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Insights 21 : 12 June 2020
Newsroom: Eric Crampton on the Government's targets for prudent debt levels.
Podcast: Nathan Smith on the shifting sands of globalisation
Research Note: Doing whatever it takes with someone else’s money

Government waging war on another global scourge
Roger Partridge | Chairman |
This week, Trade and Export Minister David Parker was exposed to one of the world’s worst ailments: trade protectionism.

After nearly two years of negotiations, the EU leaked its agricultural “offer” to New Zealand to European media.

The offer is derisory. As Parker put it, while New Zealand imports about a kilogram of cheese per Kiwi from the EU, the leaked offer proposes letting New Zealand export only 3 grams of  cheese per EU citizen – and then only at punitive tariff rates.

The irony of New Zealand catching a dose of European protectionism just as it has fought off another global contagion is hard to miss.

Parker was rightly outraged – both at the terms of the offer and that the EU decided to leak it ahead of formally communicating it to New Zealand. This is not the act of a constructive trading partner.

Over the last few years, the EU has harrumphed outrage at tariffs imposed on European goods by the Trump administration. The picture painted by the EU is of an inward-looking, anti-trade America compared with an outward looking, pro-free trade EU.

Unfortunately, the EU’s self-image is as delusional as President Trump’s tweets. Even on manufactured goods, EU tariffs (for example, on imports of US-made automobiles) have historically been higher than those imposed by the US on European cars.

On agricultural products, the tariffs (and quotas) imposed under the EU’s Common Agricultural Policy are even more onerous. The policy is designed to protect European farmers from international competitors. But it does so at the expense of global prosperity, particularly in the developing world.

New Zealand’s butter exports to the EU are subject to a tariff of €189.6 per 100kg. The tariff on cheese exports is higher still, at €221.2 per 100kg. Combined, the suite of EU quotas and tariffs imposed on Kiwi agricultural exports to the EU means this country’s exports are a small fraction of their potential under a free trade agreement (FTA).

With almost 500 million consumers, the EU is the largest trading partner with which New Zealand does not have an FTA. Securing one would be a huge win.

Kiwis should all hope the Government has just as much success fighting the affliction of EU protectionism as it did against Covid-19.

Someone else’s money
Dr Bryce Wilkinson | Senior Fellow |
For the last couple of decades, public debt and banking system liquidity has been ratcheting up around the world after each recession or market correction. But no one appears to have any credible plan for restoring public debt, liquidity or central bank policy rates to normal levels.

This week, The New Zealand Initiative published a research note called Doing whatever it takes with someone else’s money which outlined why New Zealand should be careful of going down the same path.

The problem is international asset prices are now being set on the basis that profits are private while taxpayers should bear the losses. Such an insidious policy rewards borrowers and risk takers at the expense of savers and more prudent investors. It effectively turns saving into a mug’s game.

This unsustainable trend will end on the day US or European central bank promises to do ‘whatever it takes’ are not credible. That day would begin what one specialist commentator called “the biggest wipeout of wealth in history.”

Until Covid-19 came along, Australia and New Zealand had stood against this trend. Their public debt ratios were low and central bank interest rates were well above zero.

Unfortunately, New Zealand is now on the path to higher public debt and unprecedented monetary easing with no credible plan for unwinding the situation before the next crisis.

The superficial justification is that unprecedented times call for unprecedented measures. Actually, the only proper justification for any public policy – unprecedented or not – is whether the benefits to the public are higher than the costs.

For example, why exactly is it good for the public that the Reserve Bank is borrowing tens of billions of dollars to buy government bonds? And precisely why is the RBNZ required to lift low rates of consumer price inflation towards the middle of a 1-3% range when the social cost of low inflation is not obvious? The UK had zero inflation in the late 19th century and the world didn’t stop spinning then.

The report also questions if more weight should be put on the issues of financial efficiency and stability.

All of this creates a constitutional concern. There is a growing notion that the Government should instruct the Reserve Bank to use its ‘ATM’ to fund fiscal deficits. That would end the RBNZ’s independence and compromise the conduct of both monetary policy and fiscal policy.

That would be a terrible outcome of the Covid-19 crisis and it must be resisted.

Democracy is not a fairy-tale
Dr Oliver Hartwich | Executive Director |
A new publication about Jacinda Ardern is hardly remarkable these days. The Prime Minister’s global celebrity status has created a small avalanche of books and magazine covers.

However, a book about Jacinda Ardern targeted at 5-10-year-olds is a different story. Penguin Books has just released: Taking the lead – How Jacinda Ardern wowed the world. Written by children’s author David Hill, it is illustrated by Phoebe Morris.

It needs pointing out this is a commercial publication, not a party-political pamphlet. From what we know, neither the Prime Minister nor her party had anything to do with it. It would thus be unfair to criticise them for the book.

However, that does not make Taking the lead any less cringeworthy.

Glorifying current political leaders in children’s books feels odd. It is something one would suspect in absolute monarchies or dictatorships, and there are historical examples from both.

Democracies are different. They allow anyone to become Prime Minister, and they allow the public to also remove them from office once they have had enough of them. Democracy is the form of government made for flawed humans to elect and remove one of their own.

It is that feature of democracies which make children’s books about sitting Prime Ministers awkward. Young children need stories of good and evil; they cannot fathom grey areas yet.

I read Taking the lead with our 7-year-old son. He related to it because it was like other fairy-tales he knows.

The protagonist stands for everything good. Jacinda always does what she promises. She is kind, caring and determined. She overcomes any obstacle and is rewarded for her kindness.

Our son did not understand everything. He did not know the International Union of Socialist Youth. But he liked the picture of Jacinda going fishing with her partner Clarke Gayford and their late cat Paddles (to whose memory the book is dedicated).

Other characters were notable by their absence. No Winston Peters, Clare Curran or Iain Lees-Galloway were there to spoil the story.

I asked our son what he thought of the Prime Minister. He said he liked her because she was always doing everything right. When I told him about the 100,000 houses she promised but did not get built, that confused him a little.

In its veneration of Jacinda Ardern, Taking the lead goes so far as to become boring – even for children.

Asked if he would like to read it again, our son’s response was clear: he’d prefer another Captain Underpants story.
On The Record
All Things Considered
  • Graph of the week: Map of international travel restrictions related to Covid-19.
  • What might happen in Hong Kong?
  • Why does everyone hate the media?
  • The potential role of pollen in Covid-19
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