FOOD FOR THOUGHT

I’ve been enjoying a fine smorgasbord of speakers and ideas at the Centre for Independent Studies’ Consilium in Coolum. A highlight has been a session titled ‘The Language of Denial: Freedom of Speech in an Age of Political Correctness’, featuring James Allan, super smart Canadian law professor formerly at Otago and now at the University of Queensland.  Janet Albrechtsen, columnist with The Australian and a regular guest speaker at Business Roundtable events, Brendan O’Neill, editor of The UK’s Spiked, and Thilo Sarrazin, author of Germany Abolishes Itself (the publication of which forced him to resign from his role as a Bundesbank director).

The session covered the chilling effects on free expression of political correctness in such matters as the science behind climate change, immigration, religion, the plight of Australia’s Aboriginal people, the justification of ‘hate speech’ laws, and the problems posed by the newfound prominence of Islam in Western society.  While Australia’s problems in this regard are greater and more complex than ours, there are plenty of lessons here for New Zealand. 

Less edifying was a session titled ‘An Uncertain Harvest: Investigating Global Food Security’. Malthus seemed to have a couple of seats at the table in a round of agonizing about food security and whether the world can feed its population in the 21st century.

I made the point that food security is often the code word for agricultural protectionism. It has been the excuse for the common agricultural policy and protection of Japan’s rice farmers, for example. If markets are allowed to work, trading is free, and property rights and contracts are secure, it is hard to see why global supply and demand will not balance over the longer term.  As one delegate said, there’s never been a famine in a democracy.  

 

ON HOPE AND LOVE OF COUNTRY

I’m at Consilium this week in Coolum as a guest of the Centre for Independent Studies and the recipient of their Alan McGregor Fellowship.  Consilium is the CIS’ annual ideas and think fest that brings together a great cross section of Australia’s leaders of business, politics, academia, and the wider community to deliberate on the major economic, social, cultural and regional issues facing Australia and New Zealand. It’s an impressive gathering with all 150 attendees microphoned and seated around a massive oval table.

The forum opened with a dinner last night where I and former Australian PM John Howard were presented with the two annual Alan McGregor Fellowships. The late Alan McGregor AO was a former CIS chairman who played a major role in the organisation’s development and success. The awards are given to honour individuals ‘who have made a significant contribution to the advancement of the principles for which the CIS stands’ – free markets, a liberal society, and personal responsibility  I’ve enjoyed a close collaborative relationship with the CIS over more than 30 years and greatly appreciated the honour.

The awards ceremony was followed by ‘Life Under Challenging Regimes’,a conversation with Professor Ricardo Lopez Murphy, Argentine economist, and Senator David Coltart, Minister of Education, Sport, Arts and Culture, Zimbabwe, moderated by Paul Kelly, Editor-at-Large of The Australian.  David Coltart is the only white elected MP in a cabinet of 39, and represents a constituency that is 98 percent black.  He spoke of a once highly successful country devastated by a succession of fascist governments, draconian political restrictions, genocide, economic ruin and inflation beyond the believable (a hundred trillion dollar note, that even after 21 zeros were taken off it, still did not buy a loaf of bread).  Yet in the last three years, he explained, while life in Zambabwe remains fraught with risk and social turmoil, the currency has been abandoned, exchange controls and tariffs are coming down, economic growth is picking up – to over 8% last year – and there is hope that Zimbabwe could yet regain its former status as the jewel of Africa.

Ricardo Lopez Murphy was an unsuccessful candidate for the Argentinian presidency on two occasions. He told a similar story of a man committed to achieving democracy and economic prosperity for his country.

The session was, in short, a tale of two people explaining why they love their countries and stick with them, and their grounds for hope that through the restoration of the rule of law and common sense economics, these two countries will rise again.

FRIDAY GRAPH: LOCAL GOVERNMENT RATES

The chart below shows what has been happening to local government rates in New Zealand in recent years.

 

Two points are worth noting. 

The first is the steep rise in the ratio of rates to GDP following the introduction of the Local Government Act 2002.  This is a departure from the trend in the last century when council spending and rates stayed a fairly constant proportion of GDP (while central government spending and taxes rose).

The Clark-Cullen government maintained that the wider purposes and power of general competence bestowed on councils in that Act would not lead them to spend and rate more.  This claim was naïve, as the chart confirms. The forecast implies local government revenue increases of 6.3% per annum to 2019.

Second, the projections suggest that rates will double from around 2% of GDP a decade ago to 4% by 2019. Councils as well as central government are crowding out the private sector.

FRIDAY GRAPH: THE YOUTH UNEMPLOYMENT SCANDAL

This chart from a recent New Zealand Institute publication tells a familiar story.

We think of countries like France and the United States as having shocking rates of youth unemployment (see my Friday Graph of 15 July for the United States).  And indeed they do.  In those countries youth unemployed as a percent of total unemployed is around 25%.  This is a far higher rate than in earlier decades when labour markets were less regulated.

