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Insights 3: 8 February 2019
Read: Movers, Shakers and Policy Makers - EducationHQ interviews Briar Lipson
 
Latest report: KiwiBuild - Twyford’s Tar Baby
 
Read: Roger Partridge in the NBR on how the Reserve Bank ruckus exposes governance shortcomings

Making KiwiBuild work
Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz
Anybody even remotely connected with housing, housing research, the building industry – or with the ability to fog a mirror by breathing on it – had to know it was near-impossible for the government to meet its KiwiBuild promises on its 10-year schedule.

Our current planning rules, infrastructure financing mechanisms, building materials supply regulations, council incentives, zoning, training of construction workers, rules around letting more construction workers into the country, rules around foreign builders being able to build here, rules around foreign financing of building projects, Resource Management Act processes – all of it made any non-trivial KiwiBuild impossible. The government always could decide to put a KiwiBuild label on houses that were to be built anyway, but that would hardly solve the housing crisis.

More fundamental reform is needed if KiwiBuild is to work.

Think of it as a bike path through the woods with a hundred large tree branches spanning the path at chest-level. Trimming the first couple of branches out of the way – the ones that everyone can easily see – will not be enough. The riders will just hit the next branches instead.

Any serious attempt to clear the path would have to address the blockages that led to the housing shortage in the first place – requiring a fair bit of policy work before any government building programme could even get going.

And any non-serious attempt focused on the short-term targets would displace private construction while diverting the attention of the competent officials who really need to be putting their time to clearing the rest of the path.

Last February, I argued for forgiving the government for missing KiwiBuild deadlines if it were focusing its attention on the barriers preventing either state or private housing from being built.

The past couple of weeks suggest folks are not in a forgiving mood. And that can encourage government to grasp at policies that might make it easier to hit short-term targets rather than meet the longer-term goal of a housing market consistently able to deliver new housing to meet demand.

Prioritising compulsory acquisition powers for KiwiBuild over the rest of the Urban Growth Agenda is not encouraging. At least if we think voters wanted to make housing affordable again rather than hit targets for houses with a KiwiBuild label on them.

Excessive soundness is unsound
Roger Partridge | Chairman | roger.partridge@nzinitiative.org.nz
Readers will be familiar with that exasperating feeling of looking for something and not finding it. You know it should be there, but it is missing.

This feeling may ring a bell with anyone reading the Reserve Bank’s consultation paper, Capital Review Paper 4. Released on 14 December, the paper contains radical proposals to almost double bank capital requirements. The objective is to reduce the risk of bank failure to once every 200 years.

The proposals are unprecedented in the developed world. And they will have profound implications for all New Zealanders. UBS, a global investment bank, suggests the proposals could increase borrowing costs for New Zealanders by 80 to 125 basis points – or cause rationing of credit. The Reserve Bank itself acknowledges the changes will adversely affect GDP.

The consultation document is long – 59 pages in total. But reading the paper, something critical is missing. Despite the adverse consequences of the proposals, nowhere in the paper is a detailed evaluation of the costs and benefits of the proposed 1-in-200-year target.

Indeed, the closest the paper comes to providing any evidence for the target is a footnote explaining that a 0.5% annual risk tolerance is embedded in insurance solvency standards across Europe. But that hardly justifies imposing the costs of the Reserve Bank’s proposals on New Zealanders.

Cost-benefit analysis is a critical tool for regulatory decision-making. And it is enshrined in the Cabinet Manual. The Government Statement on Regulation states that government agencies must satisfy themselves that the benefits of proposed action not only exceed the costs but also deliver the highest net benefit of all practical regulatory options.

Yet, it appears our central bank does not think it needs a cost-benefit justification for its new target. But if 1-in-200 years is less risky than the status quo, why not 1-in-400? Or 1-in-1000? Alternatively, why not only 1-in-50?

The arbitrary target demonstrates the Reserve Bank has overlooked something. It cannot sensibly assess appropriate risk tolerances without assessing the impacts – both costs and benefits.

The Bank’s statutory duty is to “promote and maintain a sound and efficient financial system”. Soundness and efficiency are related. But soundness is an attribute of an efficient financial system, not an objective to be pursued at any cost. Like other forms of safety, it should only be pursued to the extent the benefits exceed the costs.  

Before its proposals harm us all, the Reserve Bank needs to rediscover what it has overlooked – its own efficiency objective.

You can read our submission on Phase 2 of the Reserve Bank of New Zealand Act Review here

Pecunia non olet (money doesn't stink)
Dr Patrick Carvalho | Research Fellow | patrick.carvalho@nzinitiative.org.nz
Some would say politics stinks. Others…would say that too.

In Ancient Rome, for instance, Emperor Vespasian decided to impose a tax on urine collected in public toilets. The stinky commodity was widely commercialised, with the Romans using it to create a wide range of products – from mouthwash to laundry detergent.

Disgusting, eh?

That’s precisely what the Emperor’s son told his father about the urine tax. In reply, the Emperor gave his son a gold coin and told him to smell it.

“Are you offended by the smell of this coin?” asked the Emperor.

“No. Why would I be?” replied the son.

“Well, that comes from urine!”

Fast forward to the 21st century, where the latest US government shutdown showed the world an equally stinky example of odoriferous politics.

Indeed, after five weeks of impasse, things started to smell something bad for American politicians.

Literally. The stench of uncollected garbage in front of the White House and Capitol Hill was simply too strong to ignore – even for seasoned politicians.

Who knows, maybe the malodorous state of the nation’s capital was the real reason for politicians succumbing to a temporary ceasefire.

As an insider confided in me, “Whether we were getting the wall or not, both sides of politics agreed that someone had to clean the mess.”

And by mess, the anonymous source meant someone had to wipe away the toilet stains in the Oval Office. 

Dirty politics, as they say.

Getting someone to clean the sleaze and slime, the gunk and gook in Washington, D.C. is precisely what caused the current political stalemate.

Most Americans are unwilling to cleanse the dirt that sustains the American way of life. (And Americans produce a lot of rubbish, mind you.)

Young millennials find cleaning gross. Well-off professionals prefer paying for it. Baby boomers want it done for them.  

But migrants, particularly the undocumented ones, do it for a living. They are the ones cleaning America’s dirt – and could very well be the ones building the wall to keep the aliens out.

That is the festering irony behind the big-and-beautiful wall.

Money may not stink but politics certainly does.
 
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