No Country For Young Men

No Country For Young Men
2010 ACT Conference Address

This is the most carbon intensive speech I have ever given.

Normally a human being speaking excretes only about three hundred grams an hour.

My flights from Canada to here and back in a 747 emit about eight tonnes per passenger.

But I’m going to use my hundred gram allowance for this speech in a way that should annoy the Greens, or at least their big government bed-mates, even more than the eight tonnes it took me to get here.

The first is that we should be on the brink of an intergenerational civil war in this country.  There is a lot in this country’s public policy for Kiwis to be angry about, but there are certain things that Kiwis under thirty-five should be particularly angry about.

The second is that this civil war will create a political market opportunity.

The third is that ACT, by virtue of its size, nimbleness, and core beliefs, is the best party to take advantage of that opportunity.

This civil war I’m talking about will be a very curious kind of war.

It won’t be racially based war, or an ideologically based war, or a class based war.  It won’t be a war over resources or religion. 

No, this will be a war between generations.  The battle line will be drawn somewhere around the birth year 1975.

I realise that we’ve heard about the baby boomers ad nauseum for too long now, but let’s be clear that World War Two was the most important events in modern history. 

One of its many impacts is that is has created a massive bulge in the demographic charts.

From the perspective of public choice economics it has created a giant voting block of rent seekers which has used big and invasive government to enrich itself at the expense of prior and later generations in almost every way you can imagine.

Let me say this isn’t personal.  My dad is in the audience and on a personal level I’m very grateful to many of the individual Kiwis who came before me.

But at a collective level I think the country those of us under 35 are adopting is no country for young men, or women for that matter.

New Zealand has dropped the ball in so many ways.

Let me count them:

• housing affordability;
• infrastructure;
• wealth in comparison to peer countries;
• defense;
• the balance of intergenerational entitlements;
• and climate change.

Let’s start with house prices; they’ve doubled relative to income in the past 20 years; this has been called the single greatest wealth transfer in history. 

We are talking of a doubling in prices relative to income since the 1980’s.  What traditionally cost three years’ income now costs six; that is notwithstanding the additional interest costs that go with larger borrowings and longer repayment times.

If the average house value today is $400,000 then something like $200,000 per household is moving up a generation as young buy off old.

The funny thing is that the student unions are obsessed with student loans, which are nothing in the broader scheme of the lifetime costs a person faces. 

In the time I was at Auckland University, borrowing course and living costs for five years racked up $45,000, almost three times the average. 

The median Auckland house price went up about $170,000 and interest expenses inflate that further.

We know from research comparing hundreds of U.S. cities that prohibitive land use planning explains up to 45% of the value of housing in the most regulated markets.

The inflated equity in houses largely owned by the boomers and the elderly is supposed to be the anchor for a generation’s lifestyle. 

There’s nothing wrong with retiring off the equity of a house, but adopting planning policies which drive the value of housing up by as much as they have, then mortgaging the next generation for an extra $200,000 of artificial scarcity value is unjust.

On the other hand, much of the inflation in house prices is linked to the infrastructure deficits, which brings me to another area where the balance between generations is not even.

While the infrastructure of the great post war expansion was largely funded by debt and unfunded depreciation, the deficit is now hitting new home buyers in three ways. 

Rates are projected to rise at 5-6 per cent per year for the next decade, as they have been for the past decade. 

After a generation of Enron style accounting and poor asset management, local government is now struggling to fill an infrastructure gap.

Development charges for infrastructure in new property are raising the price of new housing because what once was borrowed collectively and after the fact must now be borrowed privately and up front, and so is capitalised into housing prices.

Despite paying enough for infrastructure, the planning profession has captured local authorities with their vision that we shouldn’t build any more, and the resulting limits on housing supply have contributed to our problem with house prices.

A more anecdotal way to look at the problem is to see a map of the Auckland Motorway as planned in the 1960’s and compare it to what stands today.  It’s like we planned edam and made Swiss instead.

Moving on.

Perhaps the most important duty of any government is to defend its people against external threats.  It is a simple reality that a country as small as New Zealand is defenseless by itself.  

We have two options to remedy that.

One is to pray for the first permanent benign strategic environment in the history of humanity. 

The other is collective security.

Yet our defense spending at one per cent of GDP is less than a third of Australia’s.  They spend 2.4% of their considerably larger GDP.  No wonder our traditional allies regularly complain about our foot dragging.

The GDP acronym had to come up in this speech eventually. 

The experience of Canadians, Americans, and Aussies shows that our Neo-European Anglophone country might have expected to be about fifty per cent richer had it grown commensurate to our peers.

