Motu News - August 2019

Aug 21, 2019

From the Executive Director of Motu Research
Kia ora koutou. Some macroeconomists I know are starting to worry about the New Zealand economy as consumer and business confidence is weak and jobs growth has been near zero. Given the low interest rate environment New Zealand is in, any government stimulus to the economy would best come in the form of infrastructure spending. For my thinking, this means it is the perfect time to make a real investment into mitigating climate change.

The investment horizon for climate change is very long. A common estimate is, by the year 2050, the costs of climate change for the whole world will outweigh the benefits by US$1.5 trillion. More importantly, if we look at the next 150 years to 2200, everything flips, and the benefits outweigh the cost by around US$7.4 trillion. Such investment will have a massive benefit those who are alive then, but it imposes its cost now. All of these amounts are discounted at market interest rates.

To make progress we need to understand more about who will be burdened the most and how economic policy can be set to lower that burden in a way that is acceptable to society. For that we need to get a better handle on the economic obstacles and opportunities climate change poses through modelling and theory and practical economic research. Our research programme on New Zealand’s transition to a low-emission economy is continuing, our modelling ability is now world-class thanks to our Senior Fellow, Niven Winchester, and support from New Forest will further our research efforts on the opportunities and obstacles for land owners who want to enter the Emissions Trading Scheme.

Please do contact me on john.mcdermott@motu.org.nz if you would like to know more.
John McDermott
Executive Director

Migration, house prices and wellbeing

Recent studies by researchers at Motu have used deep-dive analyses of census rent and wage data to look into migration into and within New Zealand and the affect of this migration on house prices, rents, quality of business and quality of life. Migrants are defined as ‘domestic’ if they lived in New Zealand five years ago and ‘international’ if they were not living in New Zealand. The international category therefore includes migrants who were new to New Zealand and New Zealanders returning home after living overseas.

Between 1986 and 2013, the number of foreign-born New Zealand residents more than doubled, whereas the New Zealand-born population rose by only 8%. Over the same period, the average real (inflation adjusted) house price increased by about 140%.

The findings show that migration (whether from NZ-born or international migrants) doesn’t have an impact on rents but it does have a flow-on effect to house prices. A 10% increase in local area population is associated with 4–6.5% higher house prices. However, after controlling for population growth and differences in the socio-demographic characteristics of areas, there is little systematic evidence of a relationship between the composition of the local-area population and housing market prices. In particular, there is no evidence that a higher share of new (international) immigrants in an area is associated with higher house prices.

Interestingly, the evidence shows that cities and towns with a high quality of life, such as Motueka or Coromandel, attract migrants from other urban areas, but they do not attract migrants who have been living overseas for the previous five years, whether or not they are NZ-born returnees or international migrants. People aged between 30 and 59 who've lived in New Zealand for five years tend to leave big cities, such as Auckland and Wellington, where there is high quality of life and/or high quality of business and go to smaller places with even higher quality of life, such as Whitianga or Queenstown. Meanwhile when it comes to cities and towns with a high quality of business, such as Te Kauwhata (just outside of Auckland) and Lincoln (just outside of Christchurch), they do not attract domestic (urban or rural) migrants, but do attract migrants moving from overseas.

From housing to infrastructure to the perception and reputation of a town, migration needs to be considered in the formation of local government policy. This way our towns’ leaders can provide better solutions for towns and cities to positively influence their own regional development.

The working papers referenced in this article are “Housing markets and migration – Evidence from New Zealand.” and “The Contrasting Importance of Quality of Life and Quality of Business for Domestic and International Migrants.”

Fighting Climate Change a Bonus for Planting Native Trees

Over the last three years researchers at Motu Economic and Public Policy Research have worked with Hikurangi Enterprises Ltd to scope Māori landowner interest in native forest regeneration and carbon farming. With the introduction of the One Billion Trees programme, the mānuka honey industry taking off, and the Paris Agreement on Climate Change causing carbon prices to increase, earning an income from planting native trees or letting existing pasture regenerate into native bush is getting easier and more lucrative.

