The Recovery is Off, Dear.

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The turmoil in the world economy from Trump’s attack on Iran will delay New Zealand’s economic recovery.

Back in 1993 I was perhaps the first to announce that the economy seemed to be in recovery. The notion was seized upon; apparently, the long Rogernomics stagnation was over, and economic growth would soon be booming. That is not quite what I meant. ‘Recovery’ is a technical term used in trade-cycle theory for the phase when the economy has bottomed out and begins the upswing. It says nothing about how strong the upswing will be, nor whether the top of the cycle – the ‘boom’ – will be long.

There was much disappointment from those who did not understand this when, a year later, the ‘boom’ indicated the growth trend was much like that the economy had been experiencing before the stagnation, except that the economy was growing at a lower level – it has never recovered the relative loss from the Rogernomes’ shock policies. There was certainly no faster growth which followed – no catchup. (I’ve put a couple of wonkish notes at the end of the column – no need to read them if you are not a wonk.)

The previous paragraphs were intended for a column I was about to write about the growing evidence that the New Zealand economy was in some kind of recovery. The point I wanted to underline was that ‘recovery’ did not mean that subsequent growth would be strong. I wanted to contemplate the case that the growth trend would be lower than it had been in the past. In two words, whether it was going to be a ‘weak recovery’.

The economic consequences of the attack on Iran mean that any recovery has been delayed. Probably there will be higher inflation from higher oil prices (which means that people will spend less in real terms); there may be supply shortages from difficulties with offshore suppliers; there may be setbacks in confidence and further closing down of existing businesses or delays or even abandonment of promised investments. All a bit gloomy and unsettling. What is certain is that any recovery is delayed. *

We cannot tell by how much or how long since we don’t know when the Iran war will be over. But even if the conflict ends tomorrow, its consequences will take some time to unwind. I’ll be addressing what seems likely at the time of the budget forecasts at the end of May. Conveniently, the Treasury’s main forecasting effort is still a month off, when things will be less murky. Speculating before then is pointless, even if it can make good headlines for a media bereft of hard stories.

However, it may be useful to background the sort of public economic debate which is likely to occur up to the election. The government, fronted by Christopher Luxon and Nicola Willis,  has put a lot of emphasis on its claim that the economy measures it has taken were proving successful. Had there been no Iran war and the recovery had got under way, it would have promised strong growth, although evidence for that – if the government was right – would not really have been available until 2027.

The government case now looks thin given the likely delay of the upturn. It will argue the delay is not the government’s fault (without actually mentioning it is Trump’s) and promise that there will be a recovery – eventually. I don’t know how convincing that will sound to the public. Whatever, the May budget is going to be difficult; theere can be no significant electoral ‘bribes’ – just promises. (Been there, done that.)

There is the added complication that the three parts of the coalition are running almost independent economic policies, although there is some overlap among them. The above discussion is about the central policy. Meanwhile ACT has its own approach, although I have seen little real influence from the Ministry of Regulation either on policy or the economy – or, for that matter, when I get my hair cut. NZF’s Think Big is still largely a promise. It takes time for big projects to get under way. (Their construction phase needs to be distinguished from their production phase. Muldoon’s construction phase certainly had an economic impact but there is little evidence that there was additional thrust to the economy from the production phase.) I mention the coalition party differences because they are likely to intensify in the runup to the election.

The Labour Opposition will have the easy task of taking potshots. Whether it promises anything significant which will make it a credible alternative is a bigger challenge. It will offer some new policies – like a capital gains tax – but I am not sure whether that will mean much difference to the economy; they may enhance wellbeing although that seems hardly a frame which Labour is using. The Greens are likely to pay considerable attention to redistribution but they do not give as much attention as they did once to the environment. Te Pati Māori has not much of an economic policy except to enhance the wellbeing of Māori.

In the end the economic issue may not be much about policy but about the credibility of each major party leadership to manage shocks – like the one the Iran attack is generating – using the existing paradigm.

We have yet to reach the stage in the electoral cycle where serious economists withdraw and leave it to politicians and the commentariat to grumble, pontificate and promise. That does not mean that economists will give up thinking about economic issues – but what they have to say will be drowned out by the sizzle.

* The Statistics NZ announcement that GDP growth in the December 2025 quarter was 0.2% – fractionally above zero in GDP per person terms – should be treated as that the economy is still near stagnation. It may be revised a litle – in either direction. Given the shock from the Iran war the statistic gives little indication of what may happen in 2026.

Two Wonkish Appendices

1. I expected that many of the Rogernomic changes would result in ‘allocative efficiency’ gains (better deployment of resources) that would boost the level of output but not necessarily accelerate the growth rate. I never found any significant improvement, although there was evidence of quality improvements (standard economic measures do not incorporate quality changes very well). Moreover, the economy is probably more resilient to economic shocks. (In contrast. the Rogernomes’ redistributional impacts were very evident.) It may be a guide to the well-known economics question: ‘how many Harberger triangles [the allocative effects] fill an Okun Gap [the macroeconomic effects]?’. In the case of Rogernomics, macroeconomic management was dreadful. The answer answers sems to be ‘a helluva a lot’. (See my In Stormy Seas.)

2. I have long puzzled why the New Zealand economy has not benefited by the convergence effect – the well-established proposition that lower productivity economies tend to grow faster than the highest productivity economies and begin to catch up to them, once they have met certain organisational arrangements (which is why many of the poorest do not prosper). The convergence occurs because it is easier to borrow/import existing technologies than to create new ones. My guess is that New Zealand’s industrial configuration does not generally benefit from importing technologies in the way that other economies do; we are too small and insufficiently linked into the rest of the world because of our location.

1929 and All That

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Andrew Sorkin’s new book, 1929: The Greatest Crash in Wall Street History sheds light on how financial markets work.

Economists argue over how exactly the Great Depression of the early 1930s occurred. We are pretty much agreed on what happened in New Zealand – our ability to borrow internationally became very limited while the terms of trade (the price of our – almost solely pastoral – exports relative to the price of imports) fell sharply. The external shocks were caused by the international downturn. It is the precise mechanisms which made that world depression so deep that are contested.

It is common to date the Great Depression from October 1929 when the price of shares (or ‘stocks’ in the American vernacular) on the New York Stock Exchange (commonly called ‘Wall Street’) crashed; they fell on average by almost 90 percent in the next three years. In the first week, share prices fell by (roughly) a quarter (25 percent).

Wall Street was already the greatest financial centre in the world and there is no doubt that the crash contributed to the Great Depression. However, it is argued that the world economy was weakening before October 1929 and certainly some policy responses intensified the downturn. Among the most serious was the Smoot–Hawley Tariff Act, which was intended to shield American industries from foreign competition; it set tariffs at levels so high that they make Trump look like a tariff moderate.

We can also look at the Wall Street crash outside the context of the Great Depression, to enable us to understand better how financial markets work. This is not about the intricacies, which have become much more complicated in the last century, but how financiers operating in them behave, which probably hasn’t changed that much. We can be very grateful to journalist and historian Andrew Sorkin for his 1929: The Greatest Crash in Wall Street History—and How It Shattered a Nation which could be taken as a prequel to his earlier book about the 2008 financial crash: Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves.

