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Insights 29: 9 August 2019
Oliver Hartwich comments on Newsroom on the possible consequences of Germany's negative interest rates
 
Eric Crampton explains on Stuff if we make vaping regulations too strict, it will be easier to just keep smoking
 
Patrick Carvalho explains in the NBR why the signs are pointing to the calm before the storm in the US economy

The open society needs open minds
Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz
When US President John F. Kennedy approved the Bay of Pigs invasion in 1961, he relied on advice from his staff, the defence force and the secret service. Nobody dared to voice any doubts this military attack on Cuba would be a success.

Still, it turned out to be a complete disaster. But at least Kennedy learned a lesson. From then on, he always encouraged dissent before making big decisions. This probably helped prevent a nuclear war in the Cuban Missile Crisis a year later.

The Kennedy example is used in the free online course OpenMind. Started by US psychologist Jonathan Haidt, the platform aims to restore respect and civility in debates. It does so by teaching the value of constructive disagreement.

Haidt spoke at a couple of events in New Zealand last week, which the Initiative supported. What he presented was a grim picture of politics, especially in the US. There, the polarisation has reached such levels that Democrats and Republicans can barely talk to each other anymore. They understand each other even less.

As Haidt explained, there are many reasons for this breakdown in cross-party dialogue. Donald Trump is as much a cause as he is a symptom of the underlying malaise.

American society has forgotten how to deal with conflict. It starts early. Children are bubble-wrapped and cotton-wooled by their helicopter parents. There is no more free play without adult supervision. Children never learn how to settle differences with their peers on their own. Haidt writes about this in his latest book, The Coddling of the American Mind.

‘Social’ media then hampers their psychological development further as teenagers, not least by locking them (and their parents) into their respective filter bubbles.

At university, students then demand to be protected from uncomfortable views. They will call for ‘trigger warnings’ before encountering ideas that might be upsetting. ‘Safe spaces’ let them withdraw from anything distressing.

The psychological harm to the generation growing up like this is enormous. Haidt has documented the increase in mental health issues in young Americans.

Harm is not only done to the young people themselves but also to the wider society. It breaks down the social fabric. Political polarisation results from these developments.

New Zealand may be a few years behind these American developments, as Haidt pointed out, but we are not immune.

And thus, let us celebrate the relative civility of our domestic politics and defend robust and constructive debates.

You can check out how open-minded you are on Jonathan Haidt’s OpenMind platform.

Fiscal pump priming’s neoliberal past
Dr Bryce Wilkinson | Senior Fellow | bryce.wilkinson@nzinitiative.org.nz
These are strange times, even for economists. Fearmongers are urging governments to pump up their spending in order to maintain economic activity.

They worry that central banks have done about as much as they can to stop economic decline.  Interest rates are pathologically low, even negative in some countries.

Where do such ideas come from? Why think that government profligacy will do more good than harm?

Economists trace these fears and notions to John Maynard Keynes (1888–1947), the brilliant and influential English economist who lived through the Great Depression in the 1930s.

The Great Depression produced an unholy mix of deflation, bankruptcies and dreadful unemployment. Falling tax revenues crippled government budgets.

Keynes proposed vigorous, even extreme, government action to re-employ idle capital and labour. A central idea was government deficit spending – governments should increase spending even if they had to print money or borrow money to do so.

He envisaged a kind of chain letter effect where each dollar of government spending would eventually increase national income by several dollars. The quality of the spending did not matter; the key was to get people to spend money.

The idea of deficit spending was subversive of notions of fiscal prudence, which is surely the main reason for its enduring popularity.

Keynes was alert to this danger. He prescribed fiscal surpluses when unemployment was low in order to prevent spiralling public debt and curb inflation.

Nor was Keynes a fan of big government. He considered that government spending should not exceed 25% of GDP. Today, he would be dismissed by non-economists as a neo-liberal.

The proscribed remedy unequivocally failed in the 1970s. Fiscal pump priming produced stagflation. Economic growth did not take off, inflation did. New Zealand’s unemployment rate rose progressively from 1.9% in 1975 to 6.8% by 1986. Major capital spending on energy projects and chronic government borrowing produced a public debt nightmare rather than the promised job growth nirvana.

Nor has enormous monetary expansion and deficit spending in Europe and the United States sustainably addressed the 2008–09 global financial crisis. Their legacy is ongoing fragility and enormous public debt.

New Zealand’s economic situation is roughly the opposite of that in the 1930s. There is no good reason for repeating the painful mistakes of the 1970s and 2000s.

Creative monetary policy
Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz
They say you should never let a good crisis go to waste.

New Zealand’s employment figures currently look superb. But the trade war between China and the US will not end well for New Zealand, and the Reserve Bank hasn’t much room to cut rates further.

So we might have an opportunity to get creative. What should a central bank do when the Official Cash Rate hits zero and it wants to engage in further monetary stimulus?

I see it as a wonderful research opportunity.

We could always look back to the classics. Milton Friedman suggested ‘helicopter money’ as thought experiment: Why not just load up helicopters with bags of cash and fly across the country scattering money?

While it sounds nice in theory, we might run into a few problems. You see, our currency is printed on polypropylene plastic. Most of us live near oceans. Add in a little wind, and we’ll quickly have undone whatever good was supposed to have come from the plastic bag ban.

But we can do one better. Why not encourage completing the next Census by turning this past one into a lottery? Every day, One Lucky Kiwi could be drawn from the Census registry and given a million dollars, freshly printed. On even-numbered days, the lucky winner could be announced on the nightly news; on odd-numbered days, the winner’s name would be kept secret.

Researchers could track what happens when people are given a million dollars. Are they happier? How much happier? What about the winners’ neighbours, and does it depend on whether the win was announced on television? What happens to the spiritual wellbeing of everyone involved? Statistics New Zealand has actually talked about wanting to measure that last one, but it might need to win a few budget lotteries to follow through with its daft plan. Spirit levels don’t come for free. 

Unfortunately, since the RBNZ’s rules actually preclude external economists with any research interest in monetary policy from serving on the Monetary Policy Committee, we’re likely to waste the research opportunities offered by the coming crisis.

Except one, perhaps: How does a country fare in a recession when its central bank has chased away from the Monetary Policy Committee any outsiders who understand monetary policy? That experiment is much more interesting than anything I’ve proposed.

And we can all look forward to learning the results.
 
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