The Waro Project (waro means carbon in Te Reo Māori) partners with Māori landowners interested in new native forest or allowing native bush to regenerate on their land. It aims to better understand their decision-making process and how they have navigated through challenges and opportunities experienced in establishing their land-cover aspirations and advancing towards being carbon farmers.

Carbon farming includes any land use in which landowners receive economic benefits from carbon sequestration. Sequestration involves using trees, which ‘breathe in’ carbon dioxide (CO2), to capture and store CO2, lessening the potent greenhouse gas in the atmosphere. As part of the project, a website has been created to give advice for owners of Māori land thinking about becoming carbon farmers.

Upcoming Public Policy Seminars in Wellington and Auckland

Improving lives with global human rights data: past, present, & promise
Speaker: Dr K Chad Clay, Director, Center for the Study of Global Issues (GLOBIS), Associate Professor, International Affairs, University of Georgia.
Details: 12.30pm-2pm, Thursday 22 August, Aronui Lecture Theatre, Royal Society of New Zealand, Turnbull Street, Wellington.

Emissions budgeting: a UK perspective on zero carbon
Speaker: Mike Thompson, UK Committee on Climate Change
Details: 2.30-3.30pm, Tuesday 27 August, Aronui Lecture Theatre, Royal Society of New Zealand, Turnbull Street, Wellington.

Ideas for improving world order: the SERF index and what it reveals
Speaker: Dr Susan Randolph, Co-Director of the Research Program on Economic & Social Rights at the University of Connecticut’s Human Rights Institute.
Details: 12.30pm-2pm, Thursday 29 August, Aronui Lecture Theatre, Royal Society of New Zealand, Turnbull Street, Wellington.

Triumph of the high-amenity city? Analysing urban development in New Zealand
Speaker: Stuart Donovan, Researcher, Building Better Homes, Towns and Cities National Science Challenge
Details: 5-6.30pm, Thursday 3 October Room 105-029, Clock Tower Building, University of Auckland, 22 Princes St, Auckland CBD

For details of these seminars check out the Motu website.

Insolvencies and the macroeconomy

In Aotearoa, before the GFC a ‘normal’ rate of insolvencies involved about 13 businesses failing every year. Failures ranged from large corporates usurped by innovative upstarts to businesses whose product didn’t survive the test of the market. A sharp increase in the numbers of corporate insolvencies took place in early 2008. This was some months before the fall of Lehman Brothers on 15 September 2008, and some months after the U.S. credit crunch began in July 2007. The peak of 67 corporate insolvencies per month occurred mid-2008. After a brief lull, it wasn’t until late 2014 or earlier 2015 that the number of insolvencies returned to a more ‘normal’ level.

The single most important macroeconomic factor that led to a surge in business failure was costs, with input costs rising sharply relative to output prices. The paper, Changes in New Zealand’s Business Insolvency Rates after the Global Financial Crisis, by Motu's Executive Director John McDermott and Viv Hall, is available on the Motu website.

A bit of a boast

In February 2019, Motu conducted a survey to seek feedback on its climate change mitigation work over 2017-2018. The survey had 104 respondents. Key findings included:

• Ninety percent of respondents regard Motu as a credible source of independent expert information on climate change mitigation, and 86% consider that Motu has enhanced the quality of policy discussion on climate change mitigation.
• Motu has influenced climate change policy development in New Zealand, with 68% agreeing or strongly agreeing in the case of its work on emissions trading and 66% in the case of its work on low-emission pathways. This compares with 48% and 39%, respectively, in 2016.
• Motu’s main stakeholder engagement initiatives over 2017-2018 – the e-Mission Possible roundtables and ETS Dialogue – received very positive feedback from participants. In the case of the roundtables, 92% reported they increased their understanding of the issues and 84% would recommend them to a colleague. These figures were 84% and 79% in the case of the ETS Dialogue

Motu News
NZ funds human rights monitoring in Pacific: RNZ
Why GDP is no longer the most effective measure of economic success: World Finance
International immigrants not to blame for soaring house prices, researchers say: Stuff
A first step to pricing agricultural emissions: Newsroom
Some amazing coverage from media around the world about HRMI’s new data
The census cock-up is no outlier. Stats NZ has become a lumbering brontosaurus: Spinoff
Friendlier skies: a win-win solution to reduce aviation CO2 emissions: MIT

