Prologue of Transforming New Zealand. Comments welcome.

Keywords: Growth & Innovation;

After this book had gone through its first draft, the Growth and Innovation Advisory Board, which provides a private sector policy perspective to the government’s economic strategy (and of which I am a member), released its ‘Growth Culture’ study which described the public’s attitudes to economic growth. The report is rich in detail but its main findings were the public was not enamoured with the notion of growth as a key policy objective, and was tired of being told that they had to make sacrifices to increase the economic growth rate.

The conclusion was somewhat of a shock to the economic elite who have been advocating policies to increase economic growth. Don Brash, economist leader of the National Party and past Governor of the Reserve Bank, sorrowfully concluded that New Zealanders did not understand that growth delivers them the things they want. In a similar vein Simon Carlaw, then Chief Executive of the lobby Business New Zealand, remained committed to economic growth, grumpily remarking that ‘it may seem strange not to be able to talk directly about economic issues, and to recourse to speaking about values in order to talk about them’ (a view which, incidentally, this book rejects).

Other responses from the policy elite more thoughtfully responded to the public’s concerns . Apparently a large proportion of them did not like the current economic discourse. It was not merely that they did not like the policies that were being contested: the public objected to the framework, particularly the dominance of GDP – the economist’s main measure of material production – as the primary economic goal. There seemed to be two major issues.

First, the public had little faith that GDP actually measured what they valued, believing it included ‘bads’ (such as traffic congestion) as well as goods. Thus they were not objecting to growth of something – to having more rather than less of things they valued. At issue was what was in the package that defined the something. A revealing insight was there was a widespread belief that economic growth would not increase spending on the health and education services which the public valued.

Second, they were tired (I think that was a fair summary of their tone) of being told they had to abandon what they valued in order to accelerate the growth of GDP. For instance, calls that lower taxation was necessary for higher economic growth, implied the public would have to reduce the public spending on things it valued and wanted more of. This may be where the disjunction between growth in output and growth in health and education spending came from, for they had been told that public spending on these had to be cut back to generate further economic growth.

Perhaps there was a third concern. The policies that were being articulated were descendants of policies which had been implemented in the previous two decades. Yet the historical record had been of a relative decline per capita GDP (and an absolute decline for five successive years). The demand to return New Zealand to the ‘top half of the OECD’ ignored that New Zealand had been there in the early 1980s. The wish to repeat the policies associated with the decline, without confronting their apparent failure, gave the public little confidence in the advocates. Moreover, and rather blatantly, the implementation of the policies gave their advocates (or their employers) immediate gains at the expense of the rest of the public, but only promised the wider benefits at some stage in the future, promises which had been rarely fulfilled in the past. The advocates were asking the public to make short-term sacrifices but were not expecting the same of themselves.

We have then a major disjunction between the policy elite and the public, one which had been evident enough to those policy advocates who came down from the bully pulpit and listened to their parish. In a curious way economics has been a religion of the late twentieth century insofar its practitioners thought it provided a sort of moral guidance as to how to behave socially. It was a hell and brimstone approach. If one did not take their advice the eternal damnation was poor economic performance. And just as the past clergy seized ignorantly on an unconnected event – such as the plague – to justify their advice, today’s policy advocates make tenuous links between events such as poor economic performance and their particular preference for, say, lower taxation or privatisation. At least the ancient priests were not direct beneficiaries of the moral direction they gave their flock.

Does this disjunction mean we have a standoff? Ultimately the policy elite will have to bow to the wishes of the democracy as political parties – but not all politicians – learned in the 1990s. But the tensions in the interim will be great, and result in – if one may use the term – ‘inefficient’ policy outcomes, that is practically possible outcomes inferior to that desired by the elite and the public. In particular the public’s antipathy towards the proposals of the policy elite may result in our throwing the baby out with the bathwater.

Undoubtedly there are among the policy elite those who are adapting their policy stance to one more in line with what the public want. Some may be doing so merely by changing the words – the wrappings around their package. Others will be assessing the package itself.

In one sense, this book might be thought of addressing the policy advocates, but it has a wider purpose. It has always seemed to me that the public deserves to – and needs to – understand the economy better. There are rules about how economies work – rules, I add, which are not always accepted by those in the policy elite. There are also options and directions available for we have choices albeit, so the rules tell us, not unlimited ones. A better understanding should mean better policies and better – in the sense of ‘more desirable’ for the public – economic outcomes. Thus this book is intended to improve public understanding of the economic policy debate and to enable them to contribute to it in a constructive way.

So what it its stance in regard to the Growth Culture’s findings? First it accepts agree that GDP is not a very good objective for economic policy. I set this argument out in the next chapter, but to summarise GDP is a poor indicator of the quality of life, especially in a rich economy. If an policy which increases in material production (which is what GDP measures) involves a reduction in the quality of life then I would eschew that policy. As I will suggest we really need a better measure of what we mean by economic growth, but there is no really acceptable one on the horizon.

But I am committed to economic growth if we define it properly. Quite frankly we have no option. Well – it is never quite true there is never any option. In this case there is perhaps the option of isolating New Zealand from the rest of the world, and refusing to admit new technologies or of generating them ourselves. Not only is this impractical, but the economy would not just stagnate but regress, because we would find it increasingly hard to pay for the imports that we need.

