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Insights 25: 15 July 2022
Newsroom: Oliver Hartwich on what can happen when politics is driven by marketing
Podcast: Michael Johnston on resetting literacy standards
Today FM: Oliver Hartwich talks about the NZ Initiative and its research on public policy issues

Paying the price for economic mismanagement
Dr Oliver Hartwich | Executive Director |
We can reasonably expect New Zealand’s economy to enter recession after the Reserve Bank raised its Official Cash Rate again by 50 basis points.

No one likes being in recession, but current circumstances make it almost desirable. Accelerating price increases and tight labour markets are both signs of an overheated economy. 

The Reserve Bank therefore wants to engineer an economic downturn to let off some steam. This would relax both the labour market and consumer price inflation.

Yet, it is not as easy as it sounds.

For a start, the labour market could take a long time to return to more sustainable employment levels.

Though tighter monetary conditions will reduce economic activity and thus labour demand, labour supply might still tighten. 

That is because Kiwis are considering leaving their country. Even if only a small fraction of them move, the labour market would remain tight, despite the economic downturn. Besides, New Zealand’s restrictive immigration policies and the prospect of a recession could deter potential migrants.

With Kiwis leaving and fewer migrants coming here, labour constraints could therefore remain, even in the face of a recession. That would make the Reserve Bank’s job much harder.

However, our central bankers will be concerned about more than just the labour market.

Because next year is an election year, the Government will be tempted to soften the downturn. This might take the form of fiscal stimulus and transfer payments - but both would counteract the withdrawal of aggregate demand the Reserve Bank wants to achieve.

It is possible that the Reserve Bank would struggle to meet its goals despite sustained increases in the OCR. 

Instead, it would see the economy showing simultaneous signs of overheating in the labour market, declining economic activity and consumer price inflation. In a word: stagflation.

Some will argue that it is mainly the Reserve Bank’s fault for having led us into this mess. And they would be right. This is a recession we did not have to have.

Yet it is no good crying over spilt milk, and the real question is how to get out of it.

The Reserve Bank can only do so much. The best it can do is emphasise the return to price stability as its main goal.

The remaining responsibility for economic management, however, rests with the Government.

Demand-side management must be avoided, no matter how tempting it may seem. And in order to boost the supply side, the Government must make doing business easier and cheaper.

The Government’s economic competence will determine how long and how deep our economic downturn will be. 

Joining the Initiative
Dr James Kierstead | Research Fellow |
Since this is my first Insights column, I thought it might be good just to introduce myself and say a little bit about why I’ve joined the Initiative and what I’m hoping to achieve here.

I came to New Zealand almost a decade ago to take up a position as a lecturer in Classics. It’s a position I’m still proud and happy to hold – the ancient Greeks have been one of my passions since I was a boy, and it’s great to have the opportunity to share that passion with others through my teaching and research.

So why have I decided to come down the hill a few days a week and lend a hand at the Initiative, an organisation known more for up-to-the-minute political commentary than for ancient historical research?

Two reasons. The first is a persistent sense that, although the very best Kiwi students are as good as students anywhere, there’s also a long tail in terms of performance at the undergraduate level. It’s a sense that I know I share with colleagues at Victoria University as well as at other New Zealand universities.

Is our intuition correct? If so, in what ways, exactly, are the standards being attained lower than we might have hoped? What might explain this? Is it just a matter of poor standards at NCEA level being passed onto universities, or could the universities themselves be doing something differently? These are all questions that deserve the kind of rigorous analysis the New Zealand Initiative has become known for.

The other reason I’ve decided to join the Initiative requires a little more explanation. Alongside my passion for the Greeks, I’ve long had an interest in the study of politics – in particular, in democracy, from ancient times to the modern day. And I’ve always felt extremely fortunate to have lived all my life in a liberal democracy, a form of governance which, research has shown, is associated with a whole basket of good things, from prosperity through security to human rights.

Though the idea that New Zealand democracy is about to be literally overthrown is overblown, I’m not the only one who’s concerned about a creeping tide of illiberalism that is starting to affect our online interactions, our media, and especially our universities. And this sense that New Zealand, in some subtle but definite ways, is becoming less free is something else I’m interested in throwing more light on during my time here.   

The Beehive rebuts misplaced fears
Dr Bryce Wilkinson | Senior Fellow |
We in the Beehive are aware of some unfounded dissatisfaction amongst the great unwashed.

There are stories of a health system in crisis. This is not so. If it were, we would have told you.

The real emergency is, as everyone knows, climate change. Think not of hospital shortages today. Think instead of all those who are going to drown in 2100 because they did not notice sea-level rise. Subsidies for electric cars are more important than yet more money for hospitals.

There are also stories that the amalgamation of Polytechnics has destroyed their creativity and independence.

This is absurd. Our new structure has at least 21 people with “chief executive” in their titles. The 21 oversee the chief executives of the 16 polytechnics. What chief executive would not welcome such support?

Some are complaining that the top boss is earning $13,000 a week while on ‘special’ leave. That is what we call a fair go for the ordinary bloke. Others can learn from it.

School truancy. Another problem inherited from the other lot. What everyone is missing is how much worse it would be if parents were paying directly for their truant children. Private schools are the pits.

Some are concerned that around 40% of school leavers are barely literate. Will they be able to pay enough in taxes to support our retirement? Perhaps not, but again think of how much worse it would be if parents had greater school choice.

We had to shut down partnership schools because too many parents did not understand that state schools were best. Imagine if we told parents which schools were poor performers. There would be chaotic disruption. People need government to protect them from themselves.

There are stories that people are feeling unsafe in the streets. There are shootings. It is said that police are powerless to prevent reoffending by ten-year olds because of the laws protecting minors. Nor can they do much about hardened criminals given our lenient courts. Our judges even struck out Parliament’s three strikes legislation, before we did. If they do not understand our constitution, who does?

All such complaints are unkind. You are paying for approaching 450,000 public sector employees who wake up each morning thinking only of how they can best help you each day.

Our excellent governance arrangements ensure nothing stands in their way.

Tax is love. Enjoy its fruits.

On The Record
Initiative Activities:   
All Things Considered
  • Graph of the week: Attendance levels for students in New Zealand schools
  • Alwyn Poole, Head Consultant at Innovative Education Consultants lists some disturbing statistics about school attendance and the challenges facing young people in New Zealand
  • The European economy and world economy are about to get much worse very soon
  • Betting odds on the next UK Prime Minister 
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