OnPoint by Keith Ng

While his lovely assistant Judith Collins paraded in front of you in her sparkly leotard swinging shipping containers, John Key has just said, right to your face, 'we're going to spend $385m on prisons in the middle of a recession, and we want to spend $380,000 on each prisoner because this is where our spending priorities are.'

Dude. You've been gorilla'd.*

Here's the pattern. National offers up a novel-yet-slightly-controversial-in-a-newsworthy-way way of cutting government spending. The usual punters leap at the bait. News media jumps all over it, incisively and impartially getting to the bottom of the trivial distraction, and completely misses the massive spending.

Isn't the real story here that National is spending $385m from its “stimulus package” on the least productive spending imaginable, housing a disproportionately high and ever-rising prison population?

No? How about something more Garth McVicar, then: $380,000 per bed? It's another sign of the government putting these scum first, pampering them with reinforced walls and indoor plumbing while their victims are outside, completely without steel bars and razor wire! None at all! Raar!

No?

To the guy/gal who thought this up: Well done, have a slow clap.

Clap. Clap. Clap.

The shipping containers are not a big deal. There's nothing inherently inhumane about corrugated weathering steel, it's just a construction material. Then again, there's nothing inherently spartan about them either.

So how can they save so much money? They can't. The $643,000 vs $380,000 figures are rigged.

The Spring Hill Corrections Facility (where the $643,000 figure came from) was built in the middle of a national construction boom and global spike in the price of oil and steel. That's the excuse that Corrections gave for going massively over-budget:

The difference in budget for these two [Spring Hill and Otago Corrections Facility] facilities has resulted from three main factors:

The extreme pressures of the current boom in construction, which are common across the overall New Zealand construction sector at this time, combined with other external market factors, which are impacting the cost of labour, materials and commodities such as fuel. These pressures are especially marked in the Auckland and Otago regions, where the facilities are located.”

If it had gone within budget... (crazy assumption, I know, but since we are comparing hypothetical prison beds with hypothetical prison beds, it's just as crazy to assume that the shipping container prison will be within budget)... if Spring Hill had gone within budget, it would have cost around $435,000 “per bed”.**

This is why Collins never gave a costing for what conventional construction would cost *now*. She is comparing the cost of a real prison rushed through a building boom with the cost of a hypothetical prison in the middle of a recession. Of course there's a bloody big difference.

So, that brings the savings back down to $55,000 “per bed”. Good. Great. If it checks out, by all means do it, but:

The average cost of keeping an offender in prison is currently $90,746 per year, which is lower than that of comparable countries, despite including depreciation which is not costed in many countries. The average annual cost of managing an offender on a community sentence is $3665, ranging from $2,000 for community work to $25,000 for Home Detention.”

Saving $55,000 is not very much when that prison bed will cost you $90,746 every single year. That's the gorilla in the room, right there.

* The older (original?) version of the experiment featured a gorilla, rather than a moonwalking bear. I'm on the fence about which one is awesomer.

** “Cost per bed” had nothing to do with beds, or cells. It's just the total cost of the prison divided by the prisoners it's designed to hold. It's convenient to say “cost per bed” because it sounds like it's a $600,000 bed, but only a small portion of that is spent on the prisoners' actual living arrangements. The rest is on training and rehab facilities, and amenities like walls and fences and razor wire.

Borrow to save? Not saving so we'll have more money? WTF?

National is saying that cutting contributions to the NZ Super Fund is a good thing because it'll save $19.5b in debt over the next 14 years, while Labour says that this is a bad thing because it takes $35b off the value of the NZSF in 22 years.

Naturally, both are true – they're just completely useless pieces of information.

We're comparing between two options: a) Fund NZSF and let debt go up or b) Don't fund NZSF and let debt go down. As Kiwiblog suggests, we need to know the cost of both.

For those of you interested in spreadsheets, it's here. For those of you who are not, here's the skinny:

In 2031, if we contribute to the NZSF at pre-Budget levels, we'd have $124b in the NZSF.

In 2031, if we take a NZSF contribution holiday as prescribed in Budget 2009, we'd have $86.5b in the NZSF, and we'd have $14b less debt (methodology below).