New Motu Publications

Motu Working Paper 19-16 Maré, David C and Richard Fabling. 2019. "Competition and productivity: Do commonly used metrics suggest a relationship?"
We demonstrate the power of recently redeveloped productivity microdata to produce a range of meaningful competition indicators highlighting different aspects of industry competitiveness. Combining these competition metrics into composite indicators, we summarise the diverse range of competitive environments in New Zealand by clustering industries into four distinct groups. Estimating the relationship between competition and productivity within these groups provides some suggestive results that the tail of unproductive firms may be truncated when competition is greater, in part due to greater selection-to-exit based on productivity. Overall, the limited evidence we find for a direct relationship between competition and productivity does not necessarily imply that the two are unrelated, but more likely reflects that changes in competition in New Zealand over the sample period have not been particularly pronounced, making it difficult to identify a systematic relationship. This research highlights different aspects of competition within industries in New Zealand. It draws on a redeveloped firm-level productivity dataset (Maré & Fabling, 2019b) and forms the basis for a summary report and web-based data visualisation tool (competition explorer) (Schiff & Singh, 2019). A Cut to the Chase from the Productivity Commission of New Zealand explains why these agencies undertook this work and some of the key messages that emerged.

Motu Working Paper 19-15 Hall, Viv B and C John McDermott. 2019. “Changes in New Zealand’s Business Insolvency Rates after the Global Financial Crisis.”
We examine the question of whether the rate of business insolvencies in New Zealand is related to overall macroeconomic conditions. In particular, our interest is in whether the rate of business insolvencies changed in the wake of the Global Financial Crisis (GFC). We find that there was a large increase in insolvencies in New Zealand following the onset of the GFC in 2008. We also find that the timing of the change did not occur uniformly over the country but occurred at different times in four key regional centres. Sharply rising relative costs were the most important macroeconomic factor influencing corporate insolvencies in New Zealand, Auckland, Waikato and Wellington, but have been immaterial in determining New Zealand’s total personal insolvencies. It is employment growth and house price inflation that have been significant in explaining total personal insolvencies.

Motu Working Paper 19-14 Hyslop, Dean, Trinh Le, David C Maré and Steven Stillman. 2019. “Housing markets and migration – Evidence from New Zealand.”
This paper analyses the relationship between local area housing and population size and migrant-status composition, using population data from the 1986–2013 New Zealand Censuses, house sales price data from Quotable Value New Zealand, rent data from the Ministry of Business, Innovation and Employment, and building consents data from Statistics New Zealand. Measured at the Territorial Local Authority and Auckland Ward (TAW) area level, we estimate the elasticity of house prices with respect to population is 0.4-0.65, similar but smaller elasticity of apartment prices, but find no evidence of any local population effects on rents. We also estimate the elasticity of housing quantity with respect to population of about 0.9. Although international migration flows are an important contributor to population fluctuations, we find little evidence of systematic effects of international or domestic migrant composition of the local population on prices or quantity. In particular, despite there being a strong correlation between immigration and house price changes nationally, there is no evidence that local house or apartment prices are positively related to the share of new immigrants in an area. Repeating the analysis for more narrowly defined areas within Auckland, we estimate a smaller house price elasticity with respect to population in the range 0–0.15. Finally, our analysis suggests that longer-term housing supply is relatively elastic, and demand inelastic, with respect to price.

Motu Working Paper 19-13 Coleman, Andrew. 2019 “Liquidity, the government balance sheet, and the public sector discount rate.”
This paper provides a review of the modern finance literature examining how liquidity affects the private sector demand for real assets and financial securities. This literature shows that when firms evaluate risky investments they distinguish fundamental earnings risk and liquidity risks, and choose discount rates that link the discount rates they use to the liquidity and structure of their balance sheets. The government can mimic their behaviour by adopting a procedure that (i) ranks projects by discounting their expected costs and benefits by a low ‘fundamental earnings’ discount rate, perhaps 4 – 5 percent; and (ii) imposes a second ‘liquidity’ discount based on the government’s balance sheet structure and debt objectives that simultaneously determines the quantity of investments. By more closely copying private sector practice, this approach will directly link the quantity of investments that a government makes to the discount rates it uses. It will also enable the New Zealand government to reduce the discount rates it uses to evaluate long horizon investments without compromising its aim of ensuring the public and private sectors adopt a common method of evaluating investment projects.

