Economic Policy

The Hell of Good Intentions – Climate Change

Leonard HongLeave a comment

Far too many times across history, I’ve seen and read about policymakers causing blunders. At every step, most people utter the claim that they have ‘good intentions’. Well, as Samuel Johnson quipped, “hell is paved with good intentions”. This applies to both sides of politics.

We see the classic example on climate change. Indeed, we have the moral obligation to do everything we can to lower our emissions and achieve net-zero by 2050 (the earlier the better for me). The centre-left so far failed despite the good intentions, and the centre-right under National refused to put the agriculture sector into the ETS (explained later).

The centre-right did very little with the global issue when they were previously in government. Under the National government (2008-2017), the Emissions Trading Scheme (ETS) prices dropped with a ‘flexible’ cap, not binding like now; NZ maintained the status quo for climate change. The agriculture lobby within the right of politics made the sector exempt from the ETS. This was a problem and still a problem for those that want lower emissions as efficiently and effectively as possible.

Nor have the current centre-left government made much progress. What really frustrates me is that both the Climate Change Commission (CCC) and government failed to make empirical cost-benefit assessments. According to Stats NZ, our emissions have not fallen but increased by 2% in 2018-2019. This is criminal. Our net emissions are actually set to increase, not decrease. Why?

Let’s start with the oil and gas exploration bans. This caused ‘substitution effects’ in the market – where one consumption of a good gets replaced by another due to higher costs. Consequently, we have a record high imports of coal into the country. The passage of the Zero Carbon Act in Parliament means nothing when we are failing to reach our targets. The energy market shifted towards alternative resources that emit more carbon dioxide in the air.

To give some credit, some good policy mechanisms have been introduced, primarily under Climate Change Minister James Shaw. We have a binding emissions cap within the ETS. This follows basic economic logic – having a binding carbon tax, or ETS, is the simplest and fastest way of lowering emissions. According to the Pigou Club – with renowned members such as Joseph Stiglitz, Daron Acemoglu, Kenneth Rogoff, Greg Mankiw, and Paul Krugman – such a scheme corrects market externalities. Fortunately, New Zealand leads the way with a binding cap now.

The starting point and main tool in lowering emissions should be with the ETS, not government pet projects. Spending millions of dollars on EVs and other government-led projects do not reduce our net emissions overall. It simply allows other market players to purchase carbon credits that will pollute anyway. If the government decides to lower its emissions, other people can pollute more because of the binding cap. According to Professor Hazledine from Auckland, the CC has not made it clear whether we are sticking with the ETS or a carbon tax. We should focus on improving the ETS and finding other technological, urban planning and public transport solutions to lower emissions.

Free trade agreements with a sustainable development framework is excellent too – Switzerland and Peru signed one with the first ever ‘carbon offset scheme’ which lowers net-emissions between both sides by finding comparative advantages of their respective economies. Peru finances sustainable development projects in Switzerland and takes credit for emission cuts.

Climate change is a global issue and requires our country to play its role. Efforts from all of us, but primarily the largest emitters such as China, the US, and India are also imperative – we live in a global village and all our actions have consequences. New Zealand is a responsible stakeholder in the international rules-based system. I remind people that we must stop becoming doctrinaire to the government’s intentions and focus on the effectiveness of the policy.

Lower emissions with cost-effective policies should be the goal. For example, imagine sending your broken car to a repairer, and he fails. Would you be happy if he gave you excuses and just said “I tried and I had good intentions”. You’d be like, “screw that, do it again, and get it fixed properly”. Similarly, good intentions mean jack-all when it comes to climate change. Some good work has been done, but a lot of the policies that have recently emerged will do very little to lowering our emissions.  

This is why fighting climate change is so urgent | Environmental Defense Fund

Report: The Need to Build – The Demographic Drivers of Housing Demand

Leonard HongLeave a comment

Leonard Hong

Report: The Need to BuildDownload

The political ‘buck passing’ of the responsibility for unaffordable housing by successive governments in New Zealand has created extremely expensive housing markets in cities such as Auckland and Wellington – and a national housing crisis. Auckland is the sixth least affordable city among 92 major global housing markets, according to the 2020 Demographia housing survey. The real price of housing in New Zealand increased by 171% from 2000 to 2019, compared with just 11% in Germany in the same period. Despite former Housing Minister Phil Twyford’s reforms, the government has prioritised supressing demand and targeting financial speculation from overseas. Demand-side solutions are just tinkering at the edges of the problem. Long-term demographic transformations and changing household sizes are affecting overall housing demand. Inflexible housing development is the core problem, and only freeing up enough supply can solve our housing unaffordability and overcrowding.

The projections in this report show that our housing problems are set to worsen. From 2019 to 2038, the annual average additional dwellings needed will increase from 26,246 (‘low’ migration and ‘low’ fertility) to 34,556 (‘medium’ migration and ‘high’ fertility). From 2019 to 2060, we will need 15,319 (‘low’ migration and ‘low’ fertility) and 29,052 (‘medium’ migration and ‘high’ fertility) additional dwellings annually. These figures do not take into account the annual demolition and replacement rate of dwellings and the current undersupply of 40,000. Since 1992, New Zealand has added only 21,445 net private dwellings annually to the housing stock. We are simply not building enough to meet the looming demographic changes and demands.