The practicality of such isolation is so low, that it is not worth exploring the scenario. Mentioning it however, underlines that at the core of economic policy is change over which economists have little control. Not just technological change in the narrow sense of what science and engineering generates, or even in the wider sense to include the social technologies of the way we organise society. There is also demographic change, social change and changes in taste and fashion. Sometimes political changes – war or peace, boundary changes – are important, although fortunately they have had little impact on New Zealand in the last half century.

Many – but not all – of these changes impact on the economy, so it is continually accommodating to them. As it happens, the changes are often beneficial with the consequence that the economy is able to produce more goods and services with less resource inputs. Sometimes the changes are detrimental to the economy and to society. The invention of nuclear weapons was a technological change that could hardly be described as beneficial., even were its consequences substantial. One can think of numerous technological and other changes of somewhat smaller magnitude with benefits offset by detriments. I have yet to be persuaded that the rise in the demand for whale oil in the nineteenth century was in the interests of whales.

The perspective here is a rather different one from that which is thundered from the pulpit. It sees economic policy largely about dealing with these external changes and their consequences. But there is a need for principles to guide the responses. Economists generally operate on the basis that the aim of policy is to make people better off, albeit with the caveat that we getting a bit vague when some people are better off and some worse. A very crude measure of whether people will be better off is the quantity of material production, of which GDP is a measure. Thus there is a sort of convergence between the growth advocates and this approach. Each is concerned with increasing material output.

However there is a limit to the convergence. The growth advocates’ rhetoric is that growth is a good thing, and should be strenuously pursued. The approach here is that growth is a consequence of responding to the technological and other changes which impact on society. Moreover the growth may be assessed in different ways from the two perspectives. The rhetoric of growth advocates accepts uncritically that material outputs measures such as GDP give an unequivocal indicator of success. The alternative approach has that the material output indicators are useful but not decisive.

A major divergence between the two approaches is that the growth advocates are always promising that the adoption of their policies will accelerate economic growth. Not that they deliver. (One is reminded of the woman who sued for divorce from her economist husband on the grounds on non-consummation. ‘He would stand naked at the end of the bed promising that things would get better but nothing else happened.’) The alternative sees that much policy is simply about trying to keep up with change, without any promise of there be an increase in the growth rate.

For example, I have been marginally involved in the proposals to reform the 1960 Archives Act. It will not add to economic growth, nor reduce the demand for inputs. The justification is that archives knowledge and circumstances had changed in the 40 years since the act was passed, the most noteworthy change being the plethora of electronic archives.

Or consider the Credit Contracts and Consumer Finance Act 2003, where again I was marginally involved in its replacement of the Credit Contracts Act 1981 and Hire Purchase Act 1971. A score and more years after they were passed they had become increasingly obsolete. Again I make no claims this would accelerate economic growth measured by GDP. But I hope it gives people on the margins better access to credit. (The credit markets for those with adequate assets were working fairly well. One design problem was how to avoid raising the compliance costs in that market and maintain its responsiveness and flexibility, while giving those with poor security a better deal.)

Of course, sometimes a policy change may contribute to an acceleration of economic growth, but that is rare. More often, if there is not some sort of change the economy will slow down, missing opportunities that other economy’s will seize upon. So economic policy is usually about maintaining existing levels of economic growth, not accelerating it. An even more pernicious claim is that it will accelerate it faster than other countries. But if the policy is so successful, why wont other economies also adopt it?

In many ways being in a modern economy is like riding a bike. If one does not go forward, one is likely to fall off – with severe repercussions. But note this. No, I write BUT NOTE THIS:

While the cyclist and the economy must go forward, there is a choice of where to go forward.

Those who say there is but one way to go, with them on a comfortable saddle steering the operation (while the submissive rest of us provide the power to turn the pedals for little reward) are either dishonest, if they know there are alternatives, or, if they do not know, they are incompetent. There is a role for the honest competent economist to help control the bike, and of course he or she will have their own views as to where it should go. But they have no special expertise in deciding where the bike should go, even if they can say that some options are not available, such as trying to stay where we are.

What worries me is that there is an undertone in the responses to the Growth Culture survey which suggests that some people would rather the economy stagnated – the bike fell over – than go down the route of the growth advocates’ rhetoric. Fortunately there is more choice. Most of the respondents showed a willingness to engage with the economy, to ride on a bike going somewhere, providing they had some say in its direction, some contribution to its performance rather than just the hard grind, and some actual – rather than promised – benefit.

Understandably many respondents expressed a considerable nostalgia for the past. Of course the bike went along some pleasant routes, although we often forget the hardships. But we cannot circle back, and ultimately most of would not want to (other than the desire to live our life over again) because we value so many of the changes that have happened since. Ideally, but unrealistically, we would like to be able to select the bits from the past we valued and the bits form today we valued, and the possibilities from the future that we expect to value. That, sadly, is not an option, but the nostalgia needs to be understood and respected. Sometimes it will influence the direction and speed of the bike, as when we resist the destruction of a heritage building or a valued environment in the name of progress.

The difficulty with choice of paths, is that the road map plus the pedalling and steering directions are complicated by the options. So here is what the book is going to do. First it has to decide on a general direction. The next chapter does this by starting with the path of increasing GDP and explaining why it may not be the best choice. After looking at other single indicators it selects the approach of the current New Zealand government as to the objectives of economic (and broader public) policy. It does that because the government choice has been derived by a democratic – albeit imperfectly democratic – process, but also because the principles seem to be consistent with the New Zealand public’s core beliefs as uncovered by the Growth Culture survey.

After that chapter the book uses the writer’s expertise to suggest what economic (and sometimes other) policies might be helpful in pursuing that goal.

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