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Insights 45: 3 December 2021
NZ Herald: Roger Partridge comments on why Kiwi literacy is in decline and the way forward
Webinar recording: What central banks should and shouldn't do, with John Cochrane
Podcast: Matt Burgess on the Government’s Emissions Reduction Plan

Unemployment insurance is anti-social
Dr Oliver Hartwich | Executive Director |
In all the excitement over the new ‘Traffic Light System’ and National’s new leader, a big story went almost unnoticed last week.

According to the Herald, the Government is about to complete its proposals for unemployment insurance.

It is perhaps unsurprising that hardly anyone noticed what an important change this would be. The proposal seems innocuous enough.

Yet, when you think it through, this move has enormous implications.

Here is what we know so far about the Government’s plans. If made redundant, people will receive 80 percent of their income for at least half a year. An extra tax of 3 to 4 percent will be charged on income to pay for it.

Despite the tax being shared between employers and employees, much of the burden falls on employees. Without the tax, they would be paid more.

Extra income taxes of 3 to 4 percent should be a big deal. There is only one reason they are not, and that is people have not heard about them yet.

In a recent research note*, and based on international experience with similar schemes, we pointed out reasons to be cautious.

To start with, the more you pay for something, the more of it you will get. Hence, if you pay people for being unemployed, more people will remain unemployed for longer. This ultimately hurts their employability.

Likewise, if something costs more, people will buy less of it. If unemployment insurance increases the cost of employing people, fewer people will be employed.

In these two ways, unemployment insurance has the perverse effect of increasing unemployment.

That is bad enough. But it gets worse.

Once unemployment insurance is introduced, it is almost impossible to abolish. People will feel entitled to future pay-outs as soon as they start paying in.

Therefore, unemployment insurance cannot be stopped, no matter how obvious its bad economic effects become.

On the contrary, once unemployment insurance is in place, it will set a precedent. Politicians will like the ability to channel social insurance contributions through shadow budgets. They will come up with novel things to do via separate ‘social security’ systems.

You can find examples overseas. In many European countries, between a quarter and half of all tax revenue runs through social insurance schemes. Politicians then twist parts in favour of their most pet groups and projects.

Were the innocently titled ‘social unemployment insurance’ better understood, the project would be gone by lunchtime.

Right now, people know little about it. Let’s tell them before it is too late.

* Research Note: Unemployment Insurance - A recipe for more unemployment?

Prudential climate reservations
Dr Eric Crampton | Chief Economist |
Central bank independence matters.

The grand bargain struck between governments and their central banks, coming out of the turmoil of the 1970s, and led by New Zealand in the late 1980s, was simple.

Governments stopped meddling in monetary policy. Central banks were given operational independence to pursue low and stable inflation. It was a difficult bargain for governments who preferred to avoid interest rate hikes as elections loomed.

That independence required Banks stay within limited bounds.

Monetary policy and prudential bank regulation are powerful tools with economy-wide consequences. They need to be used only toward the core ends of central banking: low and stable inflation, and the stability of the financial system.

Straying to pursue other objectives, regardless of whether they match the goals of the government of the day, is dangerous.

On Thursday, the Initiative hosted a webinar with John Cochrane – one of the world’s leading experts working at the intersection of macroeconomics and monetary policy and financial regulation. That he has a stronger record of published work in this area than the entirety of the Reserve Bank of New Zealand is a safe bet. Whether he has three times the work in the area might depend on how you weigh pages in different journals.

John has been increasingly critical of worldwide moves by reserve banks to consider climate change as a risk to financial stability. While it is very clear that temperatures are rising and that sea levels will rise with them, with obvious consequences for storms and beachfront properties, evidence of risks to the financial system is wanting.

Not everything that is a globally consequential risk is also a risk to the financial system. Systemic financial risk requires a particular kind of fragility. And the financial system, here and abroad, simply appears to be robust to the kinds of shocks that climate change will bring.

Indeed, earlier this month, the Federal Reserve Bank of New York published work showing that storms increase, rather than reduce, bank profits. People take out loans for rebuilding. Storms are bad, but they are not a risk to the financial system.

Using prudential regulation to address political concerns takes the regulator’s eye off the ball. More substantial risks can be missed. But, more importantly, doing so politicises their operations, putting their independence at risk.

And that may yet be the biggest systematic risk of them all.

John Cochrane’s webinar is available here

WHO is on first
Matt Burgess | Senior Economist |
Celebrations this week for Delta Airlines, Delta Electronics, Delta-Fly Pharma Inc and Delta Goodrem as – finally – a new variant of COVID sweeps the world.

But spare a thought for the staff at Omicron Inversiones, an investment company in Spain.

For them, chaos has come two variants sooner than expected after the World Health Organisation (WHO) decided to skip the thirteenth and fourteenth letters of the Greek alphabet to name the latest COVID variant Omicron.

One of the skipped letters is Xi.

WHO says it skipped the letter because Xi is a common surname.

It also happens to be the name of the President of China.

Which tells you something about China’s clout.

China’s influence over the WHO has been suspected almost since the start of the COVID outbreak two years ago.

WHO’s report on the source of the virus is widely seen as a whitewash. They said it is “extremely unlikely” the virus leaked from the Wuhan Institute of Virology because the lab is “well-managed, with a staff health monitoring programme.”

And now WHO is dropping letters from the Greek alphabet. How convenient.

It is not just that the WHO decided to risk being seen to kowtow to China by skipping over the name of its President. It is that WHO risks being seen to have kowtowed to China again.

That is what I mean by clout.

WHO knew we knew who WHO answers to. And they skipped Xi anyway.

But perhaps President Xi has missed a trick.

With the delta variant forced off front pages, shares in Delta Airlines, Delta Electronics and Delta-Fly Pharma are all down. It seems there is no such thing as bad publicity.

Which makes you wonder what President Xi is so worried about. I’m no expert on China, but the Xi variant could have done wonders for his name recognition in upcoming election campaign.

Meanwhile, the New Zealand government is keeping it simple. Traffic lights now only come in two colours.

The entire country is at level orange or red. Nobody is green.

Not even the Chatham Islands, which has never seen COVID and with a vaccination rate of more than 90%. Orange.

But I think I have cracked the government’s traffic light code. You see, orange is made by mixing green and red.

The government is telling us to both stop and go at the same time.

So, expect steep fines for anybody who is found not walking in circles.

On The Record
Initiative Activities:
All Things Considered
  • Quiz of the week: Put your economic knowledge to the test
  • The co-director of Wellington's ICU sounds a warning about ICU capacity and not allowing ICU nurses through MIQ and immigration
  • Sprawl is good - the environmental case for suburbia
  • The car owners most likely to be psychopaths
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