The new book tells the 1929 story by tracing the stories of various people involved ranging from Presidents Hoover (who Sorkin treats kindly) and Roosevelt to the shoeshine boys outside the dealing house (Joseph Kennedy, John’s father, decided it was time to sell when the boys were offering share tips); even Winston Churchill makes an appearance, losing a small fortune.

There are many men in the story. (Wives are mentioned plus one astrologer/fortune teller who predicted that ‘stocks might climb to heaven’ a few weeks before the 1929 crash and who lost money shortly after). There is such a kaleidoscope of them that Sorkin provides nine pages of ‘the cast of characters’.

The book gives particular prominence to Charles Mitchell, who was the president of National City Bank, sometimes described as the ‘world’s largest bank’. (It exists today as a part of Citibank.) ‘Sunshine Charley’ aggressively encouraged his bank’s customers and employees to buy securities, including shares in the bank, even on credit. The NCB was also taking over other financial institutions to enlarge its market power.

Mitchell was in the process of merging National City with another bank when Wall Street crashed. The deal was that the other bank’s shareholders could swap their shares for cash, or for National City shares. Before the crash, when share prices were high, they preferred the share swap, but when the share price of both banks plunged they went for cash. National City did not have the cash they demanded. In order to protect NCB, Mitchell did some financial manipulations which, not incidentally, put his own fortune at risk. But they did not work and he ended up broke. He had been fabulously rich. As well as a town house he had a rural estate: 108-acres including a 25-room mansion, an elaborate stone boathouse, a ten-room guest cottage, a nine-room groom’s cottage, and multiple garages and stables.

What strikes one about Sorkin’s account is that while Mitchell was frequently treated as a villain – even the chief villain – in the Crash, he was not an evil man. He got into a financial mess because he was trying to protect the institution he loved and those who were involved with it. It is true that he was criminally charged with tax evasion. The jury found him not guilty, but a civil lawsuit had him paying $US2m (say $US50m today) to Inland Revenue. (We may take it that his views were not as tender towards the US government as they were to his bank, employers and customers.)

Few of the people portrayed in the book were wicked. They were rich, they were greedy, they were arrogant, they were poorly informed on issues outside their narrow expertise (but still wanted to interfere there), and they would willingly outwit another businessman in a deal; many were religiously devout. But most were not genuinely evil; Sorkin reports a few; some got deserved comeuppances such as poverty and jail (some of the suicides involved honourable, but depressed, men). More generally, many financiers lost their fortunes; not all – Joseph Kennedy made his by ‘shorting the market’. *

Much the same applies today. There are some genuinely wicked financiers but most are so-so, rather like the rest of us. It’s worth underlining this point because when financial markets crash again, many involved will be labelled villains. While we should not feel sorry for them when they lose their fortunes and we should not try to bail them out, the attitude misses the point that there is a fundamental problem with financial markets.

It was Karl Marx who pointed this out. (Marx is considered one of the great classical economists, whatever you may think of other aspects of his thinking or that of his followers.) He observed that once money was merely a medium of exchange used to convert one commodity into another. Commercialisation changed that. Money became a store of wealth and you entered into a transaction where you purchased a commodity to increase your wealth.

Symbolically, transactions changed from C➙M➙C1 (the commodity is exchanged for another commodity with money intermediating) to M➙C➙M+ (the commodity is used to increase one’s money holdings).

The next step is to use a financial instrument – a piece of paper which is a contract about exchanging in the future – instead of a commodity. The deal becomes M➙FP➙M+.

Magically, one makes money by dealing in the intangibles of finance. We have moved a long way from the C➙M➙C1 world or even the M➙C➙M+ one. That world involving commodities worked because the other side of the transaction (actually, there could be many sides) wanted to exchange commodities too, so that both sides thought themselves better off after the transaction (providing they did not make mistakes).

In the M➙FP➙M+ world the holder of the financial paper thinks they are better off because they are going to flip it on too, increasing their stock of money. It is a speculative Ponzi scheme, relying on someone wanting to hold financial paper of intangible worth which they will convert into cash if they can pass on the baby (or is it the bomb?).

In the 1920s the mechanism was compounded by encouraging Americans to borrow to fund their speculation. In a C➙M➙C1 or M➙C➙M+ world it is a means of coordinating decisions through time. In a M➙FP➙M+ world borrowing works fine until it doesn’t and the Ponzi speculation crashes. So be it, except innocent people suffer as well as some of those who have been speculating.

Sorkin nicely illustrates the story; it is especially detailed in his account of Mitchell. You can read his book as a gripping history. But it is also a parable which may help you understand what is currently going on and what will happen when the next bust comes.

* Explanation: When shorting the market (or short selling), an investor borrows shares they do not own, sells them at the current high price, intending to buy them back later at a lower price when the share price falls and pocket the difference. This is the opposite way around from the normal speculation of buying shares, selling them when their price rises and pocketing that difference.

Accident Compensation (index)

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Compensating Factors (April 1981)

The Historic Context of the Woodhouse Commission (July 2002)

Submission on Review of Medical Misadventure (April 2003)

Ending Fault in Accident Compensation: Issues and Lessons From Medical Misadventure (December 2003)

Accidents Will Happen (April 2004)

Medical Misadventures: Should Patients Be Compensated for Managerial Failure? (February 2005)

The Economic Crisis: Where Does ACC Fit In? (June 2009)

Social Security and ACC (December 2009)

A Proposal for an Earnings-Related Redundancy Insurance Protection (April 2011)

Portrait of Owen Woodhouse (November 2011)

ACC: an Accident Waiting to Happen (November 2012)

McCarthy, Woodhouse and The Proposed Redundancy Social Insurance Scheme (April 2022)

The following books all have significant sections devoted to Accident Compensation

Social Policy and the Welfare State in New Zealand (Allen & Unwin, 1980) (Japanese Edition, 1987)

Pragmatism and Progress: Social Security in the Seventies (University of Canterbury, 1981)

Economics for New Zealand Social Democrats (McIndoe, 1981) 156pp.

I was involved in the 2007/8 review of the Accredited Employers Scheme but was not a major player in the writing of the final report. 

IS THE RICH WORLD GOING INTO SECULAR STAGNATION?

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Chapter 7 of ‘In Open Seas’

In the last 200 years, world per capita incomes (measured by market output) have risen over ten times on average– more so in the most affluent countries. In the previous 200 years they are thought to have risen about 10 percent. Can the miracle growth of the last two centuries continue? Stein’s law says that ‘if something cannot go on forever, it will stop’. But when? Perhaps ‘soon’, at least for the affluent economies.

Secular stagnation is the notion that affluent economies are moving into a low economic growth stage for a long period, if not forever. (For economists, ‘secular’ means the ‘long term’, of indefinite duration.) Are we there yet?

There are some economists who think that the world economy may already be in secular stagnation and that GDP per capita will not grow much in the long term. Indeed, secular stagnation has been a common concern of the profession; among the greats who have pondered on it are Thomas Malthus, David Ricardo, Karl Marx, John Maynard Keynes and Joseph Schumpeter. However, there is no consensus among today’s economists that the rich economies face the prospect of long-term stagnation compared to their experiences of the last two centuries. There is even less consensus on why it may happen.

