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The Prime Minister has recently laid out some plans for opening New Zealand’s borders. Contrary to what some may think, re-joining the rest of the world is crucial for our future prosperity. The longer we delay the further behind we will fall. 

What is our biggest challenge now? Getting the adult population vaccinated.

Recently, John Key proposed telethon-type messaging on vaccination rates with this information being updated and shown on TV screens.

Here is a better idea.

Despite what the government would have you believe the vast bulk of people are not anti-vaxxers or rabble-rousers. They just want to get on with their lives. What then prevents vaccine uptake? Inertia! 

Currently the government is asking people to log on to websites, find a centre close to where they live, figure out a suitable date and then sign up for a jab. This may be thought of as the “opt-in” option. 

Instead, here is what we should be doing. Send each eligible adult a date, time and place for vaccination. Those above 65 or 70 could be given times during the weekday while those younger would get times during the evening or in the weekend. If needed pay extra to those administering jabs during evenings and weekends.

We do something similar before the elections when we send people information about where to go to vote. This should not be logistically too onerous.

People have the option of changing those dates but offered a date, a vast bulk of people will go ahead and show up at the appointed time.

It would also be useful if people could get this done with their own GPs since when it comes to medical advice these are our most trusted advisors. 

Research suggests that when it comes to retirement savings with employer-matched contributions, firms that use the “opt-in” option, where they ask workers to sign up to a program, often end up with fewer enrolees. On the other hand, firms that use the “opt-out” option do better. In this latter case, workers are automatically enrolled but have the option of opting out. Most workers do not and stay enrolled in the scheme. These people end up with much higher savings.

In one firm that switched from opting in to opting out, participation rate was 35 percentage points higher after three months on the job and remained 25 points higher after two years.

In another firm that offered a default contribution rate of 3 per cent of salary, more than one-quarter of workers contributed exactly that amount, even though the employer matched contributions up to 6 per cent of salary. Once the firm raised the default to 6 per cent, workers started contributing the same proportion.

A 2013 report in the Guardian found that approximately one year after Britain introduced automatic enrolment with an opt-out feature, there were 1.6 million more savers in workplace pensions. Only 9 per cent chose to opt out.

Relying on the “opt-out” option for vaccination will lead to much quicker uptakes. In countries such as Canada or Sweden governments are also trying other innovative approaches such as lotteries and/or financial incentives.

In the meantime, we need to stop talking about vaccine mandates, vaccine passports and ostracizing the unvaccinated etc. None of those things will come to pass or help and such talk only ends up raising people’s hackles. 

To those who are not generally opposed to vaccinations, I suggest the following. Yes, the Covid vaccines are not particularly effective against mutant strains. But nevertheless, the expected value is still positive. If you meet another person, vaccinated or unvaccinated, you are still better off being vaccinated. In the parlance of game theory, this is a dominant strategy; a strategy that does better against all other strategies adopted by others.

Are there side-effects? Maybe. But all vaccines have side-effects and there is little evidence to suggest that the side-effects to the current ones are any more dire than others. These are very low probability events that people often over-estimate. If you are scared or worried, let it be; opt-out. 

But equally the government needs to realize that we will never get as many vaccinated as we ideally want. And it also matters less than is being made out to be. There is little value in holding out for a great outcome when we can get a perfectly good outcome. We need to get going. 

Throughout the Covid-19 pandemic, we were told to just “trust the science” implying: listen to the advice of epidemiological researchers. But this was a narrow view of what the relevant “science” was. Epidemiologists can tell us about case and infection fatality rates of pathogens or their prospective path of transmission. But what we do with that data, what level of risk we are willing to tolerate, what costs we are willing to bear and what freedoms we are willing to sacrifice is no longer a question for epidemiologists. In fact, this question should not be left to them. It requires expertise from other social sciences and humanities. In reality, this “trust the science” mantra was an abdication of responsibility by our leadership for decisions that require statesmanship and are fundamentally political in nature; a pretense that a narrowly defined view of science can substitute for ethical judgments that ultimately need to be made by elected leaders.    

Which brings us to the news that there is much consternation around the fact that the consumer price index is up by more than 3% on an annual basis. Why the surprise? This is one of many inevitable outcomes of the zero-Covid mindset. The government has refused to acknowledge that Covid-19 was not merely a health crisis; it was also a social and economic crisis requiring a multi-pronged response rather than single-minded devotion to elimination. The “scientists” advising the government failed to understand that while too little social distancing leads to loss of lives and livelihoods from Covid-19, too much social distancing implies a loss of lives and livelihoods from other diseases and factors. Little thought was given to issues like our geographical isolation, the impact on global supply chains; that vaccination roll-outs may take a long time; that this will make it increasingly difficult to hunker down in Fortress New Zealand.  