So does our previous relative wealth, we were as wealthy as if not wealthier than all of them sixty years ago, but we dropped the ball.

We are now in a situation only slightly better than hopeless.  Economically, we are facing a perfect storm. 

We need to grow faster just to keep the GDP per capita gap level, let alone catch up.  Basically, if Australia grows at 3 per cent next year, we need to grow at 4 per cent, just to keep the dollar gap in GDP the same.

Because we have a smaller GDP per capita, we need higher tax rates than others to achieve the same level of public spending in dollar terms.  In real dollar terms New Zealand and Australia have very similar public spending per capita.  What’s more the political appetite for public expenditure means that we can treat that expenditure as something of a sunk cost.

But maintaining similar real dollar spending with a smaller private economy means higher taxes.  Australia has about 35% of GDP to our 40% in public spending depending on which figures you use from which side of the financial crisis.

Yet we need much lower tax rates if we are to achieve the growth rates I started out with.

Nowhere does a gap in living standards become more obvious than in healthcare.  Doctors, nurses, medical equipment and drugs are all highly fungible on the world market.  What would you do if you were a young doctor with a student loan?  Bonding them to stay here is a band-aid solution, the futility of which does little more than draw attention to the real problem.

Making the tax rate problem worse is the demographic shift that occurs when a smaller generation is brought on to support a larger one.

One British estimate suggests that the 1945-65 boomers over there will take 118% of what they put in from the welfare state.  In the absence of better evidence, I can’t see why our ratio would be much different.

If you assume a median household income of $60,000, say 40% of GDP is government spending, and education, health, welfare, and superannuation are two thirds of government spending then you have $16,000 per year per household cycled through the welfare state.  If you do that for forty years and take out 18% more than you put in, then you have about $120,000 of other generations’ money benefiting the boomers.

Finally, regardless of how frail the case for it being such an actionable concern really is, climate change is a political reality. 

It has become a spiritual balm, a political cause du jour, a business opportunity, and the basis for the professional reputations of too many people for it not to be an actionable concern.

Through the lens of intergenerational politics, this cost will largely fall on the younger generations.

Altogether, generation x and y have inherited a country with some of the most unaffordable housing in the world, poor infrastructure, weak defense, a living standard that will a require a miracle not to fall further behind the rest of the world, social programs that will fleece incoming taxpayers as dependency ratios change, and apparently we’re supposed to deal withal of that without emitting any more greenhouse gases! 

Even if you say that defence issues won’t materialise and the world will see sense on climate change, even if you take a defeatist attitude about economic growth and say we’re just too isolated and we just don’t have the economies of scale for a global economy so we were always destined to be poorer than Estonia by 2020, and even if you say the obligation to build infrastructure is neither here nor there amongst generations…

Even if you accept all that, and I don’t, then just the housing  affordability and welfare state issues amount to $300,000-400,000 in today’s dollars that have shifted up a generation as a direct result of public policy.

Given all of that, there must be at least a chance that we of the spoilt brat brigade have a point.  There should be a political market for a party that explicitly reaches out to the 38 per cent of voters who are under forty (and will one day be a majority) with what I would call the Generation Y Manifesto.

Furthermore, I think that ACT is ideally positioned to address the point.

If I had to sum up ACT I would say that we are a niche market party of big pictures and small government.

The policy paradigm that has given generations X and Y something to complain about is the complete opposite.

It is the result of majority rule.  The boomers and elderly elected Muldoon, Bolger, Clark, and Key, they made up 62% of the electorate and rising in 2008.

We are the right party to engage in intergenerational politics.

But how?

Let’s start with housing.  Actually let me start by saying; some of my best friends are planners. 

Now, their job is basically to look at urban development and say, how can we maximise the number of synergies and the range of options that people have for developing places to live.

Somehow, around the world they have captured local government and we now have housing twice as expensive as it was 20 years ago.

You just have to ask yourself, what else has changed? 

• Has our productivity for building houses and infrastructure decreased such that the real price of those goods has gone up? 
• Has the size of houses grown beyond productivity growth? 
• Has New Zealand reached a critical land shortage? 

Or have we had artificial constraints put on development?

And if you try to argue with the people responsible you won’t get anywhere because there is now an entire profession based on principles of central planning that would be laughed out of court in any other part of the economy.

Owen McShane recently made a brilliant observation that New Zealand may not be very unionised but it is very professionalised.  In other words, rent seeking behaviour didn’t go away, it just went to University and come back smarter and better organised. 

I’m not sure that’s progress.

But I think planners are a bit like reserve bankers; no matter how complicated they may make their business sound, they know how to respond to the right incentives.

