NZ is getting riskier

This week's column on regime uncertainty at Newsroom is now ungated. A couple snippets:

Last week, Finance Minister Grant Robertson provided a letter to Air New Zealand outlining the Government’s expectations as the majority shareholder. These expectations include maintaining a comprehensive domestic route network; engaging with the development of new aviation fuels and enhancing its role as a leader for best-practice workplace relations.

Robertson noted that because the Government expects meeting the objectives is “aligned to the creation of long-term value for Air New Zealand”, there is no conflict between meeting the Government’s objectives and fulfilling duties to act in the company’s best interest.

Each of the objectives might individually sound innocuous. But each brings a distinct possibility of conflict between acting in the company’s best interest and achieving the Government’s objectives if they ever diverge.

If a regional route becomes unprofitable and the airline can see no way of making the route profitable, will the Government’s objective of a comprehensive domestic route network prevail?

In 2018, Regional Development Minister Shane Jones criticised Air New Zealand’s cutting of regional routes. In response, Air New Zealand Chair Tony Carter wrote to the Minister of Finance, reminding everyone the airline is independent of the Crown. Would that be possible in 2022?

If new synthetic fuels reduce emissions at a cost-per-tonne well above either current prices in the Emissions Trading Scheme or forestry planting, would the airline pursue the more costly option? Or would it be able to shift to alternative fuels only when they become cost-effective?

What might be packed into enhancing best-practice workplace relations when the Government is also working through a new industrial awards system? An industrial award might not be what is best for the airline and its workers.

Robertson also signalled the Government would be involved in a board renewal process to help achieve the Government’s expectations and objectives. If achieving the Government’s objectives should come at a cost to the firm's best interests, can minority shareholders be sure that their interests will be protected?

...

Tax changes normally follow a rather careful process. Changes to the tax treatment of mortgage interest for residential rental properties did not. They bring substantial uncertainty about just what might come next. That uncertainty makes investment in rental property development riskier.

If the Government exempts new builds from the announced tax changes, how could investors find that promise to be credible? What would prevent a future Finance Minister from saying those exemptions were too definitive?

If rents go up because of the tax changes, will the Government impose rent controls? Robertson refused to rule them out; they seem held in reserve as a threat. But the threat can too quickly become a self-fulfilling prophecy. Landlords worrying about coming controls may want to lock in increases ahead of the ban.

Rent controls are poor policy: they reduce rental housing supply and make it much harder for renters to move house. For every surveyed economist who agreed rent controls were beneficial, 40 disagreed. But when policy changes in housing are announced without any reasonable input from officials, can we rule anything out?

If further tax changes and rent controls could be on the table, how many will be willing to take on debt to finance new rent-to-build properties?

The Government was happy to announce substantial ad hoc changes to the tax treatment of the largest expense facing businesses in one sector, with casual asides that providing rental housing should never really have been considered a ‘business’ in the first place. What other sectors should worry that they might be next?

The Heart of Let's Get Wellington Moving

After a couple of decades of Wellington transport issues not really being dealt with, you might think that transport would be at the heart of the newest iteration of the thing, Let's Get Wellington Moving.

You'd have to not really know Wellington to expect that though. 

They had another big long meeting on it, and they could only agree on one thing, according to Councilor Diane Calvert.

City councillor Diane Calvert​ spent about three hours at the meeting.

She said a “mixture of opinions” were aired, but no consensus had been reached, apart from the parties agreeing that reducing carbon emissions was at the heart of LGWM.

Transport is in the Emissions Trading Scheme. Suppose that Wellington declared cars illegal and shifted to a bus fleet powered solely by the concentrated smugness of its officials. No emissions at all, or at least not GHG emissions. 

What happens next? 

Less diesel and petrol sold means the fuel companies buy fewer NZU at the next auction. 

At a reduced price, other people buy the units instead. Emissions continue elsewhere in the system, unless the drop in demand is enough to make the cap non-binding, in which case folks elsewhere stop trying to reduce emissions. 

