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Insights 41: 4 November 2022
Sunday Star Times: Eric Crampton on successive governments’ failure to inflation-index the tax bands
Podcast: Michael Johnston and James Kierstead with Jacob Mchangama on the global history of free speech
Newsroom: Oliver Hartwich on how Germany is continuing its China policy as if it were still 1999

Time for an Australian-style immigration reset
Roger Partridge | Senior Fellow & Chairman |
As 2022 draws to a close, it is clear the Government's May 2022 'Immigration reset' is not working.

Skills shortages and immigration settings remain at the top of chief executives' list of concerns in the Herald's recent Mood of the Boardroom survey. With almost daily reports of labour shortfalls in one industry or another, this should be no surprise.

Many factors are responsible for the reset’s failure. Constant tweaks to immigration settings have contributed to complexity and confusion for migrants and officials. The Government abandoning targets for processing visa applications has led to fewer decisions being made. Immigration NZ's antiquated legacy processes and teething problems with its new online systems have also played a role. And then there has been the Government’s clunky approach to dealing with pandemic-related backlogs.

Yet these issues are all symptoms rather than the cause. The root of the problem is the Government's distrust of immigration. It stems from a belief that productivity improvements will come from restricting the supply of migrant labour. Unfortunately, that belief is not founded on economic evidence. And it risks tarnishing our longstanding record as a favoured destination for skilled migrants.

The distrust also contrasts starkly with the new Labor Government's approach to immigration in Australia.

In her address at the Anthony Albanese-led "Jobs and Skills Summit" in September, Minister for Home Affairs Claire O'Neil declared, "Immigration is one of the biggest levers we have to drive our country forward, and it is fast, and it is powerful."

O'Neil promised her Government would switch from a system focussed almost entirely on keeping people out to one that "recognises that Australia is in a global competition for talent."

"[F]or the first time in our history, Australia is not the destination of choice for many of the world's skilled migrants," she said.

O'Neil described Australia's migration system as "fiendishly complex" with "multiple skilled occupation lists… and an outdated visa processing system that is anything but fit for purpose."

If this sounds all too familiar, the Minister's prescription was anything but. O'Neill promised, "A simple, fast system that's easy for businesses, big and small, and for migrants, to use."

As New Zealand firms and workers battle rising interest rates, a cost of living crisis and geopolitical uncertainty, it is time our Government ended the self-inflicted harm of restrictive immigration settings.

Here's to a Labor Australia-style immigration reset.

To save our cities, ask urban economists
Dr Oliver Hartwich | Executive Director |
Last week, I wrote about why New Zealand’s cities are shrinking – and why that is a cause of concern. 

Cities have always been engines of prosperity. Bringing people together makes them more productive. Economists refer to this phenomenon as ‘agglomeration effects’.  

In a classic 1994 paper, Ed Glaeser found that urban workers earn a third more than their rural counterparts. The reason? City workers learn from one another and thereby improve their abilities. In economic parlance, cities promote the accumulation of human capital. 

This effect is one of the many ways in which cities create opportunity. They also do so because of the competitive environment they create.  

When there is only one bakery in a village, the baker will have a great deal of market power. It is a different story in a city where pastries are available at every corner. It also means consumers will have more choices. 

Cities make doing business easier. You can conveniently outsource parts of your work when your supplier is nearby. Or, in econ jargon, cities reduce transaction costs. 

Well-functioning cities should mean higher real wages for workers and better entertainment options. So why are New Zealand’s cities shrinking? 

Our cities just do not seem to be working well and that comes down to poor policy decisions. 

Without congestion charging and good transport options, cities lose some of agglomeration’s benefits. Glaeser says cities are where ideas get together and have procreate, making new and better ideas. But if the people with those ideas are stuck in traffic, the magic just does not happen. 

When zoning and consenting make it too hard to build in places where people want to live, work and play, land prices inflate in surprising ways. Turning inner suburbs into museum pieces blocks the dynamic change that lets cities thrive. And banning new subdivisions at the city’s fringes makes the land under downtown apartments more expensive than it should be.   

Once again, economists explain how to keep urban land markets working. Councils need incentives to zone ample land for development. It is vital to finance infrastructure well. Then zoning will not introduce artificial scarcity. More competitive land markets unleash opportunities.   

Urban economists have explained why cities are important. They have also told us how to make them work better. 

Now we just need politicians, bureaucrats and city planners to listen to them. 

The Reserve Bank’s Frog-Exaggerator
Dr Eric Crampton | Chief Economist |
In a classic Simpsons episode, the gang went out looking for the Loch Ness Monster. Professor Frink turned on his scanning scope. He watched the gauge.

Then, with horror, he announced: “Oh, my great, good God. Gentlemen, your attention, please. I am detecting a gigantic amphibious life-form. It’s 80 meters long and it’s heading this way.”

A frog hopped out of the Loch and onto his shoe.

Then Professor Frink realised that he hadn’t been using his Monster-Ometer. He’d turned on the Frog-Exaggerator.

A Reserve Bank press release this week warned, “Climate change stress test highlights flooding risks”. The first paragraph cautioned that river and surface water flooding “may pose an even greater risk to bank residential mortgage portfolios than coastal flooding.”

Professor Frink was at least embarrassed about having used the wrong machine. He didn’t write press releases emphasising the large size of the frog that had jumped onto his shoe.

Because if you read through the report, it looks like RBNZ has been using its frog-exaggerator for climate risk to the financial system. Again.

The Bank assessed how many mortgaged properties might be affected by flooding by 2100, if sea levels rise by a metre, a 1-in-100-year event happens, and if banks do not change their lending practices.

Almost 4% of mortgaged properties will be in the flood-zone of a 1-in-100-year storm tide that happens on top of a one-metre sea level rise.

In Auckland, more than a quarter of mortgaged properties touch at least some small part of river flood zones.

Really, the numbers are a lot smaller than we might have expected.

But more importantly, and as the Bank’s report later points out, a heck of a lot can happen between now and 2100. Almost no loans are for more than 30 years and 80% of current mortgages in these flood-zones have low loan-to-value ratios. Defaults are unlikely.

There is substantial risk of sea level rise over the coming century, but banks aren’t stupid. Most mortgages turn over in about three years and banks will be less likely to provide mortgages for houses that have high risk of being underwater. In BusinessDesk, Jenny Ruth calls the Bank’s arguments ‘spurious’.

Climate change is hugely important. But it just isn’t a substantial prudential risk for the financial system.

There are far bigger financial risks out there. For example, a Reserve Bank that spends too much time playing with its frog-exaggerator when an inflation monster is running wild. 

On The Record

Initiative Activities:   
All Things Considered
  • Graph of the week: What the bottom tax bands would look like if they automatically updated with inflation: inflation indexing since 2010, or since 2017, or since 2021
  • Chart of the week: Achievement by decile for literacy and numeracy standards
  • Classroom overload in Canada
  • Political extremism fuelled by high levels of illiteracy
  • Speed-running the content moderation learning curve
  • Canadian Supreme Court rules Councils can be liable when they block development
  • Making stuff up and misleading Parliament
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