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Insights 07: 4 March 2016
Poorly Understood: The state of poverty in New Zealand
 
Dr Oliver Hartwich and Roger Partridge discuss Brexit
 
Three things you need to know about our latest report, Poorly Understood

Runway competition and entrepreneurship
Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz
When businesses make investment decisions, they should make them on their own. Taking risks and reaping the rewards: that is what entrepreneurship is all about.

What companies should not do is make decisions and expect others to pay for them. Nor should they seek to stop other players from pursuing their plans. Neither is compatible with the idea of competition.

Competition and entrepreneurship: These are the cornerstones of the market economy.

In such generality, hardly anyone would disagree with this proposition. It gets more complicated when we talk about real life examples. Wellington Airport’s runway extension comes to mind.

The proposal would allow larger planes to fly to the capital. This could open routes to new destinations, particularly in Asia.

The question about the airport expansion should be simple: Will increased international traffic justify a $300m investment? 

As such, it is a normal investment decision. Businesses have to make such calls all the time. Companies need to determine if the extra revenue is larger than the extra cost.

Why should it be any different for Wellington Airport? Because its owners claims that the extension will also benefit the city. Yet that hardly justifies a public subsidy.

Plenty of things that companies do have spill-over benefits. Car manufacturers increase mobility. Farmers keep the population healthy. Newspapers lead to better informed debates (at times).

The existence of public benefits is not a good enough argument for a subsidy. It is for companies to figure out how to capture some of these benefits.

The airport’s owners should be good entrepreneurs. They should accept the risk that comes with their investment. They should not ask anyone else to underwrite it or prop it up.

Other airports and airlines, meanwhile, should be good competitors. They should let Wellington Airport reach its decision on the extension on its own. 

Of course, existing airlines using the airport should not have to pay for the extension. Their existing landing fees should stay the same. They should not pay for their new competitors’ ability to fly to Wellington. Nor should they be able to stop them from doing so.

Put in such simple terms, the runway extension is not a big political conundrum.

Competition and entrepreneurship: This is how economies grow. This is how markets develop. This is how they best serve consumers.

Let’s hope the decision about the runway extension will be based on sound economic principles.


Playing Grinch on minimum wages
Roger Partridge | Chairman | roger.partridge@nzinitiative.org.nz
The festive season is well behind us, but this week I feel like the Grinch who stole Christmas.
 
Like the Yuletide, this strikes annually. It coincides with the Government’s annual review of the minimum wage. 
 
Last year’s review saw the adult minimum wage increase from $14.25 to $14.75. Monday’s announcement was for a further 50 cent rise to $15.25.
 
Though a 3.3% rise, it is hardly a princely sum. Indeed, $15.25 is more than 20% lower than the $19.80 an hour advocated by the living wage movement. That rate is calculated through research carried out by the Family Centre’s social policy research unit. The Centre says the living wage is intended to enable workers and their families to earn an income that allows them “not just to survive, but participate in society”.
 
No one could be against enabling New Zealand workers and their families to prosper. Indeed, at the Initiative, that is our mission: to develop and promote social and economic policies that will provide prosperity for all New Zealanders.
 
Unfortunately, it is not as simple as regulating the floor below which hourly wages may not go. If it were, why not lift the floor to the living wage, or even higher?
 
The problem is that labour markets operate like other markets. Lift the price charged and less is demanded. A higher wage is good for those who have jobs. But what about those whose employers can no longer afford them? Or worse still, who have not yet persuaded an employer they are worth taking on?
 
The workers at the margins in New Zealand tend to be young and unskilled. Increasing the hurdle they have to overcome to persuade an employer to take them on does them no favours. To the contrary, it deprives them of the right to sell their labour for what its worth. And shutting this cohort out of the workforce increases their risk of long-term welfare dependency.
 
The position is exacerbated because the minimum wage in New Zealand is already relatively high. Indeed, at 67% of the median wage, New Zealand’s minimum wage ranks among the highest in the OECD.
 
Jobseeker Support for an 18-year-old in 2016 is $156.51 gross per week. That equates to a little under $4.00 an hour. 
 
A policy that makes it harder for our most vulnerable to move from $4.00 an hour to earn an hourly wage, let alone a living wage, hardly seems like the Christmas spirit.


Apology to Bob Jones
Dr Eric Crampton | Head of Research | eric.crampton@nzinitiative.org.nz
Last week’s column reckoned that Sir Robert Jones’s economic impact assessment tallying the merits of a five kilometre high statue of Gareth Morgan was sounder than rather a few economic impact assessments.
 
The case for the statue is especially strong where the construction costs would be borne by the population of North Korea. Economic impact reports will typically ignore costs incurred by those outside of the evaluation. And so the costs borne by poor North Koreans in helping to fund the thing are out of scope.
 
But the column may have left readers with the wrong assessment of Sir Robert’s intent. It said that the proposal was “presumably tongue-in-cheek”.
 
We have been informed otherwise. And lest the record stand in error, here is Sir Robert’s letter in its entirety. But note that we have not independently verified the claims.
 
Dear Dr Crampton,
 
Your report on the long overdue Morgan statue has been shown to me.  Plainly there has been a misunderstanding.  It most certainly was not a “tongue in cheek” proposal.  The widespread affection and admiration for Mr Morgan demands nothing less.
 
For example, indicative of the emotion stirred by this announcement, the chief Ombudsman Mr Peter Boshier, has generously offered himself as a ceremonial human sacrifice when the foundation stone is laid.  He won’t take no for an answer.
 
As for the difficulties you describe there’s a simple solution, namely ask Mr Morgan.  I gather that following imminent publication of his next two books (“Why Einstein’s Theory of Relativity Is Wrong” and “The Cure for Cancer”) written simultaneously, a pen in each hand, Mr Morgan will then be available to address your concerns.
 
I hope this is helpful.
 
Yours sincerely,
Sir Robert Jones

 
As an evidence-based think-tank, we welcome this clarifying feedback. We also thank Sir Robert for assuring us that this corrective mitigates any libel risk we might have faced in suggesting he may have spoken with tongue in cheek.
 
I will perform the necessary corrective purification rituals before the statue on its construction. It would not hurt me, I expect, to gather a few laurel leaves.
 
As my first penitential offering, I note that Morgan was dead right in last week’s NBR about the importance of spending scarce conservation dollars carefully.
 
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