The Covid-19 recession is also different. In the past, governments were fighting recessions caused by shocks that had already happened. But for the Covid-19 induced recession, faced with declining output and the prospect of large-scale unemployment, our government started borrowing heavily, thereby dramatically increasing the government’s debt. But simultaneously, the government (in the guise of the Reserve Bank) bought back that same debt in a massive program of quantitative easing; printing money to stimulate economic activity. This would be funny if the consequences were not so dramatic. Not surprisingly, it became clear soon enough that the ability of quantitative easing to stimulate business spending was going to be limited. This is because what was holding back such spending was not a lack of credit but an acute uncertainty about what the future held.   

In most recessions house prices take a nose-dive. But not this time around; partly because this recession hit the non-asset owning blue-collar workers far more than the while-collar ones. The latter had the option of working comfortably from home and therefore, did not experience much economic hardship. The historically low interest rates set off a quest for higher returns, resulting in investors gravitating toward houses and equities, furiously bidding up prices and fueling speculative bubbles. Among other things, this will create long-term wealth (and inter-generational) inequality. A government that touts its progressive credentials was essentially giving away free-money to the asset holding class. 

On top of this, the government decided to adopt another common populist tactic: the minimum wage was put up to nearly three-quarters of the adult median wage. I firmly believe that the negative employment consequences of minimum wages are often blown out of proportion by opponents. But not in a recession and certainly not in a situation when the country’s borders are shut tightly thereby depriving businesses of making compensatory adjustments. In any event, the inflationary pressures we are experiencing are more due to the quantitative easing rather than the minimum wage increase. These policies hew closely to ones followed by other populist regimes such as in Argentina or Venezuela. First, money creation to deal with large fiscal deficits; followed by wage increases (helped by substantial minimum-wage hikes) and declining unemployment. Soon, however, bottlenecks appear and prices skyrocket.  

The government is supposedly keen on having more skilled labour. This would require building up capacity in the tertiary education sector. Yet, by restricting funding and forcing redundancies, the government is in the process of bringing our universities to their knees. The government deficits are creating a temporary boom in consumer spending and giving people the impression that everything is fine; but this will be short-lived. In the meantime, long lasting damage is being created to the country’s productive capacity. Unfortunately (or maybe fortunately) another group of people will be tasked with repairing that damage, which will become ever more apparent with the passage of time. As the saying goes, those who would give up essential liberties for temporary security will have neither security nor liberty.  

There is understandable unease with the proposed new hate speech law. But for those of us paying attention, this proposal is part of an established pattern manifesting an inherently authoritarian mindset.  

Back in mid-March, 2020, New Zealand was in Alert Level 2. Then we went to Level 3 for one day before moving to Level 4. At the time, two legal experts wrote: “[The lockdown] imposes the most extensive restrictions on New Zealanders’ lives seen for at least 70 years; perhaps ever. No matter how ‘necessary’ these may be, we should expect such restrictions to have a clear, certain basis in law and be imposed through a transparent and accountable process.”  

Subsequently, a Court found that the first nine days of this lockdown was “unlawful”. In response, the government passed “under urgency” the Covid19 Public Health Response Bill. According to one report in Newsroom “the bill went through Parliament in less than two days and with no select committee hearings (and) grants police warrantless entry to premises if they reasonably believe virus-related orders are being breached.”

Both the Human Rights Commission and civil rights advocates expressed reservations about this law given the concentration of power in the hands of the Executive.

Later in 2020, New Zealand Ombudsman Peter Boshier revealed that he was “horrified” to learn that in the aftermath of the pandemic the government had actually considered suspending the Official Information Act, before backing down. Curbing freedom of the press is a well-established authoritarian practice.

Recently, another court found the government guilty again of exceeding its powers (ultra vires) when it rolled out a universal vaccination program under the 1981 Medicines Act. This once again required a hasty fix to the existing law to ensure that the vaccination program is lawful.

In a recent article, my colleague Robert MacCulloch argues that even the government’s climate change strategies are more about power than about prudent policy making. Another columnist noted that the government is well on its ways toward establishing a command and control economic and social structure.

A recent paper by two European researchers shows that countries hit to the same extent by Covid-19 were more likely to declare a state of emergency when their constitutional emergency provisions granted them more discretionary power.

But the assumption of such emergency powers by the Executive has long term consequences for a country’s development.

Now we have the proposed hate speech law.

The fact that the drafters of the law have little understanding of what they are talking about is made clear by an example that is provided in the draft bill.

