Friday 12 April 2024

Afternoon roundup

More bits as I clear through the tabs. 

Net zero means net negative?

Will look forward to reading the Climate Commission's latest report. This bit, from Jim Rose over at Carbon News, is a bit concerning:

The world is not on track to meet the Paris Agreement’s 1.5 degrees target, the commission says, and New Zealand is likely to continue contributing to global warming after 2050.

That’s because the country’s current target doesn’t require biogenic methane to reach net zero by 2050 and has no requirement for long-lived greenhouse gases to be reduced beyond net zero.

“This means that it is possible to achieve the 2050 target and still have net positive emissions of 700–1,000 KtCH4 – and the associated contribution to global warming – in 2051 and every year after,” the commission says.

The commission says that when New Zealand’s net zero target was set in 2019 it was seen as ambitious but that’s no longer the case.

I had always understood Net Zero 2050 to mean that the unbacked NZU issued before 2050 would represent the sum total of net emissions from the covered sector from now until forever. An NZU might be redeemed after 2050; it's the quantum of unbacked units issued through 2050 that determines the amount of net emissions overall. 

If the Commission is shifting to a view that Net Zero implies undoing the emissions that have obtained from an indeterminate start point through to 2050, that's of course a much bigger job, and one that Parliament certainly didn't authorise.  

A clean ETS is certainly capable of driving beyond net zero. The government or others just need to buy credits through the system and retire the credits, unused. And if tech follows some potential paths, doing so may well be cost-effective in undoing some accumulated emissions. But probably a good idea to wait and see what the cost paths wind up looking like before committing on that one. 

Wednesday 10 April 2024

Afternoon roundup

The afternoon's worthies, as I close the tabs from one of the many open browsers....

Tuesday 9 April 2024

In a structural deficit, the only real tax cut is a spending cut

This week's column in the Stuff papers. A snippet:

Tabarrok warned that America had two political parties – “the Tax and Spenders and the No-Tax and Spenders” – and neither was fiscally conservative. In the two decades after Tabarrok’s warning, the federal government never achieved a balanced budget. America’s federal deficit ranged from 1.1% of GDP to over 14% of GDP and gross federal debt doubled, rising from 60% of GDP to 120% of GDP.

New Zealand’s Public Finance Act aims to avoid those kinds of outcomes.

The fiscal architecture is neutral about whether core government spending should be about 27% of GDP, as it was in 2018, or over 33% of GDP, which it is forecast to be in 2024.

The six-percentage point difference in core Crown expenditure, as a proportion of GDP, might not sound like much. But in a $405 billion economy, it amounts to almost $25b in increased core government spending per year across a population of just over 5 million people. Or over $18,000 for a family of four.

Some of that substantial increase in spending has been funded by a higher tax take. Core Crown tax revenue increased from just over 27% of GDP in 2018 to over 29% in 2024. The rest, after accounting for other bits of government spending and revenue, is funded by what is now a substantial structural deficit.

Taking on debt during the depths of lockdown to deal with the crisis was one thing. Now, that crisis has long since passed – but the structural deficit remains. The One Big Task for the coming budget is providing a credible path out.

It is not just a test for the current government. It is also a test of the Public Finance Act.

I'm all for tax cuts. Start by balancing the structural budget. That's the most important tax cut to make. Then see whether there are opportunities to go further. There should be. The government takes in a lot more in tax than it did in 2018, and is spending a lot more than was projected in the 2019 Wellbeing Budget. 

I'd filed the column a few days before having a chat with RNZ's Morning Report on proposed staff reductions in government agencies. I was a bit frustrated about that RNZ rarely informs listeners about whether cutbacks in an agency simply undo the last couple years of hiring, whether they revert staffing levels to levels comparable to pre-Covid, whether they go back to where things were when National left office, or whether they go further than that. If an agency has stayed fairly constant over time, and there haven't been substantial productivity improvements or other shifts, a 40% cut would mean they can't keep doing stuff they've been doing for a long time. But if one has tripled in size recently, and then cuts back by 40%, well, there are options around what things no longer get done.

Checking the last five years' data is really easy at the Public Service Commission's website. Click the link, scroll down to the table, click the tab to open the 'Five Year Trend' view. Done. 

I don't know why Radio New Zealand doesn't check. They were really outraged about proposed 40% staffing reductions at the Ministry for Pacific Peoples. That Ministry had 40 staff in Q2 2018 and 136 by Q2 2023. They reduced a bit at the end of 2023 to 121 staff. If a 40% reduction comes off that figure, they'd still be left with more staff than they had in Q2 2020.

Update: Kate MacNamara does some checking


Thursday 28 March 2024

Things I'd have hoped we could all agree on

This week's Budget Policy Statement was disappointing. 

There are a few things I'd have thought we could all have agreed on. They seem pretty basic.

