The Reserve Bank Governor (2013) versus the Labour Party on whether its monetary policy upgrade will increase the inflation rate and destabilise the exchange rate

Attempts to keep the dollar from going “too high” would have ruinous domestic consequences as the Governor of the Reserve Bank explained last year:

If New Zealand decided to cap the NZ dollar, depending on where the cap is enforced, similar levels of intervention might be required as global foreign exchange turnover in NZ dollars relative to GDP is similar to that in Swiss francs.

The OCR would need to drop to zero first in order to eliminate the interest arbitrage motivation for NZ dollar inflows. Any attempt to retain non-zero interest rates by “sterilising” such massive intervention would be very difficult.

In effect therefore a Swiss type operation to cap the value of the NZ dollar through large scale FX intervention would also amount to quantitative easing. As I mentioned, this would be highly inflationary in the NZ context.

Graeme Wheeler, Governor of the Reserve Bank of New Zealand

20 February 2013

Manufacturing decline not just a dollar story A speech delivered to the New Zealand Manufacturers and Exporters Association in Auckland

Sterilised interventions in the foreign exchange market are a fool’s errand

If exchange rate manipulation had any chance of working, the U.S. Fed, the Bank of England, the European Central Bank and the Bank of Japan would be all over it already. Their mutual efforts to depreciate their own currencies would cancel out.

Most central banks gave up on exchange rate interventions in the mid-1990s because attempts to manipulate exchange rates without loosening monetary policy rarely worked.  Brute experience taught them that they were on fool’s errand.

These exchange rate interventions, known as sterilised interventions, become an independent source of exchange rate instability and invite counter-speculation by currency traders and hedge funds. Every hint that a central bank might intervene in the exchange rate invites currency speculation. As Milton Friedman said:

The central problem is not designing a highly sensitive [monetary] instrument that offsets instability introduced by other factors [in the economy], but preventing monetary arrangements becoming a primary source of instability…

By trying to move the value of the dollar, the Reserve Bank of New Zealand will add its own element of currency instability and invite counter speculation by currency traders and hedge funds. This is a dangerous game for a small Reserve Bank to play.

As stated by Paul Krugman in 1999 on the concept of the impossible trinity: free capital movement, a fixed exchange rate, and an effective monetary policy –

The point is that you can’t have it all: A country must pick two out of three.

It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain – or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today or for that matter most of Europe).

Exchange rate manipulation by the Reserve Bank cannot alter the competiveness of exporters. The looser monetary policy will inevitably lead to higher CPI inflation that will erode any temporary advantage to exporters from the initial depreciation of the NZ dollar.

What did the Swiss do to keep their exchange rate down in the GFC?

Labour’s Monetary Policy Upgrade referred to the efforts of the Swiss National Bank to cap a massive appreciation of the Swiss Franc after 2009 and the Euroland sovereign debt crisis:

The Swiss have actively protected their currency from appreciating to the detriment of their tradeable sector (p.16)

The Swiss National Bank stemmed the rise of Swiss franc by loosening their monetary policy as they say so themselves:

The Swiss National Bank has successfully maintained its exchange-rate floor against the euro, often through heavy nonsterilized purchases of foreign exchange (Swiss National Bank Annual Report, 2012, p. 34).

These non-sterilised exchange rate interventions were a loosening of Swiss monetary policy. The Swiss National Bank happens to be one of a number of central banks that conduct their monetary policies by buying and selling in the foreign exchange markets.

Labour’s aim of a positive external balance through a tightening of monetary policy is a repeat of the fool-hardy policies of the Hawke-Keating government in the late 1980s.

1988 witnessed a major monetary policy tightening in Australia. The tightening was motivated by a current account deficit rather than double-digit inflation:

  • The inflation rate fell to below 3% in 1991.
  • The current account did not change much as a result of the deep recession and 10%+ unemployment rate designed to bring it under control.

The current account deficit as a major policy problem was then quietly forgotten in Australia.