Our housing needs are also set to rise much faster than population growth. The average annual number of dwellings needed based on just projected population growth, excluding the smaller household size, was between 5,452 (‘low’ migration and ‘low’ fertility) and 21,543 (‘medium’ migration and ‘high’ fertility) to 2060 in our analysis. The difference represents an annual shortfall of 9,867 dwellings for the former and 7,509 for the latter (or 64% and 26%, respectively). This means housing policy using only projected population growth will markedly underestimate future demand.

Covid-19 and the Reserve Bank of New Zealand’s monetary response to the ongoing recession has led to much financial capital flowing into the housing market. Consequently, the national house price average reached $725,000, an increase of 19.8% from October 2019 to October 2020. Low interest rates created incentives for greater borrowing and investments in real assets such as financial stocks and housing. However, if sound institutional arrangements were established and growing supply could meet growing demand, there would be far fewer speculative incentives.

Local councils and Statistics New Zealand already factor demographic changes in their household and dwelling projections, but the effect of the average household size on housing demand is rarely discussed in the public sphere. The aggregate housing demand is based not just on population growth, but also the composition of each household. With household sizes shrinking, fewer people living with many children, and population ageing, we have ‘empty nests’ and ‘crowded houses’.



For this report, we calculated long-term population numbers using the demographic software Spectrum. Based on three fundamental factors – net migration, total fertility, and life expectancy – 36 scenarios were projected to 2060 (and 2038 for dwelling projections). In 33 out of the 36 scenarios, New Zealand’s population in 2060 will be larger than it is today. Under all 36 scenarios, the median age will be higher. The 36 scenarios were further narrowed to the six most plausible based on New Zealand’s recent demographic history. Among the six, the variation in median age and population size by 2060 was vast – the projected population ranged between 5.55 million and 7.26 million, while the median age was between 41.0 and 48.5 years. Even if migration is low (say, 14,000 per annum), New Zealand’s population will still grow substantially over the next few decades.

The current housing crisis is just the tip of the iceberg – if the government does not change course, future generations will face abysmal housing affordability prospects. Stopping migration completely would only produce new problems while doing little to fix the housing problem.

Demographic changes also have long-term implications for fiscal prudence. Under the six most plausible Spectrum scenarios, the dependency rate rose with population ageing, and the number of those over 65 years by at least 23% by 2060. This will result in fewer future taxpayers and more demands on working-age New Zealanders to fund public services such as healthcare and pensions.

Policymakers need to make our economic institutions more versatile so New Zealand can cope with any combination of demographic or household scenarios in the future. New Zealand had net zero migration in 2020 due to Covid-19 related border closures but this did not stop housing inflation. Politicians should stop blaming the housing crisis on migration, land banking investment, and speculation, and instead find policy solutions to free up urban development and housing supply. Faster productivity growth too would help fund additional public services in the long term.

Building now and fast is imperative for the nation’s future economic and social wellbeing.

Click below to download the two-page summary of The Need to Build: The demographic drivers of housing demand.

The Need to Build Report SummaryDownload

Why America matters – The Liberal World Order and New Zealand

Leonard HongLeave a comment

“In recent years it has become evident that the consensus upholding this system is facing increasing pressures, from within and from without… It’s imperative that we act urgently to defend the liberal international order.” — President-Elect Joe Biden in 2017.

The Liberal World Order is one of the most used phrases in international relations scholarship. It’s a repetitive term, but a significant one, considering the fact that it affects everyone around the world. The United States began the Liberal International Order with the end of World War II and the defeat of the Nazis. With Franklin Roosevelt’s vision, the Western superpower set up international institutions and created long sustaining alliances for a greater multilateral and tolerant global society. Without the liberal world order and brilliant American leadership in the likes of Roosevelt, Eisenhower, Kennedy, and Reagan, New Zealand and other allied nations would have not been able to thrive during the Cold War period. Regional and international institutions such as GATT, WTO, IMF, the World Bank, European Union, and NATO provided security and economic cooperation among allied nation-states.

And yet, there are a lot of people in New Zealand that criticise America for its role as the leader of the world. In fact, many of them want to see its role reduced substantially. I agree with that statement somewhat, I’ve been very critical of their nonsensically hawkish interference in the Middle East, its naive attempts at forcefully spreading liberal democracy around the world. Its eastward expansion of NATO and the EU was also a great mistake that resulted in the military retaliation of the Russians. America’s neoconservatives and liberal hawks that were fundamentalist on the ‘end of history’ ultimately created all this mayhem.

However, if they mean America’s leadership getting entirely compromised and allowing authoritarian governments to enter that space – such as Communist China – then my answer is an absolute ‘no’. As President-Elect Biden noted, “it’s imperative that we act urgently to defend the liberal international order”. The Thucydides’ Trap is incoming at this stage in history and the US-China geopolitical contest will be the defining historical turning point for global liberal democracy. As John Mearsheimer noted before, this security competition will continue even under the Biden Administration and beyond.

So what is the point of this post? My message to New Zealanders in this blog is simple, America matters for the western world and in fact democracy itself. They have to win, and it is imperative that they do. I say this, despite knowing America’s complicated history.

