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Insights 1: 25 January 2019
Watch: Bryce Wilkinson discusses his new KiwiBuild report on TVNZ Breakfast
Read: Briar Lipson questions in the NZ Herald recommendations made by the Tomorrow's Schools taskforce
New report: KiwiBuild - Twyford’s Tar Baby

The poverty of inequality reports
Dr Eric Crampton | Chief Economist |
Everything has its season. The slow January news period brings Oxfam’s annual condemnation of wealth inequality and calls for redistribution. And every January, economists go through their figures to show that, once again, Oxfam has played fast and loose with the numbers.

Oxfam combined Credit Suisse data on the decline in wealth for New Zealand’s least wealthy with Forbes data on the only two Kiwis who made it onto the Forbes list of billionaires. Oxfam presented the difference as a growing gap between rich and poor.

Oxfam’s analysis is riddled with problems. Let us consider the most obvious one.

Credit Suisse’s 2018 report on global wealth, which formed the basis for Oxfam’s work, showed that wealth in New Zealand became somewhat more equally distributed over the prior year, not less. The Gini coefficient is a standard inequality measure. Credit Suisse’s reports show that New Zealand’s wealth inequality declined from last year’s 72.3 Gini points to this year’s 70.8 Gini points. We are positioned midway between France and Canada.

The Credit Suisse report showed that while the least wealthy New Zealanders did see a drop in wealth, so too did richer Kiwis. Wealth dropped across the board according to their measure – the two billionaires aside. Why? Wealth is measured in US dollars, and the exchange rate dropped. The reduction in wealth, measured in US dollars, affected all parts of the income distribution.

New Zealand was even listed among the countries with the largest drops in the number of people in the world’s wealthiest 1% – 20,000 fewer of us are in that group. But we remain a very wealthy place. New Zealanders remain strongly over-represented among the world’s wealthiest 10%, 5% and 1%.

We can perhaps forgive the Dominion Post’s Tom Hunt for playing along with Oxfam in a front-page story on the report headlined, “Rich richer, poor poorer”. A lot of news outlets presented similar stories, and none of them bothered to check the data. More accurate headlines might have read “Fewer Kiwis among the wealthy global elite – and wealth inequality is down too”, or “New Zealand is poorer (but it’s mostly currency movements)”, or even “All things considered, New Zealanders are pretty wealthy”.

It is also the season in which we expect the final report of the Tax Working Group, and a government response. We hope both are somewhat less credulous than New Zealand’s reporters.

The pretentious nonsense that is KiwiBuild
Dr Bryce Wilkinson | Senior Fellow |
KiwiBuild – the government programme to build or deliver 100,000 homes in 10 years – serves no useful public interest purpose and promises to endlessly distract and embarrass the government.

That is the signal conclusion of KiwiBuild: Twyford’s Tar Baby, a research note released this week by The New Zealand Initiative.

The programme does not directly help those on low incomes; only the relatively well-off can afford KiwiBuild homes.

To subsidise such people would be unfair. That is why the Housing Minister has had to assert there will be no subsidy.

Yet to sell at below market value is to see taxpayers subsidise the purchaser. The very decision to allocate by ballot rather than by auction indicates Labour’s willingness to subsidise.

Other indicators of an implicit subsidy are the eligibility restrictions on potential purchasers and the resale restrictions and capital gains claw-back provisions.

At the heart of these contradictions is the fact that private developers exist to meet unsubsidised demand. Neither they nor unsubsidised buyers need KiwiBuild. The most likely reason they are participating in KiwiBuild is that the government is providing each side with an unpriced financial inducement at taxpayers’ expense.

Labour’s dilemma over the subsidy issue is heightened by its relatively weak incentive and ability to meet people’s needs as to types, designs and locations at unsubsidised cost. The risk to taxpayers is that it will commission homes that cannot be sold even at the posted price. The unsold KiwiBuild homes in Wanaka illustrate the reality of that risk.

The government’s commitment to a programme with such deep contradictions promises to endlessly embarrass it. If it has to ballot, the implied subsidy is inequitable; if it commissions homes that are unsold at cost, it loses face.

Both the government’s hands are stuck to this tar baby.

Our research note also explains why KiwiBuild is unlikely to materially meet its intended objectives of increasing the home ownership proportion or add permanently to the housing stock.

The ongoing political and public sector resources needed to manage KiwiBuild’s risks and shortcomings represent a massive distraction from what is needed – decisive action to increase land supply for residential housing (upwards and outwards) and to reduce construction costs.

Other aspects of the government’s housing policies are better directed in this respect, but the need is to see real progress on these fronts. The KiwiBuild distraction does not help.

Kia Ora New Zealand
Dr Patrick Carvalho | Research Fellow |
Being the most recent addition to the New Zealand Initiative research team, I would like to briefly introduce myself. My name is Patrick – also known more commonly in some social interactions as the “Father of Liz” or the “Husband of Julia”. I am originally from Brazil but have also lived and worked in Australia and the United States.

From a public policy perspective, I have been fortunate enough to closely examine a range of social experiments in different societies and the idiosyncratic rules they abide by. Interestingly, in my experience, quite often allegedly righteous and morally superior policies tended to produce the greatest devastating effects.

As a trained economist, I am always looking for potential pitfalls of unintended consequences in supposedly well-intentioned policies. In the words of Nobel-laureate Milton Friedman, “one of the great mistakes is to judge policies and programs by their intentions rather than their results”.

In short, incentives matter, and these are determined by the rules of the (policy framework) game.

In Brazil, for instance, I was a vocal opponent of the government’s price controls on energy, including petrol, which according to the official storyline were designed to thwart inflationary pressures but had precisely the opposite effect. In Australia, a same-same-but-different type of price controls on labour costs designed to sustain wages and benefit the working poor and middle class was in effect crippling the job market chances of the most vulnerable in society. In the United States, unfunded public state pension promises – based solely on overoptimistic actuarial assumptions – led to frustrating policy reversals in recent years, with many more required painful adjustments yet to come.

In all these international cases, supposedly well-intentioned policies simply did not produce the intended results. Although superficially different, they all equally ignored the correct market incentives to fix the problem.

Having said that, I consider myself even more fortunate for being welcomed at The New Zealand Initiative. It is encouraging to be part of an organisation guided by a diligent commitment to policy prescriptions that are logic-driven, evidence-based and outcome-focused.

I am also excited to be in New Zealand, where Julia and little Liz will soon join me to call home. I look forward to exploring the amazing natural landscapes here with the family, as well as contributing to better public policies.

Kia ora Insights readers, it is a real pleasure to meet you.
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