Land supply

I wonder if National will ever come up with a response to the Productivity Commission's report on housing. The Productivity Commission chalked most of our current problems up to land supply: land being released in dribs and drabs keeps underlying land prices high and helps prevent achieving any kind of economies of scale in construction; our bespoke housing production model largely comes down to developers rarely getting permission to build large subdivisions.

Don Brash weighed in over the weekend:

On TVNZ's Q+A programme yesterday, host Corin Dann asked Dr Brash if high Auckland house prices were not simply a function of the fact "people just wanna live in Grey Lynn [a trendy central Auckland suberb, where a basic two-room home can sell for close to $1 million]. They want it all right now."

People could get cheaper housing if they were willing to live on the city's outskirts.

Dr Brash replied, "That’s not true.

"I recently saw a subdevelopment just out of Pukekohe [south of Auckland] – $249,000 for a 500sqm section. I mean, that’s a ridiculous price. That’s $4 million a hectare.

"I think the Productivity Commission report had a very good chart in it which compared the price of land just 2km inside the metropolitan urban limit in Auckland with the price 2km outside that limit and the multiple was nine times.

"It’s a question of supply of land."

Local government was blocking access to land, pushing up prices, Dr Brash said.

"The market is stopped from working. It’s local government which has stopped the market from working."

I agree:

A leading economist has backed comments by Don Brash and Productivity Commission chairman Murray Sherwin that New Zealand has a land supply probelm, not a house price problem – and says it is making quake fallout worse in Christchurch.

"Getting land use policy right doesn't just help developers to provide low cost housing options for young families, it also builds in flexibility," Canterbury University senior lecturer Eric Crampton told NBR ONLINE.

"After the Christchurch earthquakes, the land use regulations that slowed development in normal times made it almost impossible for anybody to build new housing for those whose houses were destroyed. Bureaucracies just cannot move fast enough when the unexpected happens," he said.

"Seventeen months after February's earthquakes and it's still illegal for a homeowner to build a self-contained flat with a kitchen in his house to help ease the rental crisis."

There's a bit more at NBR. I really need to arrange a new stock photo with the Uni...

Minimum wage nonsense

I love it when journalists think that their crappy interpretation of an OIAed email from Treasury gives them a scoop that overturns basic economics. Here's Patrick Gower:

Everyone knows it’s got bloody hard to live on the minimum wage - even John Key admits that. His defence is that a rise from $13 to $15 an hour will cost jobs.

Key has used this defence in a televised debate, and he's used it to workers on the shop floor at McDonald's as seen in my story last night. But what Key doesn't want to admit, is that this claim is not the full picture and may just be fear-mongering - a rise may not cost jobs at all.

That's what Treasury says in this advice from March 2010 obtained by 3 News under the Official Information Act.

SEE THE TREASURY EMAIL THAT SAYS A MINIMUM WAGE RISE WON'T COST JOBS

Yes, that's right - the Treasury.

The Treasury are the big guns - Government's quasi-independent economic advisers.

And the Treasury says the "claim" (yes Treasury calls it a "claim") a minimum wage rise may cost jobs - "has not been true in the past".

Ok, so Gower's claiming that Treasury says a minimum wage increase from $13 to $15 will have no employment effect.

Go read the Treasury email and you'll find Treasury's Tony Burton wondering about the rise in youth unemployment through 2010. What "has not been true in the past"? That changes in the youth minimum wage hitting 18 & 19 year olds a decade ago resulted in increased youth unemployment - the Hyslop and Stillman study found no effects. The period of study saw some of the lowest adult unemployment on record in New Zealand, so it's not exactly the kind of period in which we'd expect strong disemployment effects. Burton then wonders about other things that might have affected youth unemployment rates through 2010.

But it's insane to extrapolate from anything in that Treasury email to claim that Treasury supports an increase in the minimum wage from $13 to $15. I hope that somebody at Treasury steps up to make that clear.

Gower tries to frame this as a scrap between Treasury and the Ministry of Labour over estimates of the disemployment effects of minimum wages.

So the Department of Labour report actually mentions about 6000 forecast new jobs that might not happen under a theory that the Treasury doesn't believe.

