus or our response to it.

I want to go through some of the strange things I see when talking about our COVID policy response, and some of the things people say to avoid facing the reality of this trade-off. My personal view is that the reasonable thing to do is to make sure our policy response does not shorten lives and reduce their quality more than COVID would. I hope that this helps people to understand where Gigi is coming from.

1. The exponential growth and tail risk story
One of the big claims early on was that those talking down the risk didn’t understand exponential growth. Strangely, exponential growth doesn’t usually apply to virus propagation. The pattern is well-understood to be logistic growth, which is going to saturate the population at some point. The unknown was merely where that point would be. An upper bound for that point was pretty clear early on based on evidence from China, Italy and the Diamond Princess cruise ship.

2. Virus prevalence estimates
How much of the population has been exposed to the virus? This is another area where the worst-case scenarios got all the airplay, and where more sensible estimates were ignored. The more prevalent the virus was, the lower the overall mortality. You can see the media incentive for publicising the high mortality estimates, even though it was known quite early on what the realistic estimates were.

3. Infection and case fatality rates
Initially, the highest estimates were promoted, but the reality is that the range of 0.25-0.65% for infection fatality is the current view. If two-thirds of the population is infected overall, that is a worst-case scenario of about 0.16-0.4% of the population dying from COVID, or a few months of normal deaths brought forward in time. This is a generous worst case. The "Swedish disaster" has seen a crude COVID death rate of just 0.05% of the population, under a third of my lowest estimate. 

4. Getting the orders of magnitude right
I asked my Mum when she was panicking about the COVID outbreak how many people she thought had died. She said 5.

When people tell me about the shocking number of COVID deaths I like to ask them how many people die each day in normal times. No one seems to know, or care.

Nearly 8,000 people die every day in the US. Fear does not care for statistics.

The 6,000 coronavirus deaths likely to come from the virus in Sweden are equal to around 24 days of normal expected deaths, and many of these COVID deaths are not in excess of normal deaths. 

A good rule of thumb is that 8 in 1,000 people die every year (0.8%), or about 60 million globally.

For perspective, the seasonal flu in Australia kills 1,500 to 3,000 people, with about 18,000 hospitalisations.

In Queensland alone last year 285 people ended up in ICU due to flu. 

5. Getting the cost of life right
Everyone dies, so dying of one thing today simply stops you dying from something else later. Deaths are life-shortening. In the trade-off I described above, economic recessions and lower future output are also life-shortening. There is no point talking about “prevented deaths”, only shorter lives (that whole quality/quantity thing). If people die a year to two younger than otherwise from COVID, then that’s not too bad. If they die 30 years younger than otherwise, the loss is fifteen times worse per death.

6. But what about transmission!
Another argument is that coronavirus can have lasting effects on some people. Yes. And? Others say that you might feel bad transmitting the disease to others. Yes. And? These issues are true of all viruses. They were true of last year’s record 1,300 flu deaths. There are hundreds of people out there who transmitted the flu virus to someone last year and it killed them. Where was the outrage then?

7. Or do recessions save lives?
I’ve heard the argument that recessions decrease traffic and workplace fatalities, reducing crude death rates. I can’t make a judgement about whether this is true, but it makes perfect sense and could be. But it only raises another question—if recessions save lives as a general matter, why aren’t we trying to orchestrate recessions all the time? If it is logical to do it for coronavirus, then it is logical to do it for traffic fatalities, workplace deaths, or whatever other indirect mechanisms of death are at play during economic expansions. 

8. The poorest countries suffer the most
There are global costs to lives from large scale lockdowns. Global vaccination programs for preventable diseases are being delayed, costing lives right now. Construction of health facilities is being delayed, costing lives in the future. Their general development and progress are hampered. Worse still, with very young populations, most poor countries have relatively few people at risk of COVID. 

9. The endgame. What endgame?
After a month of “flatten the curve” rhetoric, which basically had the right intention, there was a silent shift towards “crush and eliminate”. How does this make sense in a globalised world where the virus is going to saturate the rest of the world population? What endgame does that entail?

