Govt’s direction: Forward into the past
The ghost of Muldoon’s command economy has been revived — and the damage is growing
The first rule for a government minister put in charge of a New Zealand industry should be: “don’t break it”. Even a small sector has thousands of actors, most of whom have been living and breathing their industry for years and will likely know much more than the minister. And as a small country with relatively thin markets, breaking a sector is easier than you might think.
The second rule is: when designing a policy, have a clear idea what the objective is, and then look for levers that will help you get there. Think through the effect each lever will have, or you might fall foul of the law of unintended consequences.
Unfortunately, quite a few ministers in the current Government seem to be unaware of these important rules of thumb. In industries as diverse as housing, energy, tourism, international education and broadcasting, ministers are being highly interventionist in ways which will depress investment and generally make a bigger mess. Messes that will thwart their objectives and which we will all end up paying for.
Take housing right now. Let’s be clear that the current bubble in house prices is being driven mostly by monetary policy in the form of ultralow interest rates. Population growth has stalled since our border was closed a year ago, so it clearly isn’t a worsening supply shortage that caused last year’s 16 per cent increase in house prices.
As the Reserve Bank governor used to be fond of saying, house price increases are a feature, not a bug, in the Bank’s monetary policy response to the pandemic. Higher asset prices, including house prices, make people who own them feel wealthier and spend more, thus helping counter the recession.
The Government now realises house prices have gone too far so they are trying to make investment in housing less attractive by introducing increasingly draconian measures, which they euphemistically call “removing loopholes”. We literally therefore have the policy of one arm of government fighting the policy of another arm of government. Nobody knows which policy will win, but we know who the definite losers will be — people stuck living semi-permanently in motel rooms in cities and towns across the country.
The Government’s latest housing rules, if they work, will discourage people from investing in housing by making it less attractive than any other asset class. That’s not how you grow the housing stock. On top of that, people who rent out their existing home will be penalised. All of this means fewer houses than otherwise, and fewer available for rent. Rents will go up further and rentals will be even harder to find.
That’s okay — the Finance Minister has another band-aid to place on top of the other band-aids which are on top of the original intended monetary policy outcome. In a truly Muldoonist twist, don’t be surprised if his next solution is rent controls! These would bring another bucket of unintended consequences and make it harder for people to find a house to rent.
So what was the policy objective? If it was to ensure everyone had a warm, dry house to live in, we are going in completely the wrong direction. If it’s to halt house price increases, then we need to go back and alter the monetary and fiscal stimulus response to the pandemic, which has surely overshot its target, as it has around the rich world. And that probably means going back and revisiting the changes made to the RBNZ policy targets agreement made in 2018, which gave the bank responsibility for employment while removing consideration of asset prices.
But it’s not just housing that is suffering under this band-aid on top of band-aid approach. I spent two days this week attending the big annual Downstream Energy conference in Wellington. That sector too is grappling with more overweening and contradictory government policy that is damaging outcomes for consumers.
The Government’s stated objective in the energy sector is to reduce carbon emissions, which is a laudable public policy goal. However the levers it is pulling to achieve that outcome are both expensive and delivering results that counter its objective.
The gas exploration ban, which was done without consultation or even expert advice, is having the feared consequences. Investment in the gas sector is rapidly declining, gas supply is limited and unlikely to recover (through that lack of investment), and prices are on an upward trajectory. Meanwhile, in this dry year we are suddenly burning massive amounts of emissions-heavy coal rather than gas at Huntly to create electricity, and that is likely to continue.
That’s okay, the Government has a second lever. It is demanding 100 per cent renewable electricity by 2030, despite even its own climate boffins politely suggesting the timetable doesn’t make sense.
In support of that new lever, it has, out of nowhere, dusted off a hugely expensive old proposal, the Lake Onslow pumped hydro scheme, as its preferred solution for getting us there. The scheme’s backers, mostly a few engineers with nostalgic thoughts about Think Big projects of the 1970s, are overjoyed at the thought of digging a big hole somewhere in Otago. Most of the rest of the industry is shaking its head.
Simply put, Onslow is the wrong solution in the wrong place. It will chill other renewable electricity investments and either force up our already rapidly rising electricity prices or leave a massive bill for taxpayers.
And so it goes on. The Broadcasting Minister is planning on merging Radio New Zealand and Television New Zealand for a reason he struggles to articulate, but which runs counter to his objective of improving the viability of New Zealand media. If he’s successful he will create a hybrid state-commercial competitor which will be unfairly subsidised from our taxes to compete with the other NZ media companies, and that will weaken them.
Ministers need to more carefully think through the consequences of their actions. Right across the economy, poorly thought-through interventions risk damaging industries, discouraging investment and providing poor outcomes for Kiwis. Its almost like Muldoonism and the command economy never went away.
The Government’s latest housing rules, if they work, will discourage people from investing in housing by making it less attractive than any other asset class. That’s not how you grow the housing stock.