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Insights 1: 29 January 2021
Dominion Post: Eric Crampton on why policy choices are to blame for high inflation
Podcast: Matt Burgess on climate change policy
NZ Herald: Leonard Hong outlines why the housing shortage is even worse than you had thought

Budgeting analysis
Dr Oliver Hartwich | Executive Director |
This week, Stuff’s Thomas Coughlan uncovered an extraordinary story of last-minute heroics by officials who demanded good practice on an important decision.

As Cabinet prepared to make its final decision on the proposed Auckland light rail project in February 2020, Treasury intervened. Their objection was this: after two years of planning, for a $10 billion project, nobody had done a cost-benefit analysis.

Treasury suggested postponing the decision until the ‘value-for-money’ case had been made.

Covid-19 further delayed the decision before New Zealand First finally killed the project.

The story reveals an astonishing disregard for costs and benefits, especially given the large sums involved.

Cost-benefit analysis, often loathed by Ministers, serves the public interest. It puts an onus on officials to show a project can plausibly deliver tangible and intangible benefits which are large enough to justify costs.

It is not uncommon for analysis to reveal projects which would cost many times more than their benefits.

Nowhere is the risk of lopsided costs and benefits greater than emissions policies.

On Sunday, we will learn whether the Climate Change Commission sees value in cost-benefit analysis when it presents its long-awaited carbon budgets. The budgets will chart this country’s course to lower emissions over the next 15 years.

The Commission’s recommendations will have even greater ambition and reach than Auckland’s light rail, affecting every person and every business in New Zealand.

What chance the Climate Commission’s proposals stack up against conventional cost-benefit analysis?

An area likely to command the Commission’s attention is transport, which produces 20% of New Zealand’s emissions.

The Commission is likely to recommend the country’s vehicle fleet transitions off fossil fuels to alternatives, mainly electricity.

That transition, if it is recommended, will not come cheap. At a conference late last year, the Commission’s chairman Dr Rod Carr anticipated a potential cost “well over $100 billion in the next 25 years”.

The Commission may also recommend emissions standards, restrictions on imports of certain vehicle types, or vehicle usage restrictions.

Whatever the Commission proposes, its recommendations will have substantial direct and indirect costs which can be justified only by lower emissions.

Anyone who cares for effective climate change action should care for cost-benefit analysis. Such analysis can reveal how to get the biggest emissions reduction bang for our buck. Of course, this must also include whether the proposed measures are compatible with New Zealand’s Emissions Trading Scheme. Or, indeed, whether buying and retiring ETS credits would be more effective than some of the measures considered.

Yet such analysis likely will not feature in the Commission’s proposals. In their public statements, the Commission’s chair and staff have repeatedly said their advice would be a “direction of travel.” Cost-benefit analysis will come later when departments write the black-letter laws.

The problem is twofold. First, departments no longer routinely do cost-benefit analysis, as the Auckland light rail case shows. If the Commission does not do the analysis, it is possible nobody else will. Second, the Climate Change Minister has said he will accept whatever the Commission gives him. Given this, the Commission should have at least a rough idea about the efficiency of those policies.

Even if its proposals are only in principle, the Commission cannot wash its hands of the responsibility to check its conclusions when it knows nobody else will do an analysis before the government commitment becomes final.

The Commission’s predecessor, the Interim Climate Change Committee, set a useful precedent by backing its advice on the electricity sector with high-quality analysis.

Will the Commission use analysis to support its proposals, demonstrating the emissions benefits of their ideas? Or will the Commission merely repeat the Auckland light rail non-analysis? We must wait for the Commissions release on Sunday to find out.

Build for the Future
Leonard Hong | Research Assistant |
Everyone knows that the status quo with respect to housing is “unsustainable”. The Prime Minister now seems to recognise the need for fundamental change and the opposition has recently offered to work with the government to find non-partisan solutions. 

While many people in the public assume that a key driver of house price growth is migration, recent trends show that even without migration, rapid house price inflation can occur.

Because of Covid-19, the government closed the border for international travel early last year. As a result, monthly net migration was close to zero for most of 2020. Nevertheless, over the last year, both rents and housing costs increased by 12% and 20%, respectively.  

Migration is only one part of the story. A myriad of factors contribute to housing dynamics in both the short and long-run, but not all of these receive equal attention.

Discussion of the effects of demographic change and an ageing population on our housing markets is limited. Yet, these drivers are also set to contribute to our housing woes over the coming decades, especially if housing supply does not respond. That is because ageing populations require more homes for the same number of people.

For instance, when the typical group of a hundred people consists of 20 couples, each with two young kids, and ten retired couples, those hundred people fall into thirty households. Thirty homes might be needed. When the hundred instead are 15 couples with two kids each, and 20 retired couples, 35 homes might instead be needed.

In New Zealand, the average household size has fallen from 3.2 in the 1970s to 2.6 in 2020 (like other OECD countries). According to Statistics New Zealand’s projections, it could fall even further in the next two decades or less.

So, are we gearing up to build the additional housing that our changing demographics require?

Policies that target land supply and infrastructure bottlenecks are key. However, the asymmetry of political and economic incentives between councils and the government has created a frustrating gridlock.

Growth and economic expansion in areas bring little revenue to councils but impose upfront infrastructure costs, such as water pipelines. This adds to councils’ reluctance to free up land for development.

Restrictions on density further add to housing supply issues.

The housing market is bad enough already, even without considering the effects of demographic change that will only worsen the problem. The government’s proposed policy responses must address the root of the problem rather than tinkering around the edges.

Puke Ariki and the mothers of invention
Dr Eric Crampton | Chief Economist |
It’s comforting to think that necessity is the mother of invention. By that account, come the time, the inventor will rise, and problems will be solved.

Historian of Innovation Anton Howes has been studying the backgrounds and lives of some 1,500 inventors, over three centuries of the industrial revolution. He suggests that necessity cannot be the mother of invention, because necessity has always been with us. Necessity instead provides the problems to which inventors apply their skills – if any are around. If no one of an inventive disposition is to hand, hard problems can remain unsolved for a long time.

Dr Howes points to the innovative culture inventors built as having been vital. Inventors and innovators met with each other, formed societies to encourage invention and innovation, and awarded prizes for great inventions.

The best predictor of whether someone becomes an inventor is not whether there are hard problems at hand to solve; the world is always filled with hard problems. Instead, Dr Howes finds that being exposed to other inventors seems crucially important for future inventors. Some 83% of the inventors in his three-hundred-year sample had met other inventors before they had invented anything themselves, and Howes suspects he does not know enough about the other 17%.

Seeing inventors and innovators helps build an inventive mentality that sees problems as opportunities for making the world a better place. He speculates that exposing more people to the culture of invention and innovation, celebrating inventiveness and discovery, could help in building future inventors.

Other barriers, including regulation, can also stymie invention. But having more inventors makes invention more likely.

During this summer holiday tour of Wellington’s greater backyard, our family visited New Plymouth’s superb museum, Puke Ariki. And we discovered something wonderful: a venue that celebrated innovation and discovery rather than problematising it.

The museum highlighted the achievements of local inventors who applied their skills to the problems at hand. Better haying equipment, butter presses, mining drills, and even the first farm bike. It was coupled with old footage of the inventors and conversations with those who knew them and who testified to their inventiveness.

Necessity is constant. The culture of invention that overcomes necessity needs not be taken for granted.

Take the trip to Puke Ariki and bring your kids. Future inventions may need a mother.

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