But the chart shows that it is New Zealand that stands out with youth unemployment being 45% of total unemployment, the worst outcome in the OECD.

Why are our political parties not talking about this appalling state of affairs?  One reason is that many of them are complicit in bringing it about.  The abolition of the youth minimum wage, sponsored by the Greens and Labour, is clearly a major contributing factor to the surge in youth unemployment.  National in office has declined to reintroduce youth wages.  The New Zealand Institute in its report also ducked the issue.

This conspiracy of silence on the subject is an indictment of New Zealand’s seeming inability to face up to grim social realities.

FRIDAY GRAPH: THE IMPACT OF MINIMUM WAGES ON YOUTH

This graph from a 1 July 2011 Wall Street Journal article tells a familiar story.

The article explains that:

This is a rotten summer for young Americans to find a job. The Department of Labor reported last week that a smaller share of 16-19 year-olds are working than at anytime since records began to be kept in 1948.

Only 24% of teens, one in four, have jobs, compared to 42% as recently as the summer of 2001. The nearby chart chronicles the teen employment percentage over time, including the notable plunge in the last decade. So instead of learning valuable job skills – getting out of bed before noon, showing up on time, being courteous to customers, operating a cash register or fork lift – millions of kids will spend the summer playing computer games or hanging out.

The lousy economic recovery explains much of this decline in teens working, and some is due to increases in teen summer school enrollment. Some is also cultural: Many parents don’t put the same demands on teens as they once did to get out and work.

However, there is more to the story:

But Congress has also contributed by passing one of the most ill-timed minimum wage increases in history. One of the first acts of the gone-but-not-forgotten Nancy Pelosi ascendancy was to raise the minimum wage in stages to $7.25 an hour in 2009 from $5.15 in 2007. Even liberals ought to understand that raising the cost of hiring the young and unskilled while employers are slashing payrolls is loopy economics.

As always, such minimum wage increases hit disadvantaged groups hardest:

Black teens have had the worst of it, with their unemployment rate rising to 41.6% in April from 29% in 2007, faster than almost any other group. A 2010 study by economists William Even of Miami University of Ohio and David Macpherson of Trinity University found that as a result of the $2.10 increase in minimum wage, “teen employment dropped by 6.9 percent… For the teen population with less than 12 years of education completed, teen employment dropped by 12.4 percent.” For teens priced out of the labor market, their wage fell to zero.

All this mirrors New Zealand’s experience in first increasing youth minimum wages and then abolishing them altogether.  It has been estimated that these moves have cost around 10,000 jobs for young people.

Note too that the current US minimum wage is US$7.25 an hour or under NZ$9.00.  Our current minimum wage is $13.00 an hour, a ludicrous level for a country that is far less wealthy than the United States.

Why former Green MP Sue Bradford has not been pilloried for her ignorance or wilful blindness about the impact of abolishing youth rates, and why the government has not moved to reinstate them, is impossible to fathom.

THE TREASURY’S LIVING STANDARDS DOCUMENT: NEW WINE OR OLD BOTTLES?

In May the Treasury published a paper Working Towards Higher Living Standards for New Zealanders.

It corresponds loosely with similar exercises by the OECD (on which I blogged recently) the IMF, the US Treasury and the Australian Treasury.

It’s not immediately obvious what’s new in the Treasury’s thinking.  The paper makes the conventional points that GDP as a measure of welfare has its limitations and that in framing policy, factors such as equity, environmental quality, the benefits of leisure and social cohesion need to be taken into account.  All these have been well-accepted principles of public policy in New Zealand for as long as I can remember.

Somewhat more prominence is given to individual rights and freedoms than in past Treasury writing.  However, the authors’ grasp of relevant concepts seems a little unsteady.  At one point the paper observes:

Some of the rights and freedoms that institutions should protect can be considered absolute and should not be traded off for another person’s wellbeing.  For example, the United Nation’s Universal Declaration of Human Rights (United Nations, 1948), to which New Zealand is a signatory, sets out rights that are intended to be alienable and indivisible.

But this is immediately followed by the claim that “the right to one’s property is not an absolute right.”  Presumably the authors have not stumbled on Article 17 of the declaration which reads:

(1) Everyone has the right to own property alone as well as in association with others.

(2) No one shall be arbitrarily deprived of his property.

Australian economist Winton Bates (who spent some time in the New Zealand Treasury) blogged on the paper here.  He makes a good point when he says:

… it would be hard to find a better indicator of relative living standards as perceived by New Zealanders and Australians than net emigration to Australia. Net emigration to Australia seems to me to be a highly reliable indicator because the preferences that people show about where they live must be heavily based on their assessments of living standards.

The relevance of this indicator was not considered in the paper.

At the launch Treasury was asked how its new framework differed from the OECD’s framework for its New Zealand reviews.  No differences were identified.  The operational significance of the new framework appeared to be a blank space.