It states: “For example, the film classification regime limits the freedom of expression of creators and viewers to uphold the rights of children and other members of the public, to protect them from content they might find harmful or that breaches society’s standards.”

At best film certification regimes can be construed as a form of censorship. This is a far cry from classifying something as hate speech since a film maker is seldom thrown into prison for making a movie with controversial content. At worst, the movie gets a R rating or is prevented from being shown widely.

Possibly the most problematic part of this new law is Proposal Two, which would prohibit speech that “maintains or normalises hatred, in addition, to speech that incites or stirs up hatred.” The word “hatred” replaces four different terms in Section 131 of the Human Rights Act: “hostility”, “ill-will”, “contempt” and “ridicule”. “Hatred” is obviously so much easier to define than the other terms.

Why may this be problematic?

I have been highly critical of aspects of the government’s Covid-19 elimination strategy. While I am certainly not opposed to vaccination, I am deeply sceptical about vaccinating children for Covid-19. Globally very few children have contracted Covid-19 and therefore they are unlikely to pass it on. These children are being vaccinated not for their own health, but in order to protect other, mostly elderly, citizens. This is not dissimilar to (at times forced) sterilization policies to reduce population growth, notably in Indira Gandhi’s India back in the 1970s and Alberto Fujimori’s Peru in the 1990s; inflicting an invasive medical procedure on individuals supposedly for the greater good.

There is a serious moral dilemma here that vaccine proponents are choosing to ignore.

The draft suggests that “more groups would be protected by the law if hatred was incited against them due to a characteristic that they have.” How is characteristic defined? This implies that the new law could well find me guilty of violating Section 21 of the Human Rights Act for inciting hatred toward the elderly and medical professionals.

“Knowledge workers” like academics, performers, journalists or lawyers, who tend to dominate airwaves and social media typically skew left of centre. Consequently, we worry a lot about right-wing authoritarianism. But left-wing authoritarianism is a problem too. Stalin and Mao were no less evil than Hitler or Mussolini. But the proper functioning of a liberal democracy is crucially dependent on calling out authoritarianism, whether on the left or on the right. After all, the price of liberty is eternal vigilance.

The on-going crisis over the Covid-positive person who visited Wellington from Sydney raises questions about the government’s zero Covid stance.

Leaving aside other economic and moral drawbacks of a zero Covid approach, here are some immediate reasons why this goal poses problems going forward.

Most people (and quite possibly those in government) thought that in order to achieve this zero Covid goal, all we needed to do is to keep our borders closed till the vaccines arrived.

But, in reality, we need to keep our borders closed till the entire world (or at least a large chunk of it) achieves herd immunity. By most estimates this means that somewhere around 60%-70% of a country’s population must be immune.

As of now there are around 120 countries in the world that have not managed to vaccinate even 10% of its population.

New Zealand features on that list, as does Australia. New Zealand has managed to vaccinate only around 8% as of June 23^rd. Why?

Many have blamed government incompetence. But I suspect the reason lies elsewhere.

New Zealand is getting its vaccine through the COVAX facility. Under this agreement, countries that are able to pay (self-financing countries) will get enough vaccines to vaccinate 20% of its population to start with.

How was the sequence of distribution decided? A plausible answer is that among self-financing countries, those with higher rates of Covid incidence got their quotas first. Countries like New Zealand (or Australia), which have reported low numbers of cases, most likely found themselves at the back of the queue.

According to statistics available from Our World in Data, New Zealand has received a shade above 1 million doses. Note that while this does correspond to 20% of the population, this only corresponds to around 500,000 (or 10%) fully vaccinated since the Pfizer vaccine requires two doses.

But even 20% is nowhere near enough for herd immunity.

When do we get the next lot? No one knows because under the guidelines established by COVAX, after all the self-financing countries have received their 20%, those countries that are unable to pay and need help will get their quota of 20%.

So, it will be a long time before New Zealand manages to get its share of those fully vaccinated high enough to achieve herd immunity.  

The government website says that NZ has “secured enough vaccines” for the entire population. But I seriously doubt that we actually have 10 million doses sitting in refrigerators around the country.  

It is likely that even the government has no idea about the timeline for getting all the remaining doses. If they do, they should tell us about it.

In order to open up, we must make sure that we only interact with those other countries that have also achieved herd immunity.

At the very least, this list will include developed nations such as Australia, USA, Canada, UK, all of Western Europe, Scandinavia and some Asian countries like Singapore and South Korea. When will these countries reach herd immunity?

While we seem to have written off large parts of the developing world including people in the Cook Islands., what about China, one of our large trading partners?