Three conflicting monetary policy objectives

The New Zealand Labour Party wants the Reserve Bank to do three impossible things before breakfast:

  1. Loosen monetary policy to bring the dollar down such as in Switzerland after 2009;
  2. Tighten monetary policy to reduce the current account deficit such as in Australia after 1988; and
  3. Loosen and tighten monetary policy as required to stay within the inflation target.

The best contribution of monetary policy to the competitive positions of exporters is low inflation.

image

Inflation targeting removes monetary policy as in independent source of exchange rate instability. Attempts to manipulate the exchange rate undermines the inflation target that has been such a great success since 1989, and reduces the commitment of public policy to a stable, predictable business climate. Bordo and Humpage add:

…sterilised foreign-exchange intervention can sometimes affect exchange-rate movements, but sterilised intervention does not provide central banks with a mechanism for systematically altering exchange rates independent of their monetary policies.

Attempts to stabilise or undervalue exchange rates necessarily weaken a country’s control of its monetary policy and ultimately leave the real exchange rate unaffected.

What really matters?

Labour’s monetary policy upgrade is a distraction from the only game in town for the future prosperity of New Zealanders:

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

Paul Krugman

The Age of Diminishing Expectations (1994)

 

the beauty of proportional voting is that even if they don’t vote for you, you’ll probably still get in.

HT: Kiwiblog

Video

The Greens want to ban… | Kiwiblog

I cannot stand political correctness. It serves no purpose other than to restrict freedom of speech. Yes, some language can offend someone, but we all have the right to offend. It doesn’t mean we should, but we can. 
Without the freedom to offend, we do not have the freedom of expression. When we restrict the use of language, we risk entering the George Orwell 1984 dystopia - “ungood”, “goodest”, “plusgood”, “doubleplusgood” - that’s where we’re heading every time someone starts sobbing like a child because they were offended. 
You taking offence doesn’t make you special. You don’t get some new right when you’re offended. No one’s going to run over and kiss your feet. You will be offended by many people, many times, throughout the rest of your life and you pointing and screaming to tell them not to use “those words” or “that language” is just so unbelievably childish. 
Of course people can take things too far, but we can take anything too far. We can take violence too far by starting meaningless wars, we can take rights movements too far by not stopping at equality and desiring dominance. What words people use, really is the last of your concerns. 