Motu Working Paper 19-12 Winchester, Niven, Dominic White and Catherine Leining. 2019. “A community of practice for economic modelling of climate change mitigation in New Zealand.”
The public and private sectors face important strategic decisions about low-emissions transitional pathways. Such decisions require sound evidence, with input from experts and stakeholders across the board. Models can be used for evidence-based decision-making, but New Zealand has shortcomings in its capacity for climate policy analysis, particularly in comparison with other jurisdictions. These deficiencies pose a serious risk to New Zealand’s future economic development. Climate policy analysis requires assessing a wide range of factors. A multi-model approach supported by multiple providers improves consistency, coordination, and collaboration across members of the modelling community, users of modelling results, and funders of modelling. This document summarises the compelling case for developing a New Zealand ‘Climate Policy Modelling Initiative’ (CPMI). This initiative would coordinate and enhance delivery of modelling across multiple providers. This work is informed by several workshops that brought together economic modellers from a range of organisations. If supported by government leadership and commitment, the CPMI would have a transformational effect on New Zealand’s capacity to plan for a successful low-emissions future.

Motu Working Paper 19-06 Grimes, Arthur, Kate Preston, David C Maré and Shaan Badenhorst. 2019. "The Contrasting Importance of Quality of Life and Quality of Business for Domestic and International Migrants.”​
We examine whether bilateral regional migration flows are driven by the city’s quality of life (QL) or quality of business (QB). The QL and QB measures are constructed using (quality-adjusted) rents and wages in each city. QL and QB reflect the willingness to pay of households and firms, respectively, for local amenities. The measures are constructed for 31 urban areas in New Zealand using five-yearly census data covering 1986 to 2013. We adopt a gravity model of regional migration – augmented by destination and origin QL and QB – to model bilateral flows of working-age migrants (post tertiary education and pre-retirement age). We also model flows between urban and rural areas and flows for the urban areas to and from overseas locations. We find different attractors for international versus domestic migrants according to the type of city amenity. International migrants are more attracted to cities with productive amenities whereas domestic migrants are more attracted to places with consumption amenities. Thus, in deciding on the type of city amenity to enhance, city officials implicitly choose the type of migrant that they attract as well as the type of city that may result. 

Climate Change Response (Zero Carbon) Amendment Bill: Submission to the Environment Select Committee from Catherine Leining and John McDermott
We strongly endorse the intention, direction, and overall framework of the Climate Change Response (Zero Carbon) Amendment Bill (ZCB). However, key aspects need to be improved to ensure it delivers sufficient policy ambition and certainty to unlock transformational investment and ensure a strategic and just transition for New Zealand’s economy in line with the 1.5oC global temperature goal in the Paris Agreement. Cross-party support is essential for the success of this legislation – and New Zealand’s pathway to decarbonisation. We call on all Members of Parliament to stand together in passing and implementing a strong and effective Act that provides clear long-term direction through a 2050 target, a framework for evidence-based decision-making and accountability on emissions budgets and plans, and establishment of an independent Climate Change Commission. We make recommendations for changes in the following areas: policy framework, 2050 target and emissions, budgets, emissions reduction plans, adaptation, Climate Change Commission, and alignment with the NZ ETS and NDCs.

Action on Agricultural Emissions: Submission from Catherine Leining
Last year, the Government asked the Interim Climate Change Committee (ICCC) to look into options to reduce agricultural emissions. The Ministry for the Environment used the ICCC’s recommendations, as well as conversations with leaders in the agriculture sector, to put together some proposed ways forward. Their Action on Agricultural Emissions: Discussion Document proposes putting a price on agricultural emissions at farm level from 2025. There are also two options for managing emissions in the interim. These options are to put a price on emissions at processor level, or establish a formal sector-government agreement. Catherine Leining has made a submission on this document. 

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