Tuesday, 15 April 2014

Bad economics and contemptible politics

It's election year, so maybe it shouldn't be a surprise that, according to (for example) the Herald's account, there's a "Rethink on foreign home-buying" underway, with various parties suggesting monitoring, controlling, restricting or banning it.

With the possible exception of gathering some data, this is a truly awful policy line to take.

We have an asset that's come into strong international demand (and which we're capable of building more of), and we want to stop the people willing to pay us high prices from getting out the cheque book? What sort of madness is that? It's as if the Aussies decided that their own manufacturers weren't getting coal or iron ore cheaply enough, so they won't sell any of it to the Chinese.

Let's face it: this is protectionism, pure and simple, and one of the things we know about protectionism is that it is a self-defeating, negative sum game. Both the 'protecting' country and the countries being 'protected' against end up worse off than they would have been if they had been allowed to trade freely with each other.

Some other countries control access to their housing markets? Among the many possible correct responses are: (a) more fool them, (b) most of us learn as adults not to put our hand in the fire just because Little Johnny did, and (c) I'm not inclined to take much economic or political guidance from overseas countries with political and economic systems often a lot worse than ours.

And why is the politics contemptible?

Try rewriting any of the news coverage of the proposed policies with 'Catholic', 'gay' or 'black' substituted for 'foreign'.

10 comments:

  1. one of my favourite Aaron Sorkin lines:

    "We have serious problems to solve, and we need serious people to solve them.

    And whatever your particular problem is, I promise you, Bob Rumson is not the least bit interested in solving it.

    He is interested in two things and two things only: making you afraid of it and telling you who's to blame for it.

    That, ladies and gentlemen, is how you win elections.

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    1. Thanks - great definition of a 'populist'

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  2. Generally I agree strongly regarding the benefits of trade, but of course we live in at least a second best world, in which local councils, facilitated by Parliament, severely limit property owners' land use rights, and hence drive residential land (and house plus land) prices sky-high. A strongly first-best option would be to remove most of those restrictions. But that shows no sign of happening, and our first home buyers are caught in the middle.

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  3. Thanks - a lot of these issues aren't 'either/or' things and as you say likely need tackling on a number of fronts

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  4. I'm not trying to defend Winston Peters (god forbid), or advocate for these policies, but I have to disagree with a couple of things you've said.

    "We have an asset that's come into strong international demand (and which we're capable of building more of)"

    - a house is not just a collection of bricks and mortar and wood and corrugated iron, it's an occupied geographic location, that can't be occupied by something else so long as it remains there. Of course this doesn't necessarily mean restrictions are warranted, but I hardly think it is analogous to exporting coal.

    "And why is the politics contemptible? Try rewriting any of the news coverage or the proposed policies with 'Catholic', 'gay' or 'black' substituted for 'foreign'."

    I'm sure a lot of the motivation for these policies comes from xenophobia, and certainly a lot of the discussion and media coverage is rooted (implicitly at least) in xenophobia - and I agree appealing to those sentiments to advance your policy position is contemptible politics.

    However, as far as the policies restricting the sale of land/homes go (as I understand them) it's not a matter of foreignness, it's a matter of residency status (and citizenship), which are not things we usually have an issue discriminating over - obviously there are a multitude of things a non-resident, non-NZ-citizen can't do that a NZ citizen or resident can.

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    1. Don't yet see why it's not analogous to exporting coal. The fact that a geographic location with a house on it can't be occupied by something else so long as the house remains there simply means that there is an opportunity cost to building a house. Same as there is to exporting coal. In each case, that is why you expect to be paid money for it.

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    2. Well, I was taking issue with Donal's statement that "We have an asset that's come into strong international demand (and which we're capable of building more of)" -- and my point was that, because a house is just as much about the land it sits on as it is about the house itself, we're not capable of building more - a house on the periphery of a city is not equivalent to a house close to social/cultural/employment centres, and while those desirable zones will expand, there are more factors than just the supply of new houses that determine how, when and where they do.

      I would also add that housing is different to coal because, being the place where people live, it has a massive psychological impact on people. I'm not arguing this means we need to introduce restrictions on purchases for non-residents, but I think more regulation is appropriate for housing than it is for coal - whether that's taking action to make buying a house more affordable, giving renters more protection, providing more non-market housing (i.e. state housing), or whatever it may be.

      The ultimate point is that (anecdotally, at least) there are a lot of people in New Zealand who do not have sufficient housing, or do not feel secure in the housing that they have. I think that providing security and stability for these people should be one of the fundamental roles of government, and I think ultimately it is to the benefit of the entire country to do so.

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  5. Thanks for your thoughtful comment (and apologies for delay in responding but have been away over Easter): as you say, it's hard to take a principled line for some form of controls without risking being in unsavoury company, and you've done a good job of it. I can see your point of view. I suppose where we end up is that there is a spectrum of things you might consider allowing non-residents or non-nationals to do and I will generally be found somewhere out at the permissive end, mostly on free-trade-like grounds. And sometimes other countries draw the line out there, too: I can recall being able to vote in local elections in the UK, for example, without being a UK citizen.

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    1. Thanks Donal.

      I would say that for most things I am also at the permissive end of the spectrum with regards to distinctions between citizens and resident - for example, I think the fact that NZ allows non-citizen residents to vote is a good thing, and in general I think there are very few instances where a citizen should be treated differently than a permanent resident.

      I'm maybe a bit more towards the restrictive end when it comes to distinctions between citizens/residents and non-residents - but I would be in favour of making it easier to gain residency/citizenship.

      As for the policy of regulating property investment by non-residents, I've yet to be convinced that it is the right path to take, and the framing of the issue by many supporters leaves a very bad taste in my mouth -- however, as I mentioned in my reply to Albert Ross, I think the current arrangements are failing many New Zealanders, and some kind of action is appropriate and necessary to provide people with security and stability.

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  6. Thanks again. I have to fess up and say that for the sake of argument I have been bypassing some of the distributional outcomes of high house prices, but I can see that there is a potential issue about access to affordable housing for some groups, akin to affordable access to health services or other necessities of life. I think where the discussion has gone is that there is agreement that preventing the aggregate rise in house prices (through restrictions on non-residents or otherwise) isn't the answer, but it's not obvious what is. Part of me wonders if there is a market failure at all: in a workably competitive market you'd expect (maybe later rather than sooner) a vigorous supply-side response, and it may be underway (go out to the area around Silverdale, for example, and it's currently one massive house construction site). But perhaps Michael's opening comment was right, and there are obstacles (eg local authorities) preventing the market supplying the more affordable end, in which case you;d have to look at some policy response to get the goods delivered

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