Gordon Campbell on National’s “do nothing” alternative to Three Waters

luxsmallThere are sound economic reasons (and equally good reasons to do with social equality) why the Three Waters scheme would centralise water management into four separate bodies – rather than leave the whole issue sitting in the laps of the 78 local, regional and unitary councils dotted around the country.

The centralisation envisaged under Three Waters would (a) deliver economies of scale, and make for example the bulk purchasing of essential pipes and equipment cheaper and also (b) would make water treatment and delivery more socially equitable, since poorer councils with fewer wealthy ratepayers living in their catchment areas would not continue to be left behind, unable to afford to replace their decaying infrastructure.

All that aside, one of the other prime virtues of the Three Waters plan was that the four entities could borrow money more cheaply and efficiently from the banks. Otherwise, some of those 78 bodies would struggle to be able to borrow at all against their limited assets, let alone on satisfactory terms. To repeat: The Three Waters scheme is a more efficient, cheaper, and fairer way of upgrading our water infrastructure, in the face of the challenges posed by climate change.

But hang on. Last week, National unveiled its alternative plan. And what role does it envisage for central government? Basically, none at all. The current system – and its ratepayers – would (somehow) have to finance the whole thing as best they could, themselves. As Christopher Luxon put it, “Making water services sustainable is a bottom line for National.” Apparently, that’s what will give us all “ the confidence that investment will be made when and where it will be needed” And what, pray, will central government be doing to ensure that this happens? Apparently, nothing at all. As Luxon put it:

“Financial sustainability means there is enough money coming in either from rates or from user pays to cover the maintenance and the deprecation of the water infrastructure, and investment in new trader assets. 

Yep, a 21st century water management system is to be funded by the current system i.e. by raising rates through the roof, and by imposing sky high water charges on consumers. Who in their right mind would vote for a party that is promising – in the face of climate change – to walk away from the problem, and just let the current inefficient, socially inequitable and physically dangerous system muddle on through as best it can? Not to mention that landlords will simply shift any increased water charges they face onto the roughly 50% of New Zealanders who rent where they live – even while landlords pocket the billion dollar giveaway that National is also promising whereby once again, they will be able to deduct interest on their rental properties on their tax returns.

National has indicated that those 78 councils would be on their own. As to how they might manage to borrow the money required to do what’s needed… Well that’s their problem, not a problem for a National government. Because National is content to leave it to local government to fix our decaying systems of wastewater, storm water and drinking water services.

No doubt, there would be the occasional Luxon pep talk that he has faith in our can-do Kiwi spirit. There might also be more cake sales, in parts of the country where there aren’t enough wealthy ratepayers to foot the bill or enough ordinary citizens able to afford the new water bill, on top of their existing power bills.

Bottom line: If local councils really are going to have to foot the bill to upgrade their water management systems, they are probably going to have to raise the money by selling some of their assets. And that may be the real rationale behind National’s “plan” to replace Three Waters. Flogging off public assets to their mates after all, is what centre-right governments exist to do.

Are profits inflationary

One striking feature of every Reserve Bank Monetary Policy statement that rolls down the pike is that the words “profits” and “inflation” rarely appear in the same sentence. This could easily lead anyone to treat inflation as solely a function of household spending, wage increases (the dreaded wage/price spiral!) and a bunch of stuff to do with foreigners. The price of oil, the supply chain blockages, the war in Ukraine etc

If you thought that foreign tourists not coming here was bad, then behold the alleged effect on inflation of the recent sharp recovery of foreign tourism. Besides their profligate spending, foreign tourists are also exposing the scarcity in café/hospitality sector workers and thereby driving up wages, thus adding more fuel to the wage price/spiral.

For months, economists have been saying that the labour market needs to “soften” – which is another way of saying that far more Kiwis need to be thrown out of work, in order to reduce “demand.” They’re talking about anything between 50,000 to 70,000 job losses. That’s right – the mainstream solution to inflation aka “the cost of living crisis” is that more people need to be added to what used to be called the dole queue. However, since even beneficiaries have to eat, this is still putting a vexing amount of pressure on household spending at the supermarket. Could price gouging by supermarkets be a serious inflationary problem here, rather than just the stubborn level of “household spending” on the food-and-rent essentials of life?

