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Insights 15: 7 May 2021
Dominion Post: Eric Crampton discusses if local government is fit for purpose
 
Podcast: David Law explains the perils of rent controls and who benefits
 
TVNZ Q+A: Briar Lipson on education and NZ children's declining maths performance
The good, the bad and the alarming
Roger Partridge | Chairman | roger.partridge@nzinitiative.org.nz
Grant Robertson could not have looked more pleased delivering his 2021 pre-budget speech to the Wellington Chamber of Commerce earlier this week.

For a start, he was speaking to a live audience, in stark contrast to 2020. More than that, he could paint a picture of the New Zealand economy that was unimaginable this time last year.

Unemployment sits at 4.7%, against last year’s dire projections of near double-digit joblessness. The country’s exporters are enjoying strong global demand. GDP growth in the December quarter was down less than 1% compared with pre-pandemic levels. And, though Robertson did not mention it, GDP looks set to grow strongly in 2021.

Despite this rosy picture, there are plenty of fiscal problems for the Minister of Finance to ponder. The latest IMF forecasts to 2022 show New Zealand suffering the tenth worst deterioration in its structural fiscal balance relative to GDP since 2017 out of 80 countries studied.

New Zealand’s deterioration is only partly explained by the massive stimulus programme implemented by the Minister of Finance during 2020. The bigger part of it results from the Finance Minister loosening the purse strings pre-Covid. As a result, Treasury predicts net core Crown debt will have ballooned from a pre-pandemic low of 19% of GDP in 2019 to 52% of GDP by 2023.

Robertson acknowledged that “[a]s a small economy subject to external shocks, it is sensible we look to reduce our public debt as the economy returns to full health.”

Yet in other comments the Finance Minister showed an alarming disregard for the need for fiscal prudence. His speech revealed that Ministers have identified $926 million of savings from Covid recovery spending as a by-product of “better than expected economic outcomes.” Yet rather than bank the savings, Robertson said they would be “returned to the fund” to “aid the recovery.”

But the so-called Covid Response and Recovery Fund was never an actual “fund.” All Covid recovery spending was to be borrowed. With the economy rebounding strongly, fiscal prudence suggests the savings should be saved. Unless the Government makes savings where it can, its fiscal balance will never improve.

Equally alarming was Robertson’s announcement of a new “Implementation Unit” to be formed within the Department of Prime Minister and Cabinet. Reporting to the Minister of Finance, the unit will “monitor and support implementation of a small number of critical initiatives.”

While the focus on implementation is commendable, the creation of a new unit within the DPMC shows a troubling lack of confidence in both officials and ministers. After all, it is their job to implement government policy.

The new unit also casts doubt on the effectiveness of the Government’s once-in-30-year reforms to the public sector in last year’s new Public Services Act. Promoted by State Services Minister Chris Hipkins, this Act promised to create a “joined-up” public service capable of tackling “the biggest challenges facing Governments.” The new implementation unit suggests these reforms have not matched expectations.

As the economy emerges from recession, there has never been a greater need for effective fiscal policy and effective implementation. On neither count is the outlook as rosy as the picture Robertson painted on Tuesday. 
Bombs away
Dr David Law | Senior Fellow | david.law@nzinitiative.org.nz
Last week, The New Zealand Initiative released a paper outlining the perils of rent controls. It was fun to reminisce about our first year of economics study.

Subsequently, we learnt that the Housing Minister had requested advice from officials on rent controls. The Green Party has released a discussion document on “Reasonable Rents”, extolling their virtues. And, I debated a representative from Renters United on Radio NZ on the merits of rent controls.

Bypassing countless peer-reviewed studies highlighting the failures of rent controls, the Greens and Renters United both found the same blog that says they are not so bad after all. Unfortunately, the blog’s author, J. W. Mason, is clearly confused.

Mason says the standard economic model of rent control fails in the real world.