It's bailing the sinking ship from the bow into the stern. It doesn't reduce net emissions. 

Transport planning has to take *some* account of rising ETS prices. When petrol prices go up, demand for public transport goes up because driving a car becomes more expensive - until people take on the higher upfront costs of EVs. Roads that work for petrol cars also work for EVs, right? And if there aren't enough charging points for EVs relative to expected demand, you could imagine Council subsidising the commissioning of a few more as a short-term thing. But those shouldn't be at the heart of a transport policy. They're maybe a pinkie toe. 

Local government often complains, and rightly, that central government forces unfunded mandates on it. Here, Wellington is imposing that cost on itself. And it's just dumb. You might as well put National Defence at the heart of Let's Get Wellington Moving. Or inflation. Maybe Foreign Policy should be at the heart of Let's Get Wellington Moving. Anything but actually sorting out transport issues and getting congestion charges in place. 

Three headlines

Maybe RNZ has a CMS with a short headline character limit and subeditors under time pressure. 

Or maybe this is RNZ doing its usual RNZ thing. 

Compare the three headlines on this excellent piece by Prof Norman Gemmell, former Chief Economist at Treasury, on the tax mess that Labour announced on housing. 

When he wrote it for The Conversation, the headline was "New Zealand's new housing policy is really just a new tax package - and it's a shambles".

Now I don't know if Norman wrote the headline - sometimes the outlets do that. But that was the original. 

When The Herald syndicated it, they changed the headline a little. For The Herald, it was "New Zealand's new housing policy is really just a new tax package - and it's a mess". This version's gated. 

Mess is a bit shorter than shambles, but they're about the same thing. Or close enough.

Here's what Radio New Zealand did with it. "Opinion: New Zealand's new housing policy is really just a new tax package". 

The article is worth reading. I suppose we should be grateful that Radio NZ gave it any space at all. 

Getting to Net Zero

We have not been fans of the Climate Change Commission's draft report.

New Zealand has an Emissions Trading Scheme with a binding cap, and a declining path for net emissions in the covered sector. Measures taken within the covered sector cannot reduce net emissions. NZU not purchased by one sector get purchased and used by another. Regulatory measures around coal boilers or electric cars can affect the price of NZU, and will affect which sectors move earlier or later in reducing emissions, but they cannot affect the quantum of emissions. 

Like, imagine you have a crate of 12 beers and 12 thirsty people, each of whom would be pretty happy to drink 2 or 3. They run an auction to decide who gets the scarce beers. The thirstiest folks drink two, others cut back to a half or none. The money goes into the crate. Then each of the dozen people gets a 1/12th split of the money in the crate when the beers are gone (the heaviest drinkers wind up compensating the rest this way). At next weekend's session, the crate will only have 11 beers - there's a declining cap. And so on. After the first session, all the beers were consumed, and folks split the money. And it's pretty obvious that they'd have been happy to have drunk an awful lot more if there were more in the crate. 

Regulations saying that Jim cannot have any of the beers, or that Mary cannot drink more than 3 of them, or that Fred must go to Alcoholics Anonymous because he's bidding the price of beer up too much - none of those wind up affecting how many beers get consumed on the night. They change who drinks them, and they affect the price at auction, but that crate's going to be empty at the end of the session unless you put in so many rules and constraints that they wind up more binding than the "there are only 12 beers" constraint. If the set of rules ban half the folks there from drinking any beers, restrict three people to having no more than 1, and the remaining 3 didn't want more than two drinks anyway - then the rules would reduce total consumption. But if you had really wanted to knock the amount down by three beers, it would have been easier just to pull three of the bottles from the crate at the outset and pour them down the drain before auctioning the remaining 9.  

