Blog | Auckland’s Economists on New Zealand: Policy Problems, Solutions, and Misconceptions

By Paul Simperingham

Recently, Paul Simperingham of the Public Policy Club’s content team sat down with three of the University of Auckland’s most prominent economists to discuss pressing policy matters in New Zealand and around the globe today.

Meet the Economists

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Dr Asha Sundaram is a senior lecturer in the University of Auckland’s Economics Department, where she focuses on international trade and development economics. 

Dr Sundaram grew up in Mumbai where she first became interested in economics and trade when she saw how India changed completely when it opened up to trade in 1991. From there she studied at the University of Mumbai, University of Oxford, and received her PhD from Syracuse University. 

She eventually made her way to the University of Auckland, where she was attracted by the quality of life in New Zealand and the complementary skills of the economists already here.

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Dr Ryan Greenaway-McGrevy is a senior lecturer who also serves as the head of the Economics Department at the university. He is an econometrician who has published research both on inequality, and the housing market in New Zealand.

Originally from Auckland, Ryan was attracted to economics by a particularly “cynical and grumpy” highschool economics teacher. He received both his Bachelors and Doctorate from the University of Auckland before moving to Washington DC for 7 years at age 27.

He then returned to Auckland with his wife to raise their kids, which he sees as “the best place in the world to have kids”. 

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Dr Steffen Lippert is a senior lecturer who joined the University in 2014 after first coming to New Zealand in 2006 where he first lectured at Otago and Massey. Dr Lippert’s PhD is jointly from Toulouse and Manheim universities, and his expertise is primarily in competition and innovation, social interaction and networks, and contract theory.

After growing up behind the Iron Curtain in East Germany, he first studied business administration before he was drawn to economics and away from business after hearing a management professor say “you’re not supposed to understand things, you’re supposed to memorise them”. 

 

Questions for All

Could you discuss some of the misunderstandings or misconceptions you think people have about economics or economists? Either with the public or media.

Asha: Oh yeah, major misunderstandings. People don’t understand what economics is – they mostly ask me about the stock market and macro stuff. They read about unemployment, and GDP and think that’s all economists do. 

I think the whole side of microeconomics about behaviour and incentives is ignored, that’s a big chunk of what we do. People don’t think we study anything like health or education, they think we are just focused on GDP growth. But that’s what’s lead to the mess we’re in; we care about the distribution of wealth, not just wealth. Ignoring the intersection between economics and politics, I think, leads to things like Brexit and the Trump administration.

This is also a lot our fault. For a long time, there was this whole focus on neoliberalism and neoclassical economics, but it has opened up a little bit in that space with behavioural and experimental economics becoming more mainstream.

Ryan: I do sympathise with the media. We don’t talk to them as much as would be good, partially because we know how much we don’t know and we’re unwilling to say anything that we aren’t confident about. We often have a really short time to answer and prepare they’ll call me asking if I can do an interview this afternoon, I’ll ask if we can do it next week instead, but by then they have to move onto the next topic.

Steffen: I think there are two big things. The first is that everyone thinks we look at interest rates and money, but most of economics is about decision making. It’s about anything. It can be financial decisions made by firms, but can also be voting decisions, or what people in a committee choose to do. The second big one is probably the role of mathematics and modelling. We often hear claims that our models are unrealistic, and that’s coming from, I think, a misunderstanding of what modelling is able to achieve. 

Is there something that you see New Zealand doing that you think the rest of the world could adopt or vice versa? Where do you think there’s a particular policy or approach that you think one or the other could learn from? 

Asha: I think this new government is doing very well on this pitch of well-being, Jacinda talked about it at the U.N. and so on. The idea of not just focusing on GDP, not just per capita consumption. There is a big debate on how you actually measure it, but I think in this day and age of data we should be able to do a decent job.

However, people say that New Zealand is great with the environment, but I have questions around dairy and meat industries. I don’t think they’re putting enough thought in terms of diversification of the economy, particularly the nexus between immigration and how you could have a large services industry. There is the graphics design and Xero, but other than these firms I don’t think there is a lot of thought that goes into diversifying into services. So I would say that New Zealand needs to do more of this. New Zealand has moved a bit anti-immigrant with this government which I think is quite sad.

Ryan: Something interesting that New Zealand is doing now, and something that is quite innovative is the Auckland Unitary Plan. Until Auckland did it, no city in the world had up-zoned housing regulations in order to enhance affordability, and since then Portland and Seattle have both adopted similar plans.