It is generally accepted that international real (adjusted for inflation) interest rates are low compared to the past and are likely to remain low for some time. In principle, low interest rates ought to stimulate an investment boom, but none is evident. That seems to suggest that in rich countries businesses do not see growth opportunities.

Business sees opportunities in poorer countries, although they may be hesitant to invest there because of political instability. Many poorer economies are growing faster than the rich ones. However, even the economic growth of the star performer, China, is slowing down. Japan too, was once growing very quickly but it slowed to the rich economies’ rate once it caught up. This suggests the rapid growth occurred by Japan as a poor country adopting rich countries’ technologies. Once that had and Japan was using the top ones, its economy slowed down to their rate.

Another concern is that much of today’s growth is dependent upon ultimately unsustainable financial behaviour. There is bound to be at least another major financial crash sometime in most readers’ lifetimes and that will almost certainly set back the international (or individual countries’) growth track.

Mechanisms Ending Growth

Why might growth rates in rich economies stagnate? Here are some possible explanations. They are not exclusive.

First, the shift from the non-market economy to the market economy – evident in the rise of food preparation (and consumption) outside the home, that home dressmaking is much less common and that more of childcare occurs outside the family – may be near exhausted. New Zealand has already very high labour force participation by women – among the highest in the world. Can we squeeze any more blood out of the kitchen?

Second, if economic growth has been as dependent on consuming natural resources, as the previous chapter explored, then we may be reaching the point where such exploitation is ending, especially if we stop using as sumps for polluting waste air (greenhouse gases and smoke emissions), fresh (waste and runoff) and sea water (including plastic bags) – the alternatives are more expensive measured in GDP terms.

Third, it is possible there is a slowdown of new growth-promoting technologies compared to the last two centuries. As Chapter 4 discussed, economists think that a major drive of economic growth has been technology rather than capital accumulation. This may explain why poorer countries are still growing. They are upgrading their technologies to rich-country levels. When they reach that level, they will grow at the rich-country rates.

American economist Robert Gordon, who has done more research in the area than anyone else, argues that today’s innovations are not comparable to those of a century ago – like electricity and the internal combustion engine. We may know whether he is right in a hundred years, although there certainly seems to be an ongoing multitude of new innovations if not as dramatic as the ones Gordon cites.

Why? One possibility is that the technologies at the back of the warehouse (Chapter 4) are less exciting than the one’s near the front which have already been discovered. I am not sure about that. One suggestion is that those at the back are harder to get at, since the researcher has to work their way through all the technologies at the front of the warehouse, so one needs to know a lot more nowadays.

A third possibility is that the new technologies do not give a commercial return. For instance, the contribution to wellbeing of new pharmaceutical drugs, costly to generate, may far outstrip their contribution to GDP. (Not in Narrow Seas mentions the impact of efficient contraception which hardly appears in GDP but made a dramatic impact to wellbeing.)

A variation on the social valuable innovations which don’t give commercial returns is infrastructure, which is often cited as generating a high return to the economy. Generally the return does not go directly to the investor but is spread widely, which is why private investors tend to be uninterested (unless there is a public subsidy). While public-debt-constrained governments have difficulties funding infrastructure without raising taxation, motorists sit fuming in a traffic jam unwilling to pay the taxes to improve roads.

A fifth possibility is there are increasingly severe difficulties measuring conventional economic growth as we shift from the product economy to the service economy.

A sixth is that the degree of monopolisation seems to be increasing in key sectors with the incumbents resisting new entrants. This may be because they are often ‘common carriers’ (natural monopolies) with the technologies favouring only one significant provider. (Examples are the immensely profitable Facebook and Google whose revenue comes more from advertising than the services they provide to users – similar to newspapers.) That may slow down economic growth by stifling genuine innovation. (I certainly think that natural monopolies should be regulated in the public good. If that generates economic growth as well as improving wellbeing, so be it.)

A seventh possibility is that secular stagnation is a rich-economy phenomenon because the rich countries offshore production to poorer economies. I wrote about this in my Globalisation and the Wealth of Nations. Essentially, the ability of poor countries to produce many of the same products using lower paid workers switches economic growth in their favour, whereas in the past circumstances favoured the now-rich producers. Even so, there remain opportunities for affluent countries to provide advanced precision products, as Germany’s capital goods exports to China demonstrates.

The world’s regional balance of economic activity is always changing, which must imply some regions are in relative decline. Once Northern England was more affluent that Southern England (which is why many New Zealander’s nineteenth-century ancestors came from the south). Booming parts of the US are now rust-belts. The South Island once had a larger population than the North Island. Over the long run, there are changes in the relative rankings of economies by per capita GDP. Observe that in Europe and the US economic development moved from increasingly congested centres to the periphery (in Europe from Britain to Finland and the Mediterranean; in the US from the Northeast and Midwest to the South and Pacific West). Now, the same processes move industry offshore, so when Japan reached rich country status some of its industries moved on to South Korea, Taiwan and South East Asia.

The underlying economic model suggests that the developing country shifts its labour out of its low-productivity farm sector into a medium-productivity manufacturing sector which exports to the rich. (The cognoscenti will recognise here a ‘Lewis’ model of growth; West Indian Arthur Lewis was the first non-European Nobel Laureate economist.)

A final theory is that a lot of economic growth is a kind of Ponzi scheme, especially that which depends upon the financial sector. It argues that investors are benefiting today from trading worthless financial paper with others who expect similar returns in the future. One day they will not be delivered. Such arrangements may not be illegal, but they are painful when they collapse. Much of the 2008 Global Financial Crisis can be explained this way. (Economic growth depending on environmental depletion is also a kind of Ponzi scheme.)

Secular stagnation may have begun towards the end of the twentieth century – perhaps as the result of a slowing down of the rate of technological innovation which could be commercialised (although others of the explanations above may have also contributed). The financial sector speculative boom in the first decade of this century disguised the sluggishness. The GFC ended the boom.

A Stagnant New Zealand?

The full model of the offshore movement of manufacturing to poorer countries (the seventh possibility) has an interesting prediction, especially for New Zealand. These new manufacturing countries will suffer a food deficit because their agricultural sectors will not be able to deliver all the food demanded by the more-affluent city workers. The price of foodstuffs then rises relative to the price of manufactures.

That has been already happening over the last forty-odd years because of industrialisation in East and South East Asia. The rising prices have been to New Zealand’s benefit (because it gets paid more for the same production). In contrast, the food terms of trade had been generally falling in the twentieth century before the 1980s.

This adds to the promise for the New Zealand economy. The foundation of New Zealand’s prosperity has been its resource base – especially, land, sun and water – which it has processed and exported. Is New Zealand running out of the resources to fully reap the gains?

What if Economic Growth is Dependent Upon Environmental Depletion?

To return to the second possible explanation. Suppose past economic growth has been partially dependent upon depleting the environment (as well as innovation). There are two major ways the depletion happens.