China will most likely achieve a high rate of vaccination on the basis of its indigenous vaccine, Sinovac. The current vaccines are not fully effective since we know that even vaccinated people have caught the virus. But let us concede that the vaccines, even if not fully effective, still slow the spread of infection.

Even the Chinese government is clear that Sinovac has just about 50% efficacy. Is this high enough? There are reports of large number of people catching Covid even after being vaccinated with Sinovac.

As of now there are 40 countries around the world including large South American countries like Brazil and Argentina that are relying on Sinovac.

How about the Russian-made Sputnik V or the Indian-made Covaxin?

Back in 2020, the first nine days of our April lockdown were found to be unlawful. In response, the government rushed to pass a new Public Health Response law under urgency. More recently a court ruled that the government did not have the power to roll out a universal program under the Medicines Act. This again required another rushed change to the law.

It all seems completely ad hoc. Is there a plan for opening the border? Is it really possible to keep it shut till the entire world has reached herd immunity? How long will that take? I believe these questions require answers since the current policies are proving ruinous for many.

There is increasing chatter in the Western press that Covid-19 escaped from a lab in Wuhan.  

Suppose we concede that Covid-19 did escape from a lab. What of it? This is not the first time such an accident has happened and it certainly will not be the last.  

A 2003 article in The Lancet Infectious Diseases suggests that a case of Severe Acute Respiratory Syndrome (SARS) was the result of a lab accident. A 2004 New York Times article reported that a Russian scientist working for a former Soviet biological weapons laboratory died after “accidentally sticking herself with a needle laced with Ebola.”  

In 2014, an article in The Guardian reported on numerous safety breaches at UK labs. “One blunder led to live anthrax being sent from a government facility to unsuspecting labs across the UK, a mistake that exposed other scientists to the disease. Another caused the failure of an air handling system that helped contain foot and mouth disease at a large animal lab.” 

The same year, the American Centers for Disease Control and Prevention (CDC) potentially exposed researchers to anthrax when the microbes were sent to laboratories “that were not equipped to safely handle the pathogen.”  

So how exactly does it matter even if Covid-19 escaped from a lab in Wuhan?  

The only way this story makes sense is to eventually accuse China of engaging in bio-terrorism; that China knowingly and deliberately let loose this scourge on humanity. 

But this narrative has problems. First, regardless of the hype and hyper-ventilation, Covid-19 is a relatively mild pathogen. The disease is less deadly and less infectious than originally assumed.  

So, to buy this story, one would need to assume that China spent enormous amount of time and effort to develop and release a virus that is not all that deadly. One would further have to assume that China did so because it was certain that the release of this pathogen would cause the West to lose its mind and inflict catastrophic social and economic damage to itself on its own (or possibly aided by Chinese misinformation).  

But, if China really wanted to engage in this type of bio-terrorism then why waste time with Covid-19? Why not invest in something more deadly such as Ebola, anthrax or bubonic plague?  

The reality is different.  

As the Western countries emerge from the pandemic, they are realizing that the geo-political reality has changed rapidly. China has vastly expanded its economic and political reach among developing countries whose markets are much coveted by the Western nations. 

This process, happening for a while, has gained steam recently. During the pandemic the Western countries effectively made it clear to developing countries that when it came to vaccines or other help the latter were completely on their own. The West’s priority was the West as they closed off their borders to the denizens of the third world. 

Into that breach stepped China with huge financial investments and now their own vaccine. As of now forty countries, including much of South America, are using the Chinese developed vaccine.  

The West is not only staring at the possibility of losing these markets but big pharma is distraught at the thought of losing out; especially now that it looks like we will be taking the Covid-19 vaccine every year.  

The only feasible option left is to prove to the World that China let lose this pathogen deliberately.  

But bear in mind that this charge is coming to you from the same fertile minds that attacked Iraq following the September 11 attacks; even though Iraq had nothing to do with those attacks. Those same people also spun the story that Iraq had weapons of mass destruction and spoke ominously about mushroom clouds. It was clear to many at the time that these stories were fabrications and the invasion made the truth clear to all.  

Now, we have this campaign to isolate China. To be clear a unipolar world dominated by China, a Communist dictatorship with no allegiance to due process, human rights or basic legal protections will be infinitely worse than a unipolar world dominated by the United States, which, in spite of all the recent assaults, still has robust legal institutions in place.  

But, trying to circumscribe China’s influence via a campaign of baseless canards will not advance the West’s civilizing mission and will further tarnish the image of democracy. Scientists should ponder at length before lending their credibility to this smear campaign.   

