Insights Issue 35/2014 - 19 September 2014
In This Issue
• RMA reform the golden unicorn of policy | Jenesa Jeram

• Scottish vote opens door to free banking | Jason Krupp

• Wealth funds: Sovereign and Civilian | Dr Eric Crampton

• All Things Considered

• On The Record

RMA reform the golden unicorn of policy
Jenesa Jeram | Research Assistant | jenesa.jeram@nzinitiative.org.nz

There is something deeply rewarding about Magic Eye puzzles, where if you stare at the image for long enough, and with the right kind of focus, you can discover the clearer picture.

Public policy is not like that. In fact, it is often the complete opposite: the longer you consider a policy problem, the more complex it appears. Policy problems are often multi-faceted, face unintended consequences, and are difficult to measure. There is no one, direct and immediate solution.

But just because policy problems are complex, it doesn’t mean all solutions are equally effective. And although silver bullet policies are about as rare and mythical as a golden unicorn, Ryan Bourne from the Institute of Economic Affairs argues that planning liberalisation gets pretty darn close. Although writing from a UK context, Bourne’s assessment is just as –if not more— relevant to New Zealand due to our heavily regulated planning sector.

He argues that not only would planning liberalisation ease housing affordability, it could also lower the cost of many goods and services, lead to a better functioning labour market, and improve productivity and wages.

It has long been recognised that planning restrictions and bureaucratic red-tape have been serious barriers to housing affordability. However, the connection between New Zealand’s planning regulation, enshrined most comprehensively in the Resource Management Act, and its impact on the labour market and the cost of living is often obscured.

When land costs are artificially high, as has occurred because of planning restrictions, these costs can in-turn affect workers and consumers. From childcare to social care to restaurants, high rents and property prices in turn raise prices for consumers. Land costs can also hurt lower-skilled workers’ employment options when lower margin businesses are forced out by artificially high rents.

Moreover, strict planning rules can affect labour mobility, as the cost of living in productive areas such as Auckland will price many potential workers out of the market. For obvious reasons, people want to live where the work is. If the cost of living is too high, there is a serious disincentive for people to move to the most productive regions.

While liberalising the Resource Management Act will not solve all policy problems found in these sectors, it is the one piece of legislation that inhibits the efficacy of all other policies purporting to improve housing affordability and the cost of living.

Land is a pervasive input into all kinds of production. When land costs are skewed by regulation, it’s hard for anything else to be right. It is only by lifting this layer of unnecessary complexity that we will get a clearer picture of policy challenges.
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Scottish vote opens door to free banking
Jason Krupp | Research Fellow | jason.krupp@nzinitiative.org.nz

With votes on the Scottish independence referendum still being counted, it is worthwhile pondering what the nation state will look like if the Scots choose to secede from the union.

There are fundamental questions that will need to be answered, such as how public debt, social services, and gas field revenues will be divided. But perhaps the most pressing one will centres around what currency the country will use should it emancipate itself.

The Adam Smith Institute weighed in, suggesting in a paper that Scotland pursue dollarization (or sterlingization), which involves adopting foreign currency without taking on board the associated monetary policy.

The think tank believes this could pave the way for Scotland to return to free banking.

For those unfamiliar with the concept, it is a system whereby private banks are subject to no special regulation via a central bank, and nor is there a lender of last resort. Instead shareholders are liable to depositors in the event of a bank failure.

Furthermore, banks issue their own money, based on individual reserves, held either in gold or a foreign currency, such as the pound.

The think tank argues that Scotland’s financial system would be better off by removing reserve ratio requirements, capital adequacy ratios, reforming deposit insurance laws and easing the barriers of entry to foreign banks.

This is premised on the belief that by exposing banks to unfettered market forces, they would be more prudent with their lending, and money supply would be far more responsive to changes in demand. Furthermore, domestic inflation or fiscal crises can also be avoided because the government cannot monetarise its deficits.

The paper backs its claims by looking at history.

Between 1716 and 1844, Scotland used a free banking system, which was characterised by “remarkable economic and financial stability which only ended when large banks successfully lobbied Westminster for government protections from competition”.

Furthermore, the paper notes that of the 48 crises that took place between 1793 and 1933, 41 took place in unfree banking systems, and half took place where there was a lender of last resort.

The institute also notes that several small South American nations successfully use free banking today.

Panama has used free banking for over a century, which the IMF has lauded for showing that there is no need for a “trade-off between generating optimal institutional arrangements and macroeconomic stability”.

