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Insights 15: 6 May 2022
The Dominion Post: Eric Crampton on how Wellington can improve its economic wellbeing
Podcast: Michael Johnston discusses Te Hurihanganui and its implications
Newsroom: Oliver Hartwich says Europe faces difficult monetary conditions for years to come

Too much of a good thing
Dr Oliver Hartwich | Executive Director |
Successful economies have low unemployment.

However, these are no ordinary times, and New Zealand’s ultra-low unemployment rate of 3.2% should worry everyone.

But let’s start with the positives. There are so many jobs available in New Zealand, anyone looking will have no problem finding one. 

It is not a statistical fluke, either. With more than 2.8 million people in paid work, employment in New Zealand has reached an all-time high.

If the labour market is so good, what could possibly go wrong?

Because the labour market is tight, wage pressure is building in many industries. When companies cannot find workers, they will outbid one another. Low unemployment thus drives inflation. Increases in interest rates will follow. 

Inflation, meanwhile, also affects employment, in another way. Wages are sticky, meaning they do not rise as fast as inflation, at least at first. Existing employees suffer a real wage cut when their wage increases lag inflation.

The flip side is that it is cheaper to hire staff, at least temporarily. Companies will continue to hire more workers until wages catch up with price increases.

Perhaps this is the harbinger of the dreaded price-wage spiral: Rising inflation temporarily boosts jobs. Then, the higher wages that come with low unemployment drive inflation even higher, leading to an even tighter labour market, and around it goes.

In the short run, such a scenario may appear good for the labour market. But sugar rushes do not last forever. When the short-term stimulus is exhausted, inflation and crippling interest rates will be all that is left.

This is almost a textbook case of stagflation. It is what much of the world went through in the 1970s.

But this time it is going to be even worse for New Zealand. Not only do we see early signs of stagflation, but Kiwis are also forecast to be leaving their country in droves.

There are many reasons Kiwis might want to leave New Zealand. Wages are higher in Australia and elsewhere. New Zealand has insane house prices, and the cost-of-living crisis is real. Leaving the country after two years behind Covid walls is appealing too.

With our border remaining difficult to cross for would-be migrants, we cannot simply plug the gaps in our labour market with migrants. For a start, Immigration New Zealand is way behind on processing visa applications.

The mass exodus of Kiwis to better lives abroad will exacerbate the problems for those left behind.

Do not let low unemployment fool you into thinking everything is fine. It might well be the opposite.

How do “we” fairly tax the rich?
Dr Bryce Wilkinson | Senior Fellow |
Last week, Inland Revenue Minister David Parker gave a speech titled “shining the light on unfairness in the tax system”.

His speech defended an Inland Revenue investigation into the “tax paid by the wealthiest New Zealanders relative to their economic income”. He is proposing a Tax Principles Act in this context.

Parker assured us that this was in the interests of fairness, not envy. Yes, really.

In arguing that the tax system should probably soak the rich more, he asserted that:
  • New Zealand’s income tax system is not progressive;
  • New Zealand is not a highly taxed nation;
  • Wealth is being concentrated “into the hands of an ever-smaller cohort at the very top”.
All three assertions look false. First, on the facts, it is progressive. The top 3% of income earners in 2020 earned 18% of taxable income and paid 26% of the income tax collected. Research has found that the tax system remains progressive, even after factoring in GST.

The average income tax per person in the 3% group was $77,000 compared to a median payment of $4,100. How much more grasping would a ‘fair’ tax system be?

Second, New Zealand is a relatively highly taxed nation. Of 64 countries with a population of at least two million and a reasonably high GDP per capita, 39 had a lower tax to GDP ratio than New Zealand. Outside Europe, only Brazil and Israel had a higher ratio.

Third, on Statistics New Zealand’s estimates, the top 1% (and 5%) owned a smaller proportion of total wealth in 2021 than in 2015 (or 2018).

An article in the latest Sunday Star-Times by Max Rashbrooke presumed to ask, “How do we fairly tax the rich?” It appears that the “we” are a political majority who are not rich.

Apparently, “we” see no conflict of interest in this. Rashbrooke suggests it is fair that “we” should hit the rich with a more comprehensive capital gains tax, a wealth tax, and for good measure, an inheritance tax.

Of course, ‘we’ set the thresholds sufficiently high to exempt ourselves. “We” can be predatory because Rashbrooke assures us that the rich have few emigration options. That is how we like it.

Fair outcomes cannot be expected from an unfair process. Majoritarian plunder is immoral.

A single income tax rate has greater constitutional appeal. Redistribute through the welfare system.

Impossible things
Dr Michael Johnston | Senior Fellow |
Like Lewis Carroll’s Red Queen, Elon Musk is fond of impossible things. And not content with simply believing them, Musk likes actually to get them done. He already has a formidable set of accomplishments to his name. He’s invented an electric car and put it in orbit around the sun. He’s bored impressively large holes under Los Angeles.

Now, it seems, he’s looking for a new challenge – something really hard this time. Cold fusion? Establishing a colony on a gas giant? A perpetual motion machine perhaps?

No, those things are for lesser minds. 

Having acquired Twitter for a paltry $44 billion, Elon Musk wants to turn it into a platform for untrammelled free speech.

Now don’t get me wrong, I love free speech. In fact I think it’s the fundamental value underpinning open society. Without it, there would be no democracy worth having. There would be no science as we understand it. Without free speech we would be poorer, stupider and, well, less free.

I’m close to being a free speech absolutist. But as even I will admit, free speech has some necessary limits. Credible threats and incitement to violence are out. So is libel and exposing children to obscenity.

In the real world we have laws to enforce those limits. But I don’t think that’s why, most of the time at least, we restrain ourselves from overstepping them. The real reason is that we have informal rules of politeness to keep us in line.

For the most part, those rules keep us well short of legal limitations on what we can say. If we step outside the bounds of politeness too often, we’re likely to find ourselves shunned. Human beings, as social animals, really don’t like being shunned.

But Twitter isn’t the real world, and the normal rules of social interaction don’t apply. For one thing, the 220-character restriction on each post tends to limit nuance of expression. So does the immediate nature of the discourse – it’s all too easy to tweet first and think later.

Perhaps most importantly, the consequences of rudeness are far less serious on Twitter than they are in real life. In fact people who say inflammatory things on Twitter actually seem to be rewarded. Research has shown that posts are most likely to be retweeted if they trigger strong emotions, especially rage at opposing groups.

I wish Elon all the best with his new mission impossible, but turning Twitter into a wild west for speech may not go exactly as planned.

On The Record
Initiative Activities:   
  • Podcast: Michael Johnston and Oliver Hartwich on Te Hurihanganui
  • Submission: Wellington Council on the Draft Economic Wellbeing Strategy by Eric Crampton
All Things Considered
  • Graph of the week: On Wednesday, RBNZ Governor Orr told the Finance and Expenditure Committee that “We’ve got this” and that he has no regrets. Our graph of the week is from the February Monetary Policy Statement, which showed RBNZ has kept interest rates well below the neutral level despite an overheated economy and high inflation
  • The case against the RBNZ and Finance Minister
  • American research suggests that New Zealand might be wasting resources on an ineffective primary school reading intervention
  • Sceptical about the ‘Entrepreneurial State’? You’re right to be
  • The University of St Olaf removes the faculty director of its institute dedicated to bringing controversial speakers to campus because he brought controversial speakers to campus
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