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Insights 29: 12 August 2022
The Dominion Post: Eric Crampton on blocking hospitals during pandemics
Podcast: Michael Johnston on improving our childrens' reading and writing
Newsroom: Oliver Hartwich on the leaders backstabbing NATO and the EU

First, get people into debt, then hammer them
Dr Bryce Wilkinson | Senior Fellow |
You load 16 tons and what do you get?
You get one day older and deeper in debt.
… I owe my soul to the company store

Those lyrics from a 1946 mining song lamented the plight of tough miners trapped by debt. Some householders today could be feeling similarly about their mortgage debt.

First, the Reserve Bank (RBNZ) encouraged banks to lend and people to borrow. It wanted faster inflation.

The response was terrific. Household new mortgage commitments in 2021 were a staggering $99 billion, 45% higher than the annual average during the previous five years.

Home buyers borrowed too much and paid too much. They feared missing out on rampant capital gains. CoreLogic estimates New Zealand house prices rose 50% between December 2019 and December 2021.

In 2021, 11,000 first-home buyers borrowed more than 80% of the value of their (over-priced) properties.

Now the RBNZ has shifted its policy foot from accelerator to brake. The average mortgage interest floating rate for new customers was 6.23% in July, 1.82 percentage points higher than in July 2021.

That would increase the annual interest cost of a $275,000 mortgage loan by $5,000. (Half of New Zealand households with a mortgage on their primary residence owed over $260,000 on their property in June 2021 according to Statistics New Zealand.)

In addition, Wellington house prices dropped 9.5 % in the first half of this year.  This is according to the Frank Knight Global Residential Cities Index. Auckland’s decline was 6.2%.

A journalist reported that hundreds of Wellington first-home buyers now owe more than what their property is now worth. That is believable.

There are some offsetting considerations.

First, higher interest rates are not inherently a national income loss, lenders benefit.

Second, unexpectedly high wage and price inflation benefits borrowers and hurts lenders ­provided interest rates do not rise faster than inflation.

Third, it is good that borrowing heavily to buy property is no longer seen as a one-way bet.

Fourth, Covid-response was a challenge – for almost everyone.

Regardless, the miners’ lament about debt traps resonates still. Whiplashing monetary policies have added a debt dimension to the regulatory morass that has crippled house supply.

Policies Promoting Electric Vehicles: Too Fast, too Furious?
Dr Dennis Wesselbaum | Adjunct Fellow |
Politicians are recently pushing for a large-scale adoption of battery electric vehicles (BEV; currently <1% of vehicles in NZ) to reduce the emissions generated by the transport sector.

The emissions reduction plan supports this with $1.2bn of spending, of which $569m are used for the “Clean Car Upgrade” programme. In addition, the government plans to ban importing high-emitting vehicles in the closer future. These policies imply that the government appears to have picked the “best” technology (BEVs) and now wants to implement it.

Of course, most additional policies are unnecessary with an Emissions Trading Scheme (ETS) in place.

However, even without an ETS, “cash-for-clunkers” programmes do not work. Evidence from the US shows that about 45 percent of the spending goes to people who would have purchased a new (cleaner) car, anyway. Importantly, the reduction in emissions is small and expensive (92-288 USD per ton of CO2). Further, car sales drop after the programme expires, offsetting the initial effect.

Driving BEVs is also not free of emissions: over its life cycle, an EV emits 33% fewer greenhouse gases and 93% less carbon monoxide than a comparable internal combustion engine vehicle. However, they emit 273% more sulphur oxide and 15% more fine particulate matter. Production and recycling of batteries have substantial environmental effects, including human toxicity and ecosystem effects.

A key factor is how the electricity required by BEVs is produced. Most OECD countries use a combination of fossil fuels, nuclear power, and renewable sources (solar and wind). Using this electricity mix, various recent studies show that BEVs only reduce emissions relative to diesel engines after about 200,000km.

It is not clear how the additional electricity required by millions of BEVs will be produced and distributed. If all the additional electricity is generated using renewable sources, it will have to be stored, because of the stochastic nature of production and demand. The inevitable gap will have to be produced by “traditional” sources. In New Zealand the situation is better, where most of the electricity is produced by “green” technologies. The question is whether renewable energy sources will be sufficient to meet the increased demand.

Due to these concerns, the need to change customer behaviour (charging, planning of long-run trips, battery replacement), and the ethical and socio-economic implications of mining the required elements, I doubt BEVs are the future. The market, not politicians, should lead us to the best technology.

Political psychoanalysis
Dr Michael Johnston | Senior Fellow |
The world is in a mess.

According to psychoanalyst Carl Jung, that’s because human psychology is messy. What’s worse, we usually lack the self-awareness to prevent our inner messes from spilling out all over the place.

Jung warned that “whatever is rejected from the self appears in the world as an event”. Psychologists call this projection. It happens because of an all-too-human tendency to see our flaws in others but to be blind to them in ourselves. Pots call kettles black – while calling themselves magenta.

We all project of course, but politicians seem especially susceptible.

After losing the presidential election in 2016, Hillary Clinton embarked on a monumental sulk. Understandable, considering the guy she lost to. But, in a recent bout of classic projection, Clinton accused eminent jurist Clarence Thomas of being ‘a person of grievance’.

Speaking of the guy she lost to, Clinton was repeatedly called a liar by none other than Trump himself.  Go figure.

Jung also observed that successful people often overestimate their own greatness. He called this ego inflation. We might call it believing one’s own hype.

There are exceptions. Second-century Roman emperor Marcus Aurelius was very successful. Not only is he remembered as one of the best emperors Rome ever had, but he was really good at philosophy as well.

Despite his many talents though, Marcus was well aware of his human failings. They say that anyone who desires power should get nowhere near it.  If that’s true, Marcus was an ideal emperor. When nominated as Hadrian's successor, he responded with sadness and reluctance.

In his Meditations, Marcus Aurelius admonished readers to ask themselves, “what fault of mine most resembles the one I am about to criticise?” Good advice to anyone as an antidote to psychological projection – and brilliant advice to politicians.

Today’s politics is akin to reality television, with politicians treated as celebrities. This is not an environment in which a latter-day Marcus Aurelius would thrive. Rather, it favours those who never delve too deeply into the ugly reality of their own motives.

As a consequence of projection, fearful and envious politicians pursue policies that appeal to the fear and envy of voters. Their inflated egos enable them sincerely to believe that these policies are ‘protecting the vulnerable’ or ‘helping those in need’. Lacking self-awareness, celebrity politicians wreak mayhem on their countries with the approval of their own consciences.

Yes, the world is in a mess – and politics even more so.

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