  1. Ban fizzy drinks from schools
  2. Ban fuel inefficient vehicles
  3. Ban all gaming machines in pubs
  4. Ban the GCSB
  5. Ban violent TV programmes until after 10 pm
  6. Ban feeding of antibiotics to animals that are not sick
  7. Ban companies that do not comply with a Code of Corporate Responsibility
  8. Ban ACC from investing in enterprises that provide products or services that significantly increase rates of injury or illness or otherwise have significant adverse social or environmental effects
  9. Ban commercial Genetic Engineering trials
  10. Ban field testing on production of GE food
  11. Ban import of GE food
  12. Ban Urban Sprawl
  13. Ban non citizens/residents from owning land
  14. Ban further corporate farming
  15. Ban sale of high country farms to NZers who do not live in NZ at least 185 days a year
  16. Ban the transport by sea of farm animals, for more than 24 hours
  17. Ban crates for sows
  18. Ban battery cages for hens
  19. Ban factory farming of animals
  20. Ban the use of mechanically recovered meat in the food chain
  21. Ban the use of the ground-up remains of sheep and cows as stock feed
  22. Ban animal testing where animals suffer, even if of benefit to humans
  23. Ban cloning of animals
  24. Ban use of animals in GE
  25. Ban GE animal food
  26. Ban docking of dogs tails
  27. Ban intrusive animal experimentation as a teaching method in all educational institutions
  28. Ban smacking
  29. Ban advertising during children’s programmes
  30. Ban alcohol advertising on TV and radio
  31. Ban coal mining
  32. Ban the export of indigenous logs and chips
  33. Ban the use of bio-accumulative and persistent poisons
  34. Ban the establishment of mustelid farms
  35. Ban new exploration, prospecting and mining on conservation land and reserves
  36. Ban mining activities when rare and endemic species are found to present on the mining site
  37. Ban the trading conservation land for other land to facilitate extractive activities on.
  38. Ban the further holding of marine mammals in captivity except as part of an approved threatened species recovery strategy
  39. Ban the direct to consumer advertising of pharmaceuticals
  40. Ban sale of chips and lollies on school property
  41. Ban any additional use of coal for energy
  42. Ban fixed electricity charges
  43. Ban further large hydro plants
  44. Ban nuclear power
  45. Ban further thermal generation
  46. Ban private water management
  47. Ban imported vehicles over seven years old
  48. Ban the disposal of recyclable materials at landfills
  49. Ban the export of hazardous waste to non OECD countries
  50. Ban funding of health services by companies that sell unhealthy food (so McDonalds could not fund services for young cancer sufferers)
  51. Ban healthcare organizations from selling unhealthy food or drink
  52. Ban advertising of unhealthy food until after 8.30 pm
  53. Ban all food and drink advertisements on TV if they do not meet criteria for nutritious food
  54. Ban the use of antibiotics as sprays on crops
  55. Ban food irradiation within NZ
  56. Ban irradiated food imports
  57. Ban growth hormones for animals
  58. Ban crown agency investments in any entity that denies climate change!!
  59. Ban crown agency investments in any entity that is involved in tobacco
  60. Ban crown agency investments in any entity that is involved in environmentally damaging oil extraction or gold mining
  61. Ban non UN sanctioned military involvement (so China and Russia gets to veto all NZ engagements)
  62. Ban NZ from military treaties which are based on the right to self defence
  63. Ban NZers from serving as mercenaries
  64. Ban new casinos
  65. Allow existing casinos to be banned
  66. Ban promotion of Internet gambling
  67. Ban advertising of unhealthy food to children
  68. Ban cellphone towers within 300 metres of homes
  69. Ban new buildings that do not confirm to sustainable building principles
  70. Ban migrants who do not undertake Treaty of Waitangi education programmes
  71. Ban new prisons
  72. Ban semi-automatic weapons
  73. Ban genetic mixing between species
  74. Ban ocean mineral extractions within the EEZ
  75. Ban limited liability companies by making owners responsible for liability of products
  76. Ban funding of PTEs that compete with public tertiary institutes
  77. Ban the importation of goods and services that do not meet quality and environmental certification standards in production, lifecycle analysis, and eco-labelling
  78. Ban goods that do not meet quality and sustainability standards for goods which are produced and/or sold in Aotearoa/New Zealand
  79. Ban new urban highways or motorways
  80. Ban private toll roads
  81. Ban import of vehicles more than seven years old unless they meet emission standards
  82. Ban imported goods that do not meet standards for durability and ease of recycling
  83. Ban landfills
  84. Ban new houses without water saving measures
  85. Ban programmes on TVNZ with gratuitous violence

Political correctness is the natural continuum from the party line. What we are seeing once again is a self-appointed group of vigilantes imposing their views on others. It is a heritage of communism, but they don't seem to see this.  - Doris Lessing

via Kiwiblog

Can New Zealand blame its small size for its economic woes?

The median national population size is not much more than New Zealand’s current population.

  • Controlling for location, Easterly and Kraay (2002) found that smaller states were richer than other states in per capita real GDP.
  • Rose (2006) reviewed the impact of size on the level of income, inflation, material well-being, health, education, and the quality of a country’s institutions and found that small countries are more open to trade than large countries, but are not systematically different otherwise.

As I argued in my previous post on distance, New Zealand were prosperous from the time of European settlement despite a small population and their great distance from the main markets of the world on each side of the Atlantic.

Of the ten richest countries in terms of GDP per capita, only four have populations above one million people (Alesina 2003). These countries are the USA (290 million people), Switzerland (7 million people), Norway (4 million people) and Singapore (3 million people). Of these four nations, two are below the global national population median of six million (Alesina 2003).

New Zealand’s population is similar and often larger in size than most of the richest countries in the world. Singapore and Hong Kong were initially far from the global Trans-Atlantic economic hubs before their respective development miracles unfolded in the mid and late 20th century.

Something must have happened recently for either small population size or distance to have become important when it was not important for most of the history of New Zealand. New Zealand has been on the same place on the map for all its history.

