Category Archives: politics – New Zealand

Wouldn’t banning overseas landlords reduce the supply of rental housing?

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Both the Labour Party and the Greens as well as the local Donald Trump want to ban foreigners from buying houses in New Zealand.

Seems to me that if you want to increase the supply of rental housing to reduced rents to poor families, you would want to encourage absentee landlords rather than first-time buyers. Is my logic wrong?

 

 

Wellywood is in an expensive global subsidy market

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The $300 million in film subsidies in the coming budget is riding off the back of Sir Peter Jackson’s phenomenal success. Our politicians will not consider pulling out of this global subsidy market until they have backed a few box office bombs.

The first law of Hollywood economics illustrates how fickle moviemaking is: “Nobody knows anything … Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one (Goldwin 1989).”

Big budgets, star power and large marketing budgets do not reduce ‘the terror of the box office’. Industry profits depend on the rare blockbuster; 78 percent of films are unprofitable (Walls 2005). Taxpayers cannot afford to pick winners in an industry of flops and the occasional blockbuster.

You do not have to be much of a film buff to remember box office flops with big names in them. Every Robert De Niro fan has been asking for a fair time now why did he agree to his latest film? Bruce Willis spent the middle part of his career recovering from a few box office bombs.

Many famous films and TV shows succeeded because the producers made something that audiences did not know they wanted to see until they saw it. Their success surprised everyone, including their producers. Star Wars, Rocky, The Rocky Horror Picture Show, One Flew over the Cuckoo’s Nest, My Big Fat Greek Wedding, The Godfather, Fawlty Towers and Seinfeld are all examples.

We watched the Seinfeld pilot last week. How did it ever get picked up (and initially only for four episodes)? George Clooney appeared in 23 failed pilots before hitting it big. These are the freaky odds taxpayers are playing when selecting which films to subsidise.

The most profitable movies of all time such as National Lampoon’s Animal House often had tiny budgets. Donald Sutherland is still kicking himself for insisting on a $50,000 cash rather than $35,000 plus 15% of the eventual $500 million gross (in present-day dollars). He thought he had made a nifty deal for one day’s work in a $2.5 million film, signing on only as a favour to his old baby sitter John Landis. You just never know when the biggest break in your life is passing you by in show business.

Sir Alec Guinness hated every day on the Star Wars set but made most of the money he ever made in his life from his 2 ¼%. It was supposed to be 2 ½% but did not think it important to get the increase from 2% in writing before the film’s first release in a mere 32 theatres.

George Lucas planned to be out of town to escape some of the backwash of failure at the box office. He was in LA through a mix-up in dates and only realised he was rich when he went out for a hamburger to be caught up in massive traffic jams around a theatre playing Star Wars.

Think of any successful film in the first half of the 1970s, Steve McQueen turn down it down; any successful film in the second half of the 70s including Star Wars, James Caan turned it down. Sean Connery turned down Lord of the Rings.

On Academy Awards night, the audience is full of stars showing surprising grace under pressure in an emotional profession. They show their true acting chops by jumping up, applauding and faking genuine smiles despite their having turned down the Oscar-winning role.

Many classics have modest initial reviews or weak box offices such as Blade Runner and Get Carter. Radical uncertainty about whether you will like what you see is part of the experience sought when going to the movies. My favourite movie is Casablanca the second time I saw it at Uni for $1.

Studios and investors cope with this extreme uncertainty through a portfolio approach. They invest in many films and in both established and new talent and hope to get lucky.

New Zealand taxpayers cannot diversify the risk of frequent flops with a global portfolio approach. We have only enough cash to spare to subsidise a few films. Many of these are now sequels or franchises that sooner or later will tire with their inherently fickle audiences.

Any industry which survives on the grace and favour of the subsidy granter is inherently vulnerable; doubly so when consumer tastes are so unpredictable. With 6000 or so employed in the NZ film industry, the danger is politicians will never turn the subsidy tap off because of job losses.

New Zealand is a bit player in a global subsidy market where national, state and city governments are all pitching big to attract a bit of glamour their way.

The poor returns on film subsidies are well-known. The Treasury estimated taxpayers spent $472 billion in seven years for net economic benefits of just $13.6 million from 2004 to 2011; an annual rate of return of less than one percent. Treasury found only limited evidence of spill-overs to tourism.

The infant industry argument for subsidies does not stand up if only because they never grow up. Perpetually subsidising the film industry as the basic business model makes no sense at all.

Looking past the tinsel town glamour, film subsidies are a race to the bottom for the taxpayer. That does not count for much when there are photo opportunities for politicians with movie stars.