  1. If the Reserve Bank is still using monetary policy to push against inflation, fiscal stimulus is a pretty bad idea;
  2. While fiscal stimulus through tax reduction seems more effective than fiscal stimulus through spending increases, it is a mistake to run fiscal stimulus when the Reserve Bank is pushing the other way. Sure, things are slowing down, but leave that to monetary policy.
  3. Core Crown Expenditure for 2024 is forecast to be more than five percentage points of GDP higher than it was in 2019. Total Crown is higher too; that includes interest on the debt we took on to deal with Covid (and all the other stuff Robertson spent the Covid money on). Fiscal consolidation requires getting spending down. Tax reductions should not precede the spending reductions that make room for them. Otherwise all you're doing is increasing future taxes.
  4. If you think that fiscal consolidation through reductions in government spending and transfers has bad macroeconomic consequences, remember that the Reserve Bank has the next move. Sharp reductions in government expenditure would make it easier for the Bank to ease monetary policy, which would encourage other activity to pick up any slack. If you worry that monetary policy has a lag, that's easily solved. The earlier you signal that spending will be coming down to pre-Covid levels, as % GDP, the more RBNZ can do to work it into their models. 
I agree that they can't solve it all in a single budget. Ben Thomas points to the core of the problem:

Trading in stories of government incompetence and spending overruns, opposition MPs can easily believe 6.5% of all state expenditure consists of lavish intra-departmental powhiri and expensive dinners for senior management. Government waste, like representations of toxic waste in popular culture, would be obvious: lying on the ground, oozing and glowing, in storage barrels with hazard markings ready to be taken away.

Instead, much of it is hidden. It might be a team of 10 senior people doing routine work that could be performed by half a dozen juniors. It could be a programme that was once highly valuable but has achieved its purpose, but runs on with full funding. This is waste, but it doesn’t show up in the lines of any accounts. It needs to be identified by people who are familiar with the work of that agency and the public service.

This leaves ministers hostage to fortune or, more acutely, to the public service bosses. That’s bad news too, because after six years of pushing on an open door for funding increases, a door which led to a room full of money, and lack of clear direction from inexperienced Labour ministers, it is not clear the public service has the capability, let alone the will, to deliver surgical savings at the micro level or bold changes at the programme level.

Ministers can identify programme-level cuts: that is, drawing a red line through an initiative or service. But, as evidenced by the political optics disaster of disability carer allowance restrictions, ministers are not in the weeds of the detail of most operational matters.

But National has set Core Crown spend of 30% of GDP as a target to which to aspire. That's more than a full percentage point of GDP higher than Ardern's Wellbeing Budget had projected, and more than two percentage points of GDP higher than when Labour took office. 

And they're still signaling that debt is going to fund tax reductions. If they can't achieve the necessary spending reductions more quickly, they really ought to be phasing in tax reductions more slowly. 

Wednesday 27 March 2024

The alcohol levy review - an ongoing OIA saga

I keep a bit of a watching brief on the old BERL social cost of alcohol figure. It turns up in weird places. 

As aide memoire, BERL produced the number as commissioned work in the late 2000s that was meant to follow the method set by Collins & Lapsley in Australia. 

The Collins and Lapsley method has a few problems. But BERL compounded those problems with choices that seemed designed to generate a larger number for the tallied social costs. 

For example, Collins & Lapsley had aetiological tables that tried to attribute the fraction of different disorders that might be attributed to alcohol use. Their tables had a few disorders where the aetiological fraction was negative because drinking reduces the incidence of that disorder. BERL decided that, because they were only looking at harmful drinking, it was ok to just set all those cells in the table to zero rather than maintain a number showing benefits (and consequent reductions in net harm). 

Matt Burgess and I went through the BERL report, seeing what the number would look like if more standard method were followed. For example, BERL counted as social cost to the country every dollar spent on alcohol, including every dollar spent on excise, by those drinking more than about 2 pints of beer a day. Drinkers' spending on beer is a social cost only in the sense that private costs are part of social costs. And since benefits enjoyed by drinkers would need to be netted for any sensible net cost figure, the whole thing was a bit suspect. 

BERL responded to the critique by updating the figure to no longer count as a social cost drinkers' spending on alcohol excise, but let the rest stand. 

Brad Taylor joined Matt and me for an update to the review in 2011, when we went through the underlying Collins & Lapsley work. We adjusted upward the revised BERL figure, but the majority of the BERL-tallied costs were either double-counting or costs far better considered private than external and social. 

BERL provided an updated figure in 2018, but it turned out just to be the old figure multiplied by GDP growth over the period. Which could be fine if the initial number were sound (it wasn't) or if alcohol social costs scaled with GDP (they don't necessarily, and especially where alcohol consumption was declining over the relevant period). 

And the whole thing is a bit silly where the measured social cost really doesn't matter. The policy question is always whether any intervention, whether excise or otherwise, provides net benefits. Interventions can fail to do so despite very high measured social cost; they can also provide benefits even if social costs are low. The only reason for generating large social cost numbers is to motivate "something must be done" responses. 