Transport costs on exports to England and the rest of Europe did not hold back New Zealand’s economic development in the 19th century and for most of the 20th century despite far more primitive and more expensive forms of transport.

New Zealand specialised in commodities that could be produced at a low cost because land and water was plentiful and exported them in bulk to large markets on the other side of the world because of falling transport costs. The invention of refrigeration in 1881 was a major boost to meat exports to England.

The main economic difference between smaller and larger nation-states around the globe is smaller nations are more open to international trade and foreign investment (Alesina et al. 2005).

In a world of freer overseas trade, small countries can extend the size of their markets by trade and sidestep many of the costs of small internal markets. As long as political borders do not greatly limit international trade, economic success is increasingly independent of national size (Alesina 2003; Alesina et al. 2000).

A leading economic advantage of large national size in more isolationist times was a large marketplace free of trade and investment barriers and fewer national borders and different legal systems to parry. As more nations open up to the world, the single market benefits of large size for a country start to melt away quickly (Alesina 2003; Alesina and Spolaore 2003; Alesina et al. 2000).

As countries become larger, administration costs and the growing heterogeneity in the political preferences of larger and more diverse populations counterbalance the benefits of size and scale (Alesina et al. 2003, 2004, 2006; Spolaore 2006). More nation-states and freer trade increase the degree that governments must compete for citizens and investment. Inter-jurisdictional competition increases the incentives for governments to adopt institutions and policies that promote efficiency and productivity and serve their peoples better (Friedman 2005).

Greens as heirs of the 19th century Tory radicals

The Greens are no more than a reincarnation of the 19th century British Tory Radicals with their aristocratic sensibilities that combined strong support for centralised power with a paternalistic concern for the plight of the poor:

  • 19th century Tory radicals opposed the middle classes and the aesthetic ugliness they associated with an industrial economy; and
  • Like the 19th century Tory Radicals, today’s green gentry see the untamed middle classes as the true enemy.

Environmentalists have an aristocratic vision of a stratified, terraced society in which the knowing ones would order society for the rest of us.

Environmentalism offered the extraordinary opportunity to combine the qualities of virtue and selfishness

Many left-wingers thought they were expressing an entirely new and progressive philosophy as they mouthed the same prejudices as Trollope’s 19th century Tory squires: attacking any further expansion of industry and commerce as impossibly vulgar, because it was:

ecologically unfair to their pheasants and wild ducks.

Neither the failure of the environmental apocalypse to arrive nor the steady improvement in environmental conditions because of capitalism has dampened the ardour of those well-off enough to be eager to make hair-shirts for others to wear.

The 19th century Tory radical’s disdain for the habits of their inferiors remains undiminished in their 21st century heirs and successors.

True to its late 1960s origins, political environmentalism gravitates toward bureaucrats and hippies: toward a global, little-brother government that will keep the middle classes in line and toward a back-to-the-earth, peasant-like localism, imposed on others but presenting no threat to the inner city elites’ comfortable middle class lives.

Unlike most, green voters tend to be financially secure and comfortable enough to be able to put aside immediate self-interest when imposing their political opinions.

The rising Green vote is a product of increasing tertiary education. Green voters are typically tertiary educated or undergoing tertiary education.

Green votes are defined by what they studied at university: arts, society and culture, architecture and education. Professionally they tended to be consultants, or worked in the media, health or education. Theses jobs are heavily concentrated in tertiary disciplines that are focused on much more than just making money.

Greens are very well-paid inner-urban dwellers who make more use of public transport and have few religious convictions. They tend not to have children until their 30s, if at all, which makes them even richer and gives them lots more spare time to organise political activities and annoy the rest of us. Some of them still haunt campuses, churning out more arts graduates, but increasingly, green voters comprise a well-heeled professional group.

Greens are distinct from the typical Labor or National voter demographic but they support the the Green Party for social rather than economic reasons. Not unlike middle-class Catholics in the 1950s and 1960s who voted Labour.

How ironic that the green gentry—progressives against progress—turn out to be nothing more than nineteenth-century urbane conservatives. There is nothing new under the sun.

