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Insights
Issue 18/2014 - 23 May 2014
In This Issue
•  New initiatives for a better New Zealand | Roger Partridge
•  Let's get politics out of power | Jason Krupp
•  'M' is for Money | The ABC of economic literacy
•  All Things Considered
•  On The Record

New initiatives for a better New Zealand
Roger Partridge | Chairman | roger.partridge@bellgully.com
Last week the New Zealand Initiative joined the chorus of approval for Finance Minister Bill English’s fifth budget. And rightly so. The budget confirmed that the threatened “decade of deficits” has been averted by careful fiscal management, to the envy of New Zealand’s OECD peers. Unlike his counterpart across the Tasman, Bill English could be forgiven for performing a pre-budget speech jig.
 
But while we may have become the envy of our Australian neighbours, New Zealand’s medium term growth prospects are hardly stellar. Over the five-year forecast period, New Zealand’s average real gross domestic product growth is forecast at only 2.8 per cent, well below the rates our economy achieved for much of the 1990s.
 
The forecast growth is even more miserly when compared with many of our neighbours in the Asia Pacific region. Singapore’s forecast for real GDP growth of nearly 3.5 per cent over the next five years makes New Zealand’s prospects look a little pedestrian.
 
There are many big issues for our policy-makers to tackle:
  • New Zealand’s international ranking in educational achievement has fallen. Up to 30 per cent of primary school students are not meeting national standards in literacy, with significantly lower rates for Maori and Pasifika students. 
  • Nearly 8 per cent of the population is dependent on some kind of welfare benefit, and that’s not including superannuation. 
  • In a global context, New Zealand could certainly do better. Our ranking is poor in the OECD’s FDI Regulatory Restrictiveness Index. 
  • Productivity is another issue, as New Zealanders work about 15 per cent longer than the OECD average to produce about 20 per cent less output per person. 
We believe new thinking is needed in these areas.
 
In our first two years we have developed solutions to assist our policy-makers tackle the housing affordability crisis, address the very real concerns many of our parents and schools have about teacher quality, and respond to the alarming decline in New Zealand’s international attractiveness as a destination for foreign investment. We have been pleased with the receptiveness of politicians on both sides of the House to our ideas.
 
As our organisation has developed the strength and depth of its research team, and with the appointment of Dr Eric Crampton as our new Head of Research, we have the confidence to tackle a broader range of issues. Yesterday the Board of the New Zealand Initiative approved an ambitious plan for our team to develop research-based solutions to many of these issues.
 
We will be looking at compact cities, demographic change and the housing market, examples of teaching excellence, New Zealand’s natural resource opportunities, the case for economic growth, New Zealand’s fiscal future, improving numeracy and maths teaching methods, examining the scope for social bonds in New Zealand, and the effects of household saving policies. And these are just some of the projects we will aim to tackle over the coming years.
 
We are confident we will come up with innovative thinking in all these areas. If our policy-makers listen, we will see our Kiwi economy really fly. Watch this space.

Let's get politics out of power
Jason Krupp | Research Fellow | jason.krupp@nzinitiative.org.nz
If a week is a long time in politics, it is an age in business, especially for those sectors of the economy exposed to political volatility.

Just ask the listed electricity companies, whose share prices are still wearing the effects of the single buyer policy the Labour and Green parties launched one year ago.

Take Monday 12 May as an example. In an otherwise buoyant market, with optimism running high ahead of the announcement that the government’s books were set to return to the black, the partially listed electricity stocks were a facing rougher chop.

Meridian Energy was flat, Genesis Energy declined 0.3 per cent and Mighty River Power chalked up a 2 per cent drop on the day.

The share movements had little to do with the wholesale electricity market (where prices were pinging around the middle of the recent trading band), but the prospect that a Labour/Greens coalition might just be gaining momentum ahead of the September election.

A share market analyst was quoted by financial newswire BusinessDesk as saying this sector was likely to remain volatile until the election was decided. This high level of uncertainty contrasted sharply with the air time the opposition parties have given to their own policy recently: almost zero.