When it comes to something like the budget, everyone has an opinion. Unless one is deeply familiar with the nuts and bolts of the budgeting process, it is not easy to understand what the trade-offs were and why the calls that were made were made.

It is also the case that for us average punters, the numbers are pretty much meaningless. A billion here; a billion there, what does it all mean? We don’t know if this is an increase or a decrease from the current baseline; what fraction of crown revenue does this represent and what does the increase in spending in one area mean for spending in another?

It is also the case that the budgeting process for a small open economy in the middle of the South Pacific is not easy since we are seldom the masters of our own destiny. A lot will depend on what happens to our trade with China or the US, which in turn depends on how those economies rebound from the pandemic.

So, we pontificate on the basis of our own perspective; so we talk up those things that we like and disdain those that we do not.

But having said that and a with a due mea culpa for my own pontificating, here are few thoughts that come to mind.

A budget needs to be understood as an aspirational document that sets out our priorities and goals.

And in that case surely there is something wrong with a budget that starts out with the explicit purpose of correcting three decade old wrongs. This does not mean that those old inequities should not be addressed, but my fear is that the authors of the current budget are not only worrying about three decade old wrongs but trying to address them with three decade old thinking.

Three decades ago, there was no Iphone or Ipad; “googling” had not become a verb; China was still a relatively poor country; the massive off-shoring of jobs was still to come; Amazon was still a river in South America and social media did not exist.

Let me give an example. The New Zealand government talks a lot about climate change. General Motors has just announced that by 2035 (on in fourteen years’ time) they will only produce electric vehicles. It is likely that most other car makers will follow suit.

Let us suppose that in short order all Kiwis start driving electric cars. Can our current electric grid support this? If not, then is this not something that should be a priority?

The Finance Minister has made a big deal of saying that crown debt which was supposed to exceed 50% in about three years’ time will be held down to a lower proportion. Why?

Japan’s debt is more than 200 percent of its GDP. There are other countries like Greece with debt  standing at more than 100% of GDP.

If it was fine to effectively quadruple debt in 3-4 years from its pre-pandemic level, then why the sudden pusillanimity?

Having run up that debt, why not invest in large infrastructure projects and industries with large value added?

Currently two of our biggest export industries, tourism and higher education, are on their knees.

What is the thinking here? That one fine day we will open up our borders and things will go right back to where they were?

This is highly unlikely to happen. For one thing many airlines have re-routed their existing flights so that if and when we open up there will be far fewer options and consequently higher prices.

The government seems to believe that New Zealand will become this Covid-free haven where everyone, tourists, workers and students will want to come.

This seems far-fetched. By the end of 2021, most countries in the world will be Covid-free. If I am skilled worker or student located overseas and I am looking to emigrate, will New Zealand be a priority for me?

I would be thinking: am I better off emigrating to a small country with a small market in the middle of the South Pacific? What if I get stuck there without a job when the next pandemic hits? Or am I better off looking at some of the bigger countries and markets in North America or Western Europe, which offer greater mobility and job prospects?

Already there is evidence that international students are going away from Australia to the UK. The same is most likely true, and probably to a greater extent, for New Zealand.

In per capita GDP terms, New Zealand is already one of the poorer of the OECD countries with a per capita GDP that is close to the OECD average and comparable to South Korea and the Czech Republic.

Can New Zealand sustain a first world lifestyle on the basis of primary products exports and without skilled migrants?

Yes, the Chinese economy is growing rapidly. But unless China manages to establish democracy it will never achieve the economic vibrancy of the US or Western Europe. Why? Simply because currently the best minds of the world migrate to those latter countries with new ideas and new optimism. The vast bulk of Silicon Valley start-ups were started by migrants to the US. None of these people will consider heading to China. Japan, once an enterprising pioneer, has been in decline for a long time now.

With increasing global connectivity, a stable, non-corrupt and crime-free society, why should New Zealand not be able to attract some of this talent particularly in the service sector? But governments cannot figure out who the next Sergey Brin will be; what they can could do is the make it easy for talented people to come to the country and leave them alone to build the next Google.

It is not clear that the current government understands these challenges or how to deal with them.

A recent report in the Herald suggests that inflationary pressures are beginning to appear with a small increase in the Consumer Price Index for the March quarter and more upward pressure on prices expected.  

Another report suggests that such inflationary pressures are being caused by the rise in minimum wages on April 1. 

Could higher minimum wages eventually lead to higher prices? Yes, but it is too early for that to happen and any case this should not impact price rises in the March quarter.  There are other likely suspects such as supply chain disruptions and increased freight costs. 

But it is important to acknowledge the elephant in the room; that these price increases are an inevitable outcome of policies followed by the government in recent times.  