Big HT: http://www.city-journal.org/2010/20_3_american-liberalism.html

The Internet Arguing Checklist for Right-Wingers

  1. Say something offensive.
  2. Pretend statistics support your offensive statement.
  3. Claim liberal bias in the media.
  4. Claim there’s a liberal agenda.
  5. Offer up a conspiracy theory.
  6. Call your opponent stupid.
  7. Gloat about your accomplishments.
  8. Offer easily disqualified opinions.
  9. Create derogatory nicknames for opponents.
  10. Say science proves your point.
  11. Say science is limited when it conflicts with your point.
  12. When all else fails, Communism!

via Pox Vopoli: The Internet Arguing Checklist for Right-Wingers.

The Internet Arguing Checklist for Left-Wingers

  1. Skim until Offended
  2. Disqualify that Opinion
  3. Attack, Attack, Attack
  4. Disregard Inconvenient facts
  5. Make Shit Up
  6. Resort to Moral Equivalency
  7. Concern Trolling
  8. When all else fails, Racism!

arguemnetuj1.jpg Internet Argument image by AzarIwa

via The Internet Arguing Checklist | Monster Hunter Nation.

The living wage

Why not just increase the family tax credit? That would increase the incomes of poor families without putting their jobs at particular greater risk.

The local calculation of the living wage includes cable TV and an overseas holiday.

Milton Friedman provides some critical truths on the living wage:

Do-Gooders believe passing a law saying nobody shall get less than [a minimum wage] is helping poor people (who need the money).

You’re doing nothing of the kind.

What you’re doing is to ensure that people whose skills do not justify that wage will be unemployed.

@NZGreens @GreenpeaceNZ The scrapping of the trolley buses is great news – killer green technology alert

The extra costs associated with the wire network and the difficulty of changing the buses’ routes were the main factors in this great decision.

Goldenmile-busroute-lg

Trolley buses cause backlogs when they brake down because they cannot overtake a broken-down bus. The trolley buses just stake-up behind the broken-down bus because they cannot overtake.

I have been trapped on a diesel express bus this way commuting to work many times. Central Wellington grinds to halt when one trolley bus breaks-down.

The 50-year-old power system would need upgrading soon costing “tens of millions of dollars,” and maintaining the 160 kilometres of wires and 15 substations costs $6m a year. The one-off cost of dismantling this network is cheaper than this!

Trolley bases are a killer green technology: drivers have been killed while standing on the road behind the bus reconnected the arms on the top of the bus to the overhead wires. These arms disconnect frequently, and have even hit people on the side of the road.

Wellington is earthquake prone. Having public transport run off a single electric power source connected to overhead wires is fool hardy.

I grew up in a small country town. I have none of the obsessions that big-city folk and the inner-city green voters, in particular, have with buses.

Rod Croome’s unanticipated revolution

Back in 1986, an old University mate of mine, Rod Croome was very physically brave in his protesting for reforms to the Tasmanian state criminal law.

  • Rod even walked into a Tasmanian police station and confessed to abominations against the order of nature, as the Tasmanian criminal code called it.
  • The Police said they could not prosecute without the other party coming forward as the witness. The abominee did.
  • The Tasmanian Director of Public Prosecutions then declined to prosecute on public interest grounds. His discretion to not prosecute is absolute.

These days, Rod is campaigning for the equal right to marry. All inside one generation!

When Rod walked out of that police station rather disappointed at being a free man, I wonder if he anticipated how much change would happen regarding gay rights in his lifetime, much less in the next 5, 10, and 20-years.

A good explanation of this rapid social change is in Timur Kuran’s “Sparks and Prairie Fires: A Theory of Unanticipated Political Revolutions” and “Now Out of Never: The Element of Surprise in the East European Revolution of 1989“.

Kuran suggests that political revolutions and large shifts in political opinion will catch us by surprise again and again because of people’s readiness to conceal their true political preferences under perceived social pressure:

People who come to dislike their government are apt to hide their desire for change as long as the opposition seems weak.

Because of the preference falsification, a government that appears unshakeable might see its support crumble following a slight surge in the opposition’s apparent size, caused by events insignificant in and of themselves.

