Listener: 10 December, 1990
Keywords: Political Economy & History;
We are likely to argue for decades as to why Rogernomics, the economic policies of the fourth Labour government, failed – and it is unquestionable that they did fail economically.
Of its ‘big four’ objectives, only inflation performance might be said to have improved in six years, and even then the rate was higher in ‘unintervened’ 1990 than in ‘frozen’ 1984. But the balance of payments, unemployment and the growth rate were all markedly worse by the end.
The failure of Rogernomics is already causing the politicians to rewrite history . Here is a quick run through of some excuses.
Was the economy in such bad shape in 1984? Yes and no. There were fundamental difficulties, and the collapse of the oil price in 1985 exacerbated the fragility of the ‘Think Big’ investments. On the other hand, between 1978 and 1985, the economy had experienced its fastest postwar growth rate, relative to the rest of the OECD, and we had a marked improvement in the terms of trade for most of that period.
What about labour-market reform? The issue is more complicated than can be covered in a single paragraph. But one of the rewritings of history has it that from the beginning Rogernomes advocated this. In fact, the 1984 Treasury post-election briefings were remarkably restrained about labour-market reform. Their recommendations were the basis of the 1986 Labour Relations Act, now wildly criticised by the Rogernomes. The first I recall to emphasise the crucial role of the labour market were critics like Merv Pope and Graeme Wells. That does not prove labour-market reform was adequate but it does indicate that at the beginning Rogernomics was ill conceived.
The same applies to the government deficit. The initial Treasury advice was ambiguous, but included: ‘with a floating exchange rate, there is less risk that poor monetary and fiscal policies will impoverish those industries exposed to world trade’. Even today the issue appears to be misunderstood. An article in the September Reserve Bank Bulletin discusses monetary policy without reference to the government deficit.
Another group of justifications for the poor performance of the Rogernomics policies centres on late 1987 and 1988. But except for the flat-tax package, virtually the whole of the December 1987 package was implemented. The tax package itself was ill conceived, for it involved a guaranteed minimum family income package which would have put most families on marginal tax rates near 100 percent. And the package itself was not fiscally balanced, for in the first year the tax cuts applied for six months, while the revenue compensators were for the year.
Judging the policy torpor that arose from the Lange-Douglas stand-off awaits the memoirs. But to blame it solely for the subsequent poor economic performance is to ignore the sharemarket crash which preceded it.
The story is the other way round. The crash demonstrated the shallowness of the false prosperity that Rogernomics had appeared to stimulate. The companies which subsequently fell over did not do so because of the Lange-Douglas stasis. They did so because their 1986 and 1987 profits came from paper shuffling, rather than genuine economic production. When shuffling inevitably caught up with them, they collapsed.
It is possible that the disasters in some of the financial institutions – which, alas, continue three years later – could have been moderated by a more directed policy. But one has to ask to what extent continuing with the Rogernomics strategy would have merely exacerbated the shambles in the long run, addressing the speculative bubble as if it had not happened.
Bumper slogans and a selective memory are not sufficient to explain the poor performance of the last six years, although that is all we may get from the memoirs if initial previews are any indication.
But this column would be failing if it did not also attempt to sketch some defence of Rogernomics, and I would start with the notion of ‘modernisation’.
The New Zealand economy had undergone a major external structural change in the period from 1965 to 1985, centred on diversification in the export sector. But the internal structures were not adapting fast enough. Indeed, many would argue that the Muldoon government had been stalling the rate of adaptation. Thus the brave task of the fourth Labour government was to modernise the domestic structures of the economy, aligning them better with the external sector and the burgeoning world economy.
Thus arose the need for market liberaIisation, at the border and domestically. Institutions had to be modernised too. This could not be confined to the economy, for there is no clear boundary between the economy and society. The education system, local government and the management of the environment, among other things, had also to be reformed.
The Labour government only instinctively understood this. It was so intellectually shallow that it had no standards with which to judge its modernisation programme. Cut off from the roots that sustained it (as happened also to the Muldoon administration), the government was sucked into an ideologically extremist position, without the technical competence to see it was ideology or to recognise its errors.
If the inception of Rogernomics as modernisation was justified and welcome, sadly the execution was desperately misconceived.