So let’s appoint a planning tsar to each market and give them a five year appointment with a half million dollar bonus if they reach a house price to income ratio for the final year set by the local council with some level of consistency.

It will be the best job in the world.  The less you do the more you get paid.

Whether the resulting reductions in house prices put home owners with mortgages into negative equity is a matter for how aggressive the targets are.  What I am confident about though, it that this particular brand of public servant needs some visible incentives to make housing more affordable.  Because right now they have none.

Let’s turn to tertiary education.  Costs are through the roof and results in many cases are dubious at best.  The reason is that we have unwittingly abandoned all rationing of tertiary education and therefore all incentives to use it wisely.

Once upon a time bursary was bloody tough.  I know because when I did it our preparation was to sit each of the previous ten years’ papers. 

Don’t you love Auckland Grammar?

The dumbing down that was revealed by the difference between the early nineties and the beginning of this century was extraordinary .

Then bursary disappeared completely and the deal was that tax payers would foot about 70% of the bill if the student was confident enough in the value of their study that they would pay the other 30%.  That was supposed to be the incentive to use tertiary education resources wisely.

Then they were able to borrow from the government at 7%.

Then it was 0% while studying and 7% after graduating.

Then it was no interest on student loans ever.

Now you might have thought that would be the end of bribing middle class tertiary graduates with public funds, but the Nats are almost impossible to underestimate.

Now there’s a 10% discount if you bother to voluntarily repay anything at all.

Apparently now the interest write-off is being extended to people like me who live overseas too.

I give up.

But seriously, we now have the worst of both worlds and don’t see how going towards either of them –either back to central planning where tertiary education is rationed academically, or back to price rationing by reducing entitlements- is economically desirable or politically palatable.

It’s one thing to pay for your own education, it’s quite another to be subsidising a national tertiary education slush fund.

So how about this:  You are not entitled to subsidised education until you have pre-paid $5,000 into your student loan account, in addition to normal taxes, through your tax return.

In other words, before you go to university you will have spent at least a year working full time and dealt with something similar to having a student loan, an additional tax rate plus voluntary repayments if you’d like to get it done faster.

The result, I venture, will be much more carefully considered education consumption.  Much more serious study, and a much smaller market for the swindlers who ply the unsuspecting with low grade courses. 

Altogether a different attitude to the cost of government services, higher productivity in tertiary education, and a better educated workforce.

I hope that those two ideas give some of the flavour of the kind of New Deal I have in mind for generation X and Y.  Housing and education are perhaps the most obvious issues.

All of the others are really just a matter of economic growth.  Paying for legacy entitlements and filling infrastructure gaps is easier the richer you are.

I think ACT has the prescription for growing wealthier.  Don Brash has the prescription for that.   The question is; why is the electorate so slow to embrace it?

I think Roger Kerr gave us part of the answer with his recent observations of our media’s inability to digest the 2025 task force report.  There is something to the fact that policy digestion in this country revolves around whether or not New Zealand is going towards or away from what our other Roger would do.

However borrowing a leaf or two from the book of my Canadian friend Brian Crowley, I suspect that the demographic spike is about to undo the bad work it has wrought, and that this will be to ACT’s benefit.

As demographics shuffle through this mortal coil, I believe we will have a sea change in attitude.  In a time of dramatic labour shortage it will become clear for the second time in our history that anyone who wants a job can have one.  Social and political tolerance for welfare dependency will vanish.

Secondly, there will likely be a train wreck as a number of demographic and global factors make our recent experiment in creating a Scandinavian style welfare state demonstrably unviable.

• Unaffordable housing;
• Tax and job competition from workers in low tax jurisdictions in the developing world who are literally leaner and hungrier than us;
• The injustice of generational transfers through the welfare state becomes clearer.

On the one hand there will be a private response to the policy driven transfer of wealth up a generation, parents will support children more (I hope).  And the political counter-reaction will be yet more government spending in order to smooth the perceived inequality.

On the other hand, most of what I have described could be seen as the seeds of an anti-big government generational movement.  I can think of three ACT MPs who were cured of socialism by visits to socialist countries.

I think our whole  generation has had a more general inoculation and it’s going to recognise more and more as dependency ratios increase, as housing remains unaffordable, and as international economic competition intensifies that big government has failed it.

So once more with feeling, we in the spoilt brat brigade have legitimate grievances regarding the way that public policy has split the intergenerational pie.  We will present a political market for any party that wants to take it.  But the party best positioned to represent the values of generation X & Y in the face of a majoritarian bully is the party which already has a compelling narrative on open markets and limited government, the party which has a history of being contrarian, the party called ACT.

Thank you.