The Climate Commission's draft report is rather less tasty than the draught beers in that crate - even if the beer were Rheineck. It's full of regulations saying that Jim is banned from having a coal boiler, that Mary can't plant pine trees, and that Fred is banned from importing petrol vehicles. But all of those are under the ETS cap. Someone else uses the NZU instead if a coal boiler gets banned. And while the Commission claimed that all of it made sense and that the economic costs of overriding the ETS were minimal, they didn't release a lot of the detail that might prove it. 

So our submission, written mainly by my excellent colleague Matt Burgess, went through those issues, urged more transparent costings of the non-ETS policies, and urged the use of a carbon dividend to address equity issues rather than a pile of costly regulatory measures that try to do it by shifting who bears the costs. Matt hits on some of this in the Herald as well. 

The interview between my former Vice-Chancellor, and current Climate Commission Chair, Rod Carr, and Matt Burgess is really well worth listening to. 

Richard Harmon's Politik newsletter says that the Climate Commission is losing National's support. 

National is now threatening to break up the two-party consensus on climate change because it is dissatisfied with the Climate Change Commission’s Draft Consultation document. 

The party’s Climate Change spokesperson, Stuart Smith, has taken the unusual step for the Opposition of making a formal submission to the Commission highly critical of  its proposals. 

He says they are impossible to support. 

And yesterday, he wrote to Climate Change Minister James Shaw asking for a three-month extension to the consultation period on the report. 

“My concern is the draft Plan would be impossible for us to support and put us in the unfortunate position where we are opposing the Commission’s first Emissions Reduction Plan,” he told POLITIK.

“In order to avoid this, I am requesting the Minister extend the time the Commission has to develop this plan. 

“National first and foremost wants a robust emissions reduction plan that we can support. 

“This, I believe, is a constructive step to create a situation where we may be able to support the final Plan.” 

POLITIK: “Is it fair to say the Government cannot now take National’s support for the Climate Change Commission’s recommendations as a given?” 

SMITH: “Correct.”

It's tempting to think this doesn't matter, because Labour has a majority and may well just legislate everything that Carr recommends, without bothering to go ahead with cost-benefit assessment on individual measures. 

But it does matter. 

The Draft Report recommends banning petrol vehicle imports from the early 2030s. If the Commission can't show that this really is cost effective, and National consequently commits to rescinding any such ban because transport is already in the ETS, the ban becomes nonbinding - there will be a change of government before the 2030s. 

Similarly, reversing bans on other things already covered by the ETS, like fossil fuel powered industrial and process heat, or bans on new gas connections, would also matter in maintaining the viability of those setups (remember - they're all covered by the cap, it won't change net emissions). 

So we then have to plan on going back to relying on the ETS and its declining binding cap, rather than running a pile of other stuff that is unlikely to be helpful. 

In praise of paper roads

My column in the Stuff papers this week went through the merits of unformed legal roads - the paper roads that sit, waiting to be used.

We may need a few more of them.

New Zealand, like Canada, has road allowances, or “unformed legal roads”. But remaining unformed roads are not part of any systematic grid. They rather were set to ensure access to pieces of land that might otherwise be landlocked, to provide access along waterways, and to provide access to the coast.

Designating corridors for urban growth here has consequently been more difficult.

Manitoba’s land survey, 150 years ago, preserved space for roading. Here and now, it requires designating a corridor on top of land already owned and already in use. If the corridor comes to be used, the owner will be compensated under the Public Works Act. But the designation itself can impose uncompensated costs by introducing uncertainty. It is hard to make full use of your property if it hangs under the risk of compulsory acquisition for a road or highway.

Retrofitting a full prairie grid onto a topographically difficult country might not work.

But there could be promise in designating more corridors for growth well in advance of their being needed and compensating the owners of the designated land for the inconvenience. Then, when there is need for a road or busway, and the funding is lined up, council could exercise its option and use the corridor.

Here's what it looked like in Southern Manitoba. Our old farm is on the map there, south of Notre Dame. Every one of those big squares is one mile by one mile. You can see the quarter-sections within a lot of them. In a few places, like around Cardinal and Babcock, the terrain didn't allow the gridded roads to continue. So the road would wiggle a bit before snapping back to grid as soon as practicable. 

