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Insights 30: 16 August 2019
New Research Note: The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries
Oliver Hartwich discusses on Breakfast what negative interest rates could mean for New Zealand
Second submission: Phase 2 of the Reserve Bank of New Zealand Act Review

The Unreserved Bank
Dr Oliver Hartwich | Executive Director |
On Monday, Adrian Orr was interviewed on TV One’s Q+A programme. If you had not known that Orr is the Governor of the Reserve Bank of New Zealand, you could have mistaken him for a politician.

Orr expressed clear views not just on monetary policy but on fiscal policy as well. He urged the Government to spend more, especially on infrastructure.

The two policy areas are important to each other but they are not the same. In Economics 101, we learn that fiscal policy is everything related to taxes and government spending. Monetary policy, meanwhile, is everything that concerns interest rates and money supply.

For good reasons, fiscal and monetary policy are best kept separate.

Apart from Venezuela’s President Nicolás Maduro, no one wants central banks financing governments through the printing press. And apart from US President Donald Trump, no one wants governments to bully central banks to slash interest rates to assist their re-election campaigns.

It is good practice for governments to respect the independence of their central banks. Conversely, central banks should stay out of the government’s business. This separation is necessary so there is no doubt about the central bank’s focus on price stability.

With his Q+A interview, and in a previous interview with Newsroom’s Bernard Hickey, Orr has blurred the lines between fiscal and monetary policy. Following last week’s interest rate cut, Orr also explained, correctly, that unconventional monetary policy would lead to “fiscal policy operated through a monetary institution.”

This is concerning, especially since the Remit given to the Bank’s newly established Monetary Policy Committee requires it to support the Government’s general economic objective. Once the Reserve Bank resorts to quantitative easing, it might lead the Bank to prefer some bonds over others.

The Governor, who had previously expressed his frustration about the Government not spending enough on infrastructure, could then fund this spending himself.

Not that Orr would do that. He is a fine economist who understands the difference between fiscal and monetary policy.

But it is damaging to the reputation of the RBNZ that markets even wonder whether Orr might overstep his role.

For this reason, the Remit of the RBNZ needs urgent clarification that the Monetary Policy Committee will only pursue monetary goals, even under conditions of quantitative easing.

If Orr still wants to do meddle in infrastructure policy, he could run for Parliament instead.

Our research note The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries is available for download here.

To trial or not to trial? What a silly question
Briar Lipson | Research Fellow |
Few parents would give their child a cough medicine that had not been trialled. The potential risks of doing so are endless. Plus, established, effective alternatives exist. Of course, few of us have read the clinical papers or understood the trials, but Medsafe and the Consumer Guarantees Act do that on our behalf.

If only schools could access similar trialling and protection.

Because as with medicines, the risks of getting schooling wrong are endless. After family effects, schools have the most significant impact on students’ achievement. Attainment in school is highly correlated with later success.

And yet, in New Zealand, not only do we embrace innovations with open arms, but we rarely bother to trial them.

A prime example of this is our long-standing fascination with open plan learning spaces. Since they were first introduced here in some primary schools in the 1970s, they have cycled through multiple rebrands, from modern to innovative and flexible learning environments.

The underlying premise is always the same. The layout of learning spaces can be used to change how and what students learn; teachers no longer teach knowledge from the front, and students are all supposed to lead their own development of skills.

Whether children learn better in single-celled or open plan classrooms is a testable proposition. And yet, no worthwhile study has ever been done.  

Regardless of this, open-plan learning spaces continue to proliferate in New Zealand like agapanthus in the Auckland sun. In an act of cowardly capitulation, in 2016 our Ministry of Education co-funded a four-year study into ILEs by the University of Melbourne, with a foregone conclusion. This flagship team of twenty researchers, which includes the great Kiwi education researcher John Hattie, was not charged with testing how open plan spaces compare with their single-celled cousins. Rather, they were to “investigate how teachers can use the untapped potential of Innovative Learning Environments (ILEs) to improve learning outcomes for students.”

The researchers will thus not ponder why these new spaces have still not revolutionised learning. They will instead ask how they could.

If a drug manufacturer tried a similar study design for a useless medicine, Medsafe would not be impressed. Parents should not be impressed with the Ministry’s approach to Innovative Learning Environments either.

Bad stats are hard to kill
Dr Eric Crampton | Chief Economist |
It is the hope that this time it will be different that really kills you. Sisyphus at least knew his labours were futile and could resign himself to the task of forever pushing the boulder uphill.

A decade ago, Matt Burgess and I went through BERL’s headline-grabbing $4.8 billion measure of alcohol’s social cost. Sir Geoffrey Palmer, heading the Law Commission’s alcohol legislation review, had cited the gap between BERL’s measure of social cost and alcohol tax revenue to justify imposing tighter controls.

But BERL’s figure bore no resemblance to normal notions of external costs. BERL even counted $700 million in drinkers’ expenditures on alcohol as a social cost.

There were substantial problems in BERL’s tally of almost $1.5 billion in labour costs such as wages not earned because of alcohol – only a tiny fraction of any corrected figure could be considered ‘external’. Worse, the standard figures on the intangible costs of premature mortality include the cost of any reduced output. BERL was was double-counting by adding both costs.

When BERL measured health costs, it ignored any conditions, like cardiovascular disorders, where alcohol reduces net health costs. When BERL measured crime costs, a prisoner saying alcohol contributed at least ‘some’ towards his incarceration was enough to count all the costs as being due to alcohol.

Our critique of the figure also received a fair bit of attention at the time, with BERL’s number generally considered by economists as on par with toxic waste. Our corrected figure was around a fifth of BERL’s headline, and much closer to the alcohol excise take.

We had finished pushing the rock uphill.

Last year, BERL provided what appears to be an inflation and population adjustment to the old figure: $7.8 billion per year. I had to push the rock uphill again, with a piece in Newsroom reminding everyone about the problems in the tally.

The figure has been all over the headlines again this week as part of uncritical journalistic promotion of a renewed prohibitionist campaign. Shoulder to the rock, one more time.

Knowing it to be futile, Sisyphus could at least make a game of the futility – timing how long it took to push the rock up the hill one day, and then trying to beat that record.

Maybe I should just give up hope that journalists will ever care about getting the numbers right when they are on a temperance crusade.

Dr Crampton’s article at Newsroom, last year, has more of the detail on this zombie statistic; his full report on the original BERL figure is here.’

On The Record
All Things Considered
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  • Pulling apart the butchered census.
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  • Wellington's mayor weighs into Khandallah liquor store debate,
  • Hong Kong’s fight for freedom is our fight, too.
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