Submission to Select Committee on Employment Relations (Allowing Higher Earners to Contract Out of Personal Grievance Provisions) Amendment Bill

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This Bill will increase the wages of employees paid more than the contracting out limit. Currently, these workers share the risk of a job match turning out not as hoped with their employer. Their employers respond by reducing the wages they offer because of this additional risk placed on them if the job match turns out a disappointment. Asking an employee of any pay level to take on more of the risks of an unsuccessful job match will only happen if you offer them more wages.

Employment protection laws make it costlier to fire an employee, employers will be more cautious about hiring and will pay less because they carry the burden if a job match going wrong.

Not all job matches turn out to be as hoped and the further up the management hierarchy you go, the more likely that the Peter principle, that employees are promoted one or two levels beyond the level of maximum competence. Successful employees may simply take that one promotion to many. This increases the risk premium in managerial and executive labour markets. The way in which this risk premium is shared between employer and recruit influences how much they are paid.

Employers who failed to treat workers fairly and pay them the going wage risk an increase in job quit rates. A standard literature review result is businesses spend about one-fifth of an employee’s annual salary to replace that worker. It is costly to replace workers because of the productivity losses when someone leaves a job, the costs of hiring and training a new employee, and the slower productivity until the new employee gets up to speed in their new job. With large fixed costs of recruitment and training, employers cannot afford to behave whimsically if they wish to survive in competition with the rivals with more competitive wage and employment policies.

The Centre for American Progress was good enough to document the very substantial costs of
recruiting and training a replacement employee. Employers have every reason to protect their investments in training and recruitment by minimising job turnover costs.

A policy designed to protect workers from dismissal, over time, will increase the duration of unemployment spells through a chilling effect on job creation. Employment protection laws are a tax on job creation. With fewer vacancies posted, the unemployed will take longer to find jobs. The far longer average duration of unemployment in countries in Europe with strong employment protection is shown that to be true time again. Fewer jobs are created fewer people fired so fewer vacancies open so the unemployed spend longer searching for new jobs.

There are very high outflow rates from unemployment among the Anglo-Saxon and Nordic economies. The economies of Continental Europe stand in stark contrast. Unemployment outflow rates in these economies lie below 10% at a monthly frequency.

Graduate textbooks in labour economics show that a wide range of studies have found the predicted negative effects of employment law protections on employment and wages and on investment and the establishment and growth of businesses:

1. Employment law protections make it costlier to both hire and fire workers.

2. The rigour of employment law has no great effect on the rate of unemployment. That being the case, stronger employment laws do not affect unemployment by much.

3. What is clear is that is more rigourous employment law protections increase the duration of unemployment spells. With fewer people being hired, it takes longer to find a new job.

4. Stronger employment law protections also reduce the number of young people and older workers working age who hold a job.

5. The people who suffer the most from strong employment laws are young people, women and older adults. They are outside looking in on a privileged subsection of insiders in the workforce who have stable, long-term jobs and who change jobs infrequently.

Trial periods are common in OECD countries. There is plenty of evidence that increased job security leads to less employee effort and more absenteeism. Some examples are:

  • Sick leave spiking straight after probation periods ended;
  • Teacher absenteeism increasing after getting tenure after 5-years; and
  • Academic productivity declining after winning tenure.

Jacob (2013) found that the ability to dismiss teachers on probation – those with less than five years’ experience – reduced teacher absences by 10% and reduced frequent absences by 25%.

Studies also show that where workers are recruited on a trial, employers have to pay higher wages. For example, teachers that are employed with less job security, or with longer trial periods are paid more than teachers that quickly secure tenure.

Workers who start on a trial tend to be more productive and quit less often. The reason is that there was a better job match. Workers do not apply for jobs to which they think they will be less suited. By applying for jobs that the worker thinks they will be a better fit, everyone gains in terms of wages, job security and productivity.

The only thing that is special about chief executives and others paid more than $150,000 is they are higher risk recruitments because of the costs of it going wrong. They also pose great costs on the firm if they leave unexpectedly.

Bang Dang Nguyen and Kasper Meisner Nielsen looked at how share prices reacted to 149 cases of the chief executive or another prominent manager dying suddenly in American companies between 1991 and 2008. If the shares rise on an executive’s death, he was overpaid; if they fall, he was not. Only 42% of the bosses studied were overpaid. Those with the bigger pay packages gave the best value for money as measured by the share-price slump when they passed away unexpectedly.

Share prices do speak to the value of the company and the contribution of its CEO. The share price of Apple went up and down by billions on the back of rumours about the health of Steve Jobs.

In terms of splitting of what some call the labour surplus increase from a firm hiring an executive, these employees retain on average about 71% and their employer keeps 29%. Others call this rent sharing. 71% going to the CEO might initially sound high, “but it’s not like he’s taking home more than he produced for the company,” says Nguyen.

In summary, this bill will increase the salaries of those affected by it. It will make it easier for them to find jobs especially if from less conventional backgrounds.