But absolutely nothing in the OIAed email from a single Treasury analyst speaks to the Ministry of Labour's estimates. Nothing.

Brash's assessment of Gower seems about right.

TVHE comments as well, but as usual, is too kind. Update: It gets worse. See here for Treasury's very clear opinion in the 2010 minimum wage review that raising the minimum wage from $12.75 to $13 was a bad idea.

...and on the Right

I've been wrong on every turn on the ACT contracts on iPredict, but through some decent arbitrage plays was able to limit my losses to about $21 in total.* My crystal ball is very dim; discount things as you like.

Don Brash as incoming ACT Party leader will face the same strategic problem that ACT has faced for rather a long time. If they're a strong force on the economic right but cement themselves into social conservatism, they only have bargaining power with a future National government to the extent that they can commit to bringing down a National government, or preventing one's creation, in favour of a Labour-led alternative. National's policies would have to be very far from economic liberalism before that threat became credible.

ACT's best hope is if National wants to have a scapegoat for sensible but unpopular economic policies. But blame the coalition partner only gets you so far, as Key knows. Were Key inclined to break campaign promises and blame the coalition partner, ACT would have been happy to help out in the first term. Were Key even inclined to support the reversal of legislation that National opposed and that National did not rule out changing during its campaign, like the youth minimum wage, he could just have supported Douglas's youth minimum wage bill and blamed ACT for it. The minor party that can't plausibly flip to the other side has constrained bargaining power. They'll get more with more seats, but I'm unconvinced that an ACT party with 10 seats would have much more bargaining power with National than the Green party with 10 seats has with Labour. Or, rather, let me put it another way: I'm unconvinced that they'll get policy concessions beyond those that National would likely have enacted anyway had ACT died. Regardless of ACT's existence, National was going to have to start on the serious work of fixing the structural deficit in its second term. It's been laying the groundwork preparing folks for it. The counterfactual matters.

This had been my biggest critique of Rodney Hide's leadership: in his estimation, ACT did best by proving themselves a safe and reliable partner for National - the loyal supporter that would receive its policy dues. Such was Hide's loyalty that he even backed Key against Roger Douglas's very sound critiques of government economic policy. All the effort and opprobrium of handling the Auckland Supercity campaign could be worth it if the Regulatory Responsibility Bill had gotten through. The unified opposition of the bureaucracy, Treasury, and the legal community to the bill suggests that there might be some problems with it as drafted, however worthy and necessary its intentions are. And I'd bet that that will yet kill it in committee. In which case the last term's not really come to much - supporting National through a bunch of nonsense to no policy benefit.

I had rather strongly misread Brash's play. I'd thought that his push for the ACT leadership was designed as an offer to be refused: lots of negotiations through the media and teasing them with that he'd commissioned some polling that would be available a fortnight after he launched his attack on Hide - it looked more to me like somebody trying to make sure that everyone had seen that he'd given it a go than like someone who really wanted the job. Seems I was very wrong.

I'd thought that Brash wanted the pretence of having sought the ACT leadership before launching his own vehicle that was free of some of the ACT baggage and to which the more liberal side of ACT might have fled. Then, he could have launched an economically right wing party free of the social conservatism that's been far too dominant in ACT over the last few years. A few key socially liberal policies like easing up on the drug war and eliminating asset forfeiture could have had a truly liberal party in a spot where it could credibly join up with the Greens to make civil liberty demands in a coalition with Labour. Then, post election, the new liberal party could put up a small set of "must do" and "mustn't dos" as condition of coalition with either National or Labour/Green. In that kind of position, a liberal party could keep Labour from doing anything too horrid on the economic front while promoting civil liberties, or keep National from doing anything too awful on civil liberties while promoting sound economic policy. I think the numbers are there that would back that kind of liberal party, but it couldn't easily happen if ACT were still in play.