Something that we don’t see a lot of in New Zealand is evidence-based debate over policy. Not like as you’ll see in, for example, the US. It’s hard because in the US even a little bit of money thrown their way makes a big impact, but in my view, the incentives in NZ are misaligned. If I write something about inequality in NZ, to get it published I have to connect what I write to the global economy. This leads to us using examples that apply to the US or Europe and then trying to apply them to NZ.

Steffen: One thing that I have really enjoyed seeing New Zealand implement is the Treasury living standards framework for public policy. That, and the explicit acknowledgement that we need to think about how economic outcomes are distributed both within and across generations. It is extremely important for social cohesion; it’s something that many countries aren’t doing and a lot of the problems that we see are coming from this attitude. Populist parties coming into power in Europe and in the US and elsewhere are coming exactly out of the neglect of distributional concerns, out of people being disenfranchised and feeling ignored. So that’s something that we’ve at least started to do. 

I do think we could go further with it. For example, we have no need for homelessness in New Zealand. When I first came to New Zealand in 2006 there was basically no homelessness. 13 years on it’s a striking difference. We don’t need inadequate housing, or people sleeping in cars or garages. Again looking at this framework, we could invest in more state housing, not everyone needs to buy their own home. For example, my mother has been living in the same rental apartment in Germany since 1972. When I first came to New Zealand I started renting and within two years I had two different landlords tell me they would like to sell this property would I please move out. The only way of getting some stability into our life was to buy a house and I think this is very similar for many many people.  So maybe we should consider adopting stronger tenancy laws. 

Another one is increasing R & D (research and development) funding at universities. If you’re comparing research funding in New Zealand with that in Australia, it’s much much more generous in Australia than it is in New Zealand.

If you were suddenly the supreme leader of New Zealand and you can introduce any three policies, what would they be? 

Asha: I don’t have any specific policies, and I’d need to think on it, but I can tell you what areas I think need attention. One would certainly be the inequality and the housing market as it is. With the wealth that is in New Zealand, there has to be some solution. I mean, there are political issues with the capital gains tax, but I think some form of capital gains tax is essential. The other is the immigration thing I mentioned, I think the current government went back. So there are more restrictions now on immigration but I think this is actually a good time to be opening up to more immigration. So that’s two. And then on the environment, there’s the diversification of exports away from dairy and agriculture.

Ryan: Well, first of all, I’d relinquish my power. But apart from that, I would be interested in putting resources into all-around tax reform. Firstly I’d like to lower income taxes at the lower tax bracket to increase the incentive to return to work, primarily motivated around concerns over equality. Then to make this policy revenue-neutral, there would be two policies. Firstly, through a carbon tax motivated by concerns around climate change. I think there are a lot of inefficiencies around the emissions trading scheme so I would replace it with a carbon tax. On the flip side, I would introduce a wealth tax based on the unimproved value of land. It’s a progressive tax because it will generally affect wealthy people more than poor, but it also doesn’t distort incentives. It’s hard to alter your behaviour to avoid this tax: the amount of land is fixed – unlike people being able to work more or less. Then from a tax evasion point of view, it’s not like you can move your land to the Cayman Islands. It actually creates a significant incentive to improve the value of what’s on the land, so if you take your farm and build an apartment block then you’ll improve the value but still pay the same tax. Along with this, it creates an incentive for people that have lots of assets but can’t be productive with them. For example older people owning a house in a popular area, they can sell for a large sum and avoid paying a tax when they aren’t earning anything from the asset.

Steffan: If you are someone who doesn’t need to be re-elected or doesn’t need to be elected, then you want to do policies that you think the politicians don’t dare to do. So, these are small things that I think no one has the guts to do but will have a big impact.

I’d want comprehensive capital gains tax. It’s something that has been talked about for so long but politicians don’t have the guts for. The next thing I’d probably do is break up New Zealand’s effective retail duopoly. I think the markups these powerful duopolists are able to achieve are hurting not only buyers but also suppliers. The third thing I’d do is look at what the welfare expert advisory group has published last year and implement those things. It starts with small things like dignity, then also a simplification of a lot of processes and to have a larger role for communities; for whanau, iwi, families but also church communities et cetera.