In many ways, America is somewhat a hypocritical concept – it started as the first constitutional republic against the British monarchy. It set out laws for equal opportunity…but for only white men, and simultaneously set out a brilliant Federal system of power by instituting checks and balances. Constitutional amendments were made for free speech and inquiry… but also allowed slavery. It also intervened in smaller nations and participated as a colonial power during the Imperial era. Then slavery was banned under Abraham Lincoln, and racial equality was not legally achieved until the 1960s, under Lyndon Johnson’s Civil Rights Act and Voting Rights Act… and also escalated the Vietnam War. They defeated the Soviets and ended Communist authoritarianism with the Berlin Wall falling. The American Pentagon stupidly intervened in Iraq and Afghanistan after 9/11. Then elected the first African American President, Barack Obama (whom I personally admire). Then the recent events that happened in Washington is another example of historical irony at work. It is clear that President Trump and his cronies led the world to a more chaotic, less democratic and hyper-partisan society. America as the beacon of freedom or just arrogance? In short, both. The American experiment is indeed full of both hypocrisies and social progress. Even today, many social science scholars such as Cornel West suggest that the nation has not lived up to its ideals, for instance, the inadequacy of equal opportunity for all. These are all empirically and historically accurate.

However, what separates America in contrast to other countries around the world is that it’s the first serious societal experiment in human history. The United States is like the ‘Republic City’ in the television cartoon, The Legend of Korra. The nation is defined entirely by civic values rather than on race, ethnicity, culture, background, or creed. You become American by embracing its liberal democratic values, its identity based on its historical strife against the British monarchy, its constitutional values, and individual liberty. It’s a nation created out of migration and a sociological result as a historical derivative of European enlightenment.

Diversity matters to many Americans, but what is unique is the tolerance towards others, the ability to fight for freedom around the world. Liberalism is the key symbol of America and that’s the beauty of it. As Francis Fukuyama mentioned in his column last year:

Liberalism was simply a pragmatic tool for resolving conflicts in diverse societies, one that sought to lower the temperature of politics by taking questions of final ends off the table and moving them into the sphere of private life. This remains one of its most important selling points today.

Indeed, liberalism allows for diversity. Other liberal democracies like New Zealand, Australia, the EU etc, need the United States for the sake of soft power. America as a symbol is still a liberal democracy with its political institutions stable. Even though there has been a rise of neopatrimonialism in their political process which has undermined the state to be held accountable to its people. Rent-seeking behaviour among some plutocrats has undermined Americans’ trust towards its politicians and state institutions. We witnessed such examples through the 2008 global financial crisis and the federal government’s response to Covid-19.

Historically the United States has been a success story so far, but it needs to sort its own domestic affairs out. We already have incoming challenges such as AI, automation, climate change and geopolitical tensions, that will cause more drastic disruption to the world. But those challenges cannot be solved if America’s civil society and political polarisation continues. The world needs America to be the genuine liberal captain it was when it led the liberal international order after WWII. As liberals, we have to preserve our values of freedom, justice, equality and liberal democracy in the face of rising China and revival of national populism. We cannot continue this trend of a global ‘democratic recession’.

As a liberal democrat – in the classical sense – I’m hoping that the new Biden Administration would bring some common sense back in the White House. The Electoral College just confirmed Joe Biden’s victory in the 2020 US Presidential election – He will be the next President. It’s a sigh of relief for many (including me) after President Trump’s tumultuous, chaotic, and unpredictable 4-year term. Although I criticised the Democrats in a previous post, that doesn’t mean I don’t want to Biden Administration to do well.

They have a huge task ahead. The Liberal World Order and America matter to all of us.

The Demise of Excellence – New Zealand is falling behind

Leonard HongLeave a comment

Introduction: 

One of the core cultural values I found quite hard to grasp in New Zealand is the inherent egalitarian nature of Kiwis. It shows that Kiwis are friendly, respectful, and courteous of others. Prime Minister Jacinda Ardern’s viral catchphrase “Be Kind” symbolically embodies our culture. However, are there potential negative consequences because of our egalitarianism? I wondered whether if it was why we have a ‘tall poppy syndrome’ problem.

As Dr Oliver Hartwich mentioned in his recent column for The New Zealand Herald, New Zealanders have a lax attitude towards excellence. Although, we have a few world-class sportspeople, business CEOs and others. But as a society, it seems as though we put more emphasis on equality rather than excelling in anything. I’ve personally witnessed this through the Kiwi nature of the ‘Yeah, nah, yeah bro’ attitudes towards life. ‘She’ll be alright mate’ is the common answer we raise whenever we face internal troubles or domestic difficulties. This has had unintended consequences across the country reflected in our economic and social outcomes. I think New Zealand has a broad cultural problem – if most Kiwis take a complacent attitude towards life, we will witness a further decline. This starkly contrasts countries that outperform us such as East Asian nations like South Korea and Singapore. 

Economic and Social Indicators: 

Our ‘average’ international rankings speak for itself. Our international education standards have fallen substantially in the last few decades. In PISA, our scores dropped for Maths, Science and Reading substantially shown in Briar Lipson’s book ‘New Zealand’s Education Delusion’. Our productivity gap between Australia has continuously widened closer to 20%. Our economy is still heavily reliant on primary industries and international tourism, despite being a developed economy. Our FDI restrictiveness is number one in the OECD. Our Universities are nowhere near the top 50 in the world (In contrast to our neighbours Australia, which have more than 5 Universities). There are other economic and social indicators that I could mention, but the reality is that if Kiwis continue to be satisfied with mediocre economic, social and government policies, then our whole society will ‘pay’ for such mediocrity in the long term. 

