You are subscribed as | Unsubscribe | View online version | Forward to a friend

Insights 2: 2 February 2018
Latest report: Recipe for disaster, policy-making on shaky grounds
Latest interview: Dr Eric Crampton dissuses Recipe for Disaster on Radio NZ
Upcoming event: Dinner lecture with Katharine Birbalsingh

What has economic growth ever done for us?
Dr Eric Crampton | Chief Economist |
It’s too easy to take things for granted. In Monty Python’s classic Life of Brian, John Cleese’s Reg asked what the hated Romans had ever done for the people of Judea – and was rather annoyed to hear a long list of things like medicine, sanitation, education, wine, irrigation and more.

Economic growth gets a similarly bad rap.

Last week, Greens leader James Shaw urged new economic models that balanced economic, environmental and social outcomes, while explicitly emphasising poverty reduction and broad-based growth in wealth. Labour’s Environment Minister David Parker reported enjoying hearing Lord Adair Turner’s views on new economic thinking that would de-emphasise growth.

Those ideas begin from false premises.

To begin with, the benefits of economic growth in New Zealand have been broadly shared.

The Ministry of Social Development shows that, from 1993 to 2016, real household disposable incomes have grown by about sixty percent – whether your household is at the 20th percentile, at the median, or at the 90th percentile.

Credit Suisse shows that private wealth growth in New Zealand has also been broadly based. Average real private wealth in 2017 is five times higher than it was in 2000, and the median is 4.9 times higher. If the benefits of growth had been captured by the rich, there would be a far bigger gap between average growth and median growth. Instead, it is rounding-error small.

And, at least as importantly, you hardly need to turn to fringe economic models to be able to account properly for environmental effects.

Every principles-level course in economics emphasises the importance of external costs, like environmental externalities, and their consequences for policy. Pigovean taxes on pollution have a century’s worth of history in standard, mainstream economic thinking. And other solutions like tradable quota regimes also have a very long history.

When America had big problems with acid rain, the solution came from bog-standard application of a mainstream economic solution: a tradable quota regime for sulphur dioxide that saw the most inefficient factories shut down, others clean up, and the end of acid rain.

New Zealand certainly needs better policy for dealing with environmental damage, but we do not have to invent new economic theories to do it. And neither need we risk the economic growth that is the foundation for any sustainable improvement in broad-based living standards.

What has economic growth ever done for us? The list will be longer than Reg’s.

LBJ and Oxfam
Richard Baker | Research Director |
Lyndon Johnson once said of his unrelenting critics that if he walked on the Potomac, headlines would criticise him for not being able to swim.

I was reminded of this when I read Oxfam New Zealand’s comments surrounding the release of the latest Oxfam report “Reward Work, not Wealth”. Among many evils, Oxfam decried billionaires and wealth inequality in particular.

The degree of wealth inequality within some developed countries is an issue to be reflected upon. However, when one takes a dry-eyed look at overall and longer term evidence (Max Roser ,, Oxfam’s concerns might be said to be overstated.

Across our planet’s entire population, and in human history, we have never been richer nor have those in extreme poverty had more cause for optimism. Furthermore, wealth inequality between developed and lesser developed nations has never been lower.

In 1970, out of a global population of 3.69 billion, 60% (2.22 billion) lived in extreme poverty. In 2015, out of a global population of 7.35 billion less than 10% (705 million) lived in extreme poverty. This decline is unprecedented in economic history.

From 2008 to 2015 the rate of decline increased further such that every day there were 217,000 fewer people in extreme poverty than the day before.

Oxfam New Zealand called for fairer taxation. As far as the income tax base goes, the better published and accepted evidence shows that the bottom 60% of New Zealand households receive more in government economic redistribution than they pay in tax. The top 40% (and then overwhelmingly the top 10%) pay far more in tax than they receive. This is scarcely unfair I would venture to suggest.

Further, New Zealand's top 1% and top 10% own much smaller fractions of measured national wealth than do their counterparts in Canada, Finland, Norway, Germany, Denmark, and Sweden. Among the 39 countries assessed, New Zealand's top 1% and top 10% have the 9th and 11th smallest wealth shares respectively. 

On the Gini wealth inequality measure, in 2017, out of 171 countries, 79 countries had greater wealth inequality than New Zealand. Finally, New Zealand enjoyed the world's fourth highest percentage increase in total household wealth from 2016 to 2017. This was broadly shared.

On the Credit Suisse data used by Oxfam, the world's most unequal country is Venezuela.

I am sure LBJ would have had something acidic to say about that.

Rate runs on rental market
John McMahon | Research Intern |
In recent years, the housing rental market has become New Zealand’s newest national sport. Complete with arm-chair critics and commentators. As competition for housing heats up, the tenants are on the back foot, the market is down on properties and politicians are failing to deliver strong policy.

According to the TradeMe Property Price Index, weekly rents are 6.7% higher than December 2016. Yet, the Wellington Landlords are just getting warmed up.

The government has been slow bowling on rental property policy. This weak delivery will allow the landlords to keep batting for the foreseeable future.

Add to that the $50 boost in the Student Allowance, and more punters are bound to cram into the rental stadium which is already overcapacity.

Each time a new property steps up to the crease, it is quickly snapped up by the slips nearest the agent. All tenants viewing from the outfield and the stands are barred from a piece of the action.

The delivery of tougher regulation during a housing shortage might wind up a no-ball in favour of the landlords, but a lot will depend on the pitch conditions. If the cost of regulations can be hooked straight into the hands of desperate renters, the landlords and rental rates will continue their partnership. But, if the pitch runs the other way, then some landlords may also lose their wicket.

With the home ground advantage firmly in favour of the landlords, the call to limit housing supply further should check with the third umpire. Given the tenant alternatives of sub-standard housing or roughing it in a car, that call was surely made in bad light.

Overall, the current housing policy is a donkey drop for stabilising rent rates.

A spell of policy reform will increase housing supply, but we need the government to make good on their delivery.

As the pace of rental rates dismantles the tenant lower order, the government must call time on ineffective housing policy.

Unless the government prefers tenants sleeping in cars or worse, they should spend more time practicing good policy and less time perfecting its spin.

On The Record
All Things Considered
  • Chart of the week: Why it is ecologically impossible for the world to eat as we do.
  • Aussie TV channel buys Kiwi fishing mockumentary, thinks it's fair dinkum.
  • Is this the new model for public intellectuals to succeed in the marketplace?
  • How good is economic growth anyway?
  • Spotify is a reminder of how the market makes us all richer.
Copyright © 2024 The New Zealand Initiative, All Rights Reserved

Unsubscribe me please

Brought to you by outreachcrm