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  • Writer's pictureGrant McLachlan - Column

Dopey economic theory causing social decline

The 30 July 2018 headline read "Auckland Council golf courses a $2b-plus development bonanza." I submitted a column challenging that perspective. It wasn't published. To this day, the contents of the column (as well as the reasons why it wasn't published) acts as a warning. Here it is.

Suggestions to sell public reserves and assets for the ‘greater good’ is the latest example of the absurd economic theory applied over the past thirty years that has achieved the opposite of what was intended.

The council claims that the council has $500m ‘invested’ in the Remuera Golf Course. Rubbish.

‘Open Space – Sport and Active Recreation Zone’ land is worth $0 to a developer as they can't do anything with it - unless they wish to develop the neighbouring ‘Residential – Mixed Housing Suburban Zone’ land overlooking it.

‘Value’ is being perceived where, in reality, it doesn’t exist.

The park provides the public good of open space that produces many cross benefits. If Remuera Golf Course is rezoned, sold, and then developed into ‘cram-as-many-as-possible’ townhouses, the value of neighbouring land can drop. Good luck getting those zoning changes through the courts.

The same dopey thinking applied to the ‘Million-Dollar State Houses’ argument under previous National governments. State houses are only worth a million dollars if they are sold for that.

The purpose of lower cost and social housing is to maintain socio-economic cross-sections within communities. Each community needs teachers, nurses, and labourers. When rates valuations or zoning rules change, or state houses are sold, many often can’t afford to live close to work. We are now seeing school staffing shortages and traffic congestion as lower income workers commute further.

The government has completely lost the plot with how to value and manage its land.

Tenure Review has resulted in Crown-owned land being sold to lessees, who then on sold the high-country stations for huge profits. Of the 2 million hectares of marginal grazing land, only 350,000 is now part of the conservation estate. Much of the rest has become billionaire boltholes and exclusive resorts. [Tenure Review has since been ceased.]

Land is worth what can be done with it. It isn’t difficult to see the value of a lakefront sheep station if just down the road people are paying over a million dollars for lakefront residential sections.

The opportunity cost of resource use doesn’t seem to factor into government decisions. Buying cheaper Chinese-built commuter trains resulted in New Zealand train workshop redundancies.

The ‘multiplier effect’ of one employed person spending their income has a flow-on effect to others in a community. This argument has been used selectively by government departments to justify things like the building of roads and subsidising sporting events and the film industry. It hasn’t however, been used to calculate the flow-on effect of government procurement of overseas goods and services which results in a regional factory closing.

Cause and effect has often been spun to suit a political argument. When inflation was soaring in the late 1980s, politicians to this day argue that making the Reserve Bank ‘independent’ tackled inflation. What had more of an impact was a huge increase in unemployment - much of it from mass redundancies in government departments and the removal of industry subsidies.

When a government goes from a ‘full employment’ policy to a ‘market economy’, having a large surplus supply of labour being paid a fraction of the minimum wage on an unemployment benefit keeps the cost of labour down. And it did. And inflation dropped. And interest rates.

Conversely, when there isn’t surplus supply, there is more competition for the resource.

The electricity reforms of the 1990s were an inane exercise. We went from having amongst the cheapest electricity in the developed world to amongst the most expensive due to splitting a diversified monopoly into a fragmented and illogically-priced uncompetitive model.

‘Think Big’ projects, such as the Clyde Dam project, were spun as a waste of money to justify privatising them cheaply. The Clyde Dam has since paid for itself manyfold.

The electricity ‘market’ hasn’t resulted in a desirable surplus supply. It’s resulted in wind turbines that are useless during a frost – when there is peak demand – requiring thermal generation as backup that is more expensive to run.

But why build surplus supply when you can just push prices up? Why build a stadium that can cater for 60,000 and attract major events when you can build one for 30,000, charge three times the price for a ticket, and make money from pay-TV subscriptions instead?

This illogic extends to the how the Reserve Bank ‘tackles’ inflation. The Consumer Price Index (CPI) is a distorted representation of the increased cost of living, especially in areas such as electricity consumption and housing. As the CPI doesn’t factor land value or the increased debt levels of households, the Reserve Bank’s low cash rate has fuelled property speculation.

We have an Auckland mayor applying a failed philosophy. He needs to seriously look at applying an economic logic that benefits the most people and leaves the fewest worse off. That is the legislative goal but successive governments have spun the problem into a vicious downward spiral.


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