This means that, by suspending NZSF contributions, we'd be $23.5b worse off by 2031.

Kiwiblog and the DomPost were way off because they didn't take into account the fact that NZSF earnings are taxed. The more that goes into the fund, the biggest it gets, the more it earns and the more taxes are returned. This wasn't included in the Treasury backgrounder that Farrar shanghaied because it didn't deal with tax or debt. But the lost tax revenue adds up to a lot: $16b by 2031. That's why it's so much more than the $8b difference that Farrar suggests.

I don't think Bill English wiped $23.5b off the books for shits and giggles. So WTF is going on? The NZSF offsets the impact of debt on the current accounts, so that ain't it. But it doesn't necessarily offset debt for our exposure to the international credit market... which would be something that S&P had on their checklist.

So it was, at the very least, partly done for the benefit of the credit rating agency. But $23.5-friggin'-billion to appease *one* credit rating agency? Surely there must be more to it than that. I don't really know why. My working hypothesis is that a government in the future would have a strong argument for reducing Super eligibility if the Super Fund was dry; the same government, if faced with mounting debt instead, would have to explain why Super should be first against the wall.

So this is National laying the tracks towards a future cut in Super eligibility, albeit doing it spectacularly expensively. I'll try to get some answers from English during the week. Hopefully, a journalist who is paid to do this can beat me to it.

(To journos: Look at this Treasury model. Line 34. This is how much the Crown loses in tax revenue because of the contribution holiday. This line is not counted in the fund balance because it comes *out* of the fund balance. It's about $10b gross, and $16b by 2030/31 if you include interest.)

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That's the public service part. And now, for your amusement and mine, a fisking of Kiwiblog's “Some Super Facts”, with a lot of gratuitous swearing:

1.

Phil Goff’s (and the Dom Post’s) insistence on borrowing to save is bizarre.”

Fucking hell, Farrar, even by your own calculations, investing in the NZSF (that's “borrowing to save”) comes out on top by $8b. On what planet is a choice that results in $8b more considered “bizarre”? Sure, there is an argument on what are appropriate levels of debt exposure, but the onus is most certainly on English to explain why an option that loses the country money is the better one.

(As discussed above, the $8b figure is way too small.)

2.

“Over the 11 years 2009 to 2020, there would be $19.5 billion of borrowing. Then the interest on the borrowing (calculated at 6.73% - the average cost of Govt bonds according to the Super Fund) would be $7.7 billion. So by 2030, the Crown would have an extra $29 billion of borrowing.”

Um, you forgot 11 years. After a 11 years contributions holiday, we'll need to spend the following 11 years on contributions overtime (coined here first!), where we have to put an extra $13b back into the NZSF to partially make up for what we lost during the holiday.

However, you also forgot 11 years of compound interest, so you've actually underestimated the cost of borrowing quite a bit. (Until you count the lost NZSF tax revenue, as discussed above. Then you're back to being wrong the other way.)

3.

You earn $60,000 a year. However your living expenses comes to $70,000 a year. You have a $10,000 a year shortfall. Due to this shortfall you are not making any repayments on your $200,000 mortgage. In fact you are having to borrow an extra $10,000 a year against your mortgage to cover your living costs. Now your house is worth only $350,000 so you know you can’t keep borrowing for much more than a decade before your credit runs out.”

Your analogy is stupid. Would you like to know how stupid your analogy is? I will illustrate it with an analogy of your analogy:

You earn $60,000 a year. Lex Luther aims a $290m death-ray at your $350,000 house. He threatens to destroy your $12,000 house (revalued after Lex Luther aimed a death-ray at it) with you and your family in it unless the government contributes to the NZSF at the Budget 2008 rate. You and your family can't move from the couch, because you're sitting on a dead-man switch which would activate if the total weight (in whole numbers) of the persons on the couch did not equal a prime number. The members of your family weigh 89kg, 72kg, 45kg and 35kg. If the switch was activated, it would send an explosive-laden train with twenty-two orphans who would all grow up to discover the cure for cancer into another explosive-laden train filled with twenty-three property speculators.

Superman was disestablished by the Razor Gang. The average yield for 10-year Government bonds is assumed to be 6%. There is a kitten in your basement. It is very cute.