The Dramatic Turnaround of East Asia: From Developing to World-Class

Figure 1: Labour Productivity Levels Relative to the United States (%), 1950-2019 (S. Korea & NZ)

Internationally, countries in Asia (especially North-East Asia) witnessed a remarkable economic recovery beginning during the post-WWII period. Beginning with Japan’s industrialisation, the new four Asian Tigers – South Korea, Taiwan, Hong Kong and Singapore followed suit with the ‘flying geese’ model of economic development. Economists have coined these four countries’ world-class economic outcomes as the ‘East Asian miracle’. Coincidently, this contrasts starkly with New Zealand’s mediocrity witnessed in the last 70 years. 

Economist Dr Üngör of Otago raised this in his recent Newsroom column. As shown in Figure 1, South Korea’s labour productivity level was less than 12% of US labour productivity in 1950, but by 2019 it was 63%. New Zealand was at 92% of the US in 1950 but dropped to 62% by 2019. The figure provides a humbling picture for New Zealand – The South Koreans have overtaken New Zealanders and we are falling behind the best performers in the world today. Back then, New Zealand was once one of the few nations with one of the highest GDP per capita in the world, but since then we have faltered into a mid-tier economy. 

South Korea’s overlap of New Zealand should signal warning signs for New Zealand policymakers. The turnaround was possible because South Koreans built a prosperous nation by changing the cultural narrative towards competency, strived for excellence, and took greater communitarian responsibility towards long term prosperity. A similar change of mantra can be said about the Taiwanese and the Hong Kong people. 

My personal favourite example is the South East Asian city-state Singapore. With the brilliant leadership of Lee Kuan Yew, the nation went from a wasteland with no natural resources into one of the finest economics in the world. His style of government was highly technocratic. Singapore is very competitive, meritocratic, and pursues economic policies that were practical and results-driven. A combination of state-intervention and liberal free markets, it’s the fourth-highest in the world for GDP per capita. Not only is the country extremely efficient, but it is also environmentally friendly and clean. A perfect combination of sustainable development and world-class governance. Whilst the nation is regarded as a semi-democratic society, there are many things New Zealand can learn from Singapore’s system, institutional mechanisms and broad culture. Lee changed the mindset of the Singaporean people to strive to excellence and competence.   

Competent Response to Covid-19: South Korea and Singapore

In the earlier months of 2020, when Covid-19 hit the globe, the most effective responses were from East Asian states. I researched Taiwan, Singapore and South Korea during that period. They all had an exceptional public administration, competent execution of contact tracing, regular mask-wearing, mass testing of people and a well-mandated epidemic response team in their governments. These countries did well because they had a well-functioning society with the high-level expectation of competence and excellence. With these cultural factors in mind, they have world-class healthcare, government bureaucracies, a knowledge-based education curriculum and of course a competent response to Covid-19. This would have been impossible without having excellent administrators and a well-educated population. 

New Zealand’s Covid-19 Response: Mixed Bag 

New Zealand did very well responding to Covid-19 as well. However, I give much of the credit to our geographic proximity from the world. We were far away from epidemic centres such as China and Europe during the early stages of the pandemic. In addition, having Prime Minister Jacinda Ardern – not some of her Cabinet members – at the time was essential to keeping the public disciplined in our efforts to contain the virus. The lockdown was effective at stamping out the virus, but with an economic cost. Our Debt/GDP ratio is now projected to be 56% by 2026, despite beginning at 19.2% earlier before the national shutdown occurred. 

Although this global pandemic is unprecedented, if we had the ambition and the drive to stamp out the virus without a national lockdown, I truly believe that would have been entirely possible. Our border quarantine procedures are still mediocre at best – after more than 9 months of Covid-19 – and blunders have caused the continuous resurrection of the virus in Auckland for the second time after complete elimination. It seems New Zealanders are ‘happy’ with the outcome without realising the combination of luck, public discipline, geographic proximity, and sound leadership. We have witnessed numerous examples of bureaucratic incompetence and administrative blunders in contrast to the East Asian states I mentioned before. Our contact tracing, testing, and border quarantine are still woeful in comparison. 

Confucianism: The Cause of East Asian prosperity? 

Perhaps some people might consider this East Asian trait of “excellence, merit and competence” as a broad Confucian phenomenon. Although Confucius himself did say: 

“The will to win, the desire to succeed, the urge to reach your full potential… these are the keys that will unlock the door to personal excellence.”

But I can’t entirely agree with the view that it’s just a Confucian phenomenon. Cultural change across societies depend on the decisions policymakers or what individuals themselves make. For instance, Japan industrialised as a result of forced trade embargoes imposed by the Americans under Commodore Perry which led to the prosperous Meiji period. Historical critical junctures and circumstances are what changes societal culture. 

The same thing can be said about the state of the Western world. Our cultural values have moved away from excellence towards equity. Previously, the West was leading the world on every economic, social and civilisational metric as indicated by historian Niall Ferguson. But now, the West – including New Zealand – are not as reputable as the past and the rise of Asia proves this declining trend. The West has lost the vital cultural component to its prosperity – The Weberian characteristics of work ethic, hard work and most importantly the strive for excellence. 