Kuran illustrated his bandwagon effect first with the fall of the Russian Czar in 1918. On the morning of the day that the Czar abdicated, he thought it was just another day at the office. But the regiment stationed in St. Petersburg to put down riots had been recently sent to the front. The raw recruits that replaced them melted away in the front of the rioters. The rest is history.

Then there is the Ayatollah Khomeini: two months before the Iranian Revolution, the main concern of his aides was his French visa was expiring; He needed a new country to seek refuge. Just before the Iranian Revolution of 1979, a CIA report characterised the Shah of Iran as an “island of stability.”

clip_image001

Yeltsin came to power after the coup attempt by hard-liners against Gorbachev because a KBG regiment sent to arrest Yeltsin mutinied against the orders of the hard-line coup leaders. Then everyone at the top of the military and security forces saw their main chance and switched sides. All popular revolutions against autocrats are ultimately palace revolutions, as I have argued before.

The loyalties of security forces are crucial in any political revolution. Within the security forces, a key concern is ending-up on the winning side in any show-down. Moving too early, too late or not at all have risks of their own when the time comes after a military coup to reward supporters and punish those that chose the wrong side, or even worse, sat on the side-lines waiting to see who would win.

Kuran argues that everyone has a different revolutionary threshold where they reveal their true beliefs, but even one individual shift to opposition leads to many others to come forward and defy the existing order. Small concessions only emboldens the ground-swell of revolution.

Those ready to oppose social intolerance or who are lukewarm in their intolerance keep their views private until a coincidence of factors gives them the courage to bring their views into the open. They find others share their views and there is a revolutionary bandwagon effect.

Plenty of people have had personal experiences of this in the 1980s and the 1990s when there were rapid changes in social and political attitudes about racism, sexism and gay rights.

A few political entrepreneurs such as Rod Croome had to stand up for what was right, and a surprisingly large number of others will quickly join the side pushing for social change.

clip_image002

In switching sides, these early movers and initial protestors encourage other hidden opponents of the established social and political order to switch. As knowledge of the opposition spreads and grows, the external cost of joining becomes lower.

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In Crime Waves, Riots, and Revolutions, Alex Tabarrok makes the important related point that when the courts and police are over-crowded and over-whelmed, proportionately fewer criminals or protestors will be apprehended, convicted, and imprisoned or otherwise socially pressured to conform. This feedback effect from one decision to participate in crime or protest to the decisions of others to break the law or rebel can be highly significant.

Kuran argued that fear changes sides once the revolutionary bandwagon takes hold: genuine supporters of the old political or social older or the traditional social values falsify their publicly professed preferences, pretending that they support the new order.

These are late-switchers. Do not trust them.

These late switchers are opportunists who will as easily switch back or move on to support another coup or a counter-coup or a return to traditional values.

Kuran argued that the reason for the bloody purges among revolution movements after many takeovers is to find and route-out these late-switchers. Many are purged, rightly or wrongly, before they have a chance to betray the current leaders of the revolution or military coup.

There are plenty of Christian and family parties winning upper house seats in Australia and soon in the New Zealand House of Representatives. There are plenty of morally manoeuvrable politicians willing to switch to their side if they have enough votes.

Ministers of course have a whole range of dazzling qualities, including … um … well, including an enviable intellectual suppleness and moral manoeuvrability.

Sir Humphrey, The Death List

Addendum: don’t pretend it was just the old fogeys who were the social reactionaries back then in the 80s.

When a gay men’s club sought affiliation with the Tasmanian University Union’s Societies Council in 1983, a number of clubs spoke against it because they simply didn’t like gays. I was there representing a catholic college students club so I seconded the motion.

When the motion was put to the vote, it was carried on the voices with a lot of people not saying anything or mumbling against it.

The chairman of the meeting, who was a member of the Liberal club, wisely didn’t put the motion to a vote. He declared it carried and moved as quickly as possible to the next item of business in case there was a call for show of hands.

Anti-gay rhetoric was common among young people in the 1980s.

