What can local government really achieve?

What can local government really achieve? Not much, if their collective track record around New Zealand is anything to go by.

Local body elections are an interesting political exercise. Voter turnout is quite low, and the most likely voters are ratepayers – older, wealthier.

There’s no doubt that the decisions local government makes are really important for productivity growth. But they’re so constrained by central government.

Some local government functions should probably be amalgamated into national functions with far lower levels of discretion in terms of policy making enforced.

Local government can make a difference, but there are so many constraints placed on them, what is the cost of having a severely constrained junior partner that just gets blamed for problems when central government has just as much culpability?

How does society benefit if you have two levels of government pointing the finger at each other instead of working collaboratively to solve problems and deliver actual solutions instead of long term plans that will take decades to implement and still rely on numerous stakeholders sticking to the plan for the duration?

A Median Voter Refresher

The median is the middle value, the 50th percentile of a distribution. The median voter model is the idea that people will elect governments whose policies reflect those approved by the median voter.

This is why the phenomena of middle class welfare is so commonplace around the world – the mortgage interest tax deduction in the United States, interest free student loans in New Zealand or tax free savings accounts in the United Kingdom. It gets you votes and keeps you in government.

People who want to be elected don’t often get to talk about what they really believe in. They assemble a package of policies that won’t rock the boat. Incrementalism rules the day, and the policies preferred by the median voter have moved further and further to the left over the course of the past few hundred years so this is why you see many parties like National propose things in 2016 that would have their caucus revolt 20 years ago.

The fact that reactionary or conservative movements are on the wrong side of history is often missed by liberals or progressives. They forget that conservatism has nothing to offer under the onslaught of continual policy concessions in the face of people questioning why certain “sacred truths” must be respected anymore – witness the collapse of the Republican establishment in the United States in the face of a reality television candidate spouting things that are actually not far from the beliefs median voters in many parts of the United States suffering from political ignorance or anti-foreign bias genuinely believe!

It is amusing that Andrew Little dismissed Helen Clark’s comments the other week about appealing to the centre in New Zealand politics because most New Zealanders are middle of the road sorts of people. Talking about a coalition of constituencies is fascinating because it highlights how he is clearly surrounded by advisers who think he is a South Pacific Sanders i.e they are completely out of touch and unable to communicate clearly with the people they need to in order to sell a potential replacement government.

John Key has demonstrated with his support of Helen Clark’s unsuccessful campaign for UN Secretary General that he, and his advisers, are far more sophisticated in their understanding of the New Zealand electorate and what matters to swing voters across the country. New Zealand’s political class doesn’t really interact with many people outside of their bubble.

John Key can get away with saying he meets a broad cross-section of people at Koru Lounges because relative to many other politicians he is far more in tune with the mood of the country than perhaps any previous Prime Minister.

Danyl at Dim Post hit the nail on the head with this quote:

It’s conventional wisdom on the left that Key et al are morons, and the left is morally and intellectually superior, and I’m not sure how this squares with Key and his party constantly doing very smart things, and the left’s parties and leaders mostly, consistently being pretty dumb

This can all be reconciled with the median voter model. The left clearly cannot be “intellectually superior” because they are losing. And losing really badly, and for good reason. A lot may have gone wrong in the past few years in New Zealand, but an awful lot has gone right, and pragmatic incrementalism has helped that outcome.

Other millennials should have figured out by now that the median voter is also a home owner, so don’t expect any action on housing affordability until New Zealand is perhaps 70% renter households and it makes sense under a median voter model to propose those sorts of policies!

New apartments on Gilmer Terrace?

A 24 hour a day concierge service, and a doorman who knows everyone’s name.

Former Museum Art Hotel owner Chris Parkin is planning to transform a high-rise office building in Wellington into a “sophisticated” apartment block.

Source: http://www.stuff.co.nz/business/83685851/former-hotel-owner-turning-office-block-into-new-york-style-apartments

There is a dearth of apartments in central Wellington. The more that are built over the next decade the better. It is quite unfortunate that several otherwise nice buildings have a reputation as “party buildings” and are thus unsuitable for professionals seeking relatively quieter neighbours or young families.