Conclusion: Cultural Rejuvenation is an Imperative

New Zealand needs to renew this virtue of competence, excellence and merit. Whilst egalitarian values are important to keep society strongly harmonious with good social cohesion and trust, it is imperative that we recover our prioritisation towards excellence once again. We see this with our excessive cultural obsession with diversity and inclusion. Tolerance and social justice values are indeed important, but without a prosperous and thriving domestic economy, these values mean nothing. We must rejuvenate our old virtues of excellence in New Zealand. Across our education standards and our economic performance in the last few decades, we have so far settled with mediocrity. 

The comparison and contrast between East Asian nations and New Zealand show us a few things. New Zealand is not good enough, we have been mediocre and sub-par at best across multiple performance indicators. We need to be more ambitious as a society for the long-run and we must rebuild our cultural values towards discipline, hard work, excellence and competence.  

Why the Housing Crisis in New Zealand?

Leonard HongLeave a comment

It is clear that so far both sides of politics have failed to address the ongoing problem of housing unaffordability. It’s been more than five years since the leaders of both major political parties acknowledged the housing crisis. Now, it’s 2020 and housing has become even more unaffordable with prices increasing by 19.8% with the median price of $725,000. Despite Covid-19 ‘supposedly’ cutting aggregate demand, how on earth did this phenomenon occur? It’s caused by multifaceted reasons which I will explore by sections:

Migration and Foreign Investment – Not the core factor

There is a fundamental misunderstanding of the housing crisis. Many New Zealanders believe that migration flow and population growth are the core reasons for growing housing prices. On face value, that is correct. Growing demography does mean growing housing demand. However, this would not be a problem if the growing demand is matched by a growing supply. Anti-developmental sentiments from central and local government artificially restricted land supply and housing development. In fact, migration is critical to our prosperity (especially those that are young with high skills and educated). The housing crisis is a supply problem rather than a demand problem.

Foreign investment and speculation are also conjectured by many in the public as the cause of housing hyperinflation. This is also incorrect. Much of the housing inflation is caused by local New Zealanders purchasing property and spurring up demand. In fact, only 3% of housing purchases were from foreigners between January and February 2016. Whilst further should be done to see the extent of the speculation over a long period of time, such evidence suggests that the effects are minimal.

Housing Supply < Housing Demand = Price increase

The core reason for the housing crisis is simply because growth in demand has exceeded growth in supply. One of the core fundamental economic principles is supply and demand. Housing has become extremely expensive because we have not built enough housing in New Zealand to address growing demand. In 1974, New Zealand was building 34,400 annually. However, because of the oil crisis in the 1980s and our unsustainable fiscal position, new annual dwellings dropped to 15,000 in that era. The current government have made some changes that resulted in a growing supply with 24,100 houses built in 2019. We need to note that the population in NZ was 3 million and now just over 5 million. Population growth and demographic ageing do mean that there is consequently excess demand. My research paper released in the new few months will explore this. 

In the last three years, the current government has attempted to curb aggregate demand and expand supply with Kiwibuild. There has been progress with better infrastructure financing to aid local councils and important changes to the National Policy Statement on Urban Development. This removes unnecessary regulations that so far prevented intensification. On the negative side, the government passed new laws such as the ban of foreign buyers (with the exception of Singaporeans and Australians), extended the bright-line test to 5 years, amended the Overseas Investment Act, and tried to legislate a new capital gains tax. For supply, Kiwibuild was a colossal failure with only 548 houses being built. There has been some definite progression in contrast to the previous government, but also multiple failures.

The Reserve Bank’s Impact in Housing

The global Covid-19 pandemic has forced many central banks around the world towards expansionary monetary policies. The Reserve Bank of New Zealand (RBNZ) is no exception. Under Adrian Orr, the bank committed to $100 billion of quantitative easing and also cut the OCR rates to 0.25%. This is unprecedented regarding the scale of the policy (a third of our GDP). These two decisions alone will raise the returns from investment in housing and increase pressure on house prices. Low-interest rates mean cheaper mortgages incentivise investors and consumers into the housing market. These policies led to higher equity and asset prices. Although, some of their policies are completely understandable considering Covid-19’s impact on employment and the economy. However, regardless of the pandemic, this level of quantitative easing is unprecedented. Saying this, it is undeniable that RBNZ’s policies have made a significant contribution to greater aggregate housing demand.

Lacking incentives for local government 

One of the key reasons for the current state of the housing market is because of poor local government incentives. Much of the infrastructure financing is imposed on the local councils, meanwhile, the revenue is centralised to government officials in Wellington. The current system gives far too much political leverage for those in central government, rather than allowing local officials to make important decisions on urban development. There are questions on whether the centralisation of such power into a larger government institution such as the Super City of Auckland Council led to efficient outcomes.

New Zealand’s current system does not incentivise local councils to grow but slows down development. Local government officials don’t want more people in their area, because that means greater demand for water, schools, housing, local parks, and other public infrastructure to accommodate growing demand. Meanwhile, the central government does not allocate funds based on proportionality, but rather on ‘democratic means’ of serving respective electorates and other political factors. The finance gets imposed on the councils with growing demand, but not given the finance from the central government. For example, more than 40% of newly arrived migrants settle in Auckland rather than other regions that need people. Auckland Council currently has growing debt and it wants to tackle that problem rather than expand urban development outwards. The same applies to many other local councils across the country. Without sufficient revenue provided by the central government, why would they want to grow? They would not want to free enough brownfield nor greenfield areas for housing development because all the costs are imposed on them.