One is that there is a resource – such as coal – which gets mined out. This may be thought of as converting a not-priced non-market resource into a priced market one (relating to our first possible explanation of why we may be facing secular stagnation).

A variation on this is that a resource may be used as a sump – sewerage and runoff into water, carbon dioxide into the air. The implication is that if we had a wider measure of economic activity it would include a measure of environmental depletion analogous to capital depreciation in GDP. Thus far it has proved difficult to calculate in a convincing way. Moreover, it would make little difference to current measures of material wellbeing (consumption). Rather the wellbeing would stagnate and fall in the future – sounds like a Ponzi scheme.

But environmental depletion may impact on material wellbeing. Suppose it was decided to remedy the sumps or even just to stop using them. That would divert resources which could be used for increasing consumption. Some people would say that would increase their psychic wellbeing. Fair enough. (Robert Fulghum’s All I Really Need to Know I Learned in Kindergarten says ‘Put things back where you found them; clean up your own mess’.) Whatever such actions would do for psychic wellbeing, the material economic outcome would appear as secular stagnation.

A slightly different issue is that much of New Zealand’s capital investment has been shoddy – leaky and earthquake prone buildings for example. Like remedying of environmental depletion, remedying poorly built structures will involve redirecting economic activity from adding to material consumption to consolidating past gains.

The Implications of Secular Stagnation

Predictions are hard to make, particularly about the future. So we do not know whether international secular stagnation is something to really worry about, or just another passing fad. However, I should not be surprised if economic growth among the rich countries is markedly lower in the future than it has been in the past. The secular stagnation scenario sees a continuous slow down but we should not rule out crashes followed by a very slow recovery as happened in 2008 and after.

The clue for me is real interest rates. Those in the US, which set world rates, dropped from 5% p.a. in the 1980s, to 2% p.a. in the 1990s, and to just 1% p.a. in the 2000s. Since the Global Financial Crisis occurred, they have averaged a negative 1% p.a (yup, nominal interest rates have been below the rate of inflation). They may recover but that is not what the forward looking long-term interest rate on US government bonds says. Low interest rates are indicative of a lack of investment opportunities relative to available savings.

There is a terrible inertia in human thinking when it is not chasing frivolous fashion. There is real danger we will not adapt to the new circumstances which may be, if there is secular stagnation or much slower growth, totally different from the experiences (particularly in rich countries) over the last two centuries.

Adding to the inertia of thinking about economic growth is that the growth rate and the profit rate are inextricably entwined. Low long-term growth means low long-term profitability. In the short-term business can squeeze wages, shifting the share of total income towards profits, but that cannot go on for ever. There is a basic long-run mechanism that drives profit rates towards interest rates plus a risk premium. That is why some of the great stagnationist thinkers saw an end of capitalism. Thus far capitalism has survived despite such predictions, because of its ability to morph into new forms, overcoming the inertia, or perhaps because technological innovations has kept generating new commercial investment opportunities – up to now.

Even so, practical inertia will not prevent the public rhetoric pressing for growth will remain prominent. It is largely unaffected by evidence and research, so why should new circumstances and evidence change its approach?

The Risks of Overestimating Interest Rates

The danger is that we base our future on the past growth rate; if it is markedly lower we will make poor decisions. Suppose real interest rates remain near zero but individuals plan their retirement on their savings based on a real return of 5 percent p.a. (low compared to the rate many investment advisers talk about). They are going to have a low-income retirement relative to their working-age income and their plans (their New Zealand Superannuation benefit is not going to grow much either).

They may convince themselves they can get a higher return by investing in high risk schemes. But not everyone can get a higher-than-average return on their investment. Ergo, some are going to get lower returns. In a low-growth, low-return economy some of those involved in risky investment are going to lose a lot of their savings. (Not you of course, someone else.) People who lose their savings are usually incensed, forgetting that it was they who decided to invest in high-risk schemes. That some schemes proved fraudulent or near-fraudulent heightens the anger. But other investments fail through bad luck or events outside the control of the investment manager, especially if they were betting on higher growth rates than the actual outcome.

The same trap applies to business. If their plans are based on expected growth and there is long-term stagnation, the firms will over-commit themselves and fail. That does not mean there are no business opportunities during secular stagnation – picture theatres were built during the Great Depression – but there are fewer.

Similarly for government investment, except that failure results in higher taxes or public debt. It is fashionable to argue the case for public infrastructure but the underlying case is a cautious one. There is a need for catchup of a backlog, and some new infrastructure may be vital to wellbeing – addressing the three (fresh, waste and storm waters), for instance. But such investment gives a financial return (in higher tax revenues to the government) only if there is economic growth.

So, any transition from the high material growth rates of the past two centuries to lower (or zero) ones will not be easy. Possibility the usual economic rules of the last eighty-odd years are going to be stood on their head posing quite a challenge.

How We Might Cope with Slow Economic Growth in the Future?

Thinking about the economic future one cannot avoid making some assessment of the likely course of material economic growth. If it is going to be slower than rich countries have been used to – there may even be secular stagnation. How are we to cope?

Chapter 2 argued we should shift the economic focus from material economic growth to wellbeing. But that does not mean that all the traditional concerns have become obsolete.

People still need jobs as a part of their involvement in their community and sense of worth. Thus avoiding stressful unemployment (which includes underemployment) and promoting quality job creation should be an important public policy priority.

Inequality is dealt with in a later chapter. There will be significant gains in aggregate wellbeing by lifting the relative incomes of those at the bottom. Economic growth which fails to change the relativities is of little relevance.

Diversity should be celebrated, with tolerance and respect. No group is privileged, but attention should be paid to the smaller ones. I have spent my entire life as a minority of one – so have you, if you have an independent sense of your self-worth. There is a current fashion to promote a society based on love. That seems to me to be a bit excessive in the case of some people, but we should be kind to them.

At our level of affluence, material consumption is not as important as the quality of life. That gives great significance to health care in all its dimensions. That care needs resources (as well as kindness). But we need to break away from assessments like ‘adopting my policies is worth so many billions of dollars’ which plays into the hands of those overemphasising GDP.

The same approach should be applied to safety – both personal and physical. It is not an area I know a lot about, although the law and order brigade seems to know even less.

Opportunity, or as Amartya Sen describes it, achieving capabilities is a key element of the good society and of individual wellbeing. A crucial element of that capability for each of us is creativity and achievement. There are so many social impediments to many New Zealanders being able to achieve what they are capable of. That is discussed in future chapters including the way education system has been captured by commercial considerations aimed at lifting GDP. The result is that people’s access to developing their capabilities has been limited. It is a repeat of an earlier theme. Prioritising material output in an affluent society damages wellbeing.

Finally in the list is sustainability. Earlier generations bequeathed to my generation opportunity and wellbeing. We owe the same to later generations.

Observe that the above list of objectives applies whether the affluent society is in a growth boom or in secular stagnation.

The list does not rule out the market economy, nor the need for a high-level – but sustainable – material output. But we should not confuse any analysis of growth with wellbeing; as the Maslow hierarchy makes clear, we should not be obsessed with GDP in the way that neoliberal policies have been.

