14th April, 2024

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⚠️ WARNING - this could be a bit esoteric and meandering. I make no apology. It’s been a while since I wrote anything here…

One of the weird things I’m asked to do more regularly than you’d expect is prove I’m not a Nigerian scammer or part of the Russian mafia. Every bank, lawyer, accountant or fund manager needs to complete so-called Know Your Customer (KYC) or Anti-Money Laundering (AML) checks. They ask me to prove my identity by sending scans of documents or, even worse, downloaded electronic statements which include my physical address (as if those are not trivial to fake, if I actually was a money launderer).

Sometimes one of the questions is “source of funds” - in other words, where did the money I’m trying to transfer or invest actually come from? I usually just answer “early stage investments” and leave it at that. It seems to suffice. Those asking are ticking boxes, so mostly don’t seem to care.

But sometimes I’m tempted to go back further:

When I was 12 I got a paper run, and used that income to save for a computer …

Or, even further:

I’m the ancestor of European immigrants who decided to spread religion, various contagious diseases, invasive pests and capitalism.

It is, as they say, turtles all the way down.

Let’s try this approach with a couple of the news stories from the last week, and wade through all of the layers or turtles until we get to tourists or cows.

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This week the big news is the future of news itself. The media is in crisis.

Duncan Grieve from The Spinoff must feel a bit like Cassandra. He has been saying things are fundamentally broken for ages. I’m sure it’s an odd feeling to be proven so correct about that.

He published a series this week where he interviewed the CEOs of all of the major media outlets, asking each of them what they believe is the cause of the current problems and what are some possible solutions:

What happens when you ask 20 NZ media CEOs two big questions?

There were lots of ideas about who should pay. So, let’s pick out the themes and ask “which comes from…” a few times to try and get to the source.

The business model of media isn’t that complicated. Whenever we click on Stuff or NZ Herald or watch the news on TVNZ or TV3 we are reading or watching content that quite expensive to create, but usually directly paying very little, if anything, for it. So what is the source of funds to cover those expenses?

For commercial media companies it’s a mixture of subscriptions and advertising. Normally mostly advertising. That money comes from the profits advertisers get from selling their own products and services. Or in the case of public sector advertisers, from tax payers.

This creates an obligation on the media company. They have to create content that lots of people want to read and watch. Advertisers won’t keep paying if the value is less than the cost. This explains why news websites are increasingly packed full of invasive ads. As the reader/viewer you are either the customer who pays for the content directly via a subscription or you are the product that’s being sold to advertisers - sometimes perversely both (cough, Sky TV). The business model always distorts the product, for better or worse. For example, these days business news is predominantly real estate news, and at the same time real estate companies are one of the last remaining substantial newspaper advertisers.

Many of the CEOs in Duncan’s interviews pointed the finger at the “tech giants” - specifically Meta and Google - who now earn the majority share of digital advertising revenues. However, the companies and organisations (including the government) who choose to advertise on Facebook or YouTube rather than Stuff or Newshub are generally not doing it maliciously. They pick that option because it’s better value for money. The tech companies have created highly addictive social networks and search engines - we all vote with our feet (actually our eyeballs and thumbs). The data they capture through these apps allows them to create targeted advertising options which are much more effective. Traditional media sites simply can’t compete. It’s the same pattern that saw Trade Me decimate printed classified sections in newspapers in the early 2000s.

One idea is to force the tech companies to pay to license the content the media companies produce which is often shared on these platforms. By the same logic, perhaps I could also get paid for this free content you’re reading right now, if any of you choose to reference it on LinkedIn or Twitter? It’s a good theory, but the risk is that the sites like Facebook or Google, with the largest audiences, will just choose to block the content rather than pay for it (see: Facebooks response to similar rules in Canada, for example), which would be largely self-defeating for the media companies.

Another idea is to force the tech companies to pay whether they use the content or not, by charging a levy on digital advertising. I read this week that a 1% levy would be equivalent to the Public Interest Journalism Fund that the previous government used to support local media companies. So even a single-digit percentage levy would be a revolution. But, where would this money come from? Facebook and Google aren’t going to just absorb this cost, it will be passed on to advertisers. That will be reflected in the prices those companies charge us all for their products and services. Or, in the case of public sector advertisers, the increased costs need to come from taxes.