To address these problems for New Zealand’s local governments, I advocate for ‘localism’ as it provides greater political leverage to local governments and decentralises decision-making. Countries such as Germany and Switzerland follow this form of local administration. In the United States, Houston in Texas also has a very decentralised governance system. At the federal level, they simply set out basic regulatory frameworks and for the implementation of policies, they leave it to local councils.

For instance, let’s take the case of Essen and Dortmund – the two regions have a competitive and cooperative governance arrangement. The reason is that the tax revenue created is tied to the number of residents in their area. It is essentially a form of a ‘means-test’ requirement for local officials to get their revenue. Because of the incentives to have more residents in their area, the government understands that they need to have good institutions, a clean and green environment, affordable housing and sound public infrastructure. the two cities needed to allow enough land supply available in their area to deal with growing demand. If certain residents leave their regions, they lose tax revenue consequently. In essence, a solid local structure that incentivises competition. Currently, both Essen and Dortmund have affordable housing. Since the 1980s, prices have only risen by 10% in the last 30 years. Simply by changing the tax incentives with a decentralised local government system, it leads to more optimal urban development that matches growing demand with sufficient supply.

Germany’s economic system is a strongly Keynesian-oriented system with high levels of taxation, a generous welfare system and a decentralised form of governance. Localism is neither a right nor left policy subscription, but an example that has worked in these areas. Experimentation in New Zealand wouldn’t be a bad start and we can learn from these international examples. I am not advocating for the de-amalgamation of Auckland Council, but rather changing the tax structure so that local councils get the incentives. Decentralisation of command towards district councils, for instance, is a potential alternative without removing the Super City’s institutional arrangement. As stated by renowned American investor Charlie Munger stated,

“I think I’ve been in the top 5 per cent of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.”

Basic economics is about incentives. Incentivising local government to grow public infrastructure and push for housing development requires the officials to have the incentives. This will help the expansion of supply – both housing and infrastructure. 

Conclusion

These are the many reasons why housing is unaffordable. Housing is an extremely complicated subject but this post attempted to explore fundamental factors as to why house prices increased in New Zealand despite housing demand ‘supposedly’ very low under the current era of Covid-19. It is clear that housing supply has not expanded fast enough to accommodate growing demand. RBNZ’s policies have exacerbated the problem fueling investment into the property market, and the current set-up of local governments prevents them from wanting to expand development because most of the costs are imposed on them, rather than the central government.

It is imperative for the new Labour government to push for the expansion of housing and land supply rather than continuing to just curb growing housing demand.

Picture of Houses in Suburbs.

The Democrats have been hopeless

Leonard HongLeave a comment

It was in 2016 when I first watched and observed the outcomes of a US Presidential election. I detested Hillary Clinton back then – I still do now – but I didn’t expect Donald Trump to win, yet he did. Following on from Brexit, this was another shock to the American Establishment and symbolic of the rise of national populism. Back then, I was a hardcore social democrat, and I was disappointed and sad that America lost the opportunity to elect a 21st-century version of Franklin Delano Roosevelt, Bernie Sanders. I consider myself a moderate centrist today, but that’ll be discussed in another blog post.

The world witnessed four years of a Republican White House and boy it was a period of pure entertainment and a complete mess. Now it’s 2020 and the Democrats have selected an old, weak and out of touch politician – Joe Biden – as their candidate. Throughout 2019 and 2020, I felt that the liberal establishment learnt absolutely nothing from 2016, and it shows. Despite the polls suggesting that it will be a landslide for Biden, they were completely wrong. The US election is still an ongoing dispute and it is still too close to call for either of the candidates. The rustbelt states such as Michigan, Pennsylvania, Wisconsin have moved back towards the Democrats, but only because of Trump’s incompetency regarding Covid-19. They have lost seats in the House and also the Senate is in the strong hands of the Republicans. If Trump didn’t have to deal with Covid-19, the President may have indeed had a landslide victory against Biden.

The question is why did the Democrats perform so poorly despite the expectation? The Americans have faced a period of complete chaotic governance by the Trump Administration but many still voted for him. The fact of the matter is that many Americans are sick and tired of political correctness, wokeness, and identity politics. And this is taking into account Trump’s disastrous policies. Many people including Sam Harris, Andrew Sullivan, Eric Weinstein, Paul Graham, and Niall Ferguson and others have previously warned centre-left people about this form of politics.

One prominent scholar that understood this problem for the Democrats was Stanford’s Francis Fukuyama. He covered this topic of identity politics in his book, ‘Identity: The Demand for Dignity and the Politics of Resentment’. The core thesis of the book surrounds the concept of ‘thymos’. Fukuyama described it as “part of the soul that craves recognition or dignity.” Fukuyama says that the thymos of blue-collar, white Americans was not recognised by the political and economic establishment in America in 2016. The craving of status and recognition is not a new phenomenon, which is evident from the cultural movements of the 1960s – the civil rights movement of African Americans, Women, LGBT, and even the environmental movement. These movements were legitimate and necessary but extended far beyond its necessity up until 2016. Because that sense of dignity was ignored by the Democrats, but recognised by Trump in the form of nationalist sentiment and protectionist economic policies, they switched to him. Even with his racial rhetoric, many didn’t care, they were just glad someone wanted to talk about the negative externalities caused by globalisation. The former core of the Democratic Party was on socioeconomic issues, but it moved on entirely into cultural matters, even in 2020. 

