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Insights 38: 12 October 2018
Read: Oliver Hartwich writes in his column for Newsroom that Angela Merkel's run of good luck is over
Read: Bryce Wilkinson concludes in NBR that there are grounds for concern about aspects of our judicial system
Latest report: Fit for Purpose? Are Kiwis Getting the Government They Pay For?

Be Worried (But About the Right Things)
Dr Oliver Hartwich | Executive Director |
Oil prices rising, the Kiwi dollar falling: these are the economic issues dominating our domestic headlines.

It is understandable that New Zealanders follow such developments with eagerness. They directly feel the effects at the petrol pump and on their next international holiday.

However, as the International Monetary Fund (IMF) reminded us this week, the world economy is undergoing fundamental shifts – and these transformations could dwarf the things we fret about.

In its new World Economic Outlook, the IMF paints the picture of a global economy on edge. A downward correction of world economic growth from 3.9 to 3.7 percent in the organisation’s April forecast may not sound dramatic. But the underlying factors are.

As the IMF explains, the world economy is facing two main risks: Donald Trump’s tax and trade policy and, linked to it, the vulnerability of emerging markets.

President Trump’s decisions on fiscal spending, tax cuts and protectionism have stimulated the US economy. But these policies are not sustainable, not even for the US. Second, the retreat from globalisation and free trade is a threat to the world.

Emerging markets especially risk facing the brunt of Trump’s policies. If the Federal Reserve responds to the artificial US boom with interest rate hikes, countries like Argentina, Turkey or Pakistan will be exposed as large parts of their debt are denominated in US dollars.

The IMF points out that since the beginning of the last financial crisis in 2007, global public and private debt has increased by 60 percent to a staggering US$182 trillion.

If you wonder how all this could affect New Zealand, compare our NZD’s exchange rate to the greenback and the MSCI Emerging Markets index. Over this year, both our dollar and the index have moved in sync. It shows how much New Zealand is tied to the world economy, especially to emerging markets.

Should you worry about filling your car or planning your next holiday, that is understandable.

But if you were the Governor of the Reserve Bank, the Finance Minister or the Prime Minister, these irritations should be the least of your worries. The global economic outlook is mightily disturbing, and New Zealand must prepare for the next financial crisis.

An Effective ETS Is the Pink Slip for Other Subsidies
Matt Burgess | Research Fellow |
Minister for Climate Change James Shaw this week announced that a package of incentives to buy electrical vehicles will arrive soon. The package will join other climate change measures, including a recent proposal to tighten up New Zealand’s Emissions Trading Scheme (ETS).

The principal benefit of an ETS is the discovery of least-cost ways to abate emissions. A 2013 OECD study showed it can cost 17 times more to abate a tonne of carbon by using government subsidies than by simply relying on emissions trading.

But an ETS works only if its emissions cap is binding. Currently, New Zealand’s ETS cap is soft, in part due to free allocations of New Zealand Units (NZUs) – emissions rights – to selected industries. This explains the limited evidence, so far, for the effectiveness of the ETS.

The Government’s proposal will change this. An August consultation paper outlines a raft of changes to the ETS, including rolling five-year caps on emissions that will steer New Zealand towards zero net emissions by 2050. Agriculture will remain outside the ETS for now.

The ETS is valuable as a means for New Zealand to meet its international obligations at least cost, and so these changes should be welcomed.

But if the ETS becomes binding, with emissions determined by the number of NZUs issued, then measures like EV subsidies cease to have any effect on overall emissions.

Consider a family’s decision to trade in their gas guzzler for an electric vehicle. Their carbon footprint will be smaller, but total emissions will not change. The emission credits that would have been purchased with their petrol do not disappear. They will be released on to the market for purchase and use elsewhere.

It might be argued that a government could cut the number of NZUs by an amount equal to the emissions avoided by a subsidy-induced increase in EV uptake. True. But the government could just buy back or otherwise reduce the number of NZUs available and let participants in the ETS find their own best ways to cut emissions. The trading scheme can do that at a far lower cost per-tonne.

With a tougher ETS, other emissions policies, including EV subsidies, will do no more than raise the costs of abatement. That might be a source of aesthetic benefit for those who like seeing electric cars. But it will not help the environment.

Len Lye Lessons
Jenesa Jeram | Research Fellow |
This week, a beloved piece of public art was destroyed.

On a warm spring day in Wellington (yes Aucklanders, you read that right), a young man decided to climb the expensive Len Lye sculpture on the waterfront until it snapped.

No doubt this is a terrible waste of taxpayers’ money. But the young man’s excuse for vandalising the sculpture is even more infuriating.

In interviews later, he admitted he was showing off and wanted to perform for the crowd. Worse, he tried to shift the blame, claiming there was no sign telling people not to climb the sculpture.

Even so, there are valuable lessons from this experience. And it is not that Wellington doesn’t deserve nice things.

First, the public outrage at the needless waste of taxpayers’ money needs to be capitalised. In the grand scheme of things, a broken sculpture is chump change when it comes to government waste. Every ineffective or unnecessary public spending can now by expressed in terms the public understands: funding policy x is the equivalent of breaking, say, five Len Lye sculptures.

Second, the public are not fans of regulations to protect the stupid - sorry - common-sense deprived. Even the Wellington mayor described the vandalism as a “display of stupidity” rather than a reminder to strengthen health and safety regulations. We do not need bigger warning signs telling people not to do what they obviously should not, or more fences and barriers to deter people who do not think like normal human beings.

Where there is a will to act stupidly, there is normally a way.

And third, New Zealanders react badly to show-boating. In fact, rumour has it that exhibiting self-deprecation is the bonus value in NZ First’s immigration test, resulting in automatic citizenship. 
To add insult to injury, the young man was show-boating his newly acquired gymnastics skills. This is a huge mistake in a country where rugby, cricket and netball are the only recognised sports.

If one must show-boat in New Zealand, they must do it the Kiwi way. Consider Shamubeel Eaqub, who recently described himself in a radio interview as a D-grade celebrity economist. This was actually a clever way of setting himself apart from normal economists, who are notoriously arrogant.

Then again, it is entirely possible this dare-devil was doing exactly that: appearing stupid - sorry - common-sense deprived in his follow-up interviews in a misguided attempt to earn the nation’s respect.

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