First, some studies show rent controls were effective at holding down rents on rent-controlled accommodation. But this is predicted by the model and is news to no one. Rent controls set a maximum rental price below the market clearing price – prices must fall for affected rental accommodation.

Second, Mason points to studies which find limited effects on the overall supply of housing. But what Mason forgets is that the model is about the rental market. It predicts the supply of rental accommodation will fall, not that total housing supply will fall, although it may well do. The papers Mason cites himself do an excellent job of showing rent controls reduce the supply of rental accommodation and that the standard economic model of rent controls stacks up.

Rent controls are a brilliant lesson in policy failure. The intent of rent controls is to lower rents, but the outcome is to reduce the supply of rental accommodation leading to shortages and queues. Quality drops, mobility falls, and a mismatch between tenants and rental accommodation ensues. Rent controls can even make inequality worse and push rents up on uncontrolled accommodation.

Unfortunately, even if sense prevails on rent controls, there are plenty more terrible policy interventions to choose from. The Treasury has recommended advice be provided to ministers on both stamp duties and a deemed rate of return for investment properties.

Stamp duties are a tax on the sale of houses. Among their worst effects, they reduce mobility of homeowners – disincentivising people to move for better jobs or when their housing needs change. With the tax on tenants package, announced in March, it is clear another important lesson from first-year economics has been missed. You tax things you do not want, not things you do want – unless of course the real objective is to raise tax.  

As for deemed rate of return on investment property - to the extent this keeps rents below market rates, as intended, we can expect similar outcomes as more conventional rent controls, albeit with higher administrative costs.

I had better end things here. I have an appointment with some flat-Earthers.
Get rich with Dogecoin
Leonard Hong | Research Assistant | leonard.hong@nzinitiative.org.nz
Recently, you have been really responsible with your finances. You stopped buying chicken paninis, cut back on the flat whites, and eating out at KFC. You put more money into a savings account.

Unfortunately, the reward for being financially frugal is a meagre 0.8% per annum of interest. After 2% inflation, you are losing money. Not very satisfactory.
 
But, if you cannot build some long-term wealth in the bank, what else can you do?  
 
Well, let us explore a few options.
 
You could try housing. However, you'll need to get a new mortgage and a substantial amount of deposit. It is also costly, with the average house price now exceeding $800,000. And that will only provide you with a 30% return within a few months.
 
But what if I told you that you could make a 900% return, no a 11,000% return in the same period?*
 
How about investing in Dogecoin! Yes, that meme dog cryptocurrency.
 
It started in 2013 as a joke Bitcoin alternative with a caricature of an innocent Japanese Shiba-Inu dog as its symbol.
 
Then, this year in February, Elon Musk tweeted about it, and Dogecoin took off to the moon.
 
A dollar invested when Elon tweeted is now worth $17.4 – Oh wow.  
 
Dogecoin is now worth $80.5 billion – worth more than companies such as Ford Motors, Honda and Adidas. Dogecoin was a joke about cryptocurrencies, but in an ironic twist, it became a wealth-creating digital asset.
 
In April 2021, a man named Glauber Contessoto gained notoriety for becoming a Dogecoin millionaire. We are supposedly living in a completely new era of unorthodox wealth creation.
 
Or perhaps it's just a bubble. During the 1600s in Holland, multicoloured tulips became prized possessions. "Tulipmania" saw prices go crazy until it burst into nothing of substance. 
 
The folly of human speculation has always been there.
 
My generation particularly loves bubbles – look at GameStop, for instance. You can profit and still get a decent result on investment by selling at the right time.
 
No need to be financially responsible. Eat out, buy KFC and spend your remaining funds on the latest Dogecoin.
 
It will be fine as long as you are the last one out before the bubble bursts. Just short it. Easy peasy.
 
*Not investment advice
 
On The Record
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Other Initiative activity:
  • Podcast: David Law explains the perils of rent controls and who benefits
     
  • Submission: ensuring our energy and airports regulation is fit for purpose
 
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