This demonstrates that the contribution holiday would lead to kitten death.

More seriously though, your analogy is crap because:

a) Your person has a debt that's 330% of his annual income. New Zealand has a debt that is 8.7% of GDP.

b) Your person has an annual deficit that's 16.7% of his income. New Zealand's operating deficit is 3.3% of GDP.

c) A person who invests $2,000 probably pays more fees, proportionally, than an institution that invests, say, $20,000,000,000. Probably.

d) A mortgage for a person earning $60,000 is probably more risky (and therefore more costly) than a loan to the Government of New Zealand. Probably.

e) I'm pretty sure that New Zealand will still be creditworthy in 2019. I think that would be the case – and I don't say this lightly – even if we had Gerry fucking Brownlee as the Minister of Finance for the next ten years.

f) Unlike governments, households... oh fuck it, it's just a really crap analogy, okay?

4.

So remember this. Even if you discount the reduction in debt and finance costs by suspending contributions (which you shouldn’t anyway), the long term impact is that future taxpayers have to pay for 92% of superannuation, instead of 89%.”

So... $19.5b plus interest is a huge amount of debt to be racking up, but $37.5b in the Super Fund is practically insignificant, because you've expressed it as a percentage of total Super spending per year?

*That's* your magic trick?

(Methodology: Debt is assumed to incur 6% interest per annum. 100% of reduction in NZSF contribution is assumed to go towards debt repayment (i.e. Reduces debt). 100% of reduction of tax revenue from the NZSF (as a consequence of a lower NZSF balance) is expected to be funded out of debt (i.e. Increases debt).)

It’s a simple, simple Budget. It’s only goal was bringing down the debt track. This is the scary-o-graph showing the debt track that the government was heading towards, with the alternative line showing the impact of the policy changes:

The changes are expected to bring down debt by more than 30% of GDP by 2023. That’s about $88b.

There are no magic beans here. To get $88b less debt, you have to squeeze $88b out of the books (well, $88b minus interest). So which $88b got squeezed?

The bulk of it comes from changes to the future spending allocation, which was reduced from $1.75b to $1.1b. $650m doesn’t sound like much, but it doesn’t just add up – it compounds.

This allocation is an addition to the sum the government can spend each year. Which means that every time another $650m is added, that’s another $650m for every year after that. Each $650m stack up on top of the previous one.

So, if it’s a $650m in the first year, it’ll be $1.3b in the second year, $1.95b in the third year, and so on. And if you’re counting the total spent, you’re counting the entire stacks. So, for the three years, it’ll be $650m + $1.3b + $1.95b, and so on.

In 2011/12, the reduction in spending will be worth about as much as stopping contribution to the NZ Super Fund. By 2022/23, it’ll amount to a $9.8b reduction in spending a year.

To put it into perspective, the Super Fund contribution will be worth $2b that year, and the tax cuts that have been deferred would cost $840m.

This graph shows how much of the reduction in debt comes from this "reduction in future operating allowance" line (as a % of GDP):

So, how has National managed to reduce future debt? By cutting a fuckload of future government spending.

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Update 1: So what about the tax cuts, then?

Technically, they’ve been deferred. Deferred till when? The government is not expected to be back in black until 2018. So, here are the hints that we got. When I asked English whether they’ll reconsider the tax cuts while the government is running a deficit, he said that the government will consider them if the growth track gets better (which implies that yes, they will consider them while the government is in deficit, as long as they’re moving out of it). When Bernard Hickey asked if English seriously expects to be able to reinstate tax cuts before the next election, English said no.

So it sounds like it’ll be reconsidered towards the end of the fiscal recovery period, which is a decade away, give or take. With two elections between now and then, the tax cuts as promised in the 2008 election are as good as dead.

Fiscal hawk says: YUSSS! In yo face!

Meanwhile, National are still reaffirming their commitment to aim towards a top rate of 30%. It all sounds a bit silly, given that it’ll take them close to a decade to even glad-eye a top rate of 37%.

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Update 2: Less money for Super Fund = Less money for Super

The other $19.5b elephant in the room is stopping contributions to the NZ Super Fund while the government is in deficit – i.e. the next 11 years.

