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Insights 11: 6 April 2018
Upcoming event: Dinner lecture with Katharine Birbalsingh
Sam Warburton discusses the Government's proposed fuel tax increase on Newstalk ZB
Recent report: Spoiled by Choice: How NCEA hampers education, and what it needs to succeed

Transport calculation in a world without prices
Dr Eric Crampton | Chief Economist |
The biggest lesson of 20th Century economics is that it is hard to get anything right if prices are wrong. It is high time that lesson were applied to transport.

From the 1920s through the 1940s, economists pointed out the difficulties in running centrally planned economies. If prices do not emerge from the interplay of consumers and producers in markets, somebody has to set those prices. And if those prices are wrong, everything else starts going wrong.

If you do not know how much value consumers put on, say, getting a car, how could you ever decide how many factories should be devoted to making cars instead of trucks or tractors – let alone whether it would make sense to open another iron or chromium mine? The 20th Century command economies always got these things wrong, resulting in long queues for ghastly cars.

New Zealand has similar long and ghastly queues: at peak travel times, on the roads, where we do not use prices to ration access.

But that is only the most obvious problem. We also have all of the problems that any student of the old Soviet economies might expect. Without prices on road use, it is hard to tell how best to allocate funding. Should the next billion dollars go to better bus routes, light rail, or to add another lane of highway? Prices would help us make sure that we are not wasting billions of taxpayer dollars, year after year.

This week’s Government Policy Statement on Land Transport does some good by abolishing a few projects that looked to provide very little value for money. But it leaves the deeper problem unaddressed. There was a good case for petrol excise funding of the roads when administering Road User Charges across millions of petrol-powered vehicles was too difficult, and when congestion charging was even harder.

The world has moved on since then.

Funding transport through petrol excise hikes means that a poor family in the Far North driving a 1994 Toyota Emina subsidises richer Auckland commuters’ public transport. It is inequitable. And it is far less efficient than perfectly feasible alternatives.

But it is the kind of policy we get when we refuse to use prices. Could it be time to move transport into the 21st Century?

The taxing matter of outrageously high house prices
Dr Bryce Wilkinson | Senior Fellow |
Could changes in 1989 to New Zealand’s tax treatment of retirement savings plausibly explain a significant portion of the subsequent sharp rise in New Zealand house prices?

Andrew Coleman made the case that it could to a LEANZ audience in Wellington this week. He was careful not to argue that it did.

He said other relevant factors were operating. These included higher per capita incomes along with lower inflation and lower real interest rates. No one has been able to unscramble their effects empirically with meaningful precision.

The New Zealand Initiative has always emphasised in addition the role of restrictive land zoning. Rising land prices have contributed far more to house price inflation since 1989 than rising dwelling construction costs.

In support, I have pointed my finger at the Resource Management Act 1991. Its key feature is a strong bias against development and a constitutionally-disgraceful disrespect for property rights. Massive price differentials have been found across planning boundaries.

Coleman’s case that the change in retirement tax was potentially important is rigorously made in Motu Working Paper 17-09, May 2017.

Its starting point is 1989. The then government put the taxation of retirement savings on the same basis as the taxation of interest income. Previously it had been tax preferred, much like the tax treatment of owner-occupied housing.

An unintended effect was to induce New Zealanders to invest more in dwellings and less in retirement savings. Coleman calculates that this potentially increased desired house sizes by 25%. It also made it potentially worthwhile to pay roughly 50% more for a property in a desirable location than under a neutral tax system.

These are one-off effects. They don’t explain ongoing property price inflation. Coleman estimates that subsequent lower real interest rates could have increased real land values for properties in desirable locations by at least 60% since the 1990s.

No contending tax structure would have stopped such rises. Not even a capital gains tax.

Coleman laments the intergenerational inequity of the current situation, as does The Initiative.

There are many options for making tax system more neutral between capital investments. For example, taxes on owner-occupied housing could be increased or taxes on retirement savings reduced. He comments that retirement savings are commonly tax favoured in most OECD countries.

Coleman wants a more open-minded and better-informed tax debate about these tax structure choices. Commendably, he has led by example.

Memo to Russian spies in New Zealand
Joel Hernandez | Policy Analyst |
Memo to: FSB Spy Class 2018, Moscow (New Zealand posting)
From: Chief Instructor Disguise
Subject: Discoverability


For spies it is best not to be discovered. Discovery is never helpful. If people know that you are a spy searching for secrets to pass on to our Supreme Leader Vladimir, they will not be hugely enthusiastic in sharing them with you. Not even in friendly New Zealand.

So here is rule number one: At the airport do not declare that you are a spy. This is a good start to your espionage career. If they attempt to trick you with a crafty question such as “Who do you want to meet with in New Zealand?”, just reply that you are on a trade mission to see Winston Peters. This is eminently credible and will not arouse any suspicion.

Rule number two: When you leave the Russian Embassy in Messines Road, always use the back door. This way you can come and go without detection. The Kiwis probably do not even know there is a backdoor. And if discovered, just say you are on your way to visit Bill English. He lives just up the road.

Rule number three: Always have lunch at Café Pravda in Wellington. First of all the food is good (if not authentically Russian). But more so, spies meeting at Pravda would be so cliché that no one would ever suspect a real Russian spy to have coffee there. To underline the clichés, only drink White Russians or Moscow Mules. People will conclude you are just a wannabe KGB agent.

Rule number four: When in public, always wear your cone of silence and occasionally remove your right shoe and speak into it. It is helpful to flash an open briefcase from time to time showing a cheese-topped mince pie and an old copy of Penthouse. Seasoned observers will dismiss you as an anti-vegan extremist or an SIS operative.

Rule number five: Never, ever dine at Astoria. There are too many civil servants and politicians slumming it there, and chance meetings are seldom arranged or successful. Apart from that Astoria is so noisy you will not understand a thing. Not even what you said yourself.

Rule number six: There is no rule number six. Just forget about that.

From now on, every year we will declare our two embassy receptionists as spies to the New Zealand authorities as a goodwill gesture. This will trick them into thinking there are no other spies here.

As for the rest of us, see you at Pravda.

We welcome Joel Hernandez to our team. When he doesn't write Russian spy satires he works as an economist on the Initiative's data-heavy projects.

On The Record
All Things Considered
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  • Robots are coming for our jobs. Isn’t that great?
  • Why we need women in the military.
  • Is the U.S. economy still scarred by the past?
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