The case against industry policy in one photo

Industry policy is back in vogue in New Zealand:

  • The National Party-led Government is keen on smart specialisation.
  • The Labour Party wants a Manufacturing Upgrade targeting R&D and innovation.

The case against picking winners is the answer to the question in the picture of the weirdoes below.

One of the people in the photo won a competition on the radio that offered free company photos. That is how Microsoft could afford the photo. That photo became one of the most iconic photos in American business history.

I first saw this photo 12-14 years ago at a presentation, so who first designed the caption is lost in time.

Stephen Franks: Time to call out the earthquake sooks-updated

An over-the-top blog post title spoiled a great round-up by Stephen Franks of the costs and benefits of higher building standards regarding earthquakes:

  • Employees are pressing employers to avoid premises seen as risky even if the earthquake risk is a fraction of the risks faced by employees in their homes, or getting to and from work;
  • Retroactive earthquake strengthening may cost more than the cost of a completely new building (the Canterbury Earthquake Royal Commission mentions up to 120%);
  • Retroactively strengthening buildings outside our highest seismic risk regions is rarely likely to pass any rational cost/benefit test because few if any of them will ever cause an injury.
  • The Martin Jenkins & Associates cost benefit study mentioned by the Canterbury Earthquake Royal Commission showed no  retrospective upgrading policy that could deliver net economic benefit.
  • Rationally, almost all existing weaker buildings should be allowed to end their useful life naturally and be replaced.
  • In high risk Wellington the $60m the Council is looking at spending on the Town Hall would save more lives if spent on dedicated cycle-ways.

via StephenFranks.co.nz » Blog Archive » Time to call out the earthquake sooks.

I remember reading a justifiably bitter op-ed by a woman who survived the bus on which a wall fell on and flattened in the second Canterbury Earthquake in February 2011. Eleven died.

That historic wall was known to be in risk is collapse both before and after the first Canterbury Earthquake in 2010.

The wall could not be demolished because of restrictions under the Historic Places Act.

A relative sat on a council committee in a small country town that was among other things trying to demolish a derelict building. The building was protected by heritage legislation.

Permission was refused to demolish the derelict building even after it caught fire and nearly burnt down the pub next door.

Lessons from how Australia came out of the Great Depression-updated

How Australia got out of the Great Depression in the 1930s could have lessons for today, for the global financial crisis and the Great Recession. In Australia, the massive fiscal contraction from late 1930 onwards was called the Premiers’ Plan. In 1931, unemployment rates was 25% or more.

The Premiers’ Plan required the federal and state governments to cut spending by 20%, including cuts to wages and pensions and was to be accompanied by tax increases, reductions in interest on bank deposits and a 22.5% reduction in the interest the government paid on internal loans.

The Premiers’ Plan was complementary to the Arbitration Court’s 10 per cent nominal wage cut in January 1931 and the devaluation of the Australian pound. Most countries had abandoned the gold standard by 1931 and 1932 and devalued by about 10% including the UK. These competitive devaluations were called currency wars. Most countries below started to recovery before they left the gold standard, a year or two before they left the cross of gold.

Real GDP and dates of exit from gold standard

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Sources: GGDC‑Maddison International Historical Database (http://www.ggdc.net/Maddison/), Bernanke et al. 1990; Gruen and Clark 2009.

The New Zealand Government also cut everything that could be cut by 20% in 1931.

Maclaren (1936) dated the Australian economic recovery from the last months of 1932. It was to take another three years before unemployment rates fell below 10 per cent — the rate it had been during most of the 1920s.

The June 1931 Premiers’ Plan of fiscal consolidation had time by late 1932 to become credible and take hold given the usual leads and lag on fiscal policy.

Unemployment data in the 2001 Australian yearbook of the Australian Bureau of Statistics graphed below shows a rapid fall in the high twenties unemployment rate in 1932 to be below 10 per cent by 1937. This fall started just after the 1931 Premiers’ Plan of fiscal consolidation.

Australian unemployment was 7.5 per cent in 1938, which is the long-term average for the period 1906 to 1929. The USA had an unemployment rate twice that in 1938 and was coming out of a double dip great depression.

