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Insights 9: 25 March 2022
Newsroom: Oliver Hartwich on why the West is back as a political force
Podcast: Dissecting James Shaw’s dubious climate claims
Dominion Post: Foreign doctors' exclusion makes little sense, says Eric Crampton

Welcome to the 1970s
Dr Oliver Hartwich | Executive Director |
As the saying goes, everything in fashion eventually returns. And so it seems in the economy.

By now, we are not only aware of the cost-of-living crisis. We see its effects every day. Yesterday, the Initiative published a research note discussing the most important price changes.

The underlying reasons for those inflationary developments are less clear. To understand them, it is useful to recall what was happening in the 1970s.

Back then, the world encountered a new monster: stagflation.

Before the 1970s, economists believed that there could be periods of inflation when the economy grew, and periods of price stability when the economy stagnated.

What economists did not expect was for a stalling economy to also experience high inflation at the same time. And then came the 1970s oil crises.

The collapse in oil supply coincided with loose monetary policy and profligate government spending. It turned out these were the ingredients required to create recessions with price increases: stagflation.

Does that 1970s scenario remind you of something?

Like fifty years ago, the world economy is facing massive supply shocks. Current supply disruptions may be even more severe. Today’s crisis is not just around oil, and its effects occur in a much more interconnected world economy.

On the fiscal and monetary side, too, the vulnerabilities are greater than in the 1970s. Governments are bigger and more indebted. And especially after the GFC and the pandemic, central bank balance sheets are larger than ever before.

Supply shocks, public debt, and an overhang of monetary policy make a toxic cocktail. Add to that the risk of an escalation of the Ukraine war - or a Chinese invasion of Taiwan. And also consider the political and social divisions plus ageing populations in many developed economies.

Compared to the 1970s, the situation is much uglier and more dangerous today.

So, what does this mean?

Well, it means that this is not just a cost-of-living crisis. In fact, inflation is only one part of the underlying malaise of stagflation.

Let’s hope it is only a stagnation and not a collapse in economic activity.

As politicians and central bankers experienced during the 1970s, fighting stagflation is challenging. Curbing inflation makes the economy contract, while trying to stimulate the economy will only lead to more price increases.

Perhaps the most urgent task is to realise that demand-side stimulus cannot fix supply shocks. Ultimately, it took policymakers most of the 1970s to finally realise that.

We can only hope it will not take us that long this time.

Matt Burgess’s research note The rising cost of living for Kiwis is available here. Oliver and Matt's podcast on this research can be listened to here.

Gratuitous hardship
Matt Burgess | Senior Economist |
In rugby, injuries are all too common. Yet we can be certain that 15 players will start for the All Blacks in their next test. Why? Because rugby teams have reserves ready to step in for the injured.

By the same logic, New Zealand is on track to deliver its climate change commitments.

This week, the New Zealand Initiative released a report, Pretence of Necessity: Why further climate change action isn’t needed and won’t help. The report argues that existing policies will deliver legislated emissions targets.

Parliament has committed to reduce net emissions of greenhouse gases. The ‘net’ is crucial. It says domestic removals (for example, carbon captured by pine trees, among other technologies) and offshore mitigation (for example, replanting rainforest) count towards emissions targets.

Removals and offshore mitigation are affordable and available in effectively unlimited quantities. This secures emissions targets.

However well existing policies including the Emissions Trading Scheme cut emissions, this country can be confident it will meet its obligations. Removals and offshore mitigation will be there if needed. In effect, Parliament has given emissions targets their own reserves bench.

That does not mean New Zealand should plant its way to net zero emissions. This country can make reasonable or best efforts to reduce emissions and be certain of success against our targets.

Yet the government is resorting to desperate measures on climate change when it does not need to. It is about to deliver a welter of new policies which will bring untold hardship.

It begins next week. On 1 April, the highly regressive Feebate policy launches. It will add thousands of dollars to the cost of new and used imported vehicles.

The government's massive Emissions Reduction Plan will soon follow. And the Budget has an extraordinary $4.5 billion of new spending on climate change.

None of this is necessary. Parliament has made no commitment that requires further taxes on cars. We do not need to price agriculture emissions, or plant a single further pine tree, to reach net zero emissions. New Zealand has options.

Moreover, for all their cost and disruption, most of the government’s policies will have no effect on net emissions. The government has already capped emissions with changes to the Emissions Trading Scheme in 2020. The new policies have no way to lower emissions from under the cap.

What kind of government inflicts hardship on its citizens when it does not need to?

Read Pretence of Necessity here. You can listen to our response to the Climate Change Minister’s comments on our report here.

Take a walk
Dr Michael Johnston | Senior Fellow |
“Because there is no time for thinking and no rest in thinking, we no longer weigh divergent views; we’re content to hate them.”

Friedrich Nietzsche wrote that back in 1878, but he could easily have been describing the early 2020s. Perhaps it was ever thus, but I can’t help feeling the problem Nietzsche was describing has recently got a lot worse. In fact, it seems we’re content not only to hate divergent views but, more and more, to hate those who hold them as well.

My sense that everything is falling apart seems to be more than a symptom of curmudgeonly middle age. Surveys of American voters run by Pew Research show that Democrats and Republicans really don’t think much of one another. Democrats think Republicans are closed-minded and stupid. Republicans think Democrats are lazy, immoral and unpatriotic. And these uncomplimentary views have intensified over the last decade.

Here in New Zealand things might not be quite as polarised as in the US, but we do seem to be less willing to hear divergent views than we used to be. Healthy democratic disagreement has turned toxic.

People’s views on a host of seemingly unrelated issues appear now to track together. If you know what someone thinks about A, you can be fairly sure of what they think about B, C, D and E as well. People are clumping into two great tribes, the Woke and the Deplorables, and they disagree about almost everything. The Woke call the Deplorables racist, misogynist, transphobic Nazis.  The Deplorables call the Woke soy-boy, snowflake, libtard cucks. It’s not at all clear that the Woke and Deplorables can successfully inhabit the same galaxy. This poses a problem for democracy.

Nietzsche didn’t have much time for democracy, perhaps because he was so acutely aware of the all-too-human tendency to form warring ideological camps. It’s almost as if the issues themselves don’t matter – it seems to be identification with a ‘side’ that we’re after.

I blame Twitter for exacerbating this tendency to polarise. On Twitter, everything is immediate and unceasing. Twitter rewards the recycling of rehearsed opinions. Its dynamics discourage taking “time for thinking”. Neither does it encourage “rest in thinking”. Twitter warriors never seem to pause for reflection.

Nietzsche liked walking almost as much as he liked thinking. In fact, another thing he wrote was, “all truly great thoughts are conceived while walking”. So, if you want to prove Nietzsche wrong about democracy, get off Twitter and go for a walk.

On The Record

Initiative Activities:   
  • Submission: A New Zealand Income Insurance Scheme by Oliver Hartwich
  • Report: Pretence of Necessity by Matt Burgess
  • Research Note: The rising cost of living for Kiwis by Matt Burgess
  • Podcast: Pretence of Necessity - Why further climate change action isn't needed and won't help with Matt Burgess
  • Podcast: Matt Burgess on addressing James Shaw’s dubious climate claims
  • Podcast: The rising cost of living for Kiwis
All Things Considered
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