Sunday, 6 February 2011

Don't goose demand to fix a supply problem

NZ Revenue Minister Peter Dunne proposes allowing families to get an advance on their allowance* to use as a down payment on a house.
"Families should be able to ‘capitalise’ their Working for Families entitlement as a lump sum to buy a home, or extend their existing home. Those doing this would be entitled to a small additional incentive to acknowledge the savings in administrative costs for the government.
However Dunne later said precise details on how WfF capitalisation might work had not been finalised.

"Bearing in mind that WFF payments can be quite substantial, my thinking is that the amount to be capitalised would be set on an annual basis, with the usual square up provisions applying. That way, the contribution towards a home deposit could be built up over more than one year without disruption. In effect, therefore, what we would be developing would be a form of taxpayer subsidised home savings scheme," Dunne said in an emailed response to questions from (see below).
New Zealand has some of the world's least affordable housing when measured relative to median household income. This is largely due to supply problems related to city planning and zoning. What happens if we try to make something that's inelastically supplied more affordable by subsidizing the demand side? Prices ramp up.

If the government were serious about making housing more affordable, it would start looking more seriously at the regulatory barriers that prevent supply from increasing.

Again, not rocket science economics. Basic principles of micro. Every commenter over at the original article linked above seems to get it. But not our Revenue Minister. I'm starting to think it would be an improvement if the real Dunne could be replaced by his doppelganger who wrote the introduction to the (satire, not entirely worksafe) Reserve Bank Annual 2010
WHEN I’M VISITING schools, young people will often ask if I’m “the boss” of the Reserve Bank. I always have a good laugh at this display of childish ignorance. If only they had studied my speeches, or read my books Home is Where My Heart Is (ISBN 0-473-08433-3) and In the Centre of Things (ISBN 1-877-39903-5)—instead of ļ¬lling their heads with ‘rap’ lyrics and ‘heavy metal’ guitar solos—then they wouldn’t ask such silly questions.

I usually answer them by explaining that the relationship between the Ministry of Revenue and the Reserve Bank is rather like a game of netball. The netball court represents the New Zealand economy, and as Minister of Revenue, I play the position of ‘Goal Attack’—whereas the Governor of the Reserve Bank, Dr Alan Bollard, plays the position of ‘Goal Defence’.

The other players in our team are athletic young women with beautiful strong thighs, well-toned stomachs, taut...
Ok, I'll cut it short there; you can get the full excerpt and buy the book here - if you haven't already, you really ought to. Would the fictional Dunne contained therein be really that much worse?

* Yes, many New Zealand families get a weekly allowance from the government. Our version of EITC pays families based on household income and number of children. The system results in insanely high effective marginal tax rates. Check it out:
What level of EMTRs do families face overall?

Of the 357,200 WFF recipient families in the 2008 tax year:
  • 34% (122,800) had an EMTR of 25% or less
  • 20% (71,600) had an EMTR between 25% and 50%
  • 35% (126,700) had an EMTR between 50% and 75%
  • 9% (30,800) had an EMTR between 75% and 100%
  • 2% (5,400) had an EMTR above 100%.
Keep in mind that the top marginal income tax rate is 33%.

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