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Insights 42: 12 November 2021
Research Note: Climate of fear - How the reserve bank is overstepping its mandate
Newsroom: Eric Crampton on the Reserve Bank and its independence
Podcast: Dr David Law on unemployment insurance

Mahuta on Three Waters
Matt Burgess | Senior Economist |
This week, Local Government Minister Nanaia Mahuta recorded a lengthy podcast with the Taxpayers’ Union. If you missed it, or do not want to spend 32 minutes unpicking platitudes, here is a summary:

Taxpayers’ Union: How does taking water assets off councils save money?
Nanaia Mahuta: Because of economies of scale. We need to solve under-investment. Water has to be financially sustainable. We’re not taking the assets.

What do mean you’re not taking the assets? Councils lose ownership except in name.
Councils will own the assets. We have to prevent privatisation. Economies of scale.

What ownership rights will councils have?
Councils will set strategic performance expectations. There will be good governance. Water won’t compete with other council services for funding.

Can you rule out iwi groups receiving water royalties?
We have to prevent privatisation. Iwi cannot sell the assets. Iwi care about the long term.

You said iwi won’t have a veto right. But iwi will be 50% of boards and major decisions require a 75% majority. So, iwi hold a veto, correct?

Given 61 of 67 councils oppose your reform, how has consultation shaped your reform?
First, we need public ownership. Second, we must prevent privatisation. Third, we need solutions. Fourth, we want good governance.

Will ratepayers be represented on the working group?
Only through councils.

You signed off a Cabinet paper on the reform on 18 October. Four days later, your office received a summary of council submissions. Was your consultation a sham?
I received regular feedback from DIA and LGNZ through that period.

Why are the reforms so unpopular?
The current system does not work.

61 of 67 mayors oppose your reform.
It’s about the ratepayers.

Ratepayers hate your reforms. Have you seen our poll? It’s three to one against.
It’s about economies of scale.

Castalia has rubbished your cost modelling.
Castalia accepts privatisation. We must prevent privatisation.

Your cost savings are based on Scottish data which was not adjusted for New Zealand.
It was adjusted.

You are promising operating cost savings of 50% and [up to 9,000] more jobs in water. How does that make sense?
Economies of scale. Better funding.

You only looked at new statutory entities, not the existing Council Controlled Organisations (CCO) model. Why?
Because water needs to be able to borrow off council balance sheets. There is no way to do that with a CCO. Economies of scale. Prevent privatisation. Good governance. Affordable services.

Why is the Treaty relevant when we’re talking about pipes not water?
Excellent question. Iwi will achieve better environmental and drinking water outcomes for the whole community.

How are Māori more connected to the environment than anybody else?
They’re not. But Māori are very connected to the environment.

Why not leave water with councils and guarantee their debt instead?
Economies of scale.
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So, in summary, Three Waters is about alleged scale economies and thwarting a privatisation nobody wants. You can listen to the full interview here.

Unemployment Insurance - More Tax for More Unemployment
Dr David Law | Senior Fellow |
In May, Budget 2021 revealed that work was underway to develop an unemployment insurance scheme. This would see benefits tied to past employment and wages in some way, and those benefits would be generous compared to the status quo.

Six months on we know nothing more about the scheme. This week, however, The New Zealand Initiative released a report “Unemployment Insurance: A recipe for more unemployment?” that foreshadows what the consequences might be if unemployment insurance were introduced in New Zealand.

For a start, it is not immediately clear there is a problem for unemployment insurance to solve.

Our welfare system is very well targeted by international standards, directing help to those who need it most.

New Zealand has relatively low levels of unemployment. From 2000 to 2020, New Zealand’s average annual rate of unemployment was 5%, compared to 6.9% for the OECD.

Furthermore, long-term unemployment, that is, people who have been unemployed for 12 months or more, is also very low in New Zealand. From 2000 to 2020, New Zealand’s average annual share of long-term unemployment in total unemployment was 11.8%, compared to 29.4% for the OECD.

