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Insights 22: 21 June 2019
Dr Eric Crampton explains on Newsroom how to fix our broken housing markets despite Kiwibuild
Dr Bryce Wilkinson explains in NBR why the return to wage fixing would be a vastly complex and problematic undertaking
Auckland event (supported by the Initiative): Jonathan Haidt - Moral Psychology in an Age of Outrage (tickets for purchase)

Learning by comparison
Dr Oliver Hartwich | Executive Director |
Next week, The New Zealand Initiative will be taking a delegation of more than three dozen senior business leaders to Copenhagen. Our members want to study and experience first-hand what makes Denmark one of the world’s most successful small countries.

Denmark’s success may appear surprising given it is one of the most highly taxed countries in the world. It is often regarded as the social-democratic country par excellence, with a cradle-to-grave welfare state.

There is a grain of truth in these clichés. Still, they are deceptive. Denmark is also one of the best regulated developed economies.

Ranked first for lack of corruption (Transparency International), third for ease of doing business (World Bank) and eighth for competitiveness (IMD), the small Scandinavian country does well in international benchmarking.

Perhaps more astonishingly, despite its reputation as a big government country, Denmark is ranked just behind the United States in the Heritage Foundation’s Economic Freedom Index.

Denmark’s sound social, political and economic institutions are reflected in its long-term economic performance. In 1960, New Zealand’s per capita income was 70 percent higher than Denmark’s. Today, the Danes are 31 percent ahead of us.

We believe that it is worth discovering what drives Denmark’s success. But we also want to understand its weaknesses and challenges.

During our week, we will thus meet with a wide range of Danish companies and their leaders. They include LEGO, that most quintessential of Danish companies; brewery giant Carlsberg; and the world’s largest shipping line, Maersk.

We will visit Europe’s leading robotics cluster in Odense. We will learn about renewable electricity generation. We will check out Copenhagen’s new waste incinerator Copenhill, which doubles up as a power plant and a ski slope.

We look forward to discussions about Denmark’s flexicurity system, which combines labour market flexibility with a social safety net. We will hear about the country’s discussions around multiculturalism and immigration. We will explore regional cooperation with Sweden across the Øresund with its impressive Øresund Bridge.

We will even spend a couple of hours at Christiania, the self-declared free state and autonomous anarchist district of Copenhagen.

The delegation follows a similar visit to Switzerland two years ago. If our Swiss experience is anything to go by, we will learn a lot about our new destination. But in doing so, we hope to find out even more about New Zealand by comparison.

Why both GDP and income growth are essential for wellbeing
Dr Bryce Wilkinson | Senior Fellow |
A Radio New Zealand journalist reported in the last fortnight that other top economists privately shared Eric Crampton’s publicly expressed concerns over Treasury’s economic capability. Yesterday, Treasury’s former deputy chief economist went public on the malaise in the organisation.

I share the concerns and offer two public examples.

First up is Treasury’s endorsement in recent years of Robert F. Kennedy’s absurd claim that GNP (Gross National Product) “measures everything … except that which makes life worthwhile”.

GNP and GDP are at once measures of income, production and spending. They have to be. What is produced needs to be sold and what is sold produces income. The measures are all related.

To declare that GNP does not measure things that make life worthwhile is to say measured national income does not make life worthwhile. Yet income for food, rent, clothing and much else does make life worthwhile. Even the much-increased life expectancy in the past 200 years has been found to owe more to income growth than health spending.

Well, Kennedy was a professional politician. In politics, rhetoric can trump reality. One may sigh over absurd overstatements, but not be surprised.

For Treasury to cite Kennedy’s statement approvingly even once should be professionally embarrassing.

Treasury’s many competent economists surely pointed this out internally to senior management at the time. That should have put an end to the endorsement. But it did not.

Income is REALLY important for wellbeing. That is why people relentlessly pressure governments to spend more and more of other people’s income without their consent. This process likely reduces national income.

Treasury used the Kennedy quote because its senior management wanted to promote wellbeing and living standards as a replacement focus for economic growth. Yet that idea is also professionally embarrassing.

Introductory welfare economics proposes that people make choices that maximise their wellbeing, as they perceive it, subject to their budget constraints. Ease those constraints and wellbeing should rise.

Productivity growth is central because it increases income per capita. Higher national income per capita can ease everyone’s budget constraints and thereby improve wellbeing.

For Treasury to disparage a focus on GDP or economic growth in the name of wellbeing is to lose the plot on wellbeing.

It would be good to see some evidence that Treasury’s senior management is listening to its remaining competent, professional economists.

The only winning move is not to play
Dr Eric Crampton | Chief Economist |
We all know that best policy is not paying off the kidnappers. Countries that get in the habit of paying the kidnappers encourage the taking of more of their nationals as hostages. It’s a dangerous game to get into because it’s so hard to stop.

But would any country be so daft as to not only pay the kidnappers, but also deliver to them the next round of hostages as part of the bargain?

If you think no country would be so mad, think again. It’s how the film subsidy regime in New Zealand works – as it does in every other place that chooses to play the game.

Last September, The Herald’s Matt Nippert reported that the Labour-led government had decided to continue the previous National government’s film subsidy scheme. Minister Parker ruled out changes where thousands of jobs could be at risk because business viability was threatened by ending subsidies, and where commitments by the National government risked lawsuits if the subsidies ended.

So there are your hostages: thousands of workers in the film industry who would have to shift to other employment, or shift offshore, if the subsidies ended. And here’s the payment to the kidnappers: the budget estimated that New Zealand will spend $113.6 million on screen production grants targeting international productions this year, with $171.6 million budgeted for 2020 – or about $100 per household.

Meanwhile, a host of New Zealand government-funded polytechs and universities train students towards diplomas and bachelors in screen production, diplomas in on-screen acting, bachelors of design (stage and screen), certificates in applied filmmaking and television, and more.

The government is subsidising specialised training students for jobs in an industry that would shrink dramatically in the absence of further subsidies to that industry, and further subsidies to that industry are justified on the basis of the jobs that would be put at risk if the subsidies ever ended.

To put it plainly, the government is teeing up the next round of hostages.

Had governments been this smart in the early 1900s, subsidies for training in the fine art of making buggy-whips would have been accompanied with bans on cars to protect the jobs of the whip-makers.

To crib a line from an excellent ’80s Cold War film, the only winning move in the international film subsidy game is not to play.

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