Saturday, September 24, 2022

Roger Partridge: Productive land hocus-pocus


Nobel laureate Paul Krugman once quipped that David Ricardo’s theory of comparative advantage defined who counts as an economist. Because every economist understands comparative advantage and its related notion of “opportunity cost” and practically nobody else does.

With that in mind, we must assume that no economists were involved in the drafting of the Government’s new National Policy Statement for Highly Productive Land.

If anyone needed a textbook example for ignoring opportunity cost as a factor for analysing choices between different options for production, the Government has just delivered it. It shows the pitfalls of making policy that ignores basic economic insights.

Released last Sunday, the NPS is the culmination of more than four years of deliberations by the Ministries for the Environment and Primary Industries. It directs councils to map highly productive land within their territories. And it restricts them from rezoning this land for urban development unless a series of stringent tests are met. A specific prohibition targets the rezoning of productive land into rural lifestyle blocks.

The NPS applies to vast areas of the country, amounting to about 14% of New Zealand’s total land area. To put this in context, urban areas account for less than 2% of the country (and, on some measures, less than 1%). The overwhelming majority of the land covered by the NPS is used for pastoral farming, with just a small fraction dedicated to market gardening.

A joint press release from Environment Minister David Parker and Agriculture Minister Damien O’Connor explained the goal of the NPS. The ministers said it would “enhance protection for our most productive land, providing security for both our domestic food supply and primary exports.” Parker said the NPS would protect highly productive land from “inappropriate subdivision.”

But large tracts of the so-called highly productive land covered by the NPS are on the peripheries of growing urban areas, including Auckland. Consequently, the NPS runs headlong into a critical public policy goal: affordable housing.

The premise of the NPS suggests a terrible dilemma. Either we allow our cities to spread to reduce the cost of housing at the cost of rising food prices from the lack of highly productive land. Or we can preserve the highly productive land at the expense of affordable housing.

Even expressing the dilemma this way, it is by no means obvious that protecting land for agriculture is the right choice. After all, it is easier to import food than housing.

But it is precisely this type of dilemma that Ricardo’s insight helps solve. It forces us to ask the following question. What is the opportunity cost of restricting the use of highly productive land to agricultural activities?

Unfortunately, both the NPS itself and the Ministers’ announcement are silent on this issue. The announcement proudly proclaims that the NPS will facilitate adding $44 billion to primary sector exports over ten years. But it says nothing about the cost.

Consequently, to evaluate the NPS we are forced to look back at the Treasury’s assessment of the draft NPS back in 2019. The analysis is scathing. Treasury points to excessive costs of urban land at that time “perhaps in the order of $600 billion nationally.” Treasury concludes that the proposed NPS “appears likely to exacerbate this, which would undermine the achievement of central government’s primary objective... to ‘improve housing affordability’...”

Treasury also points to very large losses in welfare from owners of highly productive land not being able to sell their properties for urban development. It concludes, “These costs would dominate by several magnitudes the claimed net-benefits.”

That should have been enough to scotch such an economically illiterate idea. But the NPS has another fatal economic flaw.

Like other capital assets, land value reflects the present value of the future profits it can generate. Horticulturalists must therefore pay more for highly productive land than for less fertile land. Higher land values mean higher land costs per hectare for those farming highly productive land.

The alternative to highly productive land is less productive land. It may be harder to farm, but it is less costly to acquire because it is less fertile. Indeed, simple economics suggests the value of less productive land will be lower in proportion to its lower productivity.

This means the problem of the comparative scarcity of highly productive land is solved by the price mechanism. And without the need for regulation in the form of the restrictive NPS. The lower price of less productive land compensates for its lower productivity.

The price mechanism is also the solution to the apparent dilemma about whether highly productive land should be used for horticulture or housing. Well-being will be maximised by taking into account opportunity costs. Where land is more valuable for housing, we should build on it - and farm on less productive land. Less productive land may be harder for horticulturalists to farm, but the opportunity cost of the alternative is worse.

In 2019 Treasury advised Cabinet that the NPS had a “weak problem definition and rationale for intervention” and that this “creates risks of low benefits, high costs, unintended consequences and risks to achieving other policy objectives.”

Treasury’s criticisms remain just as applicable today. One wonders what hocus-pocus has seen the NPS reappear.