Anyway. 

The number turned up again in last year's "Independent Review of the Alcohol Levy Stage 1: Rapid Review". The work for the Public Health Agency was undertaken by NZIER and Allen + Clarke. 

The work included this section:

90. The cost of alcohol-related harm to New Zealand society is significant. This section provides a summary of existing estimates of the cost of alcohol-related harm in Aotearoa New Zealand. 

91. The most recent study to quantify the social cost of alcohol in Aotearoa New Zealand was conducted by BERL in 2009. Commissioned by ACC and the Ministry of Heath, the report aimed to quantify the social cost of alcohol and drug related harm looking at the personal, economic, and social impacts. While the estimate of the social cost of alcohol-related harm in Aotearoa New Zealand published by BERL in 2009 and updated in 2018, or rather the methods used to generate it, have been criticised by some commentators, it has been widely cited in the alcohol-harm research and policy space in New Zealand over the last 14 years (BERL, 2009; Nana, 2018). The Law Commission’s 2010 report on the review of the regulatory framework for the sale and supply of liquor also cited the BERL 2009 report. 

92. In 2018, the updated estimate of the social cost of alcohol, based on the BERL methodology, was calculated to be $7.85 billion per year (Nana, 2018). This estimate included costs resulting from justice, health, ACC, social services, unemployment, and lost productivity. Intangible costs such as years of life lost from premature death, lost quality of life, child abuse, sexual abuse, and impacts on victims of alcohol-caused crime are also relevant to assessing the overall impact of alcohol-related harm on society. The 2018 update did not include intangible costs. A recent Australian Study found that in Australia $48.6 billion AUD of intangible costs could be attributable to alcohol (National Drug Research Institute, Curtin University, 2021). 

This section seemed particularly poorly undertaken. Citing the 2018 figure seemed particularly odd where the thing was just the old number multiplied by cumulative GDP growth. 

It's also incorrect to say that the 2018 update didn't include intangible costs. Intangible costs of lost life and lost quality of life were included in the 2009 figure, and the 2018 figure just inflated the old number by GDP growth.  

Paragraph 91 alludes to that 'some commentators' have criticised it, but said nothing about the nature of those critiques or who made them. Were the concerns trivial or notable?

Meanwhile, the bibliography included these two relevant references that weren't included in Para 91:

Crampton, E. (2018). The alcohol cost ‘zombie’ has returned. 

Crampton, E., & Burgess, M. (2009). The Price of Everything, The Value of Nothing: A (Truly) External Review Of BERL’s Study Of Harmful Alcohol and Drug Use (Working Paper No. 10/2009).

The 2009 piece was my original critique of the BERL figure with Matt; I'd have preferred the updated critique from 2011. The 2018 column had my initial guess that the updated BERL figure was just an inflation and population growth adjustment; my 2019 column had Ganesh Nana's confirmation that the new figure was the old figure inflated by cumulative GDP growth. So I'd have pointed to the 2019 column instead. 

But the authors clearly knew about my critiques. That they were in the bibliography suggested that there might have been more fulsome discussion of those critiques in earlier drafts. 

On 6 September 2023, I sent an OIA request to the Ministry of Health asking for all early and working drafts produced by NZIER [Paragraph 14 of the report said that NZIER undertook the analysis of existing data and evidence]; for correspondence between and notes from conversations between MoH, HPA, Allen + Clarke and NZIER regarding NZIER's analysis; and, for any peer review of the report. 

On 15 September, MoH replied saying that the correspondence would be extensive and that I needed to refine the request if I wanted to get anywhere. 

I replied immediately asking them to prioritise delivery of early and working drafts, and any peer review. I also suggested prioritising correspondence and relevant notes from meetings between and among MoH, HPA, and Allen + Clarke regarding the NZIER report. 

On 6 October, I reminded MoH that the refinement of my request only asked that they prioritise two parts of the request, and should not have triggered a clock reset; the requested information was due.

On 17 October, I had a reply from the Public Health Agency's Ross Bell. He noted that they'd considered the refinement as having triggered a time extension. But more substantively, they refused early and working drafts, as well as peer reviews, under 9(2)(g)(i) to protect free and frank expression of opinions. 

I proceeded immediately with the Ombudsman. 

On 16 November, the Ombudsman's Office commenced investigation. 

On 13 December, the Ombudsman's Office advised that the Ministry was prepared to reconsider its decision with respect to final drafts and asked whether that would be sufficient. I wouldn't know until I'd seen any released documents - if the released drafts let me see what had happened in the relevant section, that would be fine. If they didn't, I'd need to see more. I'd have to wait. 

On 2 February, a Senior Investigator at the Office of the Ombudsman noted that the Ministry had advised it would be providing a partial release, and asked whether I wished that they review the withholding of the earlier drafts; I noted that I couldn't know until I'd seen what they would release.