What this shows is that the political machinations do not occur in a vacuum, and can generate unintended consequences quite a ways down the track even as the ardour for that particular policy dies down.

This is not to say that the opposition are wrong to express concern about rising power prices – that is essentially what our democratic system is there to do. But there needs to be a greater awareness of the potential risks when policy ideas are bandied around.

For example, in the electricity sector, the political risks are not just borne by those who own shares in the partially privatised power companies, but by almost every working age New Zealander with a KiwiSaver account, as a part of their retirement savings are likely invested in the local power sector.

Plus, there is no consensus within the industry that the proposed single buyer model will lower power bills.

On a broader level, the political volatility in the electricity sector raises an important question that needs to be asked of every election promise, namely what spill-overs will linger long after the rhetoric is dead?

'M' is for Money
The ABC of economic literacy | info@nzinitiative.org.nz
Money is the modern economy's essential lubricant. But for money, there is only barter trade—and poverty.

Money is anything that is widely accepted as a means of settling a debt or paying for a good or service, simply because it can be similarly passed on. Even unopened packets of cigarettes or bags of sweets have been used as money in extremis.

An unexpected shortage of money can cause recessions or depressions, yet too much money can cause inflationary booms that end painfully. Even modest inflation is a stealth tax on money holdings.

Governments, having monopolised the printing of money, must decide how much to print. That can be a difficult choice, particularly at times of financial stress.

Governments tend to print too much money, unless constrained by non-inflationary arrangements backed by public opinion. Printing more money creates the illusion of greater prosperity. Shrinking the amount of money in circulation is seldom an attractive political option.

Governments found it hard to generate inflation when money had to be backed by gold. Britain adopted the gold standard in 1717 and the US sustained the value of its dollar at US$20.67 per ounce of gold between 1834 and 1934.

But neither country could sustain the gold standard when spending pressures got too great. Britain abandoned it in 1914, the onset of World War I, taking Australia and New Zealand with it. The US devalued its dollar to US$35 per ounce of gold in 1934, amidst the Great Depression, and suspended convertibility entirely in 1970, amidst big fiscal problems.

Two statistics illustrate the inflation that followed these abandonments. First, New Zealand's Consumer Price index (CPI) in March 2014 was 75 times higher than in June 1914. Second, in March 2014, the price of gold averaged US$1,385 per ounce, roughly 67 times its pegged value prior to 1934 and 40 times greater than its pegged value between 1934 and 1970.

New Zealand was slower to curb inflation than the United Kingdom (under Prime Minister Margaret Thatcher) and the United States (under President Reagan). But New Zealand led the world in 1989 in obliging its central bank to focus monetary policy on price stability. The result to date is encouraging. New Zealand's average annual rate of CPI inflation was 11.5 per cent in the 20 years to March 1989 and 2.3 per cent in the 20 years to March 2014.

However, political pressures to print more money in order to create the illusion of greater prosperity endure. 

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘N’ for Nationalisation.

All Things Considered
  • Graph of the week: here’s a neat web app that lets you calculate how the tax and welfare system impacts you.
  • Whoever said the public doesn’t know what’s good for them doesn’t live in Switzerland, where they just voted against a monster increase in their minimum wage.
  • It’s always good to know what the local rag really thinks of those in the lower socio-economic bracket. 
  • Money is really tight when even a nation’s children are concerned about the tanking economy.
  • Being a member of parliament certainly does expose one to many colourful characters while on the campaign trail.
  • Colin Craig is at it again, this time over the trademark of “Nek Minnit.”
  • This young man is proof that kids learn way too early these days.
  • The police have to train dogs to find drugs, but it seems that cats can do it naturally.
  • Shane Jones' valedictory speech in parliamentary reminds us why he will be missed in politics.

On The Record
 

Professor James Allan about "Democracy in Decline"
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"Open for Business" report launch
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Up or Out? Examining the Trade-offs of Urban Form
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