A lot of this has to do with our response to Covid-19. What our government failed to understand is that while it was possible to be too lenient in terms of social distancing, it was also possible to be too restrictive where the economic costs become prohibitive. Our government has consistently chosen to err on the side of being excessively restrictive.

The Covid-19 recession is different from others. In the past, governments were fighting recessions caused by shocks that had already happened. But in this case, governments were fighting a recession that they were exacerbating, if not causing in the first place.  

Faced with the economic fall-out the government initiated a massive program of deficit spending. Net core Crown debt is expected to reach more than 50 per cent of gross domestic product over the next five years.  

But alongside this massive deficit we have been also running a policy of quantitative easing whereby the Reserve Bank buys up the government bonds used to issue this debt. This injects liquidity into the system. Think of this as cash floating around. The aim here is to keep interest rates low and if and when needed provide capital to businesses.  

But in the absence of business expansion and increasing output, this extra money sets off inflationary pressures.   

We have historical precedent for such policies. Sebastian Edwards, an international economist at UCLA points out that: 

“Four episodes in particular are instructive: Chile under President Salvador Allende’s socialist regime from 1970 to 1973; Peru during President Alan García’s first administration (1985-1990); Argentina under Presidents Néstor Kirchner and Cristina Fernández de Kirchner from 2003 to 2015; and Venezuela since 1999 under Presidents Hugo Chávez and Nicolás Maduro. 

In all four cases, a similar pattern emerged. After the authorities created money to finance very large fiscal deficits, an economic boom immediately followed. Wages increased (helped by substantial minimum-wage hikes) and unemployment declined. Soon, however, bottlenecks appeared and prices skyrocketed, in some cases at hyperinflationary rates. Inflation reached 500% in Chile in 1973, some 7,000% in Peru in 1990, and is expected to be almost ten million percent in Venezuela this year. In Argentina, meanwhile, inflation was more subdued but still very high, averaging 40% in 2015.” 

Given that the Reserve Bank is tasked with maintaining inflation at low rates we will have to wait and see how they respond but in any event there will likely be significant economic pain as the Reserve Bank tries to rein in inflation.

The other issue is that such expansionary monetary policies, besides generating inflationary pressures, will also exacerbate our wealth inequality.  

For most households, their major source of wealth is the house they own. In previous recessions such as the Global Financial Crisis, house prices had taken a beating, making investments in real estate a losing proposition. But this was not the case this time around.  

It is also the case that the lockdowns disproportionately affected blue-collar workers often working for hourly wages. White-collar workers who could work from home were not particularly affected or, at least, not to the same extent. By and large, they did not suffer adverse shocks to their wealth. This meant that these households whose income and/or revenue streams were unimpacted were free to invest in financial assets.  

Our quantitative easing policies have fuelled huge speculative bubbles in financial assets such as houses and stocks.

Data from New Zealand suggests that residential property owners are among the largest beneficiaries of government-related support provided during this pandemic. Mortgage holders will receive around $2.3 billion of relief on their repayments over the course of 2020, thanks to the low interest rates.

But these benefits can only accrue to those who already own property and/or other assets or have the financial means to invest further. Low interest rates have been a massive boon to the asset-owning class to the detriment of those with little collateral.  

If there was any doubt that the government does not have much of a clue when it comes to Covid-19, the latest Auckland lockdown should settle that debate. It has been pointed out that the so-called “elimination” strategy followed by the government was misguided and will, by necessity, required an extended series of such lockdowns. We were told that as the government got better at contact tracing and isolation, lockdowns will be few and far between. Then, of course, a vaccine will arrive. And now the vaccines have arrived, yet we have two lockdowns in Auckland in three weeks.

Not that the opposition party is brimming with alternatives. Their big idea? A prison-like MIQ facility in the outskirts of Auckland. In that case, pray, why not use that money to build a new hospital or new ICU units or expand public health services?

At this point it may be worth reiterating that there are significant economic, social and psychological costs of lockdowns and much emerging evidence suggests that these costs outweigh potential benefits. Lockdowns also cost lives, except we remain oblivious to this since those lives are lost in the background, away from the media spotlight.

The Prime Minister is apparently frustrated that people are not following the rules. This is only because the government and their stable of experts seem to have little understanding of how human beings work. Their mathematical models are based on treating humans as automatons and when people do not behave like this in real life, they are surprised and frustrated.

Policies designed to deal with a pandemic must take into account elements of human psyche. Furthermore, when we design machines or policy, we do not assume that everything will go right. The key part of good design is to anticipate what could go wrong and then design fail-safes around that. This way when unexpected things happen, the machine or the policy does not come apart at the seams.