Productivity in New Zealand lags behind many of its contemporaries, and it is below average in the OECD. How do you see this issue? Is it a little bit inevitable because of the small size and distance of New Zealand, or what are some possible solutions or improvements we could make to make our economy more productive? 

Asha: I think the housing market does distort a lot as it’s a lot of unproductive investment. We want investment into innovation, and capital into productivity. I also think distance is a problem, but this is where I think things like service exports can help because you can use communication technology and New Zealand can carve a niche I think in service exports. 

I think even using immigrants skills well is a boost to productivity. New Zealand is new to the immigration game, but even things like cultural assimilation of migrants, and trying to make it easier for them to find the right jobs.

Ryan: If we want to keep up with medical advances and not allow it to become just something for the wealthy, then we need to take productivity seriously as an issue. Similarly, if we care about the environment, then we need to consider our economy that is dominated by tourism, and commodities. So that’s why productivity is important – as for how? The most productive industries are going to be located in cities in tech sectors; either IT or high-tech manufacturing. So Auckland’s housing has to be sorted out while maintaining the pleasant aspects of Auckland. Lots of academic research shows that if you want to stop growth in cities you need to make them expensive.

Anything beyond that, I don’t have a lot of answers. We have problems with getting venture capital in New Zealand, so all these entrepreneurs end up heading overseas, at least partially. You don’t want to see these entrepreneurs become highly productive only upon heading overseas. That’s a difficult nut to crack and possibly where universities could play a role. A lot of why Silicon Valley is where it is, is because of Stanford. They have this revolving door with the private sector. So I think we should do more to cultivate that relationship with the universities.

Firms also often want to expand and can’t find people. So perhaps as a university we could do a better job signalling where the employment opportunities are. 

Steffen: Two things that I’ve already talked about and would at least partially address this problem. So if we have a capital gains tax people stop investing money in unproductive assets. If we were to deal with the lack of competition in this country in a stricter way I think we would be avoiding a lot of misallocation of resources which will, in the end, be beneficial to productivity in the country. I think these things will lift real wages, and we need to do more to promote competition, which in turn is a very, very strong driver of innovation. 

So reducing competition would do two things, it would reduce deadweight loss and we would give people more incentives to actually get up and innovate. 

 

Fields of Expertise

Asha, you’ve previously talked about how in a lot of ways the world trade system is breaking down, and many of the rules that we used to operate by are broken. How do you see this issue continuing to change in the future? What are some of the implications you think for New Zealand moving through a new system?

I am extremely nervous like everybody else. Honestly, most mainstream economists did not think that the trade war would continue as long as it has. I think a lot of people are hoping that 2020 will change things, but I think it really depends on what happens then. If the Trump administration is voted out we can pretend like this was a blip. If that doesn’t happen, then I think the WTO really needs to start getting real. Essentially you have the U.S. withdrawing from its leadership role in trade, whether China can and is well placed to take that role we don’t know. We are optimistic about let’s say countries like France, Germany, China taking that leadership role. The UK has… it has its own problems so we don’t have high hopes of the UK either. So it’s really up to the European Union i.e. Continental and China, India and the large developing countries to sort of go forward. 

So for New Zealand, it’s a small country which means it does not have a lot of bargaining or negotiating power. I think New Zealand trade negotiators, by the way, are some of the best in the world, to get the kinds of deals that New Zealand gets with its size you have to be extremely good. So I think New Zealand, the negotiators and this government are aware of this, so they’re trying their best to make sure that the WTO system stays the way it is, either with or without the US. If they withdraw from the WTO and they cut a deal with China, and we have a system where large players are cutting deals with each other, that’s bad for New Zealand, because we’re not going to be able to cut deals with anyone. 

It is a great thing for New Zealand to get in on a thing like the CPTPP. Given that the WTO system ideal of the whole world being one big trading bloc isn’t going to happen, the next best thing is regional trading blocs. That is what New Zealand needs to do, slot itself into a very massive trading block.

Ryan, could you discuss some of your key findings around housing and affordability, specifically what do you think about the council and government’s current approach to tackling housing? 

Auckland unitary plan is definitely a step in the right direction but it remains to be seen. We’ll need 10 years to evaluate if it has really been effective, and Auckland Council gave itself until 2030 to make house prices only five times annual income. However, my own research on that shows that there was already some initial price effects in the more intensive forms of Housing, where we have seen a little bit of a price drop. With the market already anticipating supply coming, that is also increasing the value of houses that are sitting on a lot of land. The areas that have been targeted for density have seen a 100% increase in consents, so while it’s unclear if it will be enough, at least it’s creating the kind of construction that it was intended to.

