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  • Robert MacCulloch

When a Central Bank starts writing and talking like politicians, using tricky, if not downright misleading half-truths in their press releases, it verges on the disturbing. Read these lines in the RBNZ's 6th May "plain language summary" regards why it is "concerned about rising house prices" in NZ and what is to blame:

"Resilient household incomes, bolstered by wage subsidies, strong migration levels prior to the border closure, and supply constraints – including land use restrictions and barriers to the supply of infrastructure have also contributed to the recent surge in demand".

First, this sentence should be retracted by the RBNZ, together with an apology for failing 101 economics. It says that supply problems have led to a surge in demand. Supply problems have led to a restriction of supply and increase in prices - the idea they have led to an increase in demand is a stretch. Is the RBNZ confused about supply and demand and how prices are set? We knew they were weak on economics, but this weak? If this is the "plain language" version for us, the ordinary folk, I'd like to see the more technical version.

Second, the statement plays down the effect of the RBNZ's own $100 billion "Quantitative Easing" program, making no explicit reference to it. Border closures happened over one year ago, yet house prices have since gone through the roof, coinciding with that program. The Bank adds: "The cost of servicing a new mortgage compared to renting remains relatively low ... but, as with the levels of many global asset prices & the pace of their recent rise, the sustainability of house prices in NZ has been called into question ... long-term interest rates have been trending down for decades & the global monetary policy response to COVID-19 brought them even lower".

Hang on a second. They're blaming the "global policy response" to the virus and argue that asset prices are high (and long-term rates are low) practically everywhere!? But it makes little sense to blame global factors for high house prices in NZ, since a vast number of countries which have also experienced a downward drift in long-run rates have not had the kind of affordability crisis that we suffer from here. The RBNZ's unprecedented money-printing QE experiment has nothing to do with these long-run trends in interest rates.

Third, the reason why the RBNZ says it's currently "concerned" with high house prices - namely due to "vulnerabilities that this poses to the economy’s financial stability" - is disingenuous. The reason for the present concern is that the Bank's remit was changed by the Minister of Finance a couple of months ago due to vulnerabilities in the government's popularity caused by unaffordable housing, whereby many low income folks have been priced out of the market. Effective on 1 March, the Bank's remit was altered to require it to “assess the effect of its monetary policy decisions on the Government’s policy” which is to "support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers”.

Economists have learnt over many centuries that playing with words and not being transparent may lead to political success but typically comes at a terrible price in relation to the smooth functioning of the economy.

For sources, see:

  • Robert MacCulloch

I wrote an article today for the National Business Review with the above title. The NBR is well worth subscribing to. See or if you're too penny pinching to sign up to the NBR, here it is:

During the Cold War with the Soviet Union, politicians in the West often referenced the lack of freedoms in that country. In his 1961 inaugural address, John F. Kennedy famously referred to how we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and success of liberty." On the economic front, business owners from Europe to America to NZ widely admired the President’s stand. After all, a Soviet takeover would have led to the wealthy being disenfranchised. Firms would be nationalized; the distinction between owners of capital and labourers which Karl Marx so despised, obliterated.

And in 1975 National swept to a landslide victory over Labour helped by the most infamous piece of advertising in NZ political history - its “dancing cossacks” cartoon on TV warning of Soviet-style communism under Labour.

Back then, the alignment of economic and political freedoms was strong. The Soviets represented neither. It was practically taken for granted in those times that a happy union existed between free markets and democracies which featured the rule of law, independent judiciary and private media. Didn’t they go hand-in-hand and reinforce each other?

Meanwhile, in the ivory towers, famous political scientists were pumping out articles arguing how economic development inexorably led to inclusive institutions. In the 1970s, the top American political scientist Seymour Lipset argued that “the more well-to-do a nation, the greater the chances it has of sustaining democracy”.

However, over the past several decades, an alternative model, one not necessarily democratic at all, began attracting more attention. State Capitalism. Although there is no unified definition, this label has been given to those countries where the government retains a dominant role as owner or investor-shareholder amidst the presence of markets and private firms. Such governments often use state-owned enterprises to manage assets which they consider their “crown jewels”. They may select privately owned companies to dominate certain sectors. As well as run sovereign wealth funds for investment purposes.

Well-known examples include Singapore and Dubai. In the 1960s these places were poor, Dubai having little oil. But they subsequently undertook free market reforms and boomed. Singapore’s GDP per capita now far exceeds New Zealand’s. That being so, it comes with a dark side. Freedom House score Singapore 19 out of 40 for “political rights” and 31 out of 60 for “civil liberties”, noting how numerous structural factors impede the development of viable electoral competition”. The United Arab Emirates, which includes Dubai, fares even worse. Freedom House score it a bleak 5 out of 40 for “political rights” and 12 out of 60 for “civil liberties”.

Although they have enjoyed stupendous economic success, the small size of Singapore and Dubai, together with failed examples of State Capitalism in the past, made the model, until quite recently, a side-show. But the emergence of its leading proponent and soon-to-become world’s largest economy, namely China, changed everything. Whilst maintaining vast government ownership and intervention within a one-party State, China defied the odds and opened up massive parts of its economy to markets, calling the system “Capitalism with Chinese characteristics”. Whatever the name, it has lifted nearly a billion people out of poverty and left the western world uneasy that another model of success exists that isn’t an American-European story.

But if the Freedom House scores for Singapore and Dubai look bad, they rate China worse. At -2 out of 40 for “political rights” and 11 out of 60 for “civil liberties”.

So where does this leave us? With the fact that although much of Kiwi business see openness to China as financially appealing, it comes with a potential moral dilemma the likes of which has not existed before. Whereas in the 1960s no trade-off existed between money and the “success of liberty” regarding the Soviet Union, which failed on both fronts, State Capitalism may have helped create one. One that has left business divided over its support for a Kennedy-style “pay any price” foreign policy.

Certainly, trade-offs are not how China wishes NZ, nor the West more generally, to see things. International trade, it argues, invoking a who’s who of America’s own leading economists, is a win-win. As for human rights, shouldn’t a sovereign state have the right to design its own institutions within its own borders? Another Cold War is in no-one’s interests these days, it adds.

As much as they try to play it down, the China conundrum is a watershed for Labour which has stood, until now, for well-being, for health, for the environment. For how quality of life should triumph over a narrow focus on quantities like GDP. Borders must be shut even if tourism suffers, least the virus enter. Attaining a carbon neutral economy is a moral obligation to future generations even should the price be high. The Prime Minister’s reputation has been built around these kinds of non-material ideals. So the sudden reversal, arguing how we mustn’t mess with our “largest trading partner”, even over the objections of allies wishing to prioritize concerns unrelated to money, seems starkly at odds with Labour’s previous themes.

The unexpected political winner out of this situation may turn out to be ACT. Many of its supporters are libertarians with strong convictions in favour of freedom of speech and curtailing the power of the State. Business already has little doubt that ACT’s domestic policies of low taxes and less regulation are beneficial to it. The party’s DNA lies in a faith that free markets are key to prosperity. At the same time, marking out a moral high ground which is based around liberty in terms of its foreign policy may strike a chord with many Kiwis.



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Robert MacCulloch