Unemployment insurance would put these outcomes at risk and come at significant cost. For advanced economies, the total of worker and employer contributions ranges from around 1% of total payroll in Japan to as much as 8% in Denmark.

Although the cost of such a scheme in New Zealand may start off low since unemployment is now only 3.4%, as perverse labour market incentives begin to bite, expect the cost to increase. The average cost of UI for advanced economies is 2.6% of total payroll. But many of those schemes are less generous than the one proposed by our government.

Indeed, with 80% of past wages replaced by unemployment insurance benefits, the establishment of such a scheme would discourage workers from seeking new employment when out of work. There is a large body of international evidence that suggests unemployment insurance leads to higher levels of unemployment, with people remaining unemployed for longer.

Once governments introduce unemployment insurance schemes, they are very difficult to unwind. Even those who do not draw on the scheme may feel they have built entitlements through years of contributions, whether those entitlements are explicit or not.

What is more likely is that the scheme would grow over time to encompass a wider array of benefits to meet other social objectives. Healthcare, disability, old-age care, and pensions are also often covered by social insurance. Average social security contribution taxes which fund social insurance programmes are approximately 8% of GDP in the OECD. Are we sure this is a path we want to take?

For more information, you can find the Research Note here

Believing fairy tales
Dr Eric Crampton | Chief Economist |
Would you believe that the old story of Hansel and Gretel was based in fact?

In 1963, Hans Trexler published a book I’m surprised that Oliver Hartwich hasn’t read: Die Wahrheit über Hänsel und Gretel.

Trexler told the story of Georg Ossegg, an amateur archaeologist and teacher. As a child, Ossegg had loved an ancient early illustrated copy of the Grimm fairy tales. Decades later, a spot in the woods looked eerily familiar.

He realised that he was standing in one of the illustrations from that old book.

If the story were true, and he had found the path the children had followed, where would their home have been? He found the spot, now part of a motorway. Archival records said an old hut had been purchased in just that spot to make room for the road.

He traced further. He found the clearing where the fire must have been built to warm the children. After days of searching, he found the tree to which the father had tied a branch to sway in the wind and make a noise like a woodcutter’s axe, to reassure the abandoned children. Radiocarbon dating of the rope, now meters up the tree, placed it in the 1640s.

After careful sleuthing, he found the brick base of an old oven where the witch’s hut must have been. Inside, the charred remnants of a woman’s skeleton – but academics concluded that the young murdered woman had been strangled before being burned. A bent iron hinge suggested the hut had been broken into.

Finally, he found, in a hidden chest, a recipe for gingerbread.

Ossegg scoured ancient town records. Hänsel und Gretel were not children at all, but murderous rival bakers after a secret recipe.

Trexler’s book sold hundreds of thousands of copies and earned rave reviews. But despite several obvious absurdities and impossibilities worked into the text, and despite that Ossegg was entirely fictional, people believed it.

Trexler had meant to send up popular charlatans of the time purporting to find evidence for ancient myths. He wanted people to think more carefully.

But he had provided a story just sciency enough for people to believe it without thinking.

Satire can be helpful vaccination against falsehood, as Tim Harford’s excellent Cautionary Tales podcast, where I first heard this story, points out.

If only more people who have believed falsehoods about vaccinations had had such protection.

On The Record

Initiative Activities:
  • Research Note: Unemployment Insurance - A recipe for more unemployment? by David Law
  • Podcast: Dr David Law on unemployment insurance
  • Iron Duke Podcast: The looming financial crisis with Bryce Wilkinson
  • Podcast: Matt Burgess on Climate of fear: How the Reserve Bank is overstepping its mandate
  • Research Note: Climate of fear - How the Reserve Bank is overstepping its mandate by Matt Burgess
  • Podcast: Bryce Wilkinson and Leonard Hong on walking the path to the next GFC
All Things Considered
  • Graph of the week: More Kiwis say New Zealand headed in "wrong direction" - First time since GFC
  • The truth about Hansel and Gretel: Tim Harford’s Cautionary Tale
  • Central banks digital currencies will ransom our future
  • Policymakers must ensure maths curriculum is evidence based
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