In hindsight, it was entirely wishful thinking. I should have paid more attention to the talk of John Banks being onside for whatever play Brash was making; Banks is not an obvious first choice as a partner in a liberal party. But I'd never paid any attention to the former Auckland mayor and didn't realize the significance of his entry. In today's interview with Kathryn Ryan, Banks talks about being able to implement conservative policies (check 17:18, which is followed by an awfully embarrassing ebullience about the upcoming royal nuptials). I really hope he's only thinking about economics. But it'll be interesting to see where Brash takes the party. Campaigning on a straight platform of "Implement the 2020 Taskforce's Recommendations" would be great. But if they also wind up working to stomp on what's likely to come from the Law Commission's review of the Misuse of Drugs Act, they'll have done more harm than good.

A Brash-led ACT will do much better in the polls. iPredict's contracts on ACT returning to Parliament stopped being pulled downwards with the drop in the price of the contract on Hide's keeping Epsom and started being pulled up by the contract on Brash leading ACT. I was shorting the "At least one ACT MP to be elected to next Parliament" contract a few weeks ago when it was around the 50 cent mark; it's now closer to $0.90. ACT's projected share of the Party Vote has gone up to 7.5% from 3; National's has dropped from around the 46% range to about 45%. National's probability of winning the next election is back around the 85% range - about where it was trading when it looked more likely that ACT would fold and ACT voters would go back to National. The market says National's chances of forming government are little affected by the change in ACT leadership but that ACT's survival is greatly enhanced. And so Rodney Hide did the right thing by ACT, and very graciously, in standing aside.

* My losses, though they could have been worse were it not for some timely noticing that the sum of bids on contracts spanning particular spaces often summed to more than one (for example, Brash was hardly going to both form a new party AND run ACT, now, was he?):

• Closed stocks
  • $12 on Hide keeping his seat in Epsom
• In the running
  • $3 on Hide losing his position as ACT leader
  • $23 on ACT returning to Parliament
  • $12 on Brash becoming ACT leader
• But against these are $29 gain on whether a new party would be formed on the right

Prediction Act

Will former National Party leader Don Brash take the ACT Party leadership? Will he start a new party on the right? Here's the odds over at iPredict:

• Rodney Hide to win Epsom as an ACT Party candidate: 29% chance. Contract had been trading over sixty cents for most of the last month. Recall that ACT needs to keep Epsom, take another electorate, or get over 5% of the ballot to return to Parliament. It's now 30%, but only because I bought a few shares. The contract's fun for its volatility; I have no special insight into Epsom.
• At least one ACT MP to be elected to next Parliament: 51%. Had been trading around 64% for most of the last month. Nudged up past 70 cents on the early rumours of Brash taking over ACT, then collapsed to the mid 40s before starting back. The market's expecting ACT's chances outpace Hide's where previously the two markets ran in lock step.
• What share of the party vote will the ACT Party win at the next election? 3%. I've never put a huge amount of faith in the continuous vote share markets as the payoff curve is too flat for really reliable results. But the market isn't seeming to think that ACT's 50/50 shot of returning to Parliament is coming from a surge in the popular vote or from Hide's keeping Epsom.
• Rodney Hide to depart as leader of ACT: 34%. Don Brash to lead ACT: 32%. Perhaps punters are figuring Brash would take an electorate seat for ACT if he took the leadership. Or perhaps they're reckoning that Brash winning a leadership challenge would lead to higher poll numbers where a successful Hide defence would nevertheless prove pyrrhic: something like 1/3 chance of 7% of the vote under Brash plus 2/3 chance of 1% of the vote under Hide - that gets you the 3% trading price in the vote share market. But there are other ways of making the numbers work, and I'm wary of reading too much into the 3% price in the vote share market.
• Rodney Hide to win Epsom as an independent or representing a party other than ACT or National: 3%. This contract was basically dead prior to the current unrest; it's since seen a couple of spikes up to 8% and down to zero. Whoever had the big orders in at the bottom of the book has hopefully done well. Somebody's presumably thinking that Hide will be rolled and will then run as an independent. I'd throw in a few standing shorts around 8%, but then I'd be in constant terror that I've not been watching Twitter closely enough.
• New right wing party (with Brash) to be registered before the next General Election: 40%. This had been trading south of 10% for a few weeks before spiking up to 70% with the Don Brash interviews; it's now back down to 40%.

