You are subscribed as | Unsubscribe | View online version | Forward to a friend

Insights 19: 3 June 2022
Newsroom: Oliver Hartwich on an adverse reaction the Kremlin did not see coming
Podcast: The supermarket study – Foodstuffs’ perspective
Dominion Post: Eric Crampton on why I need an SUV in the city - the sympathetic principal

An update on the odds on a serious recession
Dr Bryce Wilkinson | Senior Fellow |
We explained in our November research report "Walking the Path to the Next Global Financial Crisis" why concerns about prolonged economic stagnation, or even serious recessions, should be taken seriously.

During the 2008-2010 global financial crisis, governments' responses had turned a banking crisis into a public debt crisis. In response to Covid-19, governments doubled down on their debt, and central banks took unprecedented steps to lower interest rates and create money.

Many governments are in debt traps. Raising interest rates would make their debt problems even worse, but not doing so would fuel inflation.

That dilemma now faces governments and central banks in the United States, the UK, and Europe. Inflation has soared. The risk of stagflation, or worse, has increased as central banks raise interest rates.

The official forecasting agencies have not yet predicted a recession. Perhaps they do not want to precipitate one by predicting it. Their prediction is that the gradual tightening will suffice.

The World Economic Outlook for April 2022, published by the International Monetary Fund, exemplifies this genre. In advanced economies, unemployment rates are forecast to be lower in 2022 than any year since 1980, and will remain lower through 2027. By 2023, inflation will be under control. Economic growth will be modest.

Deutsche Bank economists, however, predict a 'major' US recession by 2023 or 2024. According to Goldman Sachs economists, there is a 36% chance of recession in the next two years. Bloomberg surveyed economists last month (in May) and found that there is a 30% probability of a recession in the next year.

The problem is that central banks have limited scope to play fast and loose with a 'sound money', low inflation objective. Only as long as people at large believe the easing is temporary will they be able to ease up without inflation exploding.

Once people perceive that central banks are trapped in maintaining low-interest rates due to the public debt problem, confidence in low inflation will erode. Then stagflation and recession risks rise.

New Zealand's Budget 2022 assumes that our major trading partners will not plunge into a major recession. So do the Reserve Bank of New Zealand’s forecasts.

The odds of them being correct have slipped since our report last November.

You can read our report "Walking the Path to the Next Global Financial Crisis" here.

Economics in the New Zealand Media: A Requiem
Dr Dennis Wesselbaum | Adjunct Fellow |
The media has largely ignored economics in the last couple of years. The return of inflation, however, has brought economic topics back into people’s minds and into media coverage.

The discussions surrounding the Budget were a low point in the reporting on economics, in my opinion. You might think that experts on, say, fiscal policy would be included in these Budget discussions. However, the Newshub “expert” panel consisted of a journalist (Dita de Boni), a sociologist (Dr. Ella Henry), and an economist (Shamubeel Eaqub), who quickly disqualified himself from being considered an expert.

In response to David Seymour’s comment that government spending drives inflation, Eaqub called Seymour “economically illiterate.” However, among serious economists, there is no disagreement that government spending is a key driver of inflation. In fact, it is what students of economics learn in their first year.

Another example is the “debate” around the Emissions Reduction Plan, which was at best unbalanced. With an ETS in place, the vast majority of additional policies will not help in reducing emissions – yet this was hardly ever mentioned in the media.

Bad economic commenting is a common feature in the New Zealand media: Take Richard Prebble’s comment in a Herald column last month about “thinking the unthinkable, a return of stagflation”. That was not wrong but a bit late to the party. I wrote a piece in May 2021 predicting that New Zealand would end up in stagflation - and I was not the only economist warning.

Liam Dann, also from the Herald, wrote in May that New Zealand might be headed to a recession, but this “[…] might not be such a bad thing for the economy […]”. In short: Nuts!

My favourite piece, and a prime example of what is wrong with economic reporting, comes from Melanie Carroll of Stuff. In January, she wrote a piece about what economists got wrong in 2021.

Carroll claimed that economists were surprised by inflation, the resilience of the economy, and the conduct of monetary policy. All of this is true if you only talk to those commentator types who dominate our media. But read the work of the Initiative, or read my op-eds, or indeed the op-eds of some of my academic colleagues, and you will find the opposite.

Overall, the way the media reports on economic issues is uninformed, unbalanced, and lacks experts (that is independent, and properly trained economists). This is not only a disservice to the country but also the source of New Zealand’s lack of economic literacy.

A lamentable ignorance about ignorance
Dr Eric Crampton | Chief Economist |
Pew’s latest survey is not cause for despair – if you know a little bit about the state of public knowledge.

Pew finds that only 56% of Americans know that Ukraine is not part of the North Atlantic Treaty Organisation, NATO.

Just what is going on with the other 44%?

NATO is a defence alliance. If Ukraine had been a NATO member, Russia’s invasion would have triggered NATO’s collective security provisions.

There wouldn't have been wondering about, "Oh, can we really set a no-fly zone? Wouldn't that mean confrontation between allied and Russian forces that would trigger a broader war?" That cost would have been sunk. American, Canadian, and other European boots and kit would be on the ground in Ukraine, with air support. We'd probably have already seen nukes flying around rather than far-too-limited arms shipments to Ukraine.

But far more to the point, Russia would not have invaded if Ukraine were part of NATO. Avoiding being invaded by Russia is a big part of the point of being in NATO. That’s why Finland and Sweden are now joining.

Your baseline model of the world has to be completely out of whack to even consider that Ukraine might be part of NATO.

It seems unfathomable.

Well, unfathomable except to those of us who are not ignorant of the ignorance regularly revealed in public opinion surveys of this sort.

Two years after the Cuban Missile Crisis that had NATO on the brink of nuclear war with the Soviet Union over the Soviets’ attempted placement of nuclear weapons in Cuba, only 38% of Americans surveyed knew that the Soviet Union was not a member of NATO.

It takes a screwed-up model of the world to be able to believe that Ukraine could currently be part of NATO. But in 1964, 62% of Americans did not know that the Soviet Union was pretty unlikely to be part of the military alliance set to defend against Soviet aggression. And that’s even worse.

I suppose what I’m saying is that, if anything, this latest survey is weak evidence of improvement over the past 60 years.

It should be celebrated by those of us with appropriately low expectations of overall civic knowledge.

Despairing that 44% in the recent Pew survey seem to know nothing about foreign affairs is a bit of a tell about your own knowledge about the state of public knowledge.

On The Record

Initiative Activities:   
All Things Considered
Copyright © 2024 The New Zealand Initiative, All Rights Reserved

Unsubscribe me please

Brought to you by outreachcrm