Winton Bates observed that:

In launching the framework the Treasury Secretary, John Whitehead, certainly did not try to hide the fact that an important objective of the exercise, as he sees it, is to bring about a shift in the way NZ Treasury is perceived externally. He said:

“Misperceptions of the role Treasury has played since the 1980s have limited our ability to be persuasive when talking about what matters most for living standards.  Some have never got beyond believing that we are the root of all New Zealand’s economic evils.  Others see us as little more than the defenders of fiscal virtue …”

Winton commented:

I find that baffling. In the 1980s the NZ Treasury played an important role in saving that country from economic ruin. Why is that not more widely understood and appreciated in New Zealand?

I find that baffling too.  The Treasury seems to be at pains to tell the outside world that it is much nicer than people think.  As a demonstration of how nice it is, it will acknowledge that GDP is not a fully satisfactory welfare measure.  And because it is fundamentally nice it deserves a better hearing and more influence.

This seems a Quixotic hope.  If Treasury is doing its job properly it will not be loved – by interest groups seeking political favours, and by ministers and government departments whose spending plans are thwarted.  What the Treasury should aspire to is not love but respect – for the quality of its work on behalf of taxpayers, consumers and the community at large.  It has lost a good deal of respect on account of sub-standard work in recent years.  There is ground to be made up.

 

 

 

WATCH OUT FOR ECONOMIC LITERACY – OR THE LACK OF IT

Later this week the Labour Party is expected to unveil further policy, including a plan to introduce a capital gains tax.

I will not go into the general pros and cons of a CGT in this post.  Many (myself included) think a CGT in some form has attractions in theory but that these are outweighed by thorny administrative considerations.

Rather, I focus here on the claim that a CGT on rental properties would dampen house price increases and make housing more affordable.  According to Trans-Tasman, “Labour says New Zealand is one of the few nations which doesn’t have a CGT, and it will help prevent future speculative bubbles in the housing and rural property markets.”

First, what does theory tell us?  Theory would suggest there is little relationship over time between house and other asset price increases and the presence or absence of a CGT.  The introduction of a tax on investment properties could be expected to have largely a one-off effect (as with the introduction of GST): prices would fall to the point where previous after-tax returns were restored.  But from that point on, normal supply and demand factors would largely determine the path of price changes.

Indeed the introduction of a CGT that is applied when capital gains are realised rather than progressively as they accrue could have the opposite effect to that assumed by Labour, at least for a time.  Some owners of investment properties might keep them off the market longer to avoid paying the tax.  Prices could go up rather than down.

As far as rents are concerned, there is no reason to expect a fall.  To the extent that property investors succeeded in passing on some of the costs of a CGT, rents would be higher than otherwise. 

Does the empirical evidence support the theory?  It appears so. New Zealand experienced a large increase in house prices in the last decade, but so did Australia which has a CGT.  In its recent report on New Zealand, the OECD commented that “This surge in real house prices appears to have been triggered by the combination of a sharp inflow of migrants and easy credit conditions.”  It added, “With similar developments occurring in Australia … a common Australia-wide macroeconomic trend appears to explain over 90% of movements in NZ house prices, giving rise to what amounts to a single housing market across both countries.”  No mention of a CGT playing a role.  Other countries with a CGT experienced similar house price increases.  The OECD commented that “the introductions of capital gains taxes in Australia (1985) and in Canada (1972) did not have any noticeable immediate impact on aggregate house prices.”

On New Zealand, the OECD also noted that “Between 1990 and 2001, national average house prices had appreciated at an annual rate of only 2% in real terms, and even fell in a number of districts.”  Clearly the absence of a CGT had no appreciable effect in that period.

For completeness, it should be noted that the OECD recommended a CGT or some other approach to reduce the tax bias in favour of housing (not to curb price increases).  My preferred approach to this issue is to steadily reduce all high income tax rates (say to 20% or below).  This would not eliminate the distortion but it would make it much smaller.

In line with the OECD’s findings, the New Zealand Productivity Commission noted in its recent Issues Paper on housing affordability that:

A combination of both supply and demand factors have been identified in explaining the surge in real house prices.  These include a sharp inflow of migrants during the cycle, favourable credit conditions, a rise in average incomes, declining nominal interest rates, very low unemployment, strong gains in the terms of trade during the period (with dairy prices driving up rural land values), response lags of residential construction, increases in the costs of building homes and shortages in materials and skills.  These factors likely inflated expectations of future house price increases, though it is difficult to determine whether a housing bubble had formed.

No mention of (the absence of) a CGT in the Productivity Commission’s analysis either.

A further point is that it’s hard to see how a tax that does not apply to owner-occupied houses, which account for the lion’s share of the housing stock, could be expected to have a material impact on house prices generally.

A final irony is that Labour is apparently proposing an increase in the top personal tax rate.  A similar move by the last Labour government was regarded by many analysts as contributing to house price increases, whereas the present government’s moves to lower the top personal rate and the rate for most PIEs have reduced the relative attractiveness of housing investment.

It will be interesting to see whether journalists merely recycle claims that a CGT will “dampen house price increases” or seriously challenge them.