Hive News Wednesday: What to watch in the US election; Living costs rising twice as fast for poor as for rich; PPPs in focus at fund conference

Long line to vote in Washington early on election day. Copyright Philippa Wood.

Anyone with a political or economic bone in their body will of course be watching the US election results today, so here's my two cents worth.

I've been following Nate Silver's analysis of the myriad of polls throughout the campaign. Anyone looking for a final shot of useful insight before the results come in could do worse than look at his election-eve view that Hillary Clinton has a 72% chance of winning, which means Donald Trump has a 28% chance of winning. I would buy a lotto ticket with Trump's odds (I didn't buy one for last night's jackpot!)

However, in many ways, the results in the US House of Representatives and Senate are more important in determining what domestic policy changes actually happen after the election, given the much greater dilution of the powers of the President than, for example, here, where the Prime Minister dominates the executive and Parliament. The polls currently suggest Clinton may win the Presidency, but there's a less than 50% chance of the Democrats winning control of the Senate and a much lower chance of winning control of the House, where just 37 of the 435 seats are deemed competitive because of redistricting (ie gerrymandering).

Most of the world's economic analysts think Clinton would be better than Trump for the world economy and America's finances, and therefore better for New Zealand. Clinton is more supportive of the TPP, although the scale of the potential benefits to New Zealand of that deal are debateable and her views have seemed to rule out the current deal being passed without major renegotiation in America's favour.

As recently as last week John Key thought there was still a 50:50 chance of the TPP passing during the 'lame duck' session of Congress in between today's election and the swearing in of the new crop of senators and congressional members in January. Clinton's deputy, Tim Kaine, is a strong TPP supporter and Key's most insightful comment of the year on TPP (on both sides of the planet) was this: "It's not unusual for politicians on the campaign trail to say one thing, and then for something quite different to happen."

The more important risks are that Trump could accidentally or deliberately de-stabilise the network of defence and trade agreements that have underpinned the last 60 years of relative peace and prosperity between the great powers of America, Russia and Europe. Trump's ramblings about unpicking Nato and encouraging Japan to obtain nuclear arms are dangerous enough to get anyone worried, while his suggestions that America default on its Treasuries and his promise to impose a 45% tariff on Chinese imports are economically awful (if unlikely to ever actually get through Congress).

The best 'wisdom of the crowds' view from an economic point of view has been the US stock market, which has rallied sharply in recent days as the chances of a Clinton victory have firmed up, particularly after the FBI decided (again) against prosecuting Clinton over her emails. (For those trying to understand what on earth is the real story on the emails, this piece on This American Life shows the whole thing is more of a cock-up than a conspiracy. The details about the US State Department's IT systems in this piece help explain it.)

The other financial market 'wisdom of the crowds' variable to watch that has some local impact is the New Zealand dollar, which has risen almost three cents in the last week on improved risk appetites ahead of a presumed Clinton win and the various bits of inflationary news around here. It is nearly 74 USc this morning and at almost 79 on the Trade Weighted Index. That won't please the Reserve Bank on the eve of its OCR announcement tomorrow, given it forecast in August that the TWI would fall below 76 in the December quarter.

Living costs rising twice as fast for poor as rich

All eyes today will be on America, but yesterday the political and economic focus in Wellington was on Statistics New Zealand's new Household Living-costs Index, which showed living costs for for the poorest 20% of the population and beneficiaries in particular have risen around twice as fast as for the richest 20% since 2008.

The research challenged the Government's view that real incomes have risen broadly since 2008 and the view that low inflation has benefited most. It reinforced the role of interest rate falls and rising housing costs in essentially making the rich richer and the poor poorer, while helping to explain the Government's surprise decision last year to announce the first real increase in benefits for families since the 1970s and its continued moves to lift the minimum wage at faster rates than CPI inflation. The minimum wage is up 27% since 2008, in line with average wage growth.

It also highlighted the unfairness in the way non-Superannuation benefits are indexed to the broad CPI less tobacco index, while New Zealand Superannuation is indexed to average wages. It should also refocus attention on the distributional impacts of loose monetary policy, particularly when it is focused on the broad CPI. If monetary policy had focused on the CPI for lower income households, interest rates would not have fallen as much and house prices (and rents) may not have risen as much.

The research found living costs for the lowest 20% of the population by income rose 18% since 2008, while the broad CPI rose 13% and the richest 20% saw their costs rise 9.9%. Living costs for beneficiaries rose 16%, while the CPI less tobacco costs index that their benefits are based on rose 11.2%. Meanwhile living costs for superannuitants rose 19%, but the average wage that their benefit is indexed to rose 27%.

Fast-rising rents and tobacco taxes a factor

A big driver of the difference was higher housing costs for renters and lower interest costs for homeowners, while very fast Council rates inflation and big increases in tobacco excise has also hurt those on the lowest incomes, who tended to smoke at a higher rate and spend more of their income on cigarettes. Lower term deposit interest rates also hurt low income superannuitants relying on their term deposits to supplement their incomes.

"Differences in home-ownership rates account for much of this difference – 83 percent of households in the highest-expenditure group own compared with 55 percent in the lowest-expenditure group," Statistics NZ said.

"Rent has risen at a faster rate than inflation overall, and interest payments declined sharply in 2008–09," it said.