The argument that they’re running is that it doesn’t make sense to borrow money to save, since you have to pay interest to borrow. That sounds simple enough – except that it’s not, since you get interest on your savings, too.

Rod Oram suggested that the long-term returns on the NZSF will be actually be greater than the cost of borrowing – i.e. that borrowing to invest in the NZSF *is* profitable. One argument in support of that is that the government is a very safe borrower, and thus can borrow at a lower rate than your average investor. So while borrowing to invest is a bad idea for individuals, it can work for a government over the long-term.

When I ventured to the other side of the lunch table, Bernard Hickey presented the opposite case, saying that the return on investment will never match the market interest rates, and that the whole NZSF should be put into debt repayment instead.

Gah! A comparison of the rate of return on the NZSF vs the cost of crown borrowing would be most enlightening, gentlemen.

But regardless of which way is better, there’s no getting around the fact that less money deposited means less money can be withdrawn. Here is where English gets super-shifty:

Contributions to, and the size of, the Fund do not affect future New Zealand Superannuation entitlements or payments. The size of the contributions and the Fund merely affect how much future New Zealand Superannuation payments will be paid by the Fund, instead of from future revenue.”

It’s crazy-talk.

He’s saying that it’s okay that there’s less money, because we can afford Super payments as long as future governments pay for it. Except that the NZSF exists precisely because future governments can’t afford to.

Of course, English can’t bind future governments, so he (and future governments) can go on saying that they’re committed to something that they’re not paying for – and continue to not pay for it – right up until they have to fork out the dough.

There’s no getting around the fact that cutting NZSF contributions cuts the ability of future governments to pay for Super. This means that Super entitlements are more likely to be reduced.

Of course, loading future governments with debt also cuts their ability to pay for Super. One might be slightly better than the other, but both mean less money for the future, and no amount of book-jiggling can change the fact that less money means less money.

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On one hand, the fiscal hawk in me is quite satisfied with the depth of cuts in this Budget. Given the current economic outlook, there’s no way around the fact that very deep cuts are needed. Things like the $2b cuts by the razor gang, and even the “deferral” of the tax cuts are just smokescreens.

All the real work is done by the reduced operating allowance. It’s impact will be felt more and more as time goes on. Each and every subsequent Budget will have to make do with an increasingly inadequate pool. And at the end of it, there’ll be a big-ass shortfall in the NZSF.

This is like the opposite of pulling teeth.

But to be fair, a) it has to be squeezed from somewhere, somehow, and slow is less traumatic than fast; and b) it’s not

the end of the world – government expenditure will go up for a few years because of the recession (and more people are made unemployed, etc.), then it’ll be whittled down as the cuts start to bite, but it will end up at current levels by the end of the projection period.

There’s undoubtedly an ideological element at work here, too. When asked to elaborate on the “structural problems” in the New Zealand economy, English pointed to excessive government and household spending, as if the government, too, has been putting granite bench-tops on the mortgage. The idea that government spending is, in and of itself, a hindrance to the economy whiffs of a pretty strong ideological bent.

But hey, it’s a right-wing government that *had* to make some pretty steep trade-offs, and it chose to cut into medium- and long-term government spending. It's a perfectly valid trade-off to make.

Even cutting the Super Fund is a legitimate choice - but to cover it up with "cutting the money available for super won't affect your super" is just trying to weasel their way out of the consequences.

Bottom line: Things are bad. Making things less bad is possible, but there are consequences. Harden up.

Wolfram Alpha is not a search engine. The creator of Alpha, Stephen Wolfram, subtly hinted at this when he said:

We are not a search engine.”

And in its FAQ:

Is Wolfram|Alpha a search engine?

No. It's a computational knowledge engine: it generates output by doing computations from its own internal knowledge base, instead of searching the web and returning links.”

Not only are some tech journalists unable to semantically parse the sentence “not a search engine”, but they don’t seem to know what a search engine – arguably the most important invention of the internet since the internet itself – actually is.

A search engine uses “web crawlers” to visit every webpage it can access, sticks the information in a catalogue and allows users to search through it.