Another scholar regarding this is Charles Murray. His book ‘Coming Apart: The State of White America, 1960–2010’, explored the economic consequences of globalisation and how there is a growing gap between white working-class Americans and the urban white-collar class. The sad state of working-class America was largely ignored by the liberal establishment. The state of white America is increasingly divided along economic lines, not cultural lines. The Democrats didn’t even talk about this topic in 2016, nor did they refer to it in 2020. The Party has taken the votes of traditional blue-collar Democrats for granted.

Hence many former voters of Obama switched to Trump. This is why they lost 2016, and may only just marginally win 2020 because of Covid-19. Instead of trying to legitimately deal with the adverse consequences of globalisation, and help those people that lost their jobs to China and Mexico, their mantra was focused on intersectionalism, transgender bathrooms, and the dangers of white supremacy. Think about it, if you are a former worker of a manufacturing factory in Pennsylvania, and you lost your job, got divorced and on unemployment benefits, and the Democrats are talking about 50/50 quotas, gender pronouns, refugee rights, global governance and so on – you would feel politically unrecognised. They ignored the former core base that has voted for them from the 1930s to the 1990s. The embodiment of woke politics is symbolised by Democratic politicians like Stacey Abrams, Kamala Harris (the unlikable Vice-Presidential candidate), Alexandra Ocasio-Cortez and others.

George Mason University Professor Alex Tabarrok’s Tweet sums this phenomenon quite well:

My takeaway is that a large number of people HATE the cultural left (not the econ left) and are willing to put up with almost anything, including incompetence, chaos, corruption and bad policy, to signal their views loud and clear.

The Democrats need to move on from identity politics and move back to the core economic issues of our time – this also applies to the New Zealand Labour Party and the Greens by the way. The world is witnessing the rise of a new technological revolution and developments in Artificial Intelligence and automation. This will disrupt the international labour market significantly. This will be far more pervasive than the Industrial Revolution and exponentially more consequential. We also have global warming and climate change that requires vigorous economic and scientific analysis to legitimately solve this international problem. We also have an ongoing geopolitical competition with the West and China. Are Democrats taking these challenges seriously? In my eyes, the answer is ‘No’. The economic left of the party needs to regain control of the narrative and the cultural left need to understand that this style of woke politics will drive more voters towards the right. There is a legitimately strong case for competent centre-left politics that can try to correct structural dislocation of manufacturing work and increasingly precarious jobs (including repetitive white-collar jobs too). I see politicians such as Andrew Yang and Tulsi Gabbard as the potential embodiment of the Democratic Party’s future (coincidently they are American minorities as well).

The Democrats have so far been absolutely hopeless. Regardless of what the 2020 election outcomes will be, they need to take socioeconomic issues far more seriously. As a fan and admirer of the United States, I hope they sort their domestic affairs out.


Research Note: Safe Arrivals

Leonard HongLeave a comment

Dr. Eric Crampton and Leonard Hong

Research Note: Safe ArrivalsDownload

Up to a million Kiwis live overseas with a right to return to New Zealand. While the country is now effectively free of Covid-19, with cases only in the country’s quarantine facilities, the pandemic rages abroad and is unlikely to abate anytime soon. Even if a vaccine is developed this year, scaling up its production will take time. In the meantime, the Government must scale up its own capabilities and capacity within its managed isolation and quarantine facilities.

This report provides a pathway toward safer scaling-up of border capabilities. It begins from the principle that safe entry should be allowed, and that risky entry must be made safe.

Beginning from that principle, the report argues that the New Zealand border should be reopened to travellers arriving from places that are similarly free of Covid-19. Islands in the Realm of New Zealand depend on travel to and from New Zealand and are currently Covid-free. Taiwan has no community transmission and has pandemic control systems at least as strong as New Zealand’s. Maintaining border restrictions against travel to and from safe places imposes substantial harm. Continued closed borders to the Pacific Islands imposes an onerous humanitarian burden along with economic calamity.

Like kayakers in stormy seas rafting up together for safety, New Zealand should ‘raft up’ with other Covid-free places.

Entry from other locations must be made safe. And while closing borders entirely can feel like the right response when other parts of the world are in dire straits, it is impossible. Too many Kiwis live abroad and may wish to return. The managed isolation and quarantine system must be able to scale up to accommodate those people along with potential non-citizen visitors from similar locations.

This report argues that the Government should shift its approach. Rather than considering charging some arriving Kiwis for their stays in managed isolation, it should instead directly subsidise the stays of returning Kiwis whose stays the Government would wish to support with a voucher system.

Under the proposed voucher system, those wishing to come to New Zealand – citizens or not – would be required to present before boarding proof of a booking in one of the approved managed isolation facilities. Eligible returning Kiwis could apply their vouchers toward the full or partial cost of their stay in managed isolation. Vouchers could be set at a level consistent with the cost of a stay at a basic facility. Other returnees would need to bear the full cost of their stay. Facilities would be free to set their own room fees, but the Government would charge each facility for the full cost of police, military and other staff involved with managing isolation.

The Government would continue to oversee safety in managed isolation and private accommodation facilities would continue to provide the rooms. But this shift would make it far easier for returning Kiwis, and others, to manage their own arrivals while freeing the Government of the burden of scrambling to place arriving visitors into scarce spaces in managed isolation. It would also encourage other facilities to shift into providing managed isolation services (under Government oversight and supervision).