I love the bloodymindedness of it. There will be a road on the mile every mile, or allowance for one, and topographical disruptions can have only local effect. The grid must go on. 

You'll also notice an offset in the grid just north of Notre Dame de Lourdes. That's a correction line. Because a square grid doesn't sit well on a sphere, you need correction lines. As you move North from the US border, fewer square miles fit into the next row up. So the sections all offset by a bit at the correction lines. 

Morning roundup

The morning's worthies, from the accumulated browser tabs:

• A Manhattan Institute roundup, from last January, on the problems with rent control. What would be a fair price on iPredict for a contract paying $1 if Labour brings in rent controls. $0.60? Higher?


• Otago's tallying of the border system failures as at 30 March. Add to it this week's case of a border worker who caught it, and had somehow managed to miss vaccination appointments due to personal reasons. Minister Hipkins could issue a Public Health Order prohibiting unvaccinated workers from being at the front lines. DG Health Bloomfield could issue the same order, covering workers in Auckland. Neither has done it. They don't know which border workers are unvaccinated. The data systems are still being developed (they had to have known that they would need one since at least May of last year) and are currently a bit of a mess. Oh - and they're still not considering daily saliva-based PCR testing of everyone in MIQ, even though the capacity to do it is ready to go, right now. Instead, they're cutting down the number of MIQ spaces to reduce risk. Fundamentally, I think the problem is the one Jo Moir points to: lots of Kiwis are very happy for the country to turn into a hermit kingdom.


• NZ's unaffordable housing makes Bloomberg.


• NZ has a travel bubble coming with Australia - finally! Remember though that Taiwan has even fewer cases than NZ or Oz. We could add Taiwan to the bubble. Why aren't we adding Taiwan to the bubble? But keeping the bubble requires better practice at the border to keep the virus out.


• Jacques Steenkamp at BusinessDesk says that the government isn't bothering to process hundreds of investor visas, with billions of dollars consequently not making it here. Australia is making a better fist of it, as you'd expect. 


• I've seen a lot of snark about what counts as skilled in the skilled migrant immigration category. Brittany Keogh notes that NZ's Barista of the Year had a very hard time getting her skilled migrant visa - INZ had a hard time appreciating her skills. The result was that her employer had to go to market locally and prove that nobody local could do the job she could. It's a terrible way to run a system. It would have to be tempting to bring the award over to INZ HQ and wave it around saying "I told you!".  


• The government banned oil exploration at Taranaki. MBIE warned them that doing so would have consequence well before new fields would have started proving up. MBIE said, "any material change to the exploration side of their business may have an impact on how they view their existing producing assets, and vice versa. Should exploration opportunities be removed, it may have an impact on how oil and gas companies consider their overall presence in New Zealand, potentially incentivising them to either sell their existing producing assets or not to invest further in extending its production life." The government banned it anyway. Now, in a dry year, we're having production issues in the existing fields and gas shortages. That means old coal generators are being brought online and the cost of power has skyrocketed. And Minister Woods is shocked! that power prices are high and wants an enquiry into why. Would an official be fired for telling her that she caused it, that they warned her it would happen, and that uncertainty over the whole sector caused by this kind of policymaking combined with the potential effects of Onslow are hindering the investment in new generation that might possibly get us out of it? 


• After the government banned Taranaki, they held an utterly tone-deaf "Just Transitions" conference in New Plymouth. There, film subsidy mogul James Cameron said that Taranaki's dairy industry also needed to end, while highlighting his own more enlightened approach to farming - where he grew flax, industrial hemp, and vegetables. He now has hundreds of cows grazing in his paddocks, because what he was pitching at the conference doesn't stack up. 