On the foreign buyer’s ban, I don’t see a lot of drawbacks, especially because foreign money can still contribute to new dwellings. Seen in the context of high housing slowly strangling the economy, every little bit helps. Kiwibuild I know has a bad rep, but it remains to be seen if it was a positive net present value project, but it’s still a step in the right direction. 

I will also give National credit for trying to stem the rise of housing costs with the bright-line capital gains tax. But on the whole National, at the least, seemed oblivious to this growing problem and the threat it poses to our productivity as well as everything else. Labour seems to be much more aware of it, but whether it’s enough remains to be seen – but ignoring the problem is a very bad thing to do.

However, there are other ways to reduce the cost of living and housing, for example, better and faster public transport so that other areas such as Helensville, Kumea, and Warkworth are viable options. Pukekohe already has the rail down there, but it’s ridiculous that you have to take two trains.

Do you see the same housing problems and solutions in other areas of New Zealand? A lot of people are attributing these problems to spillover from Auckland as people and a lot of money leaves the city. So do you see similar solutions? Do you think the Wellington unitary plan would work?

Wellington should definitely be looking at what is happening in Auckland because they are very geographically constrained, the land basically is vertical at some points, so the city has to do the same. So, yeah they need to be looking at how housing could be done more efficiently through building up.

But some other cities are a bit luckier. Hamilton, if you look at a satellite map of it shows the territorial authority has built up to the edge of the city but you have all this farmland beyond that is sort of off-limits. If they open it up in a sensible way so infrastructure is paid for, they don’t have to watch this spillover from Auckland, and see the prices rise. They can learn from it, and it would be very much in the interests of young people that want to live in Hamilton. But the problem is that it isn’t in the interest of the older generation, they want the prices of their houses to go up.

Steffen, New Zealand is consistently rated as one of the most business-friendly countries in the world, yet it is often considered an unfriendly environment for startups. What reasons do you see for this? How do you think New Zealand could become a country more friendly to innovation? 

So we’re very far away from both goods markets and financial markets, so our domestic markets are often small and not very competitive. We are far from active venture capital. I think these are things that are difficult to overcome, but I think we need to overcome these issues by looking at markets where we don’t have to ship so much. Things like IT and these sort of high-value service industries.

And then the second one is very difficult because in venture capital and angel investor markets, it’s really important to have face to face interactions and it’s important to have a lot of experience. We have a very thin market for these start-ups as it is in New Zealand. So the critical experience is difficult to build up. So there is, maybe, a role for government there. Maybe we could use our NZ Super Fund that we have, and give them the mandate to have a larger share than their current – I think they’re currently investing about 5 percent on risky start-ups in New Zealand – maybe give them a mandate of going up to 10 percent in start-ups in New Zealand or maybe invest these things through the New Zealand Venture Fund as well. That’s a possibility I think. Given private investors in some parts of this world were able to learn how to pick winners, it may be possible to do that, as well as attracting people who worked for those kinds of companies to do this. 

Another thing I think is attracting bright students and keeping them here. So a lot of you guys after finishing university are taking off going to Australia for greener pastures rather than staying in New Zealand. 

I think it would be very good for the economy, in that sense, to give incentives to stay here. There are incentives in place so you don’t pay interest on your student loan if you’re staying in New Zealand and you do pay interest if you’re going abroad. So maybe a point about attracting meritorious international students – clearly this cannot be free for everyone to come here – but it could be targeted to get clearly bright students, then connect that to a requirement to maybe work in New Zealand for five years after finishing university. I think that would be beneficial for New Zealand innovation and New Zealand productivity.


Finally, do you have any questions for me or any final comments you’d like to add?

Asha: Not really, but I would like to say I think it’s really important for us to be able to have this dialogue. Economists need to do a better job establishing a relationship with the public, so I hope we can continue this into the future.

 

To read the full unabridged interviews with any of our economists, click any of the links below:

Asha Sundaram

Ryan Greenaway-McGrevy

Steffen Lippert

 

Featured image credit: http://www.icavs.org/owengglenn/

The Public Policy Club is a non-partisan club at the University of Auckland that aims to encourage, educate and involve students from all backgrounds in the education and development of political knowledge. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of PPC.

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