Alpha is a closed semantic database. It is filled with entries that are semantically linked to each other. It has nothing to do with searching the web.

(Think of search engines as a crack team of hot-shit robot librarians. By night they go read through all the books, figure out what’s in each one, and write it all down in a central catalogue. By day, when you come in and ask them for information, they go through the catalogue, figure out which ones you might want, then dump a few million books on your lap. Oh, and the library is full of porn.)

Wolfram Alpha, on the other hand, is like an encyclopedia. It is a closed database. It has what’s inside, and it has references to source material, but the volume of knowledge that it holds is a tiny tiny fraction of what’s available in the whole library.)

A semantic search engine has the properties of both. It can scurry around the internet cataloging, indexing information and automatically discern semantic relationships based on the information it gathers. Alpha does not do this. It merely searches its own database using semantic relationships that are defined by human staff.

Treating Alpha as just an answer box (from Associated Press. FACEPALM.) misses the point entirely. It’s not a knowledge base for humans. (Most) humans understand semantic relationship the old fashioned way. With words. Alpha barely does this. It gives you graph titles in lieu of explanations. Not so helpful for humans.

Alpha's promise lies in the fact that other computers can ask it questions and get answers that are meaningful to them; those machines can then use the answers and pass them along with the semantic relationships (i.e. What the answer means) intact.

It’s a knowledge base for machines. And it’s a really important building block to allow machines to understand things about the real world. This would, in turn and in time, allow us to understanding more things about the world.

In theory, you should be able to ask a computer about global warming, and it will find that it is caused by greenhouse gases, which includes carbon dioxide; at the same time, under entries for fossil fuel combustion, it will list carbon dioxide as an output, and it will link to the total amount of emissions resulting from fossil fuel combustion. With the semantic relationships joining all these facts together, a computer should be able to put them together and understand a link.

In theory. Right now, it’s kinda shit.

It knows that a World War II happened between 1939 and 1945, that a Adolf Hitler was involved and a Nazi Germany was involved. But it has no idea what Adolf Hitler did apart from the fact that he was a head of state, it doesn’t know what country Adolf Hitler was a head of state of, or whether Nazi Germany participated in any wars.

It doesn’t work because the data simply isn’t there. It’s sum knowledge of WW2 is start date, end date, a dozen countries and a dozen head of states. It’s not much.

Worse, not only does it not know much, but it doesn’t even know what it knows. It knows that WW2 involved Nazi Germany, but it doesn’t know that Nazi Germany was involved in WW2. This means that its understanding of its own semantic relationships is broken. Very bad.

Its natural language processing is also lousy, but NLP search is for chumps and charlatans (that’s the fancy name for “consultants”). NLP is useful for improving web crawling and indexing, but FFS people, it’s 2009 – users can make a goddamn search query without the aid of complex NLP algorithms.

On the bright side, Alpha works as pretty awesome statistics calculator. It’s basically the Mathematica suite as an online tool, and knows things like the indefinite integral of the Fibonacci sequence. Which… pretty much means that it has virtually zero value for the average user in the short-term. But when it actually works, and its database expands exponentially, and people start building tools to work with it, and it starts connecting with other services… then it’ll rise up and destroy us all.

Still not particularly useful for your average user, but more interesting, anyway.

"And... mark."
"Who?"
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"Mark who?"
"No, you synchronise your watch when I say mark."
"Is he, like, a watch guy?"
"Who?"
"Mark."
".... Just remember that we only have one shot at this and if we don't do it in the next twenty-two minutes, we'll never have the chance again. You remember your job?"
"Yeah."
"You got the crowbar?"
"Yeah."
"Did you check the gas?"
"What?"
"The gas. The gas on the torch."
"Oh. Yeah."
"That one."
"What?"
"That one."
"What?"
"You're in the wrong lane."
"What? That's the..."
"You're in the wrong lane!"
"But that isn't our..."
"It's that one! Oh, man! Oh! Oh! Oh, man. Oh! You just missed our exit!"
"Should I turn around?"
"It's a motorway. There is nothing we can do. This motorway has ruined everything."
"Oh... do you want to go to the North Shore instead?"
"No, no. I just want to go home."
"But good thing there're no tolls, eh?"