Australia and New Zealand came out of the Depression earlier than most other countries because of the fiscal austerity under the Premiers’ Plan. The New Deal prolonged the great depression in the USA.

For those that doubt, how much lower would have been the Australian unemployment rate between 1932 and 1937 but for the fiscal contraction? What is your counter-factual? The role of fiscal policy in Australia in the 1930s is rather under-studied in Keynesian macroeconomics. Why?

The fiscal consolidation in the Premiers’ Plan removed fears of even harsher future taxes, stabilised expectations, increased consumers’ expected disposable incomes, and increased investor confidence and therefore stimulated private investment. See Keynes’ 1932 letter where he says

I am sure the Premiers’ Plan last year saved the economic structure of Australia.

Privatisation screw-ups are the best case for privatisation

Governments are so bad as business owners and so incapable of running a commercial process free of politics that governments cannot even sell a state-owned enterprise for a good price under the full glare of the media and public.

Anyone can sell an asset. It is the simplest task of ownership. Hire some consultants and go for the best price. Governments lack this ability.

Privatisations are often politicised, with discounts for small buyers from the middle class, for employees and other special interests. These messy privatisations are the best case out there against state ownership of businesses.

 

“No asset sales” was the Labour Party’s most coherent slogan in the 2011 general election in New Zealand. It cannot be claimed that the more recent privatisations in New Zealand were not subject to the maximum amount of public and parliamentary scrutiny possible in a democracy. The 2011 election was said to be a referendum on asset sales.

This inability to sell state-owned enterprises for a profit and free of politics calls into question the ability of governments to make complicated day-to-day business management and entrepreneurial judgements as owners of business enterprises. Imagine the quality of the day-to-day state-owned enterprise decision making that is further away from the glare of an election?

Private asset owners have a strong incentive to sell assets at a profit as it will otherwise hurt their share price and their personal wealth. Inferior entrepreneurs and owners are punished by losses. Any assets that inferior entrepreneurs either mismanaged or sell at a bargain price will, through further buying and selling, end up in the hands of more alert entrepreneurs and owners.

There are no similar feedback and error correction measures disciplining governments as asset owners and in their day-to-day monitoring of their business portfolios. Governments who own business assets have an inherently softer budget constraint.

No more witty politicians

Did the crowd boo when Gough Whitlam was so ill-mannered as to refer to Kerr’s cur? Did the crowd at the steps of Parliament chant ‘manners, Gough, manners’ rather than ‘shame, Fraser, shame’?

When Gough was challenged by a voter for his view on the contentious issue of abortion, hoping to catch him out, Whitlam replied that he was for abortion and in the heckler’s case, he wished that abortion would be retrospective. Everyone laughed and Gough got off the hook.

30 years ago when public meetings in elections were raucous affairs rather than photo opportunities, being able to give as good as you get was a key political skill.

Public meetings were tests of a politician’s mantle and those that did not fight back were judged to be weak. Stand-up comics had easier initiations.

Wit has lost its place in public discourse.

Robert Muldoon pinged the famous insult “New Zealanders who emigrate to Australia raise the IQs of both countries”.

Consider David Lange:

  • Micheal Bassett was a member of parliament and a cousin on my father’s side of the family. My father delivered him and it became plain in later days that he must have dropped him.
  • To US Ambassador H. Monroe Browne, who owned a racehorse called Lacka Reason: “You are the only ambassador in the world to race a horse named after your country’s foreign policy”.
  • And I’m going to give it to you if you hold your breath just for a moment…I can smell the uranium on it as you lean towards me.
  • …a man whose life is so boring that if it flashed past he wouldn’t be in it.

Paul Keating’s contributions to Australian culture would be lost:

  •  He described his opponents as “mangy maggots”, “intellectual rust buskets”, “gutless spivs”, “foul-mouthed grubs” and “painted, perfumed gigolos”.
  • Keating said of Howard: “From this day onwards, Howard will wear his leadership like a crown of thorns, and in the parliament I’ll do everything to crucify him”.
  • On Andrew Peacock: “A soufflé doesn’t rise twice”.
  • On Wilson Tuckey: “He’d be flat out counting past ten”.

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