The primary problem with the government’s Covid-19 app? It does not work! No wonder people stop trying. Instead of incurring the cost of repeated lockdowns we could have spent the money providing people with the blue chip enabled covid card that Sam Morgan had advocated. When Morgan finally quit in frustration, the then Digital Services Minister Kris Faafoi said that compulsory covid cards would be “an extreme last resort”. It is hard to understand why the covid card is the last resort but repeated lockdowns are perfectly acceptable.

At the end of the December quarter, much was made of the drop in unemployment rate to 4.9%. One commentator argued that this definitely established that a strong health response was also the best economic response. Yet, it became clear quickly, that the drop in unemployment was not an accurate picture of the economy given a sharp increase in the number of job seeker benefit recipients and the labour underutilization rate. The true amount of unemployment in the economy is potentially much higher.  

In the meantime, the Prime Minister has clearly abandoned her exhortations to “be kind”. If you lived in Papatoetoe or went to its High School, would there be any doubt about the identity of the people involved in the current fracas? How is it okay to engage in this type of public shaming?

But the scary part is that the government’s incompetence is not confined to its Covid-19 response alone.

The government has indicated that it is determined to implement policies recommended by the Climate Change Commission even though no one actually has a clear idea of where these recommendations are coming from since the commission has refused to divulge much information about its assumptions or modelling. Kate MacNamara of NZ Herald wrote that through a range of policy intervention the commission would have the Government regulate minute details of our day-to-day lives. And while the Commission suggests that all of this would cost just under 1 per cent of the GDP we would otherwise reach in 2050, estimates from NZIER suggest that the cost may be as high as 5 to 8 per cent of GDP.

Elsewhere, the Finance Minister recently inserted language into the remit of the Reserve Bank’s monetary policy committee requiring it to take into account government policy relating to more sustainable house prices. This is problematic since it circumscribes the RBNZ’s independence.  Like the judiciary, the RBNZ also needs to be completely independent and such independence is fundamental to the proper functioning of our democracy.  

C.S. Lewis wrote:

Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. … those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.

Recently Jackie O, an Australian radio host made news by failing to answer a simple math question.

What was the question? A bat and a ball together cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?

She answered that the ball costs 10 cents. But this is clearly incorrect; since, in that case, the bat must cost $1.10 since the bat costs $1 more than the ball. But, if that were true, then the two together cost $1.20, $1.10 for the bat and $0.10 for the ball, rather than $1.10.

The correct answer is that the ball costs $0.05 and the bat costs $1.05.

But here is the rub. Faced with this question a vast majority of people provide the same response that Jackie O did; that the ball costs 10 cents. This is because the correct answer that the ball costs 5 cents is far from intuitive.

Before I get to this here are a couple more problems. You will enjoy this column more if you try them first before reading on.

Problem 1: In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days to cover the entire lake, how long does it take for the patch to cover half of the lake?

Problem 2: Suppose you are running a race. You have just passed the person running second. What place are you in?

For the first problem, the answer is not 24 days as most people respond. The correct answer is 47 days. Since the lily pads double every day, if the pond is half-full after 47 days, then it doubles and gets filled the very next day, the 48th.

For the second one, a common intuitive response is say that you are in first place. But this is not right; if you overtook the person running second then you are now in second place.

These problems, designed by an Yale behavioural scientist, are neither math problems nor are they particularly simple.

They are designed to demonstrate the limits of relying on our intuition.

Every day we are faced with a multitude of decisions; some trivial, some more complex. They range from what to have for breakfast and which suit to wear to an important meeting to which car or house to buy, what type of home loan to take out, whether to sign up for life insurance or to take out the extra super-cover warranty on the new big flat-screen television.

In many such instances, we tend to rely on our intuitions; go with our gut.

The questions above show why this may not be ideal. Very often the answer that is intuitively appealing ends up being incorrect.

In these simple riddles the price of being incorrect is minimal; a minor loss of face.

But when it comes to the bigger things in life like buying a car or a house getting things wrong can be costly.

One can think of our decision making as the result of two processes: System 1 and System 2.

System 1, which is essentially intuitive thinking, operates automatically and quickly, with little or no effort and little voluntary control. System 2, on the other hand, is deliberative and effortful. System 1 quickly gets into action as soon as we are faced with a decision. System 2 on the other hand requires time to engage.

One good analogy is to think of System 1 as an elephant that lurches into action quickly, while System 2 is the rider trying to guide the elephant; this can be done but is not easy and requires practice.

So, when it comes to decision-making should you go with your intuition or should you engage in careful thinking and maybe some research?