Nor does the analysis reject an honourable role for business. It contributes to wellbeing in a number of ways. This is its purpose, not the pursuit of material output, as sadly Rogernomics thought. Business needs to be humble about what it can do, as we all need to be.

The Return of the Policy That Shall Not Be Named

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Industrial policy is once more on the agenda of many governments.

There is a long history of Industrial Policies (IP) aimed at promoting a particular sector of an economy. When Henry VIII abandoned Roman Catholicism, the practice of eating fish on Fridays lapsed. The change devastated the English fishing industry. Edward VI, Henry’s son, reinstated meatless days ‘for the benefit of the commonwealth, where many be fishers, and use the trade of living’. There were many sector-promoting proposals in nineteenth-century New Zealand (such as prizes for finding gold or starting a new industry like export butter).

As the reach of the state broadened the sectoral interventions increased. By the 1970s they were at the point that no-one had the foggiest idea of their impact. A consensus began to form that they had to be rolled back.

One reason was that it was far from clear that the complicated plethora of interventions of the 1970s was doing anything to benefit the overall economy. During the Uruguay Round of trade negotiations, the New Zealand government agreed to reduce protection on strong beers in exchange for better European dairy access. The repercussions impacted badly on Hastings brewery workers even though they did not produce strong beers, Auckland steel workers who produced the beer cans, and Huntly and West Coast miners, who produced the coal to make the cans. The Taranaki and Waikato dairy sectors did well though.

A second reason was that industrial policies had to be rolled back as a part of our international trade deals. If we wanted our trade partners to grant more access to their markets, we had to reciprocate by lowering our barriers, including our industrial policies.

A third reason was that the policies often bordered on corruption. You see this in Trump’s America. A group from a particular industry contributes to funding one of his grandiose schemes – say the White House Ballroom – and shortly after, Trump implements an executive order which benefits the industry. I don’t think such instances were as widespread in New Zealand, but a complication here is that a sector often consists only of a single business, so a sector intervention frequently benefited a single business which may – or may not – have been providing political support.

By the early 1980s there was a widespread – but not unanimous – view that the government should wind back and rationalise its sectoral interventions. The Rogernomes who captured power went further than that consensus, when they eliminated as much intervention as they could.

Their extremism could be vicious. While I was director of the NZIER, I wrote a Listener column arguing that the current interventionism was excessive and needed to be wound back. (You can read it here.) It was a dangerous sentiment to go public with when Muldoon was bully Prime Minister. However, those in charge of Treasury research funding said that because of the column did not go far enough by denouncing the Muldoon policy regime, the NZIER would never get any more research funding. They kept their word. (Muldoon never retaliated.)

The Rogernomes were not alone. The conventional wisdom – the ‘Washington Consensus’ – which dominated world economic policy, was so antagonistic to IP, that key institutions suppressed the use of the term ‘industrial policy’ and repressed those who advocated it. IP was outside the Overton window – the spectrum of topics and arguments which were acceptable to those who controlled the discourse. ‘Horizontal policies’, such as tax reductions, infrastructure extension, more permissive business regulation and subsidisation of R&D growth were permitted, even if IP, which changed the sectoral composition of production, was not. (The upskilling of the workforce is a horizontal policy but it has been given little priority in English-speaking countries; I leave others to work out why.)

Not everyone adopted the Washington Consensus. East Asian governments, in particular, exercised economy-wide foresight about future sectoral growth opportunities and gave support to the sectors important for future growth. They implemented measures to promote them combined a shrewd balance of government and market drivers.

The Washington Consensus predicted that this strategy would lead to failure. However, the dissenting economies thrived, as is well illustrated by the success of the Chinese economy whose state-led ‘capitalism’ is the central factor in the deep structural change in the world economy; Chinese firms have often out-competed those in the West.

The rhetoric of the conventional wisdom in affluent economies now accepts, grudgingly, that some industry policies have a role. A recent IMF report concluded that ‘if industrial policy is pursued, it should be grounded in clear diagnostics of market failures, include mechanisms for regular evaluation and re-calibration, and be embedded in a strong institutional and macroeconomic framework. Market discipline should be encouraged through vigorous domestic and international competition.’ (It is not a very different sentiment from my Listener article, even if it was unacceptable to the Treasury neoliberals or Muldoon.)

The notion of ‘market failure’ used here is a bit naive. No market works perfectly so every market fails to meet the benchmark of the ideal. Taken superficially, the IMF argument that IP can be justified to deal with ‘market failure’ is an open invitation for a promiscuous industry policy. It is, of course, not their intention.

We can learn from the Chinese experience. They identified key future industries which, as the Western experience suggests, the market undervalued – including solar energy, electric vehicles and rare earths – and gave them assistance. (On the other hand, the Western markets have done better with computer chips – in part arising from the demands of the computer gaming industry – and AI, thus far.) The Chinese success has stimulated Western IP partly out of fear that the Western’s defence industries – and hence its military capacity – are being compromised.

A second major concern was the disruption of global supply chains suggested some – but not total – retreat from relying on international sourcing. The Washington Consensus implicitly assumed that there was an orderly world economy.  Even neoliberals have to accept increased uncertainty about exports and imports reflecting the unreliability of global trade caused by geopolitics and compounded by climate change and various shocks. This reframing of ‘Make or Buy’ decision by firms and economies, making them more open to ‘heterodox’ policies.

The last Productivity Commission report looked at the resilience of supply chains and found that countries with strong private-public institutions are best prepared to anticipate, prepare, absorb and recover from shocks; small countries with public-private ecosystems do better both in seizing new opportunities and responding to shocks. Sadly, in contrast to Denmark, Sweden, or Singapore which maintained reasonably transparent public-private institutions throughout the neoliberal era, New Zealand has lost the skills of intervening.

While we may learn from the Chinese experience, New Zealand should not naively imitate it. Size, location and resource base puts us in a niche in the world economy. Some obvious areas of our interests are value-added processing, where, despite talking about it for decades, we still underperform, and 3D manufacturing, which has the potential to reduce our isolation.

But New Zealand faces a serious implementation problem. One part of it is the lack of skills and experience needed to design the policy tools and implement them with appropriate accountability. The neoliberals, fronted by ACT, closed down the Productivity Commission, which was inching towards extending the Overton Window to include Industry Policy. Despite market intervention making a significant contribution to the historical success of the New Zealand economy and to the success of contemporary East Asian ones, there are parts of the New Zealand government which still insist on only ‘horizontal’ support measures, especially ‘less business regulation’.

A second issue is that New Zealand has no well-institutionalised coalitions between state agencies dealing with the production side of the economy and business, trade unions, universities, think-tanks engaged in the same activities. Yet such public-private coalitions are vital for formulating and implementing – and terminating – IP.

Is one surprised that the New Zealand economy has not been doing well?

Planning for the Future

This entry was posted in Environment & Resources, Governance, Pundit on by .

It is more than a four-letter word exercise.

In 1986, the government commissioned a review of science policy chaired by ex-Governor General David Beattie. Among the agencies it interviewed was the Treasury, in the course of which Beattie asked whether it had a science plan. The Assistant Secretary of the Treasury spluttered; he was clearly unwilling to use that four-letter word, at least in polite company.