Being a national bubble with no international travel for years until a vaccine adds to the human cost of our policy response. If (or when?) the bubble is breached we get outbreaks anyway. New Zealand is hailed as a success on this front. But until when? The first person who arrives with COVID will simply take NZ back to square one. 

10. The counterfactual
This is tricky to consider. Is there a “no panic” counterfactual where the media doesn’t whip up society into a frenzy? I think there is, and this means that the “people would voluntarily lockdown” argument doesn’t fly. Why would they voluntarily lockdown?

The 2017 flu season was nearly 4x worse than the 2016 flu season, with 1,255 deaths compared to 464 the prior year.

In relative terms, the 2017 flu season was huge. It also had the risk of being multiple times bigger given the state of knowledge in the early stages. Yet no one panicked and shut down society.

If people don’t notice a 4x jump in flu deaths, would they notice a 10x jump from coronavirus deaths and voluntarily lock down? I argue they wouldn’t.

The “don’t panic, don’t lock down, invest in health resources” counterfactual is a plausible one. 

11. The un-science cancel culture
The Twitter mob has decided it can decide what is science and what is not, while at the same time attributing all variation in the COVID outbreaks across different countries or states to the policy response, leaving no space for randomness or luck.

This is “un-science”.

There is also nothing the un-science mob loves more than cancel culture. If my Twitter searches are anything to go by, plenty of people now want Gigi to be fired from her job. Yes, for raising the point that we should try and save the most lives possible by accounting for the cost to lives from our response to COVID, she is apparently now someone who can justifiably be cancelled.

12. A final thought
One thing I have learned to do to help maintain perspective is to turn a problem around and ask the reverse question. How many early deaths would we tolerate to avoid a large recession? Is your answer really zero? Even a global one?

How many early deaths do we tolerate by not spending more on the public health system? Where is the outcry?

[UPDATE]: After being hailed as a success story, on August 13 New Zealand went into a second lockdown after a new COVID outbreak—just as predicted would happen sooner or later. 

Sunday, July 19, 2020

Submission to NSW Housing Strategy

The New South Wales government is creating a long-term housing strategy. Hooray!

You can read my submission here.

What's the strategy all about? It's always hard to know with these jargon-filled government documents. To avoid accountability for specific outcomes these documents 1) never make direct, clear, points and 2) always use coded language.

To get a feel for what the priorities are in this strategy I did a word count of key terms that seem relevant to me when it comes to housing. If word frequency is any guide, the strategy is all about population, planning and supply.

Notably, it is not about prices.

This is weird. The Housing Strategy discussion paper notes that rents are the best metric for determining the adequacy of supply and that by this metric supply has been sufficient to meet the record population growth of recent years.
Given the large amount of housing supply currently being delivered, the vacancy rate has risen in Sydney and rent increases have moderated.
So we have a whole housing strategy being created on the basis that housing supply is not responding to population growth because of planning. Yet at the same time, there is a hidden admission that this is definitely not a big issue.

The only logical conclusion is that the government needs to be seen to be doing something about housing because of declining homeownership and enormous wealth gaps the housing market is creating. But it cannot actually enact policy to make housing cheaper.
The fact that community concern about rising prices is not the focus of the discussion paper is quite clear evidence of a political balancing act being played out. Housing is desired to be more “affordable”, but policies that actually lower home prices are political suicide and also come with macro-economic risks.
...current renters and future buyers are the main beneficiaries of lower prices. But they are few in number, and low in wealth, compared to the homeowners and housing investors who gain from higher prices and rents.
This is the heart of the NSW and national housing dilemma that should be the focus of any housing strategy at any level of government. A realpolitik view is that this dilemma is behind the promotion of supply-focussed policy—it can plausibly be claimed to be helping reduce prices while in practice not having any price effects, keeping homeowners and investors happy. In addition, it provides a justification for using the planning system to deliver windfall gains to politically connected landowner ‘mates’
There you have it. Expect a lot of talk and debate about housing during the development of this strategy. Expect no substantial changes except for a few more giveaways from the planning system to well-connected developer mates.