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Insights 35: 20 September 2019
Dr Oliver Hartwich discusses on Newsroom why infrastructure spending will not solve Germany's problems
Dr Bryce Wilkinson explains on NBR how New Zealand's regulatory regime can affect investors' decisions.
Research Note - Hands-on: New suggestions to reform the vocational sector in New Zealand.

Administering monetary medicine
Dr Oliver Hartwich | Executive Director |
Imagine you went to your GP and received an unpleasant diagnosis. Would you want your doctor to panic in front of you, speculate that your disease might be terminal and prescribe a strong medicine? Or would you prefer your practitioner to calmly explain what she is doing and reassure you that her tried-and-tested treatment will work?

Most of us would choose the latter option. Indeed, clinical research has found that a doctor’s reassurance promotes health outcomes and healing.

With central banks, it is the same. The job of a central banker is to reassure the public even as they prescribe their medicine.

This week, the Federal Reserve delivered a masterpiece in the art of administering monetary medicine.

When Jerome Powell, the chair of the US central bank, announced a small cut in the federal funds rate, he did so calmly. He stressed that the US economy was in good shape. He also said that he would not rule out further cuts but did not think they would be needed after the one he just delivered.

Powell did what a good doctor would do with her patients. The headlines reflected the reassurance. Bloomberg summed it up as “Powell stresses solid U.S. outlook after Fed cuts rates again”.

Not everyone was happy, though. While Powell was still reading out his carefully worded statement, President Donald Trump tweeted, “Jay Powell and the Federal Reserve fail again. No guts,” no sense, no vision! A terrible communicator!”

So, let us imagine what the Fed should have done according to Trump.

For a start, the cut would have been much deeper – at least 50 basis points. Then Powell would have drawn a dire picture of the world economy and outlined grave domestic risks. Next, he would have announced preparations for negative interest rates and quantitative easing.

Finally, Powell would have given some colourful, strongly worded media interviews. He would have called on the government and households to borrow and spend. In this way, they should help him push up inflation and perhaps also lower the exchange rate.

Although all that would have made Trump happy, consumers and businesses would have been shell-shocked. The Fed’s speculation of economic Armageddon would become self-fulfilling.

Responsible central bankers, therefore, do not behave as Trump suggests.

Just as there are good and bad governments, there are good and bad central bankers.

At least America is lucky to have a good central bank chair.

Looking-Glass Economics and Highly Productive Soils
Dr Eric Crampton | Chief Economist |
When Alice tried to recite one of her lessons while down the rabbit-hole in Wonderland, she thought only a few words had come out wrong. The Caterpillar corrected her bluntly: “It is wrong from beginning to end.”

By contrast, the Cabinet Paper on the National Policy Statement protecting sensitive soils is not wrong from beginning to end.

Paragraphs 90, 91 and 92 contain sound advice from Treasury.

Otherwise, the paper has a few problems.

About a month ago, the government issued a proposed National Policy Statement allowing councils to designate areas of agricultural land where residential development would be banned.

I warned in Insights it risked undermining the urban growth agenda. Urban land makes up less than 1% of the country by area. It is utterly implausible that urban growth will take over the country’s agricultural land.

The normal operation of markets provides additional protection. The price of agricultural land incorporates buyers’ and sellers’ expectations of the future value that can come from agricultural uses of that land. If turning a paddock or a horticultural block into a subdivision is profitable, that means the services provided by that land in housing are more valuable than the crops that otherwise might have grown there.

So I requested the Cabinet Paper and Treasury’s advice.

Corwin Wallace’s advice from Treasury’s side in the Cabinet Paper is correct and trenchant. The difference in land value on either side of urban-rural boundaries means the land in an 80-hectare farm at that boundary would be worth between $120 million and $182 million more if it were allowed to help solve the housing crisis. Banning that conversion destroys value and risks exacerbating the housing shortage.

Treasury recommended deferring the NPS until a more rigorous cost-benefit assessment had been undertaken, and that the Ministry for Primary Industries be directed to provide options to reduce the risk of the NPS restricting housing supply.

The indicative CBA provided to the Ministry by Market Economics was astonishingly poor. Treasury provided instructive critique. And Market Economics’ response to Treasury revealed such a confused understanding of the concept of market failure that it would have earned a failing grade in the intermediate microeconomics course I once taught.

The NPS on sensitive soils is based on distorted, looking-glass-world economics. Without substantial improvement, it risks pushing us all further down the housing crisis rabbit-hole.

Ms. Monopoly
Toby Fitzsimmons | Research Intern |
“Look in the mirror long enough and monsters will come out of it,” says an old wives’ tale.

Toymaker Hasbro has put up a mirror to all of society and we do not look pretty. The mirror is called Monopoly.

Monopoly was created in early 20th century at the end of the Gilded Age of robber barons, expressing social anxiety over the monopolisation of land and capital. Since then, Monopoly has continually updated itself to reflect changes in society.

Recent editions such as Stranger Things and Rick and Morty reflect pop culture. In Monopoly Voice, a voice-controlled banker does all the difficult maths for you, reflecting the inadequacies of modern education.

Monopoly Socialism is the most realistic version of the game, bankrupting businesses immediately. Caught using a plastic straw? Pay the tax. Tofu-chip cookies made in honour of Karl Marx’s birthday – yum. Shame – that too is taxed.

Monopoly for Millennials tells you to “Forget real estate. You can’t afford it anyway.” Players no longer buy property but roam the board visiting vegetarian bistros and farmer’s markets to earn “likes” on social media. The game that represented players as emojis and hashtags inevitably resulted in millennials complaining online.

If Millennials Monopoly reflects a reactionary unease with modernity, Friends Monopoly takes it all the way from Old Kent Road to Mayfair. Friends was released 25 years ago chock-a-block with gay jokes, fat shaming Monica and no noticeable minority characters. For a series that would not have survived today’s cancel culture, its fandom is still strong enough to get a board game.

With its latest board game, Ms. Monopoly, Hasbro follows men’s awkward, heavy handed repentance for our privilege. To fight the gender pay gap, female players start off with more money and collect a bonus 20% for passing go.

“The first game where women make more than men.” With this tagline, Monopoly seems to have gone too far, leaving women patronised rather than empowered.
Perhaps Ms. Monopoly’s message is that women are not capable of competing with men’s monopoly on wages. At least that’s what the seven men out of eight executive managers at Hasbro seem to believe in selling out progressive values.

Looking into the Ms. Monopoly mirror, we see the ugly face of society.

To update Oscar Wilde, “life imitates Monopoly.” We can only hope he was wrong.
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