What is missing is any RBNZ-led discussion of what contribution to inflation is being made by excessive profit taking aka price gouging. Maybe the impact of those foreign tourists wouldn’t be so inflationary if we weren’t charging them quite so much? New Zealand didn’t used to be seen as a high cost tourist destination. Now it definitely is.

Beyond that, the structure of our domestic economy leaves us incredibly vulnerable to profiteering and price gouging. For decades, we have muddled along at the mercy of a supermarket duopoly that makes this sector more profitable here than in almost every other developed country. Wonder why.

Our banking sector is also dominated by four Aussie-owned banks that extract obscenely huge profits every quarter, let alone annually. For the record, the most recent annual profits for those banks came to a combined total of $6 billion, or $1,200 for every New Zealander. But many of the above profits are being remitted to owners based overseas, right? So by making us all the poorer, the effect could be dis-inflationary, by reducing our capacity to spend money on any other stuff.

Point being, we don’t really know – because there is precious little data and even less debate on what constitutes excessive profit levels here, let alone what the net inflationary impact might be. The level of profit taking – and the very few defences against it here – mean that we have also been in the dark as to how much of the stimulus package devised by the RBNZ and government during Covid went into excessive profit taking levels, and boosted shareholder spending. Bernard Hickey’s December 2021 analysis of the structure of wealth distribution generated by the stimulus package still stands in almost splendid isolation, and it bears repetition:

Working families and beneficiaries who pay rent are now mostly worse off or barely treading water since the first lockdowns in March 2020. Food banks are seeing record demand and the waiting list for public housing has….trebled in the last three years.

In short, by my calculations from Reserve Bank figures on term deposits, household financial assets and house and land valuations, asset owners’ wealth is on track to rise by $872 billion or 50% to $2.63 trillion within two years of the outbreak, including:

  • a $45b increase in cash in bank deposits to $319b, which incorporates a $21b rise in non-financial bank deposits to $110b and a $24b increase in household deposits to $209b;
  • a $608b increase in housing equity due to a $648b rise in the value of houses and land to $1.74t and a $40b rise in home loans to $318b; and,
  • a $257b increase in the value of shares, bonds and other non-bank financial assets to $954b.

All of that increased wealth and cash on hand is due to government payouts and the actions of central banks here and overseas. Yet the money keeps flowing to those who already have it.

Do we know much more about the subsequent effects of this huge wealth influx on the inflationary spending habits of those relatively few New Zealand households, as opposed to the decline (Or at best. the mere treading of water) in the spending power of other, poorer households? Or why everyone is being hit by interest rate hikes to counter-act spending power that has not at all been equitably distributed?

It seems significant that we collect far more data on the levels of wage and price increases than we do on profit margins. Maybe there are problems – commercial sensitivity? – in collecting such data. But demonising the (belated) catch-up in wage increases and finding the solution to inflation in higher unemployment ( thereby reducing demand for compensatory wage rises) is a very blunt and highly ideological solution to the cost of living crisis.

Footnote: Historically – as in WW2 and subsequently – price gouging was not so much the preferred route taken by firms intent on maximising their profits. Instead they relied on techniques of wage suppression, via union busting, and by other means of keeping labour costs to a minimum.

With the advent of Thatcherism, any socio-economic self interest for corporates of not consigning their potential customers to the scrap heap was eased by the rise of the service sector and by the opportunities of creating a “flexible” and insecure workforce that this offered.

The current willingness of economists to call for a euphemistic “softening of the labour market as a cure for inflation is an indication of just how normalised this socially hostile approach to economic policy making has become.

The National, S. G. Goodman

Here’s the first single from the National’s upcoming album, First two Pages of Frankenstein:

And here’s an out-take from S.G. Goodman’s terrific 2022 album Teeth Marks. This initially bluesy track by the Kentucky singer/writer changes course dramatically en route to its conclusion.