In the last few weeks my colleagues, Gareth Kiernan and Adolf Stroombergen, have discussed the importance of what economists call allocative efficiency – ensuring that the nation’s resources flow into those activities where they are most valued. I continue with that theme. My aim is to present a measure of how big a deal allocative efficiency is for the New Zealand economy.
A quote in a recent article in TheEconomist magazine caught my eye: "politics has a habit of underminingeconomics". It was just a throw-away line in an article about the Bali conference on climate change. As an economist my initial reaction was "so true". Butit leads you to ask why is this statement so true? Economics is, at heart,about maximising the welfare of a society. One would, naively, expect that attemptingto achieve that goal would be a vote winner for politicians. In countrieswithout democracy, or seriously flawed versions of democracy, one might havesome understanding about why policies might not be designed to benefit themajority. But why do political decisions in democracies, like our own, sooften fly in the face of orthodox economics?
The Labour government has been very generousto its public servants. Since Labour’s election in 1999, average ordinary timewages in the public sector have increased by 34% compared with 25% increases inprivate sector wages. In 1999 private sector wages were on average 79% ofthose prevailing in the public sector, today they are around 74% of publicsector wages.
The government announced in the budget anintention to investigate the feasibility of introducing a shared equity housingscheme to assist low-income individuals and families to purchase a house. Theapproach follows overseas examples where the government purchases the housewith you, ie a shared equity arrangement where the government could own say 30%of the house. The house is co-owned between you and the government, but youget to live in the house. The government shares in the capital gain, but thereis no obligation for you to repay the government until the property is sold.
Michael Cullen has delivered his eighthout of a likely nine budgets. Although we expect to only have to endure onemore, we are likely to face the consequences of his complex and prescriptiveinterference in the economy for many years to come.
New Zealand doesnot have a long term saving problem. With open capital markets, the decisionto save or borrow is purely a financing decision, and one that is driven by theprice of credit. The international price of credit is very low at present. Taking advantage of these low prices is a rational response by New Zealanders.