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Insights 15: 29 April 2016
Auckland - Dinner Lecture with Stephen Jennings
The Health of the State - download PDF
Read Oliver Hartwich's column in the NBR - Housing policies in short supply

The next crisis, sooner or later
Dr Oliver Hartwich | Executive Director |
In his book The Ascent of Money, Harvard economic historian Niall Ferguson introduced us to what he called “the perennial truths of financial history”. They were: “Sooner or later every bubble bursts. Sooner or later the bearish sellers outnumber the bullish buyers. Sooner or later greed turns to fear.”

With this in mind, it will be fascinating to listen to Niall Ferguson when he visits New Zealand for the first time next month. He will speak in Auckland on 17 May at PortfolioConstruction Forum’s 2016 Symposium.

Ferguson’s session, in association with The New Zealand Initiative, will be all about where we are in the cycle of “sooner or later”.

The Global Financial Crisis (GFC) that had the world in its grip between 2007 and 2010 is slowly fading from memory.

Gone are the days when banks such as Lehman Brothers collapsed. Forgotten are the bailouts that were required for countries such as Greece, Portugal and Ireland. And we certainly do not miss the times when stock markets suddenly plunged double digits.

No, the world did not come to an end in the GFC. But it is not the same world it used to be.

From 2000 to 2007, the global economy grew by 4.5 percent on average. Ever since, growth has only been 3.25 percent per year. The concerted efforts of governments and central banks may have averted a financial meltdown. However, they have come at a price.

The response to the crisis may well have laid the foundation for the next one. Zero or negative interest rates in North America, Europe and Japan have pushed money into bonds, equities and real estate. They have allowed companies to stay in business which otherwise would have failed.

Which brings us back to Niall Ferguson’s perennial truths: Have the responses to the GFC just shifted us towards another bubble economy?

Have they prevented structural reforms and reduced the potential for economic growth? And are we heading towards another financial crisis, sooner or later, to deal with these problems?

I look forward to interviewing Niall Ferguson following his presentation, and the questions above are some of the questions I will ask him.

If you want to join us for what promises to be a thought-provoking conference, you can register online.

A blunt policy tool
Khyaati Acharya | Policy Analyst |
As German-American journalist and satirist H.L. Mencken once explained, “Every election is a sort of advance auction sale of stolen goods”.
To prove him right, White House-hopefuls, blazing their campaign trails, are doing their very best.
The common tactic employed is to find something people really want and promise to give it to them. More often than not, this is achieved by taxing one person to satisfy another. It is robbing Peter to pay Paul. And sometimes, it is robbing Peter to pay, well, Peter.
Student loans are one of the issues at the forefront of these podium debates. Total student debt in the US currently stands at just over USD$1 trillion. This has inspired many POTUS-aspirants, like Hillary Clinton, to promise to lower interest rates as a solution to the growing student debt burden.
But just how effective is lowering interest rates levied on student loans?
Brookings Institution Senior Fellow Susan Dynarski argues that, based on the empirical evidence and economic analysis available, lowering interest rates is a blunt, expensive and ineffective policy tool. There are much better ways of encouraging greater tertiary education participation and reducing loan defaults than through low-interest student loans.
Sure, the lower the interest-rate, the lower the lifetime costs of tertiary education. However, as Dynarski points out, there is no compelling evidence that she can find to suggest that lower interest rates on student loans boosts tertiary enrolment. That’s probably because students are concerned about the principal cost rather than the interest when deciding to enrol in tertiary education.
A lower interest rate also does little to reduce loan default. While it does reduce the weekly payments required to cover both the principal and interest, any effect is small given that the size of loan repayments tend to be determined by principal, and not the interest rate.
Further, low interest rates benefit every borrower, including those with higher incomes who have little difficulty repaying loans. It is a poorly-targeted, expensive policy instrument if the aim is to improve affordability and participation among poorer cohorts.
If lower interest rates are a crude instrument in the US, how does New Zealand’s interest free student loan policy stack up? That question will be answered in June when the Initiative releases its tertiary education report, A Decade of Debt.
For those wanting a peek at our findings in advance, the moral is beware the uncounted costs associated with expensive electoral bribes.

Itís size that matters
Roger Partridge | Chairman |
Can you remember back to a time when fizzy drinks weren’t maligned, but instead a rare treat? When you and your eagle-eyed siblings watched over the soda pouring ritual with great intent, studiously making sure the levels were equal, and that no one was preferred (by so much as a drop)?
Back in the early 1970s, more often than not the fizzy liquid came from a soda syphon and was mixed with cola syrup. But it was a still a precious treat. And on the rare occasions when the groceries included The Real Thing, the measuring had the accuracy of a spirit-level.
Of course, there are many households today where soft drinks are still carefully dispensed, and not binged-on by the half-gallon.  And though this may be more for reasons of health than thriftiness, the soda-levelling ceremony remains a familiar ritual.
What might not be so well known is that it can be used as a measure of a child’s emotional intelligence.
Very young children are driven by a need for equality.
When two children are offered a choice between, on the one hand, two half-full glasses of the cola delight or, on the other, one full glass and one glass that is three-quarters full, but with no certainty as to which child will get which glass, younger children will invariably go for the first option. Equality rules.
As children get older, the outcome is reversed. The risk of getting relatively less is outweighed by the certainly of getting absolutely more.
Bigger is better even if it’s not biggest.
Perhaps there are some lessons in this for us grown-ups.
Of course, soft drink inequality is not an issue for adults. As we know too well, many - including among the least well-off - consume more of the sugary drink than is healthy.
But economic inequality remains a burning issue. And it’s an issue we are currently researching at The New Zealand Initiative.
However, like children and their fizzy drink, if we can find a way for everyone to be better off, should it really matter that some may do relatively better? 
A risk of aiming for equality is that everyone’s glass ends up being half full. If we dampen the incentives to excel, the danger is no one will.

Perhaps on this we could take a lead from our children.
On The Record
All Things Considered
  • Graph of the Week: This week we feature a chart rather than a graph in memory of the incomparable musician Prince.
  • Too fracking right: It is not just monkeys that fling poo, as actress Emma Thompson learned at an anti-fracking protest on a UK farm
  • Millennial moaner: With the housing crisis in full swing, home DIY shows are so passé. Rental shows are where it’s at now.
  • Anarchists’ wish come true: Governments around the world are nervously watching Spain, a country that seems to be thriving without one.
  • Dexterity: When next I go under the knife, I want a nimble-fingered doctor from the Kurashiki Central Hospital to do the cutting.
  • Ban the ban: Whenever the public dislikes something you can be sure a call for a ban is soon to follow. Here are some ridiculous examples.
  • Once upon a time, there was common sense. Now there is common senselessness as these twenty signs demonstrate.
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