When you walk around the Wellington CBD, particularly south of say, Dixon St, it really is amazing how low the levels of intensification are. There are many well integrated retail/residential buildings, 3-6 stories high, but so many light industrial and single storey retail buildings within the flat land of the city, that it couldn’t be clearer that one of the reasons so many people struggle to find suitable accomodation is that there really is nothing much that has been built.

When you add in the non-trivial number of young people and young couples earning decent incomes, it’s clear that there are some supply-side issues with Wellington Central accomodation.

Interesting China Column from Peter Thal Larsen

Xi is often described as the most powerful Chinese leader since Mao. But he sits atop a system with many weaknesses. Entrenched factions are resisting economic reforms. Meanwhile, increased state control is hard to reconcile with fostering the innovation that China needs to achieve the next stage of its development. Authoritarianism is also unappealing to the country’s elites, who are increasingly voting with their feet and their wallets. Two-thirds of Chinese who win places to study abroad do not return.

Source: http://blogs.reuters.com/breakingviews/2016/08/19/review-the-limits-of-predicting-chinas-demise/

China is still really hard for anyone outside of China to figure out. That isn’t going to change anytime soon. There are so many complex internal processes at play, that perhaps applying our stock attempts at explanation aren’t going to add any value.

I am amazed at the total lack of investigative reporting by New Zealand journalists into the “hot money” flowing into New Zealand, particularly into the property market on the part of student and temporary visa holders. There are surely some interesting stories in there.

Do facts and figures matter?

Do facts and figures matter? Did they ever? It seems that logical people project onto illogical people the same thought processes. This will never end well.

If you think that making decisions based on data is logical, rational and clearly the better way to arrive at a decision as opposed to deciding what feels right, you are very much in the minority.

I think this realisation can help people understand why the broader population reach conclusions that dismay and confuse these logical people, who were indoctrinated into elite opinions at university and have never questioned why the supposed benefits of many structural reforms didn’t actually occur outside of theoretical constructs of how the world has changed since they were first implemented.

There is a reason why most people ignore the self-appointed elites. It’s because most people simply don’t live in the bubble they inhabit. The cosy world where almost everyone earns reasonable salaries, has fringe benefits through work and frequent overseas travel is a world away from how most non-elites live their lives.

Using facts and figures to back up an argument is second nature to the educated. It’s simply an outgrowth of writng essays, writing briefing notes, writing emails, writing theses or academic studies; this way of consolidating thinking across a set of research sources is literally an alien form of thought for many non-elites.

It is all about the feels and emotions. It is all about the reckons. There is no space for facts and figures when across all socio-economic groups, the facts and figures are not taken into consideration at all outside of a small sub-set of people who genuinely care about facts and figures.

So why are we surprised when clearly logical solutions to problems are voted down, watered down by committee or watered down by the body politic by way of special interest groups elevating their reckons to the point where other people’s facts and figures are drowned out in a sea of reckons?

Household income data and house prices

Why does so much coverage of this “housing crisis” neglect to explore actual household income data and the relative economic status of those featured?

The best source of data we have for looking at household incomes is the Household Economic Survey, the latest release being for the year ended June 2015.

It’s clear that using the example of a couple earning, say, $120,000 between them not being able to afford a house in Auckland makes total sense when you can see that they’re in the 8th decile of household income.


On an individual basis, it makes even more sense when you look the relative position of such a household in the context of actual IRD individual income data.

Based on my calculations from that data, if they’re both earning $60k, they’re not individually in the top 20% of individual earners based on the IRD data. Thus, it makes complete economic sense that they can’t afford to buy a house in Auckland in the suburb their tastes and preferences might lead them to believe they deserve.

There is a seeming reluctance to acknowledge that it’s not really foreign buyers if they’re only 9% of property transactions (Source: Generation Rent estimate). It’s well-educated and very high earning couples teaming up, splitting fixed costs and being able to save for deposits in a couple of years if they budget well. Add in Kiwisaver and a non-trivial proportion of the households buying $1m plus houses aren’t even stretching their finances.

This “housing crisis” coverage is fascinating given that there are also stories currently running about rental warrants of fitness and the inability of lower income households to afford decent rental housing at all. This really is a story of first world problems.