The present system is strained. It struggles to accommodate need, but must scale up substantially if Kiwis abroad choose to exercise their right to return home. Allocating scarce positions in managed isolation by Ministerial discretion forces Ministers into impossible positions in deciding whose need is greatest.

Being able to scale up safely is critically important. The entire country made incredibly costly efforts to make New Zealand effectively Covid-free. Some Kiwis continue to bear those costs through family separation, unemployment or failing businesses. And for a long time yet, the country will be paying off the new government debt accrued to help the economy survive lockdown.

Improving border protocols to allow for safe entry at scale would not only help those worst affected by the collective elimination efforts, it would open up opportunities that simply were not available in the pre-pandemic world. Rather than trying to estimate the extent of New Zealand’s likely economic losses, the country could be looking at stronger economic opportunities.

Recommendations
The New Zealand Government should:

  • Set a principle to allow safe entry into New Zealand;
  • Recognise that entry from safe places by people who have not recently been to risky places is safe. Re-open the border to entry from Taiwan and the Covid-free Pacific Islands and assess whether individual Australian states could be considered safe;
  • Support the Pacific Island neighbours in ensuring safe external borders;
  • Continue to assess the adequacy of safety protocols on flights to risky places and at airports handling passengers from risky places;
  • Allow greater scaling-up of managed isolation by:
    o Allowing those arriving to take up a greater portion of the cost: full user-pays for non-citizens and a voucher-based co-payment scheme for returning residents and citizens;
    o Certifying facilities as authorised providers of managed isolation or quarantine services;
    o Charging isolation facilities for the isolation management services provided by the government;
    o Allowing facilities to provide their own management services if they are able to credibly demonstrate capability of doing so safely, but only under strict supervision and process auditing;
    o Requiring all arrivals book their own accommodation in authorised isolation facilities and provide proof of booking before boarding flights to New Zealand;
    o Training potential isolation management staff;
    o Charging isolation facilities for the isolation services provided by the government on a full cost-recovery basis;
  • Layering additional safety protocols for non-citizens arriving from risky places to further reduce risk as numbers increase, such as post-isolation testing and daily health check-ins;
  • Consult with New Zealand’s epidemiologist community over the medium term as both testing and app-based technologies develop to assess whether alternative sets of restrictions could reduce risk at lower cost for travellers from less risky but not risk-free places.

Unintended Consequences of Globalisation

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In the past 30 years we’ve witnessed the end of the Soviet Union, the third wave of democratisation and extensive levels of globalisation. Mass flows of capital and mobility have become the norm. Francis Fukuyama predicted the ‘End of History’ with liberal democracies spreading around the planet and market capitalism enriching everyone.

To some extent this became a reality. Steven Pinker’s Enlightenment Now shows empirical studies of great benefits brought to the world by globalisation. We live in a richer, healthier and more peaceful era than ever before.

However, drastic changes to the global economy and mass migration resulted in a backlash against cosmopolitanism. 9/11, the global financial crisis of 2008, the Euro crisis of 2011, the failures of the Iraq War and the refugee crisis of 2015 cumulatively left Western liberal democracies politically precarious. The rise in domestic inequality, offshoring of low skilled work, and declining trust in political and financial institutions led to worsening social cohesion.

These unexpected circumstances of events led us to a world of increasing populist sentiment evidenced by Brexit and President Trump’s election — the revival of nationalism.

John Mearsheimer stated that “nationalism is the most powerful ideology on the planet”. Humans are tribal and we are social animals to the core. This explains the zealous dedication people exert towards national causes which seek to advance identity-based policies.

Contemporary populism is a symptom of the problem and not necessarily the solution. We have to defend the liberal world order, but future policy-makers should consider dealing with the side effects of globalisation.

To sustain an interconnected and a peaceful modern world, we must understand the causes of populism and continue to build towards a society where we embrace liberal democratic principles.

Only fiscal discipline will protect us

Leonard HongLeave a comment

Former Australian Treasurer Wayne Swan’s valedictory speech hailed the legacy of his stimulus package (but not the subsequent — and growing — government debt).

As everybody knows, debt and recession are often linked — and many speculate that another recession may be around the corner.

It’s been 11 years since the 2008 Global Financial Crisis. In the aftermath, many Western governments, including Australia, pushed for fiscal stimuli to expand aggregate demand and boost the economy.

Since then, we have had a higher debt-to-GDP ratio as a result of continuous government spending and deficits by both Labor and the Coalition. On top of this, Australia’s economic performance in the last decade has been ‘lacklustre’ at best, on an average GDP per capita growth of 1.25%.

Although fiscal balance and economic performance aren’t closely related, low government debt provides countries with an optimal position and a better chance of having low interest rates.

Despite the growing debt, in contrast to other countries like Greece, Australia has a moderate debt to GDP ratio of 41.9%, and the Coalition is expected to record a first budget surplus after eleven consecutive budget deficits.

However, it is unlikely that the Australian government will continue to maintain fiscal discipline. The IMF’s Christine Lagarde warns of a global downturn, and it is possible that either side would push for a fiscal stimulus again if such a scenario happens. This leads to increased government deficit and debt.

This would put upward pressure on interest rates and the exchange rate, and crowd out private investment, both of which lead to lower wages and slower economic growth. Australians know that eventually, public debt needs to be paid back by either tax increases or cuts to essential public utilities.

For the Australian economy to prepare for an economic downturn and long term economic stability, we must have fiscal discipline that will make the economy more resilient against shocks.