Roger Partridge is chairman and a co-founder of The New Zealand Initiative and is a senior member of its research team. He led law firm Bell Gully as executive chairman from 2007 to 2014. This article was first published HERE.


Anonymous said...

No wonder economists are treated as less accurate than the weather forecasters if this is the best they can come up with.

Growers can just change to useless land and still feed the country. Hahaha. Still, at least the developers will be able to afford imported food.

Peter said...

“Hahaha”!? not sure you even grasped Partridge’s basic argument? As it is NZ already produces many time more food than we can eat, and in any case we can do what every other mature country does and import a bit of extra food if the opportunity cost suggests houses are more important than just growing more stuff, if it ever becomes an issue for us (unlikely). NZ’s farmers keep running the argument that no none else dare use good land for anything other than farming because “we’ve got to feed the country”, an argument you just parrot. It’s a bs argument. We can feed our small population from a fraction of our land base, but what we’re having trouble doing is housing people, largely because it’s become so difficult to expand onto new land around towns and cities.

Robert Arthur said...

The free market principle can be taken too far. Auckland has vast areas of poor land to the east and west, including the Waitakeres. It is tragic to see houses extending over the superior soils to the south, and especially Pukekohe. Successive self interest persons have got onto Councils, and the farmers very aware of the problem are won over by the huge sale price increase. Life style blocks are especially wasteful; counter to all the CO2 notions and many just raising pet horses. Become run down then ripe for use as suburbs, conquest of the countryside by stealth. Hopefully the rules will also safeguard against roads (between Otaki and Levin maori influenced sand country to the west has been avoided and market garden land taken.) If the new RMAEHSAct zoning rules had forced some sort of dense minimum development in new subdivisions much of the pain from pepper potting high rise in existing and infra structure problems could have been avoided. We are all having to retreat to a life style much as 1900 England.

EP said...

Robert Arthur says it for me, thank you.

Anonymous said...

Yes, I too agree with Robert Arthur. This piece sees landuse being determined by the highest bidder. If the housing developer can outbid the horticulturalist, then so be it. This means that food producing land will be lost irrevocably. So we import our food? What merchandise export other than wood (pine) earns the money for us to indulge ourselves in all the imports that we haven’t got a hope of producing. If we can’t control the frontier of urbanisation over our flat or near flat land eventually it will all be engulfed.

The future of feeding the increasing population, whether domestic or global, will necessarily be in food rather than feed production, where the middleman – the animal – is cut out. This will be on flat or easy-contoured land which can be repeatedly cultivated and where mechanical is possible. This may also be the easiest to build houses on, but you can build them on hills (stable ones) as well. More costly maybe, but also more desirable offering outlooks as well.

In Hawke’s Bay we have some of the world’s most productive land, aided by, generally, adequate irrigation water. Yet the cities of Napier and Hastings are increasing spreading out over the plains, when both border hill land well able to become residential. That’s where they should be expanding, forcefully if necessarily.

This is a debate for visionaries, not cost accountants.

Ewan McGregor said...

The above comment beginning "Yes, I too agree..." was posted by me. Ewan McGregor

Peter said...

Nope, I agree with Partridge not the fearful “it can only be farming” commenters here, who, frankly, should read some economic history to see the unintended consequences of politicians meddling in markets. The world’s population is being better fed on about the same amount of land that was required in 1950 to poorly feed the then much smaller global population. Actually the greatest threat to food security today is from the “we have to do it all locally”, “organic and regenerative farming only”, and “no GE” brigades. God spare us from land-use winner-picking politicians, vested-interest lobby groups, and hand-wringing liberals, who themselves having been the beneficiaries of decades of market driven innovation, now want to limit the choices of future generations.

Unknown said...

In all this debate no one seems concerned at our wasteful housing methods. Everywhere we see hectare after hectare taken up with sprawling single storey homes. Huge garages at their side and a swath of concrete out front. Developers sometimes build 2 storey units. They have finally realized that not everyone wants a garden.
A truly enlightened plan would be to look at more upward expansion. Living space with small kitchenettes for those who don't cook. State houses with no land waste for those who don't garden. Communal space for recreation. Garage blocks for cars - separate from homes as an added rental.
Time to think outside of the kiwi 'quarter acre dream'. Move to a more responsible plan for the future.