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Insights 41: 27 October 2017
Mike Hosking talks to Dr Eric Crampton about how increasing the minimum wage will cost jobs
Our Manifesto for the incoming government
Latest opinion: Dr Eric Crampton on building on the success of others

Monetary window-dressing
Dr Oliver Hartwich | Executive Director |
Judging by its coalition agreements, the new Government’s unofficial motto is not to do everything differently but to do a lot of things better.

But not every change is for the better. Sometimes, even well-intentioned changes are just window-dressing. The review of the Reserve Bank’s policy targets is the best example.

Under its mandate, the Reserve Bank has one primary role: to keep prices stable. This so-called ‘inflation targeting’ was introduced in 1989. It made New Zealand one of the first countries to commit to this goal.

Now the Labour-NZ First agreement lists “Review and reform of the Reserve Bank Act” as the first action in its economic policy section. What it means is clear from Labour and NZ First politicians’ past statements. The Government wants to give the Reserve Bank more targets, especially fighting unemployment.

Committing the Reserve Bank to both price stability and fighting unemployment would not be unusual. The US Federal Reserve operates under such a mandate.

Yet the real problem is that dual mandates do not work, not even in theory. They are the result of a misunderstanding as anyone who studied economics over the past half a century would know.

In the late 1950s, New Zealand-born economist Alban W. Phillips made a discovery. He showed that historically inflation and unemployment had gone in opposite directions. When inflation was high, unemployment was low (and vice versa).

Some economists concluded from Phillips’ curve that a central bank could choose a little more inflation to help create jobs. As it turned out in the 1970s, that belief was wrong. Back then, many countries experienced ‘stagflation’: high unemployment and high inflation in tandem.

Through the work of many top economists, we have learnt why the Phillips Curve does not offer reliable, long-run policy choices.

Imagine a central bank cutting interest rates to increase employment. Once people expect inflation to go up, they will demand higher wages. And so the employment effect of low interest rates disappears. What remains is both high inflation and high unemployment.

The best way for a central bank to achieve both low inflation and low unemployment is to make it pursue price stability alone.

The next RBNZ governor will no doubt be aware of that. In which case, she could safely ignore any dual mandate passed down from the new Government. And keep focussing on targeting inflation.

Our ambitious plan for education
Martine Udahemuka | Research Fellow |
Our newly sworn-in Government has about 1000 days to deliver on its campaign promises.

Fixing the education system will take more time. Too many fundamental aspects are in need of reform.

So it was encouraging to read in the coalition agreement about a planned 30-year strategic plan for education.

The long term outlook should enable strategic prioritisation of incremental and transformational changes.

And so working backwards we should outline the kind of system The New Zealand Initiative envisions 30 years from now.

We want a system where teaching is a prestigious and rewarding career. It can be achieved by acknowledging the teachers’ professionalism through a supportive and rewarding performance framework.

New Zealand’s teacher shortage crisis is exacerbated by the low status and low pay in the profession. Not only is the teachers’ pay here largely based on the number of years they have worked rather than their efficacy, but their earning potential is also lower than the average potential of their OECD counterparts.

The current practice serves neither good teachers nor students. New Zealand would do well to look to Singapore, Finland, and Washington D.C., where teachers can enjoy high salaries commensurate with demonstrated quality teaching.

We also need a system where gaining a school qualification holds real meaning and value, rather than mask significant variation in performance. It may require abandoning the 21st century skills bandwagon and reforming the curriculum and assessment systems to expose all students to a rich core set of knowledge on which they can build further skills.

And we envision a new deal for parents. They deserve better information about the quality of teaching and learning happening in their children’s school. Assessment information is a necessary feedback mechanism to let teachers and parents know what and how students are learning.  

Finally, we look to a landscape where low performing schools are identified early, and their leaders supported to improve. When the Initiative analysed school performance in 2015, we found too many poorly performing schools persisted with little improvement, and too many high performing schools were unable to systematically share their practice.

Better performance information will not only help parents choose a school and teachers adjust their approach, but it will also help policy makers understand what works and what does not.

Thirty years is a long time to imagine, but policies that transcend party politics and focus on an ambitious education system for all students will be most welcomed.

Government for beginners
Ben Craven | Project Coordinator |
They say that you can't teach an old dog new tricks. But you sure can teach new dogs some old tricks.

With its 31 members, the new Government is the biggest administration New Zealand has ever had. It is also one of the most junior. Only five Ministers have previous government experience.

But does this have to be a problem? Hardly, for two reasons. First, there are a few old warhorses in the Cabinet. Ministers like David Parker, Shane Jones and of course Winston Peters will be quick to tell the rookies how government works.

The second reason for good government is more technocratic. Even if you have no idea how to govern, there is a rulebook for it. It is called the Cabinet Manual. It makes running the country sound like a walk in the park.

For example, Cabinet Ministers attend cabinet. Ministers outside cabinet do not. That is, unless they are invited to attend cabinet committee meetings relating to their portfolios.

It gets a bit more confusing with Cabinet collective responsibility. Despite the name, it also applies to Ministers outside Cabinet too.

This convention applies in all instances. Unless, of course, there is an ‘agree to disagree’ provision. Such a provision allows coalition partners outside Cabinet to nominate issues as matters of 'party distinction'. They can publicly disagree with their coalition partner's stance. But they can only do this as a cohesive party unit. Sorry, no rogue Ministers.

Once the issue has been subject to a Parliamentary vote, or a decision of Cabinet, the coalition partner needs to go back and toe the Government’s line.

When talking about their portfolios, Ministers speak on behalf of the Government. It does not matter if they are inside or outside Cabinet. And Cabinet collective responsibility applies.

Things get interesting when a Minister finds themselves speaking about other matters. When speaking outside their portfolios they do so in a non-ministerial, personal capacity. Unless, of course, a Minister travels overseas.

Any Minister who is overseas in a ministerial capacity is representing the Government.

Anything she says, even on policy areas outside her portfolio, will be a representation of the New Zealand Government.

The rules of the Cabinet Manual are straightforward. What could possibly go wrong?
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