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Insights 27: 29 July 2022
Research Note: How central bank mistakes after 2019 led to inflation, by Graeme Wheeler and Bryce Wilkinson
NewstalkZB: Interest should be reinstated for student loans as current scheme no longer works, says Eric Crampton
Podcast: The size and scope of local government and its funding and financing mechanisms, with Peter Nunns and Eric Crampton

Focus on price stability
Dr Oliver Hartwich | Executive Director |
The Initiative’s reports often attract media attention. Nothing, however, could have prepared us for the storm following the release of How central bank mistakes after 2019 led to inflation.

Global media covered our report, from Bloomberg to France’s Les Echos, from the UK’s Daily Telegraph to the Australian Financial Review, and from Brazil’s Plu7 TV channel to the Philippines’ Business Mirror. It confirms that the monetary policy issues we outlined in the report are of global concern.

In New Zealand, too, our report caused considerable debate in the media. It also triggered a political response.

Shortly after the release on Tuesday, Minister of Finance Grant Robertson issued a statement, saying “The RBNZ does have my confidence.”

Perhaps that level of ministerial support was necessary because, at the same time, National’s leader Chris Luxon proposed an independent inquiry into the RBNZ on the back of our report.

Luxon’s call made him a strange bedfellow of Greens MP Chlöe Swarbrick, who has been demanding a similar inquiry since February. ACT leader David Seymour has also criticised the RBNZ, saying that Governor Adrian Orr should not be reappointed.

That brings us to the Governor’s response to our report. In a highly unusual step, Adrian Orr issued a personal statement.

The Governor’s response shows the pressure he is feeling. Senior journalist Bernard Hickey reported this week that his reappointment is now in doubt.

It is thus understandable that Governor Orr felt the itch to respond to a paper co-authored by his predecessor at the RBNZ, Graeme Wheeler. Even when it might have been wiser for Orr to ignore it and let the media storm pass.

Still, our paper’s main focus was not even on the RBNZ but on the actions of the US Federal Reserve, the European Central Bank and the Bank of England. Though domestic media coverage may have suggested the primary target was the RBNZ, it was not.

The Governor’s highly personal statement and his (sort of) mea culpa for New Zealand’s inflation, illustrates how closely monetary policy decisions are linked to personalities. Perhaps too much, one might say.

Finally, the Minister of Finance and the Prime Minister accused us of “hindsight economics”. Prime Minister Jacinda Ardern said in Parliament’s questions that “there seems to be a lot of hindsight and revisionist history here.”

Well, not quite. 

Back in August 2019, even before Covid, I co-authored an Initiative paper with Professor Robert MacCulloch and Dr Eric Crampton. Its title: The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries.

We warned that quantitative easing, which the RBNZ had flagged then, would threaten price stability. We have published many columns since in which we criticised the RBNZ’s dovish stance and its distraction by other non-monetary objectives.

None of this was hindsight economics. It was foresight economics. More to the point, it was simple common sense.

Unfortunately, our warnings were ignored by the RBNZ and the Government. One result is the inflationary environment we are now in. 

Another is taxpayers having to bail out the RBNZ for more than $8 billion of losses incurred under its money-printing programme.

All this underlines why our report this week was so important – both for our domestic debate and for central banking globally.

Chris Luxon, Chlöe Swarbrick and David Seymour are right to call for political consequences.

More importantly though, we need central banks globally to refocus on their core task: price stability.

Further reading and listening:

Crying fowl
Dr Michael Johnston | Senior Fellow |
The chickens of negligence have come home to roost – but they’re not welcome in the Henhouse of Education.

As we wrote in Insights last week, in a pilot of new literacy and numeracy assessments for NCEA, only two thirds of assessed students met a basic standard of adult numeracy and reading ability. Only one third met the standard in writing.

But rather than taking responsibility for a failing system, the Ministry claimed that its own study was flawed. They weren’t alone. A conga line of influential educators assembled to explain away the dismal data.

Their most credible argument was that, because the pilot had no personal consequences for the participating students, they didn’t take the tests seriously. But even if all of the success rates come up by ten percentage points when the tests are run for real credits, a quarter of our young people will fail in reading and numeracy, and more than half in writing.

The thing is, we didn’t need the Ministry’s pilot to tell us that we have a real problem with literacy and numeracy. Many data sources, including international tests like PISA, have been sending warning signals for nearly two decades. Even if the commentators are right and things are not as bad as the Ministry’s pilot suggests, it’s disappointing that their first instinct is to be defensive.

We need urgent reform of the way in which these key skills are taught at Primary School. For far too long we’ve allowed ineffective methods of teaching to prevail.

Sadly though, without pressure from ordinary New Zealanders, the Ministry and its educational allies are all too likely just to keep kicking the problem to touch. It will take sustained pressure from parents, employers and those educators who know how much better things could be, to make a real difference.

The implications for the lives and wellbeing of our young people are profound. Literacy and numeracy are not just ‘academic’ skills, they’re crucial prerequisites for all kinds of life opportunities. Our prisons are full of people – mostly young men – who can’t read or write.

There are many pressing problems facing New Zealand, but none more urgent than the decay of our once great education system. Every time a young person leaves school without basic literacy and numeracy, it is a travesty. As democratic citizens we must all shoulder a share of the responsibility for that. We must demand much better and demand it loudly.

Misplaced ambition
Dr Eric Crampton | Chief Economist |
It isn’t crazy to claim that New Zealand’s school system lacks ambition. Or, if it is, our shop has been crazy for a while.

But if you were going to complain about a lack of ambition in the New Zealand school system, carbon accounting seems a ludicrous place to start.

Unless you’re the Ministry for the Environment.

Newsroom reported this week on frustrated Ministry for the Environment officials unable to get school boards to fill in carbon accounting paperwork. They briefed Ministers that the education sector lacks “sufficient ambition.”


Every tonne of greenhouse gas coming from schools, whether in transport to and from school, in heating the buildings, in powering the lights, or even in the trash that winds up at landfill, is covered by the Emissions Trading Scheme.

But Ministry for the Environment officials are dismayed that half of schools aren’t filling in forms detailing electricity consumption, despite being contacted multiple times.

The real tragedy is that so many schools bothered responding.

Every school already does its own real carbon accounting. They just don’t know it. Carbon charges show up in the bills that schools pay. The binding emissions cap takes care of the rest unless a school keeps livestock.

I don’t think many schools keep livestock.

A school system spending time on carbon accounting would lack ambition to fulfil its core mission.

Think about what schools currently have to deal with, in addition to the long-term issues that the Initiative regularly highlights.

Term 1 of 2022 must have been hell for principals and Boards.

Lots of their teachers are out sick. Far too few relievers are available to help. The teachers who aren’t sick have to accommodate both students who are in the classroom and those who are isolating at home.

Taking measures to keep teachers safe and limit spread draws ire from some parents. Not doing so means more sick teachers, a harder time staffing classes, and more parents taking the precaution of keeping their children home.

Some schools have had to cancel afternoon classes, to free up teachers to cover for missing colleagues.

It is an administrative nightmare to juggle while trying to deal with huge long-term issues around declining literacy, numeracy, and attendance.

And despite it all, the Ministry for the Environment thinks schools should be spending their time running futile carbon accounting exercises.

Ambitious schools will be right to continue ignoring them.

On The Record
Initiative Activities:   
All Things Considered
  • Graph of the week: UN now projects world population to decline after 2086
  • Probably a great many famous stories could be retold in terms of maintenance
  • Govt hires for income insurance scheme despite timing concern
  • Schools are facing a critical shortage of relief teachers
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