"Household energy and property rates have also risen at a faster rate than inflation overall, which has had more of an impact on lower-expenditure households than on higher-expenditure households. The highest-expenditure group spent more on audio-visual items, which have had significant price falls over the last eight years."

Political reaction

James Shaw said the figures showed the Government had created a two-track economy where some people were worse off than others and are faring worse over time.

"I think it is a really good report because it shows what is behind all the headline numbers the Government's been crowing about," Shaw said.

"We've been seeing for some time now that the people at the bottom of the pyramid are actually getting worse off, so every time the Government comes out and says 'things are great because the median wage is rising' that actually gives a really false picture about what's going on," he told reporters in Parliament.

"When you get behind that and you break it down into the details and you really look at what's going on, people in the bottom third in particular have actually gone backwards under National rather than forward."

Key was asked about the higher costs for superannuitants.

"If you look at the increase in New Zealand Super over the period of time we have been in office, it's been quite dramatic relative to the overall inflation rate. So obviously you can always pick out one specific item, but overall New Zealand Super is up dramatically over that time and inflation is low."

Bill English said the difference in costs for different groups was largely about housing costs and explained why the Government was spending NZ$2 billion on accommodation subsidies.

"People on low fixed incomes really notice it when just one or two components of their spend are pushed up, and that's certainly been the case with rent. And it highlights the absolute requirement for us and councils - Government working with councils - to get our housing market working better because while house prices going up has been a benefit to a lot of people, this is one of the costs of it and we need to have council plans that allow for more supply of lower cost housing," he said.

English said this year's NZ$25 increase in benefits for families with children from April 1 was partly in recognition of housing costs rising faster than inflation generally.

PPPs in focus as Sovereign Wealth funds gather

Meanwhile, some of the world's biggest (and most nervous) investors will be about as far away from the US election result as they could possibly be today. The International Forum of Sovereign Wealth Funds is being held in Auckland this week and hosted by the NZ Superannuation Fund, with Adrian Orr scheduled to give his opening address at 1pm.

One of the hot topics will be how infrastructure funding deficits such as Auckland's will be filled at a time of low returns, climate change and overvalued assets.

Auckland is going to need billions of dollars as it adds a city the size of Invercargill to its population every year.

The issue is keeping Phil Goff awake at night. After promising to hold rate rises to 2.5%, the money won’t be coming from Auckland homeowners or businesses.

The Council is also close to its borrowing limits. If it borrows much more ( its debt to revenue ratio is close to its 250% limit) it will lose it AA credit rating and interest costs will head north. Funding from central government is unlikely to be quick enough or big enough.

Private Public Partnerships (PPPs) with Sovereign funds and pension funds are a possible solution, but as PwC’s global head of capital projects and infrastructure Richard Abadie points out, "someone has to pay in the long run."

The London based Abadie, who is in Auckland for the conference, says the funds are awash with money and want to invest, but they won’t, unless there is an appropriate return covered by a sound revenue stream.

The problem for Goff and other global city leaders is they can’t easily introduce taxes to create a revenue stream, unlike the city states where PPP’s have been highly successful.

Abadie says the shining examples are Dubai, Singapore and Hong Kong. Goff’s task is to persuade John Key and Bill English to let him have a regional petrol tax and some road tolls as soon as possible.

According to Abadie the most successful fundraisers in local government are the ones that can clearly articulate their vision and bring political pressure to bear on Central governments.

He also has some other tips for Goff.

"Sell all assets that aren’t strategic, especially while asset prices are inflated," he says.

When told the Auckland Council regarded its 22.7% stake in Auckland Airport as strategic, his reply was "nothing under 25 percent is strategic."

"The other thing the Auckland Council must do is what’s known as 'land value capture.' When you put a railway station in a particular spot and the price of land around it rises, the Council must capture its share of that rise. Too many big global cities have failed to do this."

That's in tune with the push for targeted rates talked about in this Stephen Town interview published in Hive News on October 26.

In other economic and political news...

In another sign that longer term mortgage rates are rising, BNZ joined ASB yesterday in hiking its three year mortgage rate. BNZ lifted its three year 'special' by 10 basis points to 4.59%. Westpac and ANZ have also talked up the potential for mortgage rates having bottomed in recent weeks, despite the prospect of another OCR cut tomorrow morning.

Amid growing concerns around migrant abuse and fraud in the international education sector, Education NZ and MBIE published a report by Infometrics and the National Research Bureau showing that the economic value from international education hit NZ$4.28 billion in 2015/16. This was up 50% from 2014 and would make the sector New Zealand's fourth biggest export earner.

However, buried in Steven Joyce's release on the report was a comment that the Government was talking with the industry about a revised strategy. "The new strategy will seek to underpin the quality of the student experience and to realise the full social, cultural and economic value for New Zealand," he said.

Paula Bennett announced that this year's funding allocation from the Regional Mid-sized Tourism Facilities Grant Fund of NZ$3.05 million had already been filled with 14 infrastructure projects being approved, including new toilet facilities in Tekapo and rubbish removal compactors in the Coromandel. There has been repeated criticism that the NZ$12 million allocated over four years is not enough to help Councils deal with the flood of tourists heading into sparsely-rated areas. "This year’s funding is now fully allocated due to the quality of applications and obvious demand,” Bennett said. “The Government still expects there to be a second round of funding in 2017, using additional funding."

Have a great day.