On 4 March, the Office reported that they were still chasing the Ministry about the later drafts. 

On 11 March, the Ombudsman advised that he had sent a letter to the Ministry recommending that the documents be released immediately and apologise for the delay.

At close of business on 14 March, the Ministry of Health released the later drafts. Ross Bell, Group Manager, Public Health Strategy & Engagement at the Public Health Agency, apologised for the delay and any related inconvenience.  

While those drafts did include some annotations from "KT" and Te Whatu Ora, they did not provide much light on what had happened with the section on alcohol social cost. The earliest draft was substantially similar to the final. 


So I still cannot really tell what happened. 

The bibliography references to the critiques suggest that, at minimum, those references were included as a citation in an earlier draft of Para 92. It's possible that an earlier version included more substantive discussion of those critiques, but it's hard to say.

I've asked the Ombudsman to form a determination around those earlier drafts' discussions of the costs of alcohol-related harm.

I suspected that the first draft from NZIER included substantive discussion of the relevant arguments. NZIER aren't idiots; they know this stuff. It's in the bibliography, so it was there at some point. 

If there had been more substantive discussion, was it excised at request of Allen + Clarke, or at request of the Public Health Agency?

In either case, the effect is a document sent to the Minister, advising on the alcohol health levy, that provides a fairly one-sided view on alcohol social costs. 

I yesterday received an additional bit from the Ministry, which might speak to the Public Health Agency's views on things:

Kia ora Eric,

Further to the below email sent to you containing the reconsidered documents of your OIA (ref. H2023031477), the Ministry has identified a paragraph pertaining to yourself in one of the early draft documents. While the Ministry is maintaining its position on withholding the early draft documents under 9(2)(g)(i) of the Act, the following excerpt is being released to you under section 16(1)(e) of the Act: 


So it seems that early drafts did include substantive discussion of my critique of the BERL figure, and that someone caused it to be erased.

I'd also note that I was discussant at the NZAE meetings on the BERL paper in 2009. It was standing room only, because my critique of the BERL paper had already been released. The Ministry could consider asking any economist in the room whether my critique was just a me-thing, or whether the profession broadly shared my concerns.

I did that work as an academic in the Department of Economics at Canterbury, five years before I joined the Initiative, and two years before doing any industry-funded work. The funded 2011 work [funded by NABIC] discovered an error in the earlier unfunded work that had us revise upward the earlier estimate of alcohol social cost. 

I note that Ross Bell, now relevant Group Manager at the Public Health Agency, was Executive Director of the Drug Foundation when the BERL figure was originally being critiqued. 

Here is the issue of the Drug Foundation's "Matters of Substance" newsletter that included discussion of the controversy around BERL's number. It would be surprising if Bell were not aware of the difficulties with BERL's figure. He had the masthead editorial on the issue of their newsletter in which my critique of the BERL figure was discussed. 

I'll look forward to seeing whether I can get any further with this via the Ombudsman. 

In the meantime, it looks pretty obvious that the Public Health Agency was very happy to put a biased document up to the Minister as advice - whether they requested that outcome directly, or had Allen + Clarke do it.

A provisional health warning on advice from the Public Health Agency may be in order. At least until we can figure out what the heck is going on over there. 

And a reminder that government-commissioned reports face censorship regimes. If the Ministry doesn't like what it says, well, the offending bit gets disappeared. As an offending bit here seems to have been disappeared. 

Tuesday 26 March 2024

Public service cuts and context

Richard Harmon's Politik newsletter provides a bit of the context that ought to have been showing up in other media reports on potential reductions in public service staffing.

Media has been reporting on staffing cuts on the order of about 7%. Is that a big number or a small number relative to growth in the overall public service?

The public service in 2023 had headcount 38% larger than it had in 2017, when National was last in office, and 19% larger than in 2019, before Covid. 

There has not been 20% population growth since 2019. 


Budget 2024 needs to provide a credible path out of deficits, ideally focused on getting Core Crown expenditure, as a fraction of GDP, back to where it was in 2019 - at least as an interim goal. That would only take things back to where Ardern had had it in the 2019 Wellbeing Budget. 

The 2019 Wellbeing Budget was not austere. It was set to increase Core Crown expenditure's fraction of GDP by about a percentage point as medium-term steady state, from just under 28% of GDP to just under 29% of GDP. 

The 2023 Half-Year Fiscal Update had forecast 2024 Core Crown expenditure at 33.4% of GDP, and a forecast path down to 31.4% by 2028. 

Shaving that back down to 29% more quickly isn't austerity, or at least not the swear word version of it. It's just retrenching after a giant shock. 

And it sure would be great if news outlets appalled at 7% cuts to Ministry rosters could remind folks that that would still generally be a substantial increase on pre-Covid staffing.