According to the World Economic Forum’s 2013/2014 competitiveness survey, Panama is ranked 7th for soundness of banks, 7th for affordability of financial services, and 8th for access to loans.This makes a compelling case for the people of Scotland. Should they grasp the nettle of political freedom, let’s hope they grasp the economic one as well.
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Wealth funds: Sovereign and Civilian
Dr Eric Crampton | Head of Research | eric.crampton@nzinitiative.org.nz

Labour’s Sovereign Wealth Fund idea has taken a fair bit of criticism over the past week. The Herald’s editorial page called it “a policy without substance or merit”.

Economist Paul Walker strolled through the usual economic problems in state-directed investment funds: it’s not easy for the government to pick winners, and we too often rely on political rather than economic criteria for deciding what should be under state rather than private ownership.

One additional problem is that wealth funds directed at investing in clean energy sit uncomfortably with the Emissions Trading Scheme (ETS). The ETS seeks to reduce New Zealand’s greenhouse gas emissions by requiring emitters to purchase permits. If the ETS were properly designed, with appropriate consequent incentives for reducing emissions, the case for additional subsidisation of or government investment in clean technology is extremely limited.

Adam Jaffe correctly notes, in this month’s MOTU Research Update, that if technological innovation provides benefits far beyond those that the inventor can recoup, we could have too little innovation relative to some unattainable textbook ideal. But this provides little basis for government directed investment in environmental technology unless this general problem is far more severe in relation to environmental technology. Where an ETS allows an enviropreneur to sell carbon credits, that does not seem particularly likely.

Japan’s Ministry of International Trade and Industry, MITI, was established to help to solve the kind of problem Jaffe identifies. MITI played a role not entirely unlike the one that Labour proposes for a sovereign wealth fund: directing investment and credit towards preferred areas to encourage innovation and development. Among its less notable successes were its attempts to keep Honda out of the car market and recommending that Japanese firms abandon consumer electronics. As Stan Liebowitz and Stephen Margolis put it in Winners, Losers and Microsoft, “[v]ery simply, MITI, which may well have had the best shot of any government agency at steering an economy toward the best bets, was no substitute for the interplay of multitudes of profit-seeking rivals competing with each other to find the best mousetrap.” It is not plausible that a New Zealand sovereign wealth fund would do any better, competent though our Superfund managers are.

Perhaps instead we should consider a Civilian Wealth Fund. Each of us could receive an equal bundle of shares in our State Owned Enterprises to do with as we pleased. Instead of the SOEs being owned by “us”, we could really own them: each, and individually. Instead of “us” having to decide what to do with our rights to SOE dividends, we each could make our own decisions.
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All Things Considered

• Graph of the week: This link is for those of you, who, like this correspondent, are frustrated by having to repeatedly explain complicated plot lines to relatives.
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• Just when you thought that voting was one of the last good things you could do to change society, economists like Gordon Tullock come along and suck all the life out of it. The dismalscience indeed.
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• The Atlantic appears to have solved the housing crisis, though we suspect that once this gets out prices for Grey Lynn dumpsters will shoot up and certain parties will want to ban foreign tramps.
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• Call us cynics or wizened spectators of the political game. Either way, we saw this political break up happening a mile away.
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• Quoting from The Daily Mail: “Even among all the dastardly deeds King Richard III might have committed, there is one crime of which he never stood accused – he never harmed a goldfish.” Until now that is.
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• Speaking of the play and its alleged abuse of goldfish, the popularity of the theatrical production might explain this emerging field in veterinary science.
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• China has launched a pedestrian gadget lane so that people glued to their smart phones can amble in safety. No doubt bike advocates will sue for plagiarism.
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• The idea to hire transport planners that have used public transport may sound novel to some, but for Paula Bennet it’s humdrum. Wonder what the Minister of Corrections would say if itbecame mandatory?
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• The Palins seem to be eclipsing the Clintons and the Kennedys as America’s most entertaining political family. Drill baby, drill!
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• Police often get a bad rap, sometimes deservedly. This officer, vindicated by a leaked video, should be lauded for his patience and forbearance.
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• As far as tourism showpieces go, this time lapse video of Pyongyang is impressive, through it obvious neglects views of the authoritarian apparatus so common with dictatorships.
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• Speaking of North Korean, we are absolutely certain head of the Scottish National Party was only too thrilled to have his bid for independence endorsed by Kim Yong-un.

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On The Record

• Colbert’s legacy lingers on, Dr Oliver Hartwich, The National Business Review, 19 September 2014.
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• Why Scotland's vote has Brussels spooked, Dr Oliver Hartwich, Business Spectator, 18 September 2014.
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• The plan against the rebuild, Dr Eric Crampton, Public Address, 17 September 2014.
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• Kim Dotcom mixes campaign on (in German), Café Europe, 16 September 2014.
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• The Panel with Nevil Gibson and Tino Pereira (Part 2), Radio New Zealand, 15 September

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