Less aspiration, more perspiration

Economics is the study of changes at themargin.   It is thus apt that the economic policies being proposed by the twomain parties feature, at most, marginal changes.   But endorsing the status quo sitsawkwardly with their aspirational goals.    

I submit two stylised facts about New Zealand’s current economic framework:

  • Policies are generally of high quality byinternational standards.
  • The policy framework has failed to produce theacceleration in productivity growth required if we are to shift our livingstandards into the top half of OECD countries.

The first of these facts explains why thereis little daylight between the economic policies of the two main parties – withsolid policy fundamentals, most changes at this stage tend to be incremental.  The more radical changes proposed by the fringe parties tend to be retrogradesteps.

Unfortunately, the second of these factsmakes a mockery of the lofty economic goals adhered to by Labour and National.  The recorded economic performance of the last 15 years (the post-reformexpansion) strongly argues against the idea that we are poised to climb up theOECD ladder.    

The graph shows multifactor productivitygrowth, the purest gauge of the economy’s efficiency.   The steady progresssince 1993 is apparent.   But at an annualised rate of 1.4%pa, we are barelydoing enough to hold our position in the OECD, and recent results suggest thatthat we are struggling to even maintain that pace.

        

We can thank the policy environment of thelast 20 years for arresting our relative slide.   However, it is a harsh realitythat sound economic policies are necessary but not sufficient for climbing theOECD ladder.   For either political party to repeat that goal suggests incomprehensionof one of the two facts stated earlier.   Labour is in denial of the fact thatits economic record in office has been unremarkable despite implementing (whatit considers are) wholesale changes from the "failed policies of the 1990s".   Nationalis in denial that the scope for growth gains from tweaking already sound policysettings is miniscule.

Both parties have been committed to thebasic economic policy foundation for some time.     Independent monetary policyhas reduced inflation and led to more muted economic cycles.   Lightly (buteffectively) regulated labour markets have contributed to a low unemploymentrate, along with steady real wage growth and a minimum of industrial disputes.  

Commitment to balanced budgets andtransparent fiscal accounts leaves the government accounts in a healthy position(present deficits should not be a concern in light of the long-run outlook).  At the nuts and bolts level it is easy to start and run a business, and ourinstitutions are free of corruption.  

Outside of this, there is little thatgovernments can do at the macro level – we should not be surprised that it ishard to discern the impact of supposedly very different economic policies inthe productivity data.  

Despite the rush to "do something" in theface of the current crisis, governments now have very little influence on theeconomy in the old-fashioned, Keynesian sense.   The point of independentmonetary policy is to effectively cede the government’s ability to influencethe economy over the short-term (government attempts to create fiscal stimulusor contraction will be unwound by the Reserve Bank if inconsistent with theinflation target).

People themselves do the best to mitigatethe impact of policies that don’t accord with personal preferences.   The government’sattempts to raise the savings rate through higher taxes and budget surpluseshave been more than offset by New Zealanders borrowing from overseas.

What is left for government?   Governmentsremain crucially important for building solid institutions, and constructingeffective decision-making processes.   Ultimately, the best opportunity for thegovernment to stamp its authority on the economy comes through efficientmanagement of the one-third of activity concentrated in the public sector.               

Unfortunately, the technocratic job ofbuilding robust decision-making processes doesn’t win elections.   Throwing theprocess to the wayside does.   National’s populist intention to over-rule theinvestment advice of the Super Fund guardians springs to mind.   Labour’sfiddling with the Reserve Bank Act is another egregious example that bears someof the blame for current inflationary problems.             

The genesis of independent monetary policy wasthe belief that governments can’t be trusted with short-term economic decisions.  Institutions are required, in part, to hold in check the worst election-yearinstincts of political parties.  

In the same vein, we need more checksagainst grand meaningless goals.   A good starting point is scaling back ouraims and introducing real accountability.

Labour’s economic policy has provided aglaring example of how not to do this.   Labour aims to raise exports to 40% ofGDP by 2020.   However, over the 2000-2008 period, exports fell from 30.6% ofGDP to 28.9%.   This fall was despite the strong improvement in the terms oftrade, and Labour’s attempts to facilitate more hands-on economic developmentthrough NZTE and MED.   Ridiculously overreaching goals, offering nothing in theway of genuine methods for progressing towards those goals, invite a repeat ofthat failure.

The sooner our would-be economic savioursresigned themselves to the limits of the government’s capacity to improveeconomic performance, the quicker the focus could turn to the smaller and morespecific policy arenas where gains can realistically be achieved.    

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