Barriers to Banking

I like the new Commerce Commission draft market study into retail banking. Instead of spending a pile of time trying to estimate whether the note on the sidewalk is a $20 or a $50, it looks at what's blocking anybody from picking up any notes that might happen to be there.

And it finds a whole pile of regulatory barriers preventing smaller banks from expanding and new banks from entering. 

The Reserve Bank lets large banks run leaner capitalisation, disadvantaging smaller ones. The large banks had access to the Reserve Bank's Funding for Lending Program; small ones didn't. The overall regulatory burden is huge, but a huge regulatory burden disproportionately hurts small players who can't spread the cost across a larger depositor base. Constantly changing CCCFA rules particularly hurt smaller players. AML rules increase switching costs and help entrench those with already-large depositor bases. 

My column over at Newsroom this week ($ today, ungates tomorrow) goes through some of it. 

A snippet:

None of this should be a surprise. The Reserve Bank’s prudential framework has not considered the effects of its rules on competition. Neither has it been required to give regard to competition. 

The draft report also points to a promising change. The Deposit Takers Act, which introduces deposit insurance, requires the Reserve Bank to take account of “the need to maintain competition within the deposit-taking sector” as one of several objectives. It’s a start. The draft report urges it to go further, recognising that existing levels of competition are not ideal. It warns that the depositor compensation scheme that will back deposit insurance could too easily set levies that have anti-competitive effects.

The Commerce Commission really should be commended for this report. Its draft report on supermarkets spent enormous time and effort trying to estimate supermarkets’ cost of capital and profitability. However, it seemed not to have occurred to the commission, in its draft report on retail grocery, that high profits should encourage new entrants wanting a slice of high profits. The final report turned to those barriers to entry.

This time, its draft report spent less time agonising over precisely how profitable the banks may be and more time on the barriers that may stop existing or new rivals from competing those profits away while benefiting consumers.

The sharper focus meant the commission could come to practical recommendations around regulatory barriers that the Government could ease to reduce large incumbents’ advantages over others.

As the coalition agreement between National and Act requires the commission’s future market studies to maintain this focus, the draft report into banking is also a promising sign for studies yet to come.

Rather than try to guess whether there are $20 or $50 notes on the sidewalk, it is far better to check whether policy and regulation have made it impossible for anyone to pick them up.

Friday 8 March 2024

Afternoon roundup

The afternoon's worthies:

Tuesday 5 March 2024

Even Lowerer Hutt

One annoying thing about writing a Saturday column for the Stuff papers is never knowing whether a piece will show up in print.

I'd thought this one was a banger. 

Anyway - the column.

Even Lower Hutt 

Transport historian Dr André Brett has suggested that Wellington be renamed Lowerer Hutt, perhaps to help avoid confusion within the region.   

Economists Matthew Maltman and Ryan Greenaway-McGrevy have been looking at Lower Hutt’s housing boom. Their paper, released this week by the Economic Policy Centre at Auckland University, suggests Brett was onto something.  


Wellington City could use a bit more Huttite thinking. And especially while Wellington’s response to the Independent Hearings Panel’s report on the district plan is still in play. 
 


While Wellington City mulled over whether it should be legal to turn rotting wooden tents into townhouses and apartments, Lower Hutt started building. 
 


From late 2016, Lower Hutt started a sequence of plan changes. They reduced parking requirements and introduced new zones allowing taller mixed-use developments and medium density housing. They allowed greater density within general residential zoning. And they quickly implemented policy changes set as part of Labour’s urban growth agenda – like medium density rules and upzoning requirements near public transport.
 


The paper tests whether those changes to zoning had any effect on building. 
 


It might sound like testing whether water flows downhill. 
 


The New Zealand Association of Economists surveyed its members this month. 96% of economists agreed or strongly agreed that district plan land use restrictions reduce housing supply. 94% agreed or strongly agreed those restrictions reduce affordability. And 98% agreed or strongly agreed that easing district plan restrictions will tend to increase housing supply and affordability.
 


But Wellington’s Independent Hearings Panel instead seemed convinced by one expert’s odd argument that zoning to allow more building, even in an obvious housing shortage, may not lead to more building. 
 


And perhaps the Commissioners saw no reason to believe that evidence from faraway places like Auckland could also apply in Wellington. 
 


So the Lower Hutt evidence is important. At least for those who need very specific local proof that water also flows downhill in the Wellington region. 
 


On notification of the plan changes, and especially after the changes started taking effect, Lower Hutt started issuing a lot more consents for townhouses and rowhouses. In the new zones enabling medium density and mixed use, there was the same jump in consents for townhouses and rowhouses – and also apartments. 
 


But perhaps that was just coincidence and Lower Hutt was only following the same trend as other councils. 
 


The authors used a variety of ways of checking that the zoning changes made the difference. For example, after the plan change, Lower Hutt shifted from being a moderate fraction of overall consents in the Wellington region to overtaking Wellington City. 
 