The answer is simple. If it is a problem that you have lots of experience with, say, grocery shopping or driving on the motorway, it is fine to rely on your intuition and operate on auto-pilot.

But if it is a problem where you have little or no experience or decisions that we face infrequently, such as buying a house (at least for most of us), then relying on intuition may drive you astray. In this case, it is better to rely on System 2 and careful deliberation.

Jackie O need not feel embarrassed. She has plenty of company. Most people struggle with these questions. It is the way our brains are designed; to come in with an immediate answer that feels feels right in our guts.

These problems are not simple, setting up as they do, a conflict between System 1 and System 2 thinking.

The minimum wage in New Zealand is set to go up to $20 per hour from April 2021. As usual, this has created divisions between the progressives, who are in favour and conservatives, who fear that this will lead to large scale job losses.

While there is conflicting evidence on this issue, the preponderance of evidence suggests that minimum wage increases do not lead to large scale job losses as is presumed by the right.

Below I discuss the typical questions that come up in this debate.

First, very often minimum wage increases are designed to keep pace with inflation. As long as minimum wages are adjusted to keep up with the cost of living it seems only fair to do so. This is particularly so given that the consumer price index, which is the general measure of the cost of living, does not include certain things, such as house prices and therefore most likely underestimates how much the cost of living has changed over the years.

The proposed minimum wage is nearly three-quarters of New Zealand median age, which puts the current wage ahead of recent increases in the cost of living.  But given that the minimum wage is adjusted only periodically, unless there are further upward revisions in the minimum wage in the near future, the cost of living increases will catch up to it soon. 

Second, why don’t we then keep increasing the minimum wage? Where does it end? Wages are a crucial part of determining prices. Beyond a point pushing the minimum wage further will certainly lead to inflation and the aggregate job losses will not be worth any additional gains. There is no indication that we are anywhere there yet.

Third, why don’t we let the market decide? Here, proponents are appealing to what is known as marginal productivity theory. Here, each worker is paid what he or she is worth to the business. But the problem is that measuring marginal productivity, and therefore how much each worker is worth to the business, is not easy.

Furthermore, as Thomas Piketty points out in his book “Capital in the 21^st Century”, since around 1980s the Anglo-Saxon countries (USA, UK, Canada, Australia and New Zealand) have seen the emergence of “super-managers”, whose enormous compensation packets are hardly commensurate with any measure of their marginal productivity.

Often such high salaries are excused by appealing to tournament theory, which says that the way to attract highly talented people is to make the prize (executive compensation) very large. In this sense, these super managers are similar to sports stars or movie actors. The evidence does not bear this out since there is little correlation between executive compensation and firm performance.

Furthermore European companies that have eschewed this star-system do not seem to be suffering from any adverse business outcomes.

So, it seems specious to argue that salaries for workers at the bottom should be solely determined by their marginal productivity while those of managers have no connection with market forces.

The playing field is hardly level and it is tenuous to argue that these wages are being set by market forces.

But, will raising the minimum wage not lead to job losses? Yes, but this answer is based on what is typically known as a partial equilibrium analysis of markets. Bear in mind that those who get this additional wage will also spend that money within the community. So, yes, some cafes may lay off their wait-staff who may then need to find a job at the Warehouse. Evidence suggests that minimum wage increases may lead to job displacement but not a lot of job losses.

Small businesses that find this wage increase onerous should be able to make adjustments to the hours of work in order to balance out the increased pay for each of those hours.

The timing and the sensitivity of demand for workers to changes in wages matter too. Raising minimum wages in the midst of an economic downturn may not be the best idea.

During booms, the labour market is “tight” with lots of employers looking for workers. This works in two ways. First, when the minimum wage is raised, even if it leads to a lower demand for workers as a whole, typically the additional gains of those who retain their jobs exceeds the losses of those who lose their jobs. But during booms, the latter find it easier to find alternative employment.

But during downturns, when business are not looking to expand, finding alternative employment is not as easy. Also, in such situations, the market is “loose”, with demand for workers highly sensitive to wages

Finally, what often gets lost in such debates is the rather illusory nature of wages and prices. For instance, if a loaf of white bread costs $2 and I make $16 an hour then my hourly wage is worth 8 loaves of bread. It does not change anything if my wage is increased to $20 but the price of a loaf goes up $2.50. My wage is still worth 8 loaves of bread.

Raising the minimum wage is certainly a way of bettering lives, lowering prices can be equally effective. Much evidence suggests that many sectors of the New Zealand economy such as groceries are characterized by a lack of competition. Reining in the market power of these businesses may well lead to lower prices and be equally effective ways of making things better off for those of us on the lower rungs of the income distribution.