• And now they're banning coal boilers. Recall that coal boilers are in the Emissions Trading Scheme. Every tonne emitted by one of those boilers is a tonne that cannot be emitted elsewhere. They're also suggesting banning other fossil-fuel boilers. Meanwhile, there's an electricity shortage caused by the Taranaki ban. So they're loading more pressure onto the power grid at the same time as they've screwed up electricity supply. The ban is in response to the draft recommendations from the Climate Commission. The Commission will barely have had time to start reading submissions on its proposals. If this government's last term includes mandating electric ambulances in the middle of power blackouts, it wouldn't surprise me. 

Afternoon roundup

The browser tabs, there are so many.

• I'm quoted in the Dom on the 1 April minimum wage increases. I hadn't gone through MBIE's advice before. MBIE's review has a decent summary of the literature, provides the necessary warnings about substantial real minimum wage increases in the current environment. Alas. The analyst would had to have known that the advice would be ignored, but be darned if the advice wasn't going to be provided anyway.


• If iPredict still existed, what would be the fair price on a contract paying $1 if NZ had US-style rent controls before 2022? $0.60? It feels like Robertson's set up a self-fulfilling prophecy. The changes to the tax deductibility of interest for debt on property investments are terrible policy. Bryce and I put out a short research note on it last week. Rents are likely to increase with the changes. Robertson has warned about rent controls if rents go up, or at least didn't rule them out. The Minister will "take action if necessary." Suppose you were a landlord who hadn't put up rents but you worried that the government was set to ban future rent increases if others put up their rents. You have no control over their rents, but you know they're running the same calculus that you are. Solve for equilibrium. Then Robertson will find himself pressured by journalists asking him to make good on his March threats, for the sake of tenants. And then we get rent control. 


• Berlin will tell you how great rent control can be. The freezing of rents in 2014 on existing builds, exempting new builds, saw shortages in existing builds (nobody moves out of them because you lose the low rent) combined with skyrocketing rents in the uncontrolled sector. Here's the IFO Institute paper on it, only the abstract is in English though. 


• Matthew Hooton's Herald column on the government's very slow vaccine rollout is excellent. The Herald also has a dataviz on it. 


• I wonder whether any of the building materials shortage would be eased if NZ didn't make it so hard to import building materials. BusinessDesk has been following the timber shortage. 


• My Newsroom column this week went through the rather cruddy legislate-in-haste policies we've been getting. 


• In praise of chain stores on Cuba Street. Finally. Excellent piece from Georgina Campbell. 


• And there's a new weird Creutzfeldt-Jakob kind of brain disorder in Canada's maritime provinces.
• Wellington's pipes? Nobody knows how much of a mess they're in. 


• Border workers who don't want to be vaccinated? This is dumb. Minister Hipkins has a giant sword. He can issue Public Health Orders. A Public Health Order could forbid anyone from border-facing work unless they had been vaccinated. Knot-sword-solved. Folks could redeploy or work elsewhere. There is unbelievable continued muppetry in the border system. It cannot afford to have unvaccinated people. 


• If I were still teaching Public Choice, the Tourism Industry Taskforce's report would feature in one of the assignments.
  
  "The Tourism Futures Taskforce report says:

  1.3 Efficient competition – Government endorsement of Commerce Commission authorisations for supplier collaboration We need to prevent competition that results in wasted surplus capacity and triggers downward competitive pricing. Authorising businesses to coordinate more sustainable pricing and supply through use of Commerce Commission authorisations will enable supplier-led capacity and price management, or government intervention. We recommend that the Government provides a policy direction to the Commission supporting such authorisations with a mechanism to value the public benefits in a consistent manner. The result of authorised collaboration will enable better economic returns on capital assets, more coordinated management of destinations and further investment by businesses in other wellbeings (which would be a clear requirement of the authorisations – for example: better wages, biodiversity, and climate and community outcomes).

  Discuss with reference to theory as developed in class. Particularly check through the weeks on rent-seeking, and sections on raising rivals' costs.