The economists also built a synthetic Lower Hutt and compared what happened there with the actual city. This method basically sets a complicated average of patterns in other cities that tracks how Lower Hutt’s consenting rates behaved before the change. Following that ‘synthetic’ Lower Hutt after the zoning change gives a comparison. 
 


Lower Hutt consented approximately 3260 more units than expected – a tripling the number of housing starts over the six-year period. More houses. More apartments. A few more retirement village units. And an awful lot more townhouses and rowhouses. 
 


It also affected building in Wellington City. Because it became relatively easier to build in Lower Hutt, some development shifted to the Hutt. Overall, about a quarter of the new consents in Lower Hutt were consents that might have happened in other places otherwise. 
 


This also matters for theories that a region may only have so much ‘absorptive capacity’ – another dubious argument relied on by Wellington’s hearings panel. 
 


The vast majority of new consenting in Lower Hutt, about three quarters of it, was new building. It did not just displace building that would otherwise have happened elsewhere. Lower Hutt’s reforms, all on their own, provided a 12 to 17% increase in housing starts for the whole metropolitan area. 
 


Lower Hutt then helps to keep rents in Wellington lower than they might otherwise be, by providing some of the housing that Wellington City would otherwise block. Every renter in Wellington owes a bit of thanks to Lower Hutt council. 
 


If Wellington Council cannot see fit to propose a district plan more enabling than the economically illiterate plan proposed by the Independent Hearings Panel, the combined Upper and Lower Hutt populations could well wind up exceeding Wellington’s.
 


If that happens, I think we should look back at the good Dr Brett’s suggestion. The Hutts’ ascendancy ought to be properly recognised. 
 


Wellington would become Lowerer Hutt, as Dr Brett suggested – or perhaps my preferred ‘Even Lower Hutt’. All of it would be part of the Greater Hutt Regional Council. Somes Island would of course become Hutt Island. 
 


And the ‘special character’ that drove Wellington’s residents, and tax base, out to the Hutts could stand as warning to other cities to at least try to be less stupid than the country’s capital.
 

Meanwhile, The Spinoff's suggesting abandoning Wellington for the Hutts and young professionals are abandoning Wellington for points farther afield like Christchurch

Buchanan said Christchurch felt more vibrant and there were plenty of young families who’d moved from the likes of Wellington and Auckland.

“Talking to my peers, former colleagues, family, and being out and about around the city, Wellington has a brain drain.

“Whether it be young teachers, firefighters or psychologists, people are unhappy or moving.”

Christchurch offered about 1000 housing options to choose from, Buchanan said, thanks to an increased supply of medium density homes in suburbs close to the city.

In Wellington, he was left with just 190. Most were in places like Wainuiomata, a Lower Hutt suburb with notoriously poor links to the city centre for commuters. A friend had recently paid $1.1 million for a small section and an old three-bedroom house in Upper Hutt.

...

According to a December 2023 Infometrics report, the average house price in Wellington City is $1,023,966 – roughly $100,000 more than the national average.

By contrast, CoreLogic measured the average house price in Christchurch as $757,881.

Wellington has long fought new-build developments, especially in the older inner city suburbs.

These “character areas” where Victorian villas still cling to the hills were described in a recent opinion piece in The Post by Eric Crampton as “wooden tents”, while by contrast he praised Lower Hutt’s initiative at constructing new-builds.

Buchanan attested to this, arguing the new builds in Christchurch only added to the character of the area.

I also had a podcast chat with Danyl McLauchlan on related issues - though we ranged a bit more broadly.

Friday 1 March 2024

The Uncompetitive Urban Land Markets Theory of Everything

The Housing Theory of Everything has one of those wonderful self-explanatory titles. A good title matters. The recent and thorough essay explains how the anglosphere’s unnecessarily expensive housing affects, well, everything. Or at least almost everything.

Zoning makes it too hard to build houses where people want to build. Urban containment policies block new subdivisions, so downtown land no longer competes with land further out for developers’ attention and for residents. Land prices then inflate across the whole urban land market. Zoning that blocks new townhouses and apartment towers in places where people want to live further worsens scarcity and affordability.

It's at the root of a host of pathologies.

People aren’t left with much to live on after housing costs; inadequate housing causes misery.

The most productive cities could be even more productive if more people were allowed to live near each other. Bans on density are then taxes on productivity improvement, with existing landowners reaping the rewards. Those bans also make it harder than it should be to reduce carbon emissions.

The essay is superb. And it has been influential.

I’ve heard it cited by both Labour and National MPs, which shouldn’t be surprising as it explains a whole lot about New Zealand.

Uncompetitive urban land markets are at the core of the problem. Current practice requires council plans to demonstrate that they have zoned for about twenty percent more housing supply than expected demand. But expected demand will depend on whether housing is affordable, and tight zoning means unaffordable housing. 

Me over in Newsroom this week. 