The short answer was that Treasury did not have a p**n for anything. The neo-liberals thought it was unnecessary, for the market had all the answers. Indeed, Treasury was closing down as much of New Zealand’s capacity to p**n as it could. Some of what was going on was not very good, but some was world quality. Treasury’s actions were not about improving the average quality; it was eliminating p**nning as an integral part of government decision making.

Of course you can’t hand over all the p**nning to the private sector. So when the public sector had to p**n it did it in an ad hoc limited way. For instance, following a 2004 amendment of the Public Finance Act, the Treasury has been required every four years to do a long-term 40-year projection of the fiscal position. This involves projecting the long-term growth rate of the economy which is done mechanically by positing a number. No attention is paid to what will be the future composition of economic activity. It assumes that the growth will happen and that the required businesses – critically, exports – will appear. After all, the market will provide.

It will, but not always in the way that may be expected. There is no compelling theory which says the market will always provide beneficially. Suppose the New Zealand economy cannot produce enough exports to pay for the imports to sustain an adequate standard of living. The market solution is that the mobile – typically the most qualified young – will leave for places where there are more opportunities (probably Australia). The market has provided. But the immobile left behind will be even worse off.

The main conclusion of the long-term fiscal projection is not greatly affected by getting the growth rate projection wrong. The aging population puts a substantial burden on the fiscal position under any plausible growth scenario; a major migratory outflow would just make it worse. Following its 2025 projection, the Treasury has chosen to highlight the conclusion very strongly although it has been evident in every one of the six statements since the first in 2006.

From the beginning a few lone voices tried to draw the public’s attention to the looming danger, but the ostriches ignored the issue. It took even the Treasury 19 years to go public. Isn’t that typical? We do not think about the future in a comprehensive way. When the crisis arrives, we are surprised it has happened, but fail to learn the lesson that we need to think systematically about the future – to p**n.

How many times have we have to suffer crises throughout the country about our fresh, storm and waste waters before we realised that we had a nationwide problem? To what extent do we see the problem as an example of a wider weakness in our governing system (which will not be resolved by yet another redisorganisation)?

Fundamentally, successful p**nning is about the process rather than the actual final figures – all future projections will prove wrong. What is important is systematically thinking through future issues.  A good report shares that thinking, moving it – and the issues – into the public arena. (Alas many of the discussions which follow have not always been useful.)

It is with some relief that one reports of the recent release of the 2026 National Infrastructure Plan (oops, the ‘National Infrastructure P**n’) with its 30-year outlook. I initially thought this column should provide a critique of the plan – perhaps arguing it was more sizzle than sausage (platitudes rather than practicals), but I want to strike a more positive note. After all, p**nning is a reiterative process. You set it down and then realise that it is not quite right; that requires more detail, that something is overlooked. My bet is that the team which pulled it all together are already discussing their next steps (unless they are already being disbanded, which would be typical of the way we have managed such things over the last 40 years).

Instead, let me summarise some key issues. First, the report’s notion of infrastructure covers a diverse range of activities (with recent outlays as a share of GDP and an arrow indicating the direction by which the level is expected to change in the future):

Land transport (1.3% ↓)

Electricity & gas (0.8% ↑)

Water & waste (0.6% ↓)

Telecommunications (0.7% stable)

Education (1.0% ↓)

Hospitals (0.2% ↑)

Public administration & safety (0.9% ↓)

Social housing (0.3% stable)

Other public capital (0.2% stable)

Note that while most of the defined infrastructures are the responsibility of the (central and local) government, a quarter is commercially provided by the private (or quasi-private) sector. Electricity and gas and telecommunications are there because they are ‘network’ industries (as are land transport and waste) but airways and ports are a part of the transport network too.

Network industries are not simple private sector market ones, as is illustrated by the government’s involvement in the LNG terminal and the broadband rollout. Perhaps there ought to be more p**nning in the energy sector, where there is more interdependency than is being allowed for in discussions on the LNG terminal at New Plymouth, the Lake Onslow pumped-storage hydroelectricity project, and the impact of renewables and battery storage.

Second, while most of the discussion is around a central forecast, there will be shocks from natural hazards (such as earthquakes and volcanoes) and from extreme weather (increasingly, because of climate change). There is some discussion in the report, but I would expect that there will be a separate one addressing them (p**nning involves reiterations). A major issue which we are only gingerly addressing – usually by ad hoc decisions when we are not deferring them – is the amount of risk which is to be borne by the private sector and that to be borne by the public sector. (If one is in a flood-prone building who pays when it is damaged?)

The boundaries in the report’s social infrastructure are puzzling. There is social housing; why omit the far bigger private sector? Education covers primary, secondary and tertiary, why not ECE? What is the report saying about private-sector hospitals? What if we had a government which intensified the outsourcing of healthcare even more than the current one? Good p**nning has to be prepared for policy changes.

Another issue is the funding of the future infrastructure. The report divides the funding between user-charges, rates and central government taxes. It is true that any borrowing will ultimately be serviced from these revenue sources but servicing of infrastructure debt can go long into the future. The report touches on borrowing; perhaps it avoids a comprehensive discussion because that is a Treasury concern. The public avoids the issue at its peril.

The report tends to favour moving away from funding public structure with general taxation towards user-charges. I am not uncomfortable with that shift, although there are technical and political issues. Water-meters are probably inevitable. I am more sceptical of comprehensive road-user charges being implemented in the medium future. A Minister of Transport promised them in the 1990s – nothing happened. Indeed, the first time I heard the subject discussed was in the 1960s and hardly anything has happened worldwide since – a few city centres excepted.

That is the problem with policy generally. We ignore looming challenges until there is a major crisis. We then panic. That is why we need systematic comprehensive planning – even if it means swearing in public.

New Zealand First’s Economics

This entry was posted in Growth & Innovation, Pundit on by .

Shane Jones is committed to state-led economic development.

New Zealand First and ACT sit further apart on the economics spectrum than do Labour and National. On other parts of the policy spectrum the two are more aligned, but this column’s focus is primarily on economics and, particularly, the economics of NZF. I leave Christopher Luxon’s future memoir to describe the strains in the coalition government from the differences between the two partner, but he may have even found the tensions helpful. Had he only a single coalition partner – be of it of the far-right or the centre-right – his government would have been dragged towards positions with many of which it would have been uncomfortable.

At its heart, NZF is the inheritor of what can be called economic ‘Muldoonism’. (This is not to say that those who adopt it have Robert Muldoon’s personality or style.) Muldoon’s economic approach was an extreme version of the way the economy had been managed for the previous century when economic development was state led with a high degree of state intervention.

Struggling with unprecedented inflation, Muldoon intensified the use of interventions, but they were always there. Recall that the first wage-and-price freeze in the post wool-price-shock era was supervised by Jack Marshall, who would insist he was an economic liberal although he died too early to give a comprehensive view on Rogernomics; he probably would have sympathised with the market liberalisation but thought it too extreme.