What you need to know about hindsight bias, luck and house prices

Behavioural finance has made some great contributions to our ability to understand why people make decisions. A lot of the findings are around the rationalisation of outcomes in people’s lives. As people succeed or fail, they are increasingly likely to either blame others for their failures or point solely to their hard work as the determinant of their success. They basically make up a story that enables them to live with themselves.

Hindsight bias is sometimes called the “knew it all along” syndrome. The ability of many to point to house prices and compare two data points (price paid, current market value) without accounting for any of the explicit costs and more importantly compare the opportunity cost across a feasible set of alternative investment options throughout the holding period are a great reason why people should tune out of the “home truths” and “housing crisis” nonsense journalists are writing about.

I’m finding this whole thing quite amusing because one of my favourite economists Robert Frank was interviewed by Russ Roberts on Econtalk the other week talking exactly about this sort of stuff! The interview is obviously a good boost for his book “Success and Luck: Good Fortune and the Myth of Meritocracy“.

The premise of the book is that a lot of people totally ignore how lucky they actually are and deny that good fortune played any part in their success. This affects their attitude towards people who are less fortunate than they are. Obviously, hard work is like a multiplier on good fortune, some people blow up any opportunities they are offered but other people figure out the size or scale of the opportunity and are able to leverage that into a positive outcome for themselves and society at large.

But the part of the interview that I’d link back to all of this drama and over-sharing about ability or inability to “get on the property ladder” is that the whole point – relative socio-economic status – has been omitted from the discussion. When will a journalist really dig into how these people feel? Why are they talking about their degrees instead of talking about their genuine economic value add in the brave new world where robots are coming for everyone?


Where is the risk sitting?

Fighting the last war is always a problem.

Where is the risk sitting these days?

Some people think it’s still sitting on bank balance sheets – but there’s an argument that the cumulative effect of Basel capital structure adjustments and Dodd-Frank has reduced that significantly since the GFC.

Some people think it’s sitting in ETFs and ETPs, because some have high levels of liquidity despite being made up of illiquid debt instruments. It’s all interesting conjecture.

No one really knows, and the people who do know and are making bets against those instruments which are the riskiest are probably unknown until those bets pay off massively and there is a John Paulson of 2016 and another investigative book for Michael Lewis to write about how the GFC happened but all these lessons were forgotten in just 6 short years.

National Labour Force Projections And NZ Super


So, if these projections are reasonable, which I’d say they are, what is the subsequent impact on the cumulative housing supply deficit?

What is the point in having a far bigger labour force over the coming decades if there’s nowhere to house them in the style to which Kiwis accept as part of the social contract in this country i.e. no slums and a back yard?

Also, if the 65+ labour force is 10% of the labour force, and the natural rate of unemployment as considered by the Reserve Bank of New Zealand seems very high i.e. above 5%, then what policy options are there to incentivise their retirement?

If a few hundred thousand people who “qualify” for the NZ Super benefit were income tested and denied NZ Super that would cumulatively reduce the cost of NZ Super as a means of reducing elderly poverty by billions of dollars. Can we put that on the table please?

Source: Statistics New Zealand

Housing affordability can’t be solved under the status quo

Housing affordability can’t be solved under the status quo. There are too many vested interests in keeping house prices high. The capital losses required to make housing “affordable” relative to median household incomes around the country are too damn high.

Thus, housing can never become affordable unless there is an enormous reduction in demand or increase in supply. The supply side can’t keep up – new houses are an order of magnitude below that needed to impact prices and deliver the kinds of houses newly formed households both want and can afford.

What does the phrase “housing affordability” actually mean? That surely depends on who is doing the complaining.

From the perspective of an older person, “housing affordability” means capital losses, the value of their main asset going down instead of up, up, up. 

From the perspective of a politician, “housing affordability” means sound bites, and occasional pearls of wisdom that can never actually be implemented at sufficient scale to solve the “problem”.

From the perspective of a “first home buyer” housing affordability means stretching their median household income to Ponsonby as opposed to Papakura. Who knows? Is there even a stock meme for what constitutes a “first home buyer” demographic profile?

It’s not clear that any policies attempting to address the housing affordability issue can actually achieve their intended policy objective without accepting that they will impose capital losses on people already owning houses. This means that because it’s not politically possible it’s not actually going to happen.