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Insights 3: 11 February 2022
NZ Herald: Unemployment insurance more problems than solutions says Roger Partridge
 
Unemployment insurance with Kirk Hope (BusinessNZ) and Oliver Hartwich
 
Newsroom: Oliver Hartwich on the EU's taxonomic vandalism in the energy sector

Finding consensus
Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz

What passes for economics in Wellington has seemed increasingly out of step with the academic consensus.

Ideas long dismissed by academic economists as mad or harmful become trendy in Wellington circles.

It makes for a dangerous policy environment. Economists who speak out against the fashionable consensus are too easily cast as ideologues by policy proponents.

A circuit-breaker is needed.

And now we have one.

For over a decade, the IGM Forum at the University of Chicago has asked an expert panel of economists about economic policy. When Congress floats ideas about policy, panellists are asked what they think. For example, the expert panel recently said that market power is not to blame for current American inflation, so antitrust intervention would not reduce inflation.

This week, the New Zealand Association of Economists and the New Zealand Initiative released the results of the first New Zealand Economics Experts Survey.

Distinguished Fellows, Life Members, and Past Presidents of the Association, and winners of the NZIER ‘Economist of the Year’ competition were invited to join the panel.

We asked their views on three policy questions drawn from prior IGM surveys. More surveys are yet to come.

Rent control has been politically fashionable. Rent control proponents have pointed to fringe American blogs for support, while casting opponents as right-wing ideologues or out of step with the literature. But 82% of our panel said that rent controls have not helped improve the amount and quality of affordable rental housing.

Opposition to rent control is not some fringe ideological view: it is the strong expert consensus. The Prime Minister rightly ruled it out. But vigilance is still needed as it could too easily re-emerge under other names.

The trendy view is that immigration is harmful. But 87% of our panel agreed or strongly agreed that the average Kiwi would be better off if more highly educated foreign workers were allowed to migrate here.

And while there has been loud support among some business journalists for printing money to fund government investment, drawing on ‘Modern Monetary Theory’, the academic consensus is otherwise. A core MMT proposition is that countries can finance as much real government spending as they want by creating money. Not a single expert agreed with that view.

Economists have a reputation for disagreeing. But there is strong agreement among expert economists on core matters, and that agreement can be far from the fashionable Wellington view. Finally, we have a way of testing that consensus.

Results of the New Zealand Economics Experts Survey are available here.
 

Central planning through the backdoor
Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz
If you thought central planning was buried with the fall of communism, you should look at the European Union.

In recent years, the EU has been working on its so-called taxonomy. This is a list of industries considered conducive to the goal of carbon neutrality by 2050.

It sounds like such a harmless idea – until you realise how politically corrupt and economically dangerous it is.

Those industries on the list will have easier access to capital and possibly subsidies. However, everyone else will have a hard time in financial markets.

The EU Commission announced last week that nuclear power and natural gas would be included. That was controversial, to say the least. Nuclear waste remains a problem and (obviously) natural gas is a fossil fuel.

The EU’s decision was driven by France and Germany, which were both seeking to protect those energy sources crucial to their national interests. It illustrates just how political the taxonomy is.

But whether nuclear and gas should have made the list is not even the biggest issue. The question is whether such a list should even exist.

In a market economy, the government’s role is to set the legal framework within which businesses operate. For carbon emissions, for example, that should mean pricing carbon or setting emissions standards.

Once these rules and regulations are set, investors should be able to allocate their capital as they see fit. After all, it is the investors bearing the consequences of balancing risks and opportunities.

With its taxonomy, the EU goes well beyond the role government should play. Effectively, it moves towards centralised planning in deciding which industries should exist and which should not.

We can already see the outcome with the nuclear and gas decision. Politicians and officials are meddling in the economy. A complex and political bureaucracy is emerging. And capital markets are no longer freely allocating capital.

Unfortunately, New Zealand is following Europe’s lead. For example, the Government last year banned default KiwiSaver funds from investing in fossil fuels. No matter that fossil fuel use is legal, and emissions are capped under the Emission Trading Scheme.

Using rules for financial markets to direct capital into favoured industries is a path towards central planning. This approach should not have a place in a market economy under the rule of law.

You only need to look at the EU’s taxonomy to see where such policies can lead.

To find out more about the European taxonomy, read Oliver Hartwich’s column in Newsroom here.

The one without the asset prices
Matt Burgess | Senior Economist | matt.burgess@nzinitiative.org.nz
It is hard to be funny when you are an economist.

Thankfully, we have the Reserve Bank. It is in rude form.

Last Friday, the Reserve Bank published a research paper on interest rates and wealth distribution. It concluded: “We find that a 50 basis point reduction in the OCR [the interest rate] leads to a more equal distribution of wealth in the economy.”

Interesting, to be sure. Striking, even. But funny?

Well, the Reserve Bank’s analysis of how interest rates affect wealth distribution did not include asset prices. I am not making this up. There was no room in this paper for the elephant.

And the Bank did not exactly hide this important detail. No, it put the punch line the method up front in “Key findings” on page two. Kudos for transparency, at least.

Jenny Ruth at BusinessDesk asks a very good question: Is it possible to look at the impact on wealth distribution of cutting interest rates without looking at what happened to asset prices?

And can you do it without provoking laughter?

Comedy really is all about timing. House prices leapt by an astonishing 30% last year as the Reserve Bank printed more than $60 billion. So what better time to leave asset prices out of your analysis of wealth? Renters must love the irony. Those are tears of laughter on their faces, right?

But perhaps the Reserve Bank is playing 4D chess. With interest rates set to rise, presumably the Bank will update its paper to include asset prices. Having previously found lower interest rates improve wealth distribution, the updated paper will conclude higher interest rates improve wealth distribution.

It is good the Reserve Bank is looking at all drivers of wealth distribution. Just don’t overreach with the conclusions. Measuring wealth without assets is like calculating the cost of car ownership from the price of wheel nuts. All you've got is nuts.

The Reserve Bank’s whitterings reminds me of a seminar I once attended in graduate school. Sitting near me was a Chicago economist who was distinctly unimpressed. In his typical way, he raised his hand and told the poor lecturer, “I feel like I went to a John Wayne movie and The Duke never showed.”
 

 
On The Record
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Initiative Activities:
  • Podcast: International Outlook: Taxonomic vandalism, EU-style, Oliver Hartwich
     
  • Podcast: Unemployment Insurance with Kirk Hope and Oliver Hartwich
     
  • Media Release: Joint statement from the NZ Initiative and NZ Association of Economists - Top economists agree on critical policy issues
     
  • Submission: The market study into residential building supplies preliminary issues paper, Dr Eric Crampton
 
All Things Considered
  • Graph of the week:  The 20 internet giants that rule the web
     
  • Price controls were a disaster in the 1970s. They would be a disaster today
     
  • Why the NZ government is right to rule out rent controls as a housing crisis solution
     
  • What Spotify data show about the decline of English
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