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Insights 39: 18 October 2019
Dr Patrick Carvalho comments on Facebook's Libra and the new currency war in the NZ Herald.
Dr Oliver Hartwich discusses free speech and "woke" culture in the National Business Review.
Report - In fairness to our schools: Better measures for better outcomes.

Let Sanity Prevail
Matt Burgess | Research Fellow |
Imagine, for a moment, the government were about to pass a Zero Carbon bill that takes the most direct path to success on our emissions targets. What would it look like?

The centrepiece of this alternative Zero Carbon bill would be a world-leading system for verifying the integrity of domestic and offshore emissions reduction schemes.

Thanks to this system, New Zealand businesses would be able to search the world for the most effective ways to reduce emissions. They could partner with or fund schemes, confident in their integrity and that their investment would be recognised as helping to meet their emissions obligations.

We don’t know what opportunities this alternative bill could unlock. Currently, the world’s most effective way to reduce emissions might be Amazon rainforest restoration. On some estimates, these schemes can take a tonne of greenhouse gases out of the atmosphere for as little as NZ$2. These schemes might not bear scrutiny. But if they do, New Zealand could reach net zero for $120 million per year, just 0.04% of GDP. Even better opportunities may exist elsewhere.

If emissions reduction can be made affordable, then why stop at net zero? New Zealand could keep going without breaking a sweat.

The authors of this alternative bill understand it does not matter where emissions are reduced. What matters is that schemes have integrity. Had the Zero Carbon bill been designed to do what works, New Zealand could have been in a position to secure affordable emissions reductions for decades. We could have met our emissions targets sooner. We could have showed the world how to curb emissions without crippling the economy.

But we’re not doing that. The Zero Carbon bill that was tabled in Parliament has no verification system. And it bans the use of offshore emissions reduction. New Zealanders must reduce emissions domestically “as far as possible,” says the bill, regardless of the opportunities offshore. That could add $300 billion to the cost of reaching net zero, and reduce GDP by nearly 6% in 2050, according to analysis commissioned by the Ministry for the Environment.

Rather than reduce emissions by re-planting the Amazon, better to deliver the same cut in emissions by closing New Zealand’s farms and businesses, and perhaps whole industries. This is madness.

The Environment Committee will shortly report back to Parliament with changes to the Zero Carbon bill. Let us hope sanity prevails.

In Praise of Scientific Evidence
Dr Patrick Carvalho | Research Fellow |
“Our goal is to make sure the fight against poverty is based on scientific evidence,” Esther Duflo said shortly after becoming the second woman (and also the youngest economist, at 46) to be awarded the Nobel Prize for Economics.

Duflo, along with her husband, Abhijit Banerjee, and Michael Kremer, received this year’s top economics award “for their experimental approach to alleviating global poverty”.

The Nobel Committee could not have chosen a more noble cause. About 650 million people lived in extreme poverty in 2018 – well down from nearly 1.9 billion in 1990, but still far too many.

The committee highlighted the potential of the randomised control trials (RCT) pioneered in the award-winning work for figuring out policies that can best reduce severe hardship.

Too often, bad policy gets hidden behind feel-good messages, with little regard for efficacy. Against that darkening tide, this Nobel prize sends a powerful message: Good intentions are not enough, and even experts often do not know which policy will do the most good.

That message matters outside of the developing world, too.

Policy trials were an important part of America’s welfare reforms in the 1990s, with different states trying different ways of helping people from welfare to work.

There is important precedence in New Zealand as well.

The previous National government’s Investment approach was meant to harness small experiments to figure out what works, and what does not, in helping people shift from dependence to self-reliance over the long term. 

The Coalition government’s shift from the Investment approach to the Wellbeing approach was not meant to abandon the experimental method. It rather sought to ensure that policies were evaluated on their ability to improve the wellbeing of the people the government was trying to help.

Unfortunately, neither National nor Labour has made nearly enough progress in harnessing the power of this approach.

We could be using policy trials in different parts of the country to find better ways of managing environmental problems, of achieving stronger regional development, or of unlocking housing affordability.

We could be making far greater use of policy trials in social service delivery to find out what works in improving the lives of the worst off.

To that end, this year’s Nobel prize is an important reminder. We cannot rely on the good intentions of our policymakers. Instead, policy needs to be tested rigorously.

The Tender Years
Dr Eric Crampton | Chief Economist |
Despite all your predictions to the contrary, the children still have not colluded against me.

On finding out that the Crampton household’s way of divvying up the chores is somewhat nonstandard, I reported on it in a May 2018 Insights column in case others might find it helpful. I was honestly a bit surprised that nobody else seemed to have figured out this obvious solution.

For specific chores that go over and above the ordinary household expectations, we use a sealed-bid tendering system. We put up the chores we would like to have done; the children submit their bids to perform those chores; we announce the winners of the chores and then tell each child, privately, what they will earn for completing them. The system works well. Whenever one of the children complains about chores, we point out that we have another contractor available to pick up the task instead. And the task gets done.

Many of you warned me, by email, that the children were likely to collude against us. But the children do not know the true maximum we might we willing to pay for any chore. And we committed to not necessarily accepting the lowest bid, or indeed any bid. The government also helps by prohibiting other families from hiring our young children to perform tasks in their households instead at higher rates, so we enjoy some helpful monopsony powers.

Two weeks ago, we put the chores up again for tender as it had been a while, and one of the children was very keen to be rid of the cat box contract.

Results? The child tired of cleaning the cat box put in a very high bid for that service and lowballed the bid for mopping and vacuuming while the child who knew that the cat box had become more contestable did not increase the bid for that service.

We are paying about the same amount overall, with a task-swap between the two children – and, crucially, with both children very happy with the swap instead of fighting about who would have to clean the cat box.

So there has been, as yet, no collusion. Even if they do eventually wind up colluding against us, they will have learned valuable lessons in cooperation. And that is okay too.

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