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Insights 34: 16 September 2022
Newsroom: Eric Crampton on how taxpayers could wind up footing the three waters bill
Podcast: Michael Johnston and Kate Morton on self-leadership as an antidote to anxiety
NZ Herald: Bryce Wilkinson on why the next Government must get serious with proper policy

Wanted: A plan for real change
Dr Oliver Hartwich | Executive Director |
After driving through rough terrain for a long time, you finally realise you have been going in the wrong direction all along.

So, what will you do: speed up, slow down, or turn around?

The answer should be obvious. Going faster in the wrong direction would only make matters worse. Slowing down will not help, either. The only way to get to where you want to go is to change course.

What appears logical in this analogy, however, is not how voters think.

Last week, Roy Morgan released its new poll. 

One finding stood out: The number of New Zealanders who believe the country is heading in the wrong direction has never been so high.

53% of New Zealanders said New Zealand is heading in the “wrong direction”. Only 37.5% believe the country is going in the “right direction”.

With a difference between the two of -15.5%, this is the lowest confidence rating on record.

But if a majority of New Zealanders believe the direction is wrong, does that mean they are willing to change course?

Not necessarily. According to the same poll, a coalition of Labour, Greens and the Māori Party would have a parliamentary majority.

Arguably, such a Labour-led coalition would go in the same direction as the current majority Government, but faster.

Voters are complicated. On the one hand, they say they are unhappy with the direction. On the other, they want more of the same.

Still, there is a way to make sense of this poll.

Despite their unhappiness with the Government, voters do not know if the alternative would be any better. 

The opposition will point out the flaws in the Government’s navigation. They will tell voters the wheels are about to fall off and the tank is empty.

But what voters actually want is something different. They want to see a proposal to repair the car –  and a cost estimate. 

They also want to see a new destination. Lastly, they want to know the alternative driver is competent.

It is one thing to realise things are not going the way we like. It is another to pass on the command to someone else.

The poll shows the opposition still needs to convince voters it is ready.

However, it also shows voters are looking for a credible plan for real change.

Whoever produces the better roadmap will win next year’s election.

Uncoordinated Monetary and Fiscal Policy during COVID-19
Dr Dennis Wesselbaum | Adjunct Fellow |
The monetary and fiscal policy responses to the COVID-19 pandemic set the stage for the inflation we are currently experiencing.

In the debate about what drives inflation and who is to blame, one important element has not received the attention it deserves: the coordination between monetary and fiscal policy.

Since Eric Leeper’s work in the early 90’s, we know that the combination between active (forward-looking) and passive (backward-looking) fiscal and monetary policy matters for the price level and inflation.

In his model, if fiscal policy is active and monetary policy is passive, deficits will increase inflation. Fiscal policy dominates monetary policy, and the central bank will have to adjust policies such to fulfil the constraints imposed by the demand for government bonds. Intuitively, fiscal policy does not adjust taxes (or spending) and the central bank must adjust the money stock to respond to deficits.

Recall that in New Zealand the increase in government spending since 2020 was mainly financed via the Large-Scale Asset Purchase (LSAP) programme (about $50b), which increased broad money by 21 percent: active fiscal and passive monetary policy.

One of the key mistakes was to ignore the importance of the coordination between monetary and fiscal policy. Monetary policy was too accommodative for too long, given the large debt-financed fiscal spending programmes that were issued without a strategy on how this debt will be repaid in the future.

Public statements by the Finance Minister, Governor Orr, and the MPC suggest that the importance of this coordination is still not fully understood.

The recent literature on the still debated fiscal theory of the price level (FTPL), which started with Leeper’s work, is very important for the RBNZ and the Treasury going forward.

This theory states that monetary and fiscal policies are bound together by a common budget constraint and that coordination – to some degree – is needed.

Any difference between the real value of government debt and the present value of surpluses generates changes in the price level (i.e inflation) that leads the economy back to equilibrium (by changing the value of nominal debt).

The inflation we experience is therefore, amongst other factors, driven by the lack of coordination between monetary and fiscal policy and has its root in the debt-financed fiscal expansion since 2020, which occurred without discussing how debt will be repaid.

Without changes in fiscal policy, reducing inflation purely by monetary policy means will be extremely painful.

Celebrating political entrepreneurs
Dr Eric Crampton | Chief Economist |
Entrepreneurship is highly rated. My son’s school even renamed their NCEA Level 1 economics paper “Entrepreneurial economics” and their accounting paper “Entrepreneurial finance.”

But entrepreneurship remains underrated. Entrepreneurs’ alertness to opportunity, and determination to see it through, are a fundamental source of rising living standards. 

But public sector entrepreneurialism often goes unnoticed. Results may not always be as desirable as in the private sector, but who are we to judge?

So let us recognise some remarkable public sector entrepreneurship.

Public sector bodies traditionally did not get involved in electioneering. But that missed an opportunity! Supporting a candidate who supports the agency’s views could make both better off.

Local government candidates extolling the merits of new cycleways feature in NZTA advertisements. The ads will have to stop running during the regulated period, but name and face recognition count for a lot. Voter memories might be short, but they aren’t that short.

It’s an innovative move that, somehow, seems allowed by law. So why shouldn’t they?

Public funding of sympathetic documentaries about Members of Parliament who are sympathetic to public funding of documentaries? It’s obvious win-win in hindsight, but it took entrepreneurial alertness to spot the opportunity. Kudos to New Zealand On Air.

And let’s not forget EECA’s exceptional achievement earlier this year. Deeming a consultant’s presentation as mere opinion, and out-of-scope of my OIA request, rather than in-scope advice? A masterstroke!

The Wiri alcohol licensing trust has been promoting candidates for local body elections – including election to their own board.

Unlike some other licensing trusts, Wiri has no monopoly on local alcohol sales. But friendly councillors would be helpful when central government considers tighter alcohol restrictions.

Local campaigner Nick Smale complained Wiri’s actions were unethical. But should we blame the Trust? They discovered an opportunity. That kind of gumption should be celebrated rather than discouraged.

Monopoly licensing trusts able to earn cartel-like rents could follow Wiri’s entrepreneurial example. In 2014, the Auditor General said they were “probably the least scrutinised part of the public sector.”

Lack of oversight provides tremendous opportunity for entrepreneurial innovation. Why not recycle trust cartel profits directly into billboard and radio campaigns for friendly candidates? It’s an entrepreneurial opportunity ready to be taken up.

So stop complaining about a moribund public sector. Innovation is all around us. You need only be alert to see it.

If New Zealand’s high schools taught civics, they could even rename it “Entrepreneurial politics”.

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