I riff on a chat I'd had with Kevin Counsell on our podcast series about the economic consultancy reports that developers have to put up showing that there's massive excess demand if they want to get a building consent. 

A new supermarket then has to prove that there is so much excess demand that the new supermarket will not impinge on existing competitors’ viability.

And maybe that kind of outcome sounds great to the kinds of people who get involved in town planning. There’s already a supermarket, why should there be another one unless there’s enough customers for it?

The result is the neutering of competition, and substantial harm to consumers. If an existing business is seriously underperforming, a new entrant provides a service by driving it out of business. Even the threat of that kind of entry provides competitive discipline.

However, in New Zealand, that kind of entry would have a hard time getting a resource consent. The government likes to wring its hands about poor productivity performance while, at the very same time, making it almost impossible for new competitors to drive unproductive incumbents out of business.

Last week, I chatted with NERA director Kevin Counsell for the Initiative’s podcast series. When councils require evidence that a new development provides overwhelming benefits, someone has to write the economic analysis. Counsell writes a lot of the reports demonstrating whether there would be sufficient demand.

It isn’t just supermarkets. Consider potential entrants who need land at the edges of town.

In 2022, the government set a National Policy Statement on Highly Productive Land. That statement sets a very high hurdle if anyone wants to do anything other than farming on the 14% of the country that is classified in the top three soil categories.

Most of that protected land is dairy and sheep paddocks. Converting it to any other use requires proving a substantial benefit from that conversion.

Counsell has been working on a proposed new industrial park outside of Morrinsville. The National Policy Statement on Highly Productive Land requires that there be substantial benefit before anyone can build anything on a paddock.

How can you demonstrate substantial benefit? You have to prove that there is huge demand for the new use. The dynamic benefits of competition in forcing everyone to strengthen their game aren’t enough. They would be harder to prove in any case. Entrants wind up having to show that there is excess demand given current supply.

The effect is harshly anticompetitive. If a group of existing businesses organised in a smoke-filled room to block a new competitor’s entry, they could face criminal cartel prosecution. But resource management provides even stronger protection against competition whenever resource consents are required.

I titled this column ‘The Uncompetitive Urban Land Markets Theory of Everything’, but it’s never easy to tell whether a columnist’s draft headline will survive. The uncompetitive urban land markets theory of everything subsumes the housing theory of everything. Just about everything wrong in housing is downstream of uncompetitive urban land markets. But the same processes that block new housing also block new supermarkets, new commercial premises and new industrial parks. 

Go listen to the podcast. Our resource consenting systems entrench anticompetitive effects by making it difficult to set a new competitor unless the incumbent's existing rents are above a threshold, and dynamic Schumpeterian competition is largely blocked. 

Maybe, just maybe, if the government is worried that NZ markets are often less competitive than they'd like, and if they're also worried that the country's less productive than it should be, it could have a look at this?

Maybe would-be competitors shouldn't have to produce reports like this?

I swear a good third of government activity is creating giant problems, not noticing that they caused the problem, then running endless inquiries about the consequences. 

Monday 19 February 2024

Tino Rangatiratanga and localism

My piece for the Saturday papers weekend before last, and now ungated here, went back to a theme that Richard Harman had noticed in the Waitangi speeches
Minister Shane Jones argued fuller debate on the meaning of Tino Rangatiratanga is inevitable, saying, “There is a deep, committed view from Pita Tipene and others that article two is a charter for iwi sovereignty. And at some point in time, that debate is going to be flushed out. It’s not a conception that I share. I conceive it to be more localised.”

Prime Minister Luxon said, “We are a party and particularly a government that is actually about making sure there is localism and devolution and that those closest to the problem should solve the problems. …Our fundamental belief is localism and devolution. We do not believe in centralization and control through Wellington.”

It is certainly not for a Canadian economist to weigh in on Treaty interpretation. I have neither the standing nor the understanding.

But one bit of the Canadian experience might be interesting.

Canada’s overall policies regarding its First Nations have been abysmal. But Canada’s First Nations nevertheless have some rights comparable to Canadian municipalities.

Basically, Canada's First Nations Band Councils have powers on reserves comparable to municipalities, except under federal rather than provincial jurisdiction. 

Decades ago, Manny Jules did the work to get band councils the authority to levy property taxes on reserve to fund band council activities. 

And look at this section of the Indian Act - I've bolded the interesting bits.