There is no magic pot of new money media companies can unlock here.

If we believe that local media companies are important then we should fund them directly.

This gets us to the next turtle in the stack, which is the value of journalism. I do think a fourth estate is important and valuable.¹ However, the “pillar of democracy” that journalism provides is currently bundled with a bunch of nonsense reality television and click-bait listicles, which makes it much more difficult to make this case. Historically that’s all been subsidised by classifieds and brand advertising, so we’ve never really engaged with the question of value.

Where do ratings fit into this? Is journalism still valuable if fewer and fewer people are reading it and watching it? Locking the most valuable bits behind subscription paywalls doesn’t seem like the optimal answer either - if we want a warning about the long-term effects of that just look at the various sporting codes who profited initially by putting their content behind the Sky TV paywall in the late 1990s and early 2000s who are now finding out the long-term effect of limiting their fan base.

Public media, such as Radio New Zealand, is directly funded by tax payers. The quid-pro-quo is that there is no advertising. Should private media companies, with private shareholders, be eligible for that funding too? If so, what’s the equivalent quid-pro-quo? One suggestion is that media companies should be exempt from paying tax. Of course, there is nothing to stop media companies from being a non-profit community service. Any commercial business that thinks they shouldn’t pay tax is really just suggesting that other businesses should pay more tax to cover the difference, surely?

These are chewy questions, and I need to be careful as I get further and further outside of my area of expertise. But I’m interested to hear what you think. If you also agree that journalism is valuable then what is the “source of funds”?

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🫴 Subsidise

One of the few genuine policy debates in the last election was between income tax cuts (proposed by all of the parties now in government) and wealth taxes (proposed by the Greens). So, it’s ironic that the current government might oversee the biggest increase in wealth taxes in a generation.

We don’t normally think of council rates as a wealth tax. However, they are charged every year independent of income and calculated as a percentage of the current value of the property. That’s a wealth tax. They are not a tax on all wealth, just real estate, but perhaps that’s appropriate given how tightly we tie our definition of wealth in New Zealand to property ownership.

I’m sure it’s not news to anybody that rates are going up. In most places the increases will be substantial and impactful. Even if you don’t own property you pay this tax indirectly through your rent. So where does this extra money come from?

The problem for rate payers is that owner-occupied property is a non-productive asset - it doesn’t generate any income directly.² To pay for rates we need another income source. Perhaps we own a business or work for somebody else who does, in which case the funds are a consequence of the profits of that business. It’s more complicated for those who are retired or out of work, who receive income from the government … which comes from taxes individuals or companies pay on their income … which comes from business profits. It’s the same equation, there is just an extra layer.

Evidence would suggest we don’t think very clearly about this in New Zealand.

For example, this story about some of the ideas that have been proposed to revitalise the Nelson City CBD area included this quote from William Samuels, the chair of Te Kāhui Whaihanga New Zealand Institute of Architects’ local branch:

I think we’re in a real problem if we have to rely on council all the time for our funding. The funding for these things need to come from community, it needs to come from local business and other funding sources.

Yes, it’s a bit crazy to assume that a council will fund all of the things, but it’s also true that the council gets all of its funding from the community and local businesses. Once again, there is no magic pot of money available for these projects.

I think it would be more interesting to talk about the businesses that generate the income which could cover the cost of these improvements. That income, either directly or filtered through many layers of middle people, needs to pay for all of the things we value - including CBD vitality, but even more urgently hospitals, schools, roads, and pipes to bring clean water in, take dirty water away and drain storm water as it arrives in increasing volumes (crazy idea: to simplify things, perhaps we could call these the three waters?) etc etc. How do we get more of those businesses?

To be specific, we should focus on exporters, because these are the businesses that bring new money into the economy (they are, if you like, the lower layer of turtles). We might, for example, make the distinction between those who sell things we have one of (e.g. land), those who sell things that are plentiful but finite (e.g. milk solids or Tongariro crossings) and those who sell things that are infinite (e.g. software subscription or creative works).