Winston Peters, the only leader NZF has had, is not deeply into economics; his university training was in law, politics and history. He left little mark when he was Jim Bolger’s Treasurer from 1996 to 1998 although he was always alert to the political implications of Treasury recommendations. (In contrast, Muldoon would engage with Treasury advice – and overrule it.) Peters has been happier as Minister of Foreign Affairs. (Perhaps he has been more pro-American under a National-led Government, echoing Muldoon and supported by Judith Collins.)

Peters left the National Cabinet in 1992 and its caucus in 1993 to set up NZF, because he strongly objected to the government’s neoliberal policies – Ruthanasia and Jennicide. That resulted in vitriolic neoliberal attacks. In 2017 he said, ‘Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong. That is why we believe that capitalism must regain its responsible – its human face.’ He is no friend of the socialist left either.

Muldoon equally strongly rejected the neoliberals, but he could not find a way to respond to economic change, given the coalition of interests he depended upon. Peters, born in 1945, is a generation younger than Muldoon, born in 1921. He does not seem to have thought greatly about how to adapt Muldoon’s interventionism to the changing economy, already occurring even when Muldoon was in power.

NZF’s number two, Shane Jones, born in 1959, is almost a generation younger that Peters. He has more of an economics background including earning a Masters of Public Administration from Harvard, advising the government in near-economic areas (such as the environment and treaty settlements) and managing business in the fishing industry. Most of the portfolios he has held – fisheries, infrastructure, regional development, building and construction – have a strong economic component. (He is also currently associate minister of finance and of energy.)

There are parallels between Jones’ ‘fast track’ legislation and the 1979 National Development Act we associate with ‘think big’. While they are not the same, for we have learned much in the five decades since it was enacted, they are in the same spirit. The underlying theme of the state as actively promoting economic development goes back to Julius Vogel and even earlier.

More than anyone else since Muldoon, Jones frequently connects his interventions and subventions – especially those in the regional development portfolio – with the expectation that his party should be politically rewarded for them. Muldoon would applaud the various policies that Jones has promoted; there is no other cabinet minister whose economic policies Muldoon would applaud more (although to repeat, almost all are a progression on Muldoonism – not a replication).

Jones is not alone. Chris Bishop, sometimes canvassed as the next leader of the National Party and one of its most successful cabinet ministers, also approaches his portfolios with a state-led development bent. (Bishop and Jones are social liberals on issues where Muldoon was generally not).

So the more-than-century-old tradition of state involvement in New Zealand’s economic development continues on the right, despite the neoliberal attempt to crush it. (That it continues on the left is more understandable.) Muldoonism was fortified by ‘Rob’s Mob’ – ‘ordinary blokes’ (but there were women); blue-collar conservatives antagonistic to the elite. Their children and grandchildren have succeeded them and are the core of NZF supporters and voters.

I am tempted to draw the conclusion that the ongoing ‘Rob’s Mob’ is evidence of a widely held belief that the neoliberal strategy of leaving development to the private sector has failed. It is not a universal belief; ACT still has its supporters (although some are not unknown to break from their general principles and demand favourable treatment by the state when it is in their interests).

It is hard to identify any period of New Zealand’s history in which the withdrawal of the state from the promotion of economic development resulted in good economic performance. That is true for all the other smallish economies I have looked at. Even large economies get into state involvement – witness the US under the Biden administration, whereas President Trump’s withdrawal of state industrial support is causing difficulties which are temporarily obscured by the AI boom.

At issue then, is not whether New Zealand should have a(n explicit) state-led development strategy but what kind of strategy. My assessment is that Muldoonism had come to an end. Affluence, diversity and choice, new technologies and specialisation, the rise of the service sector, globalisation and increasingly complex supply changes, and resource depletion (including pollution and global warming) make the Vogel approach to state-led development obsolete. There has been a lot of change over the last five decades.

What to replace it with is only partially understood – but it is certainly not ‘do nothing’, nor to go back to Muldoonism. I am not sure that NZF has it right, but at the very least its economic policy means we are reminded of the challenge.

Tariffs as Weapons of Warfare

This entry was posted in Globalisation & Trade, Pundit on by .

How successful are Trump’s measures at making America great again?

War is destructive. It destroys lives, it destroys loved ones and it destroys economies. The victors’ economies suffer because a conquest is not as valuable as the rhetoric portrays and any gains go to only a select few. Even countries which are not invaded suffer because of the sacrifices they make. Those sacrifices may include lives but there are also economic ones. The GDP of a war economy typically rises as all underutilised resources are commandeered but because of the diversion of production into warfare activities – much production simply gets blown up – private consumption does not rise and usually falls.

Donald Trump is not a fan of guns-blazing warfare perhaps because, like many of his generation, he was appalled by the body-bags returning from Vietnam. As commander of the biggest military force in the world, he is happy to use its might to pursue his MAGA ends providing it does not result in too many American deaths. That limits his ability to invade with troops on the ground.

He even seems keen to attack those who thought they were the US’s allies and friends, prosecuting his warfare by other means such as tariffs. But it is still warfare, which means there are economic costs and, as we shall see, many of those costs are borne domestically. While Americans may be largely avoiding body-bags under Trump, they are sacrificing wellbeing.

Trump argues that the cost of a US tariff – a charge on its imports – will be paid by exporters. Both theory and evidence conclude that is not entirely true.

To illustrate, suppose New Zealand were to slap a 50 percent tariff on US exports to it (just kidding). The US exporters would pay the tariff when their product crossed the border. Trump’s NZ equivalent would point to the government revenue it generated. However, the exporter would typically pass the additional cost onto the consumer who would be indirectly paying the tariff; the tariff is an indirect tax levied on things local consumers buy.

There are numerous complications. First, the US exporters may reroute their product through Australia, say, thereby avoiding the tariff. It is not always easy to prevent that subterfuge.

Second, consumers might turn to sourcing the product, say an EV, from elsewhere, say, China. Presumably, the alternative source is more expensive so consumers end up paying more, but there is no additional government revenue.

Exporters dislike such favouring of other suppliers for it cuts into their markets. Hence the grumbling at Trump setting different tariff rates for different countries, especially as the settings seem arbitrary. (By April the US Supreme Court may, or may not, have ruled Trump’s tariff regime as illegal. He seems to be imposing taxes without legitimate authority; the last time that happened in the US, it caused a revolution.)

The third major complication is that consumers may turn to purchasing alternative products. Those products may be made locally or sourced from elsewhere. Consumers would be worse off because they would prefer what they could buy before the tariff was imposed.

The above analysis also applies to US tariffs. The quantitative balance of these effects is not predicted by the theory. It has to be measured. The effective tariff rate on US imports has risen from 2.5 percent to about 13 percent, lower than what Trump announces because of numerous exemptions from his nominal rates. (These estimates do not include the impact of the quotas which many New Zealand food exports face.) A couple of research studies using different methods, both concluded that at least 90 percent of the tariff is paid by US importers and consumer. (Here and here.) The burden of the tariff war is being carried mainly by American consumers.

The burden of the tariffs appears as higher prices. Paul Krugman provides three guesstimates from three independent data sets. All three agree that US prices have risen by about 0.8 percentage points from the Trump tariff regime introduced last April (and repeatedly modified since).