Current prices suggest ACT's chances would be better with a change in leadership, but they're far too volatile to draw strong conclusions for now. I've had to update prices twice while drafting the post. Stay tuned.

Opportunities lost

Every time Don Brash steps out to say something, I weep for what could have been in 2005. Then I remember that he'd have been as much constrained as anyone else in office and outcomes wouldn't have been quite as cool as I'd have hoped. But here he is taking on Bernard Hickey's odd claim, critiqued here Saturday, that the difference between the dividend rate paid by SOEs and the government's borrowing rate is sufficient reason not to privatize:

Bernard, I see you're suggesting that it is a “line-ball” call whether it makes sense for the government to sell stakes in some of the SOEs because the government is getting a dividend yield of 7.6% on its investment in the energy companies but can borrow at 5.5%. I’m not sure I understand what you were saying, but if I do understand it, I certainly disagree with you! Leaving aside the fact that of course the government would expect to get a higher return from a risk asset than it pays on a debt instrument, you seem to be assuming that the government would sell the shareholdings for the net asset backing of the shares. Why on earth would it do that?

The risky asset bit is what I'd focused on because I go after low-hanging fruit.

You say that you are not for or against privatisation in principle. I’m unambiguously in favour of it. I can see absolutely no reason for government to own commercial operations except perhaps where there are overwhelming policy arguments – Transpower, as the ultimate natural monopoly, is a good example of a company I would not privatise, and Radio New Zealand is another (important for cultural reasons having nothing to do with economics).

I see John Key’s announcement has a step in the right direction, but a very timid one. Why on earth would government want to own a majority share in three competing power generators? Government doesn’t produce the food we eat, or the clothes we wear, or (most of) the houses we live in. Why should they own three of the five generators? The New Zealand government is now one of the very few which seems to believe that they should continue to own trading operations. The NSW Labor Government has just privatised its power companies, and the Queensland Labour Government has just sold its rail system.

By the way, when the 2025 Taskforce argued for privatizing the SOEs in its latest report, we quite explicitly said that reducing debt should not be the primary driver (as it had been, arguably, with the privatisations of the late eighties) given that current debt levels, though rising strongly, are not yet at a critical level. We argued in favour of privatisation on the grounds that that was important in order to expose some of the largest corporates in the country to the opportunities and disciplines in the private sector. (Note the reference to Nokia above.) We just couldn’t see any reasons whatsoever for retaining them in government ownership.

Hit the whole thread for his back and forth with Hickey. It's towards the end of the comments thread; best just to search on "Brash".

I think Hickey's wrong on this one, but N is high enough for bloggers that the occasional foul tip oughtn't be too damning (Crampton says in fear of the next time he screws something up!)

Orewa

Former National Party Leader Don Brash lists some of the ways National has disappointed us under Key. Among the disappointments are National's failure to split the youth minimum wage from the adult rate.

I worry that, despite knowing that the Labour Government's abolition of the youth minimum wage has very substantially increased youth unemployment - by 12,000 according to Canterbury University economics professor Eric Crampton - we have taken no action (indeed, we voted against Roger Douglas's Bill to reinstate the youth minimum wage), so that thousands and thousands of young people leave school or training and quickly become demoralized, deprived of the opportunity to support themselves, with all the social and personal harm that does.

The full Orewa speech is here.

Brash would have been referencing my post from May on the December 2009 Quarter results. The latest ones have it around 8500; unemployment's turned around a bit.

I'd warn that, besides my being Senior Lecturer rather than Prof (though I'd be happy if Don Brash were to have a quiet word with his former employee, and my current employer, Rod Carr, about this), my numbers here are still back-of-the-envelope. They're backed out from the residuals of a very simple regression plotting the youth unemployment rate as a function of the adult unemployment rate: the residual spiked up abnormally following the abolition of the youth minimum wage.

If it were a murder mystery, the residual plot would be the smoking gun. The youth minimum wage would be standing beside it all shifty-eyed and having had both motive and opportunity. It would be worth a bit more detective work. But no jury in the land would convict that charismatic and popular minimum wage, no matter what the evidence showed; worse, the judge is in cahoots with the Mob.

Update: Liberation analyzes Brash's speech.