Let’s avoid getting confused by the prospect of public-private partnerships and taking things “off balance sheet”. Taking a wide view, there is only one shared balance sheet. There is nowhere to hide. It’s likely that using the existing balance sheet is the lowest-cost option, although perhaps not in a single electoral cycle. We pay for all of these things - either directly or eventually. But only if we are smart about the way we earn that income in the first place.

However, let’s not be too negative. It’s not all doom and gloom. I’ll end this section with a story of hope. Just over the hill from Nelson the Marlborough council is obviously so flush with cash they can still afford boondoggles like a “tech hub” in the former library building that will “add vibrancy to the town as an ‘incubator’ for start-ups”:

The tech hub received a $578,000 boost from the Government’s Kānoa fund last year which would help with fit-out costs, with programme and operational costs coming from existing budgets.

Yikes, what was the total cost of the fit out, if that funding only covered some of it? Imagine what an actual startup could do with that much money.

Note: if you are an actual startup trying to raise funding at the moment, don’t dwell on that question too long - it’s quite depressing!

Council economic development manager Mark Unwin notes in the article that the region has “one of the most active angel investment groups in the country but has one of the lowest number of startups”. No doubt all of those angels will be glad to have somewhere to congregate while they wait for the startups to materialise.

That’s an example of what we’re all choosing to subsidise. I’m surprised there are not more people who question the return on investment. Maybe they are just less willing than me to be branded a hater?

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In 2012 the Flight of the Conchords recorded a song for Red Nose day called Feel Inside (And Stuff Like That). If you haven’t seen it, take 15 minutes now and prepare to be delighted. I’ll wait right here:

One of the kids in the video unwittingly describes a fundamental truth when they are asked “where does money come from?” Their answer leads to this genius lyric:

Banks got the money
They get it from the Prime Minister
The Prime Minister gets it from the Queen
The Queen gets the money from the bank
Who gets it from the Prime Minister
The craziest financial system I’ve ever seen

Funny, but actually possibly not that far from the truth.

Politicians sometime like to compare the economy to a household. They talk about the need to “tighten belts” and balance budgets. They worry about debt (the most common scare tactic is the pro-rata calculation which gives everybody an individual loan balance to repay). They talk about prioritising spending and investing in the future.

While there are some important similarities there are a couple of substantial differences too. Firstly governments can determine their own income. In the short run at least they don’t need to do anything differently, they just set tax rates as they deem appropriate. Secondly, because of that source of income, they can also borrow large amounts.

A few weeks ago, for example, the government borrowed $4 billion, which doesn’t need to be paid back for 30-years (not until 2054!) Because we are all considered reliable debtors people were lining up to lend that money - total demand was $19.1 billion - so the interest rate was set at 5%.

This made me wonder, where does that money come from? Who is giving us this money?

Going back a few years, there was material demand for NZD bonds from countries like Japan, where interest rates were lower and in some cases even negative. But these days, that’s no longer true. Those lending this money are predominantly banks, institutions and super funds etc.

Actually the biggest lender in the last few years has been our own Reserve Bank. As part of the Covid response they purchased tens of billions of dollars worth of government bonds - which was used to fund things like the employee guarantee scheme.

As the song says, the banks get money from the Prime Minister who gets it from the Queen. But, where does that money come from?

One of the great things about being the Reserve Bank is you can create money, just by adding a row to a database. Sadly, that’s not a solution available to most households.

Either way, it’s a good reminder that everything is just a row in a database. Our bank account balances, share registers, property titles, and bitcoin wallets. None of these things are, by themselves, intrinsically or inherently valuable.

Which, if we just channel the naivity of some of the kids in that video, leads to the obvious solution to the cost of living crisis: just ask the Reserve Bank to delete the row! 🤪

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Turtle Photo by Aron Visuals on Unsplash

1. Interestingly, I’m much less stressed about the demise of the first estate (the clergy) and the second estate (the nobility). ¯\_(ツ)_/¯

2. That could be disputed, if we include all possible income. Property does usually appreciate in value and can also be used as collateral or security on a loan.