81 (1) The council of a band may make by-laws not inconsistent with this Act or with any regulation made by the Governor in Council or the Minister, for any or all of the following purposes, namely,

(a) to provide for the health of residents on the reserve and to prevent the spreading of contagious and infectious diseases;

(b) the regulation of traffic;

(c) the observance of law and order;

(d) the prevention of disorderly conduct and nuisances;

(e) the protection against and prevention of trespass by cattle and other domestic animals, the establishment of pounds, the appointment of pound-keepers, the regulation of their duties and the provision for fees and charges for their services;

(f) the construction and maintenance of watercourses, roads, bridges, ditches, fences and other local works;

(g) the dividing of the reserve or a portion thereof into zones and the prohibition of the construction or maintenance of any class of buildings or the carrying on of any class of business, trade or calling in any zone;

(h) the regulation of the construction, repair and use of buildings, whether owned by the band or by individual members of the band;

(i) the survey and allotment of reserve lands among the members of the band and the establishment of a register of Certificates of Possession and Certificates of Occupation relating to allotments and the setting apart of reserve lands for common use, if authority therefor has been granted under section 60;

(j) the destruction and control of noxious weeds;

(k) the regulation of bee-keeping and poultry raising;

(l) the construction and regulation of the use of public wells, cisterns, reservoirs and other water supplies;

(m) the control or prohibition of public games, sports, races, athletic contests and other amusements;

(n) the regulation of the conduct and activities of hawkers, peddlers or others who enter the reserve to buy, sell or otherwise deal in wares or merchandise;

(o) the preservation, protection and management of fur-bearing animals, fish and other game on the reserve;

(p) the removal and punishment of persons trespassing on the reserve or frequenting the reserve for prohibited purposes;

(p.1) the residence of band members and other persons on the reserve;

(p.2) to provide for the rights of spouses or common-law partners and children who reside with members of the band on the reserve with respect to any matter in relation to which the council may make by-laws in respect of members of the band;

(p.3) to authorize the Minister to make payments out of capital or revenue moneys to persons whose names were deleted from the Band List of the band;

(p.4) to bring subsection 10(3) or 64.1(2) into effect in respect of the band;

(q) with respect to any matter arising out of or ancillary to the exercise of powers under this section; and

(r) the imposition on summary conviction of a fine not exceeding one thousand dollars or imprisonment for a term not exceeding thirty days, or both, for violation of a by-law made under this section.

It is fun to think about what could happen here if iwi had similar authority over building and development on iwi-held land, or Māori land more generally. 

For further fun, look at the 250 page services agreement between Vancouver City and the Squamish First Nation for the Sen̓áḵw development. That development is on Reserve land right next door to downtown Vancouver. 

It's very typical for Kiwi bureaucrats, or bureaucrat-adjacent types, to find the first hurdle that might cause an issue and just give up. Well, here's 250 pages of legal text working through difficulties and finding solutions. 

Back to the column.

A First Nations Band has autonomy over the Band’s land.

It isn’t mere parchment. The listed rights have consequences.

When Sḵwx̱wú7mesh Úxwumixw, the Squamish Nation, finally had five hectares of their land returned to them near downtown Vancouver, the Band had authority over that land. Not the city.

Vancouver has a housing shortage. And Sḵwx̱wú7mesh Úxwumixw wanted to build.

In Auckland, Section H27 of Auckland’s Unitary Plan sets out the Special Purpose - Māori Purpose Zone. A Marae is prescribed by H27.6.2 to be no more than 10 metres in height; height of buildings in relation to boundaries is prescribed by H27.6.3, and even the location of rainwater tanks is prescribed by H27.6.9.

Even if every one of those sections enjoyed the full agreement of every hapū when the rules were written, if a hapū’s needs changed over time, council would have to agree to any change. And City Council issues the consents.

Meanwhile, the Squamish Nation’s website describing the Sen̓áḵw development explains that “Sen̓áḵw is not part of the City of Vancouver, and is not subject to the City's typical development approval process.”

It appears that, in practice, collaboration with Vancouver City has been required in order to effect interconnection to water networks. But bargaining over such things is a bit different when the Band has real autonomy over its own lands.

The service agreement goes well beyond water of course. The Band Council levies a property tax on Sen̓áḵw to pay Vancouver for other services that Sen̓áḵw residents will enjoy. This stuff can be worked out. 

Localist approaches can be more responsive to local needs.

In 2015, the New Zealand Initiative put up a report on devolution. We argued that, if a local community saw central government’s regulations or policies as being unfit for local purposes, they should be able to negotiate their own carve-out. If the policy experiment proved successful, others could take it up. If it failed, the experiment would have been relatively small. Bespoke devolution options can make more sense where councils vary widely in capacity.

But nothing in that report needed to imply that local or regional councils are the only voices of local community. Devolution to iwi or hapū could also fit within the framework.

New Zealand has a housing shortage. Council zoning and consenting rules have obviously been part of the problem.

Devolving zoning, consenting, and rating authority over iwi-held land to iwi wishing that authority may be a longshot. And it would take a lot of work.

But it seems worth thinking about.

I have no expertise or experience in arguments around Treaty interpretation.

I just find it very hard to believe that iwi leaders signing onto the Treaty believed their descendants would wind up needing to beg a bureaucrat’s permission to build houses on their own land.

Morning roundup

The tabs did accumulate. A couple of worthies.