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Insights 26: 23 July 2021
NZ Herald: Matt Burgess says the "ute tax" will not cut emissions
Podcast: Graham Rich, a Kiwi entrepreneur in Sydney, talks Covid, charity and life in challenging times
Newsroom: Eric Crampton on bringing heritage protection onto the balance sheet

Penny wise, pound foolish
Dr Eric Crampton | Chief Economist |
The government allocated $50 billion in Budget 2020 to deal with the pandemic - on top of the $12.1 billion already allocated. We were going to spend what was needed for a strong public health response.

And, somehow, we managed to fail to order vaccines in time. The first orders for the Pfizer vaccine were not made until late January 2021.

It is difficult to understand how this happened.

Ordering vaccines while they are still in development may not be simple, but it seems far simpler than most other parts of the pandemic response.

The strategy in July 2020 should have been obvious. Buy a giant portfolio of vaccines for everyone while they are still in development, knowing some will fail to pan out at all. Pay for early delivery up front or guarantee payment for early delivery. Ask MedSafe to begin investigating each of the ordered vaccines. Administer the vaccine that best suits our needs, on its being approved, while passing other effective vaccines on for others to use.

It would be hard to claim that this kind of rush delivery order would be unkind to other countries. We would be giving other countries multiple vaccines for each course administered here at home. Early guaranteed orders from richer countries help build the capacity that gets the whole world vaccinated.

If the government had spent $30 per course of vaccines for each of eight different vaccine candidates in July 2020, it still would have cost less than 10 percent of what the government had spent on wage subsidies at that point. It would be a bargain at twice the price.

As of 17 December 2020, the government had secured pre-purchase agreements for four vaccines, including ample doses of Janssen, Novavax, and AstraZeneca. We do not know what delivery timetables were negotiated.

But they only secured pre-purchase agreement for 750,000 courses of the Pfizer vaccine they ultimately decided to use.

And they waited until MedSafe approval was imminent before making the first small order for the Pfizer vaccine, rather than getting orders in ahead of time. By the time we made that order, Israel had already delivered Pfizer doses to about 30 percent of its population.

It is a failure that we hope is not repeated.

Pfizer is developing a new Delta-variant vaccine. If we are not getting orders in right now, we risk being at the back of the next queue.

A thief in your wallet
Dr David Law | Senior Fellow |
Inflation numbers for the June quarter are out. The Consumer Price Index (CPI) rose by 3.3% in the year to June. That is much higher than forecast, overshooting the Reserve Bank’s 1-3% target range.

Inflation is a big problem. It erodes the purchasing power of money and distorts many savings and investment decisions. Perhaps worst of all, if you do not get pay rises to match, you will see your pay packet fall in real terms.

Even if the RBNZ acts swiftly, it may be too late. Monetary policy takes time to work on inflation and the Government is not exactly making the job easier – showing no signs of easing up on spending any time soon. Expect a few more high inflation numbers yet. 

To be safe, maybe we should prepare for a world with persistent inflation. We could start by lending a hand to prospective homeowners. They have suffered enough with 30% house price growth this year.

Inflation can have a substantial negative effect on housing affordability. It results in ‘front-loading’ of mortgage repayments. In real terms, principal repayments are higher during the early stages of home ownership – $100 today is worth more than $100 in 30 years. The issue is known as mortgage-tilt. 

Price level adjusted mortgages (PLAMs) can help – a debt contract that links dollar repayments to a price index, usually the CPI. Compared to a conventional mortgage, repayments are lower during the early years of the mortgage and higher during later years. This difference is important as incomes typically increase over time.

PLAMs have been widely available in countries such as Iceland and Chile and were even introduced in Denmark during a period of high inflation.

With a real interest rate of 4% and inflation of 3%, for example, initial monthly repayments are around 25% less for a PLAM than a conventional mortgage. The difference is more pronounced the higher the inflation rate.

A few years back when analysing housing affordability using the Survey of Family Income and Employment (SoFIE) I built a model of affordability based on people’s incomes, assets, and the type of mortgage available. More people could afford to buy a home with PLAMs than conventional mortgages, without initial repayments exceeding a certain percentage of income.

There could be value in further investigating the implementation of price level adjusted mortgages.

However, I find myself reminded of a quote by German economist and former President of the Bundesbank Karl Otto Pöhl: “Inflation is like toothpaste. Once it is out, you can hardly get it back in again. So the best thing is not to squeeze too hard on the tube.”

It’s easy being green
Steen Videbeck | Research Fellow |
Two cars pull up to a traffic light.

One is a farmer in his trusty ute. It is covered in mud and wouldn’t look out of place in those classic ‘bugger’ TV ads.

The other is a new Tesla EV. Self-driving of course, allowing the driver to eat their organic smashed avocado on toast comfortably on the way to yoga.

So, which one is greener? The one belching smoke or the one that sounds like a futuristic sewing machine.

It is obvious, right? So obvious that you might even be tempted to slap a subsidy on one and put a tax, sorry ‘levy’, on the other.

But it turns out the answer is a bit counterintuitive.

They are the same. Yes, there is no difference in their contribution to New Zealand’s net emissions. Nada. Zilch.

But wait, how can that be?

And no, it’s not because the EV is plugged into the Huntly coal power station. You can plug it in anywhere you like.

It is because petrol is included in the Emissions Trading Scheme (ETS). So, the ute owner is paying their dues every time they fill up at the pump. As New Zealand’s emissions are capped, every unit of carbon they emit is one less unit that can be used somewhere else. The ute is as green as the EV.

So, no more looking down on the Westie Commodore (or Falcon) owners or the illegitimate Remuera Range Rover drivers. We are all in this together. No one is better. Yes, not even the person playing Candy Crush on the bus or the high-viz clad cyclist on their e-bike.

The beauty about the ETS is it allows people to make choices, rather than the powers that be imposing their preferences by banning things, ‘feebating’ things or levying things.

If your farm dog is struggling to balance on the roof of a Nissan Leaf, buy a ute. If you love the deep growl of a V8, buy one. Or alternatively, upgrade your EV with the optional synthetic soundscape recording of a V8 engine. It is your choice – completely guilt-free either way.

But what is the harm in the Government throwing other people’s money at EV subsidies? Simple, it’s unfair to penalise people who are already paying their fair share. And it won’t reduce emissions. Oh, and it is also regressive - taking from the poor and giving to the rich. In fact, it is hard to think of a more regressive policy. Well, maybe spending $685 million on a cycle harbour bridge to one of Auckland’s wealthiest neighbourhoods.

Wait, I am starting to see a pattern.

On The Record

Initiative Activities:
  • Podcast: Graham Rich - a Kiwi entrepreneur in Sydney
All Things Considered
  • Graph of the week: Population impact of NZ's border restrictions - monthly net migration  
  • Largely vaccinated countries are opening up to other largely vaccinated countries
  • Private banks expect inflation to go even higher
  • Canada launches dedicated refugee stream for human rights defenders
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