Dispatches from the Core

Dr Eric Crampton
The National Business Review
7 July, 2018

We are lucky that, last year, economist Aaron Schiff provided us with an excellent collective noun for a grouping of economists. Owls, in concert, form a parliament. Economists, in convention, form a core.

Or at least they hope to.

In economics, the ‘core’ is the set of alternatives that cannot be beaten by some option from outside of the set. So a good economics conference will bring together all of the ideas that cannot be beaten by ideas that didn’t make it to the table.

Last week brought the 59th annual conference of the New Zealand Association of Economists. I attended and here bring dispatches from the core. I learned a lot about a lot of things.

Boston University’s Robert King led with a plenary address highlighting the importance of reserve bank credibility. Everyone understands that point: credibility is expensive to build if you don’t have it, and important to guard when you do. King’s work tries to understand what happens when people are not sure whether the Bank really will follow through on its intentions.

I take as implication that a Bank must especially guard its reputation when undergoing changes that might bring uncertainty about its intentions – like in any transition to a dual mandate. 

Understanding maternity
AUT’s Lydia Cheung explained how the 20-hours free early childhood education policy resulted in a 4-10% decline in earnings for new mothers. Anticipating the subsidy that would come in at age 3, new mothers worked less during their child’s first two years. Motu’s Isabelle Sin showed the substantial drop in earnings for new mothers relative to new fathers, with large drops in the number of hours worked and reductions in hourly wages that are particularly large for mothers who took more than a year to return to work. Understanding the wage gap requires understanding maternity.

Victoria University’s Ilan Noy demonstrated the regressive effects of EQC’s land coverage. A substantial portion of claims wind up coming from landslips on slopes from relatively more expensive properties, but land coverage is free with every EQC policy with prices that do not vary with land risk.
Related work by Motu’s Sally Owen, showing the regressivity of EQC coverage in the Canterbury earthquakes, won the Seamus Hogan Memorial Prize.

The plenary address from New York University’s Julia Lane was beautiful and filled me with despair. She explained how America is starting to build towards the kind of linked administrative data that New Zealand has in its Integrated Data Infrastructure. Unless Statistics New Zealand is able to adopt some of the more open data practices being developed in the United States, I expect our IDI will be lagging American data within a few short years.

But I made a particular point of hitting the sessions on urban economics.

Urban growth
Auckland Council’s economists provided a good summary of their take on urban growth. If you want to understand why we have a housing crisis, looking at how Auckland Council views growth is a great place to start. They argue that residential zoning and infrastructure provision adds $110,000 to $160,000 in market value to a 500 square meter section, but that capital expenditure on that infrastructure costs $146,000 per dwelling.

And remember that, at Council’s borrowing limit, any infrastructure has to pay itself off in additional rates in under three years.

The council, meaning ratepayers generally, bears the costs of urban growth while central government earns GST, income tax, and company tax from a growing city. It is no wonder that central government and Auckland Council often do not see eye-to-eye on growth. That calculus would change with better ways of financing urban infrastructure for growth.

The council’s economists commendably prefer targeted rates to development contributions and prefer setting tax rates based on land value to rates based on capitalised value.

But they seemed to miss the potential of structures like revenue bonds to both better fund infrastructure and to open up competitive infrastructure delivery. I can understand how a monopoly supplier of infrastructure winds up with capital costs of almost a hundred and fifty thousand dollars per dwelling, but I do expect somebody could come up with more cost-effective solutions.

In later sessions, the urban economics consultancy MR Cagney showed how rural/urban boundaries continue to inflate the value of zoned land in Auckland and elsewhere.

Arthur Grimes showed that, across New Zealand, places providing a good quality of life tend to be worse for doing business – a trend also seen internationally. One potential explanation is that councils do not have to work as hard to provide efficient services if they are blessed with beautiful weather and great beaches. It would be interesting to see whether Grimes’s measures correlate with any of Local Government New Zealand’s CouncilMARK ratings of the quality of local councils.

And joint work between economists at Auckland University and AUT showed that while urban residential upzoning, allowing more intensive land use, provides a lot of value to the owners of less-developed properties in the newly upzoned area, it can reduce the value of already developed properties. In short, there is a premium for sites that can be intensified. Land values increase for those properties. Housing affordability can still improve because more dwellings then sit on each site. But we might expect opposition to upzoning from owners of already-developed sections.

New Zealand’s relatively small community of economists is often a hindrance, but it allows conferences where practitioners, bureaucrats and academics can have conversations that are more difficult to arrange in bigger places. Academics need to know what is actually going on in the policy field, and policy practitioners need to know what is going on at the research frontiers.

The New Zealand Association of Economists deserves plaudits for helping to build the core.

Stay in the loop: Subscribe to updates