You may think that a 0.8 percent price lift is not significant. But suppose our Minister of Finance was advised that the price level was actually 0.8 percent lower than we thought. She – any MoF – would make sure that the news was on the front pages and batter us right through to the election with the statistic, going on that a median-wage worker would have an extra $9 a week or so in the hand.

(She would expect the RBNZ to reduce interest rates because of lower inflation. But strictly the rise/fall is for one year only. Economists are cautious about what the figure would say about future inflation but note that it may affect inflationary expectations.)

Distancing ourselves, we can take Trump’s tariff policy as an experiment with outcomes yet to be fully worked through. In the interim we can assess it against his predictions. Recall his ‘April 2, 2025, will forever be remembered as the day American industry was reborn, the day America’s destiny was reclaimed and the day that we began to make America wealthy again.’

It has increased the US government’s revenue but by much less than Trump promised. It makes a small contribution to reducing the fiscal deficit which his ‘Big Beautiful Bill’ is generating, by increasing indirect taxes on ordinary Americans to fund major income tax reductions which benefit the rich. (The macroeconomic effects of the BBB are yet to come through; generally economists expect them to be inflationary and to undermine the integrity of the US monetary system. They expect it will result in higher nominal interest rates, another way in which many ordinary Americans will be paying for the tax cuts which benefit the rich.)

Trump promised more manufacturing jobs. There has been a long-term decline in the US with some stabilisation in numbers in recent years. However, since Trump’s ‘Liberation Day’ tariff package, the decline seems to have recommenced.

Is Trump making America great again? It seems likely that the tariff and other measures Trump has taken has diminished America’s long-term (already diminishing) authority in the world, as countries turn away from the US. As well as being costly to Americans, the economic warfare is failing.

But at least there are no body-bags.

Sizzles and Sausages

This entry was posted in Political Economy & History, Pundit on by .

There are politicians who are more than a comms team.

Prime Minister Geoffrey Palmer was not doing well in 1990, so he announced his government would halve unemployment. That would have been an impressive achievement – then the unemployment rate was about 5 percent – so much so, it gave the government a temporary boost in the polls. Economists, curious as to how the government intended to do this, requested the background papers. There were none. As best as we could judge, the PM’s comms team, desperate to improve the government’s image, invented the promise but had no idea how to implement it. That was a task to be handed over to someone else.

Politicians’ promises which sizzle without sausages have continued ever since. (And, no doubt before; the 1990 one was so spectacular it wipes the memory of before.) Today, there is, however, a paradox. Discussing the issue with my Labour-aligned friends, they ask me whether I meant Labour’s leader, Chris Hipkins; among my National-aligned friends they assume I am referring to Christopher Luxon. Oh ye of little faith. I am referring to the entire political scene.

Yes, some of the parties have made promises which could be effectively implemented. (I was discussing a capital gains tax, which Labour is now promising, in the 1970s; in 1990 I suggested to a National Party conference they should pay more attention to household saving, and at last they are thinking about it. One is not overwhelmed by the rate of genuine policy innovation.)

But politicians’ comms teams – which manage their images – are dominating the political space. Think of the cabinet ministers in the Key-English and Ardern-Hipkins Government who seemed important at the time but left little achievement behind them. Can’t remember them? Exactly.

Currently the New Zealand political theatre is a contest of one side which makes promises which never seem to be implemented (or if so, extremely ineffectively and very slowly) and which are criticised by the other side which does not offer an effective alternative. Even the supporters of each side seem to be getting impatient.

To be more positive, just sometimes a politician offers a bit of sausage which is a pleasure to report, even if one’s sausage taste is different.

Thus it is with Craig Renney’s booklet The Good Economy. Grant Robertson describes Renney as a ‘gifted economist’ an assessment with which his profession would agree. (He went on, ‘and a rare breed, a left-wing one’, which tells you how out of touch Robertson was; I could give him a list – I could also give a list of competent right-wing economists were he that way inclined.) As well as working for Robertson, Renney has worked for Treasury, MBIE and the RBNZ. He is currently director of policy at the NZCTU. (His background includes his father losing his job following a Northumbrian mine closure, a redundancy tough on his family. Renney has been here since 2012.)

I described Renney also as a politician. He is vice-chair of Labour’s Policy Council and is a Labour candidate in this year’s election with a good prospect of winning either an electorate seat or list one. His booklet deserves to be taken seriously. It may be very influential on the next Labour Government even if it is not (yet?) current Labour policy.

The booklet includes chapters on ‘political polarisation, inequality and instability’, the ‘role of the state’ and ‘the rise of the dual-income and the working mother’, so it presents an analytic foundation. Renney brings his themes together in the final chapter with four key recommendations:

            – an Inflation and Incomes Act;

            – a Decent Work Act;

            – a Ministry of Green Works;

            – a new fiscal approach: a national investment bank, a state-owned default KiwiSaver scheme and a capital gains tax.

Each is elaborated. They included an extended version of the Social Unemployment Insurance scheme which Hipkins dumped in his policy bonfire of early 2023.

It is a coherent program which deserves consideration. One’s natural inclination is to write a Treasury critique of the proposals, for they will not all be as practical or as effective as hoped. Even Renney writes, ‘these policies might seem aspirational and perhaps radical – particularly in their terms of a more active state’. He goes on, ‘none of them would be considered unusual in many countries we compare ourselves with’. Perhaps, but many compare us with only a very narrow group of countries, excluding the European social democracies which Renney has in mind. (To interpolate; what is intriguing is that those economies, typically members or associates of the European Union, have been able to maintain extensive welfare states despite being very open economies. I do not deny that they are under strain, but there is no economy in today’s world which is not under strain; if there was it would not have to employ economists and would soon do things which put it under economic strain.)

As I have indicated, you may not personally like the taste of this sausage. (I favour a more active state but, frankly, I am not sure we have the capacity in the public service to deliver it, given the way we have been damaging its ability to function effectively.) But at least it is nutritious enough to chew upon. Better that than the expectation that we will be invited to a 2026 election barbecue and you turn up to it sizzling away but nothing on the grill. Perhaps they want you to bring your own sausages.

I wanted to illustrate the column with a picture of Renney at a barbecue, but he has no comms team to supply one.

Where is the World Going?

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on by .


Canadian Prime Minister Mark Carney outlines an architecture

For some decades the United States of America domination of the world has been falling. This is most obvious in economic terms. The US is no longer the world’s largest economy. It is easy to say that China is because of it has larger a population but caution in the comparison is necessary. Comparing GDP per hours worked, the US is seventh behind Belgium, Denmark, Ireland, Luxembourg, Norway and Switzerland. Americans have a higher per-capita GDP because they work more hours or, put the other way around, many Europeans use their affluence for leisure.*

But it is not only economics. Think of how many international organisations are now being undermined by the US because it can no longer get its way in them. While the US has done some generous and noble things over the last 85-odd years, its self-interest was always there. These days its actions are more likely to demonstrate self-interest without much generosity or nobility.

It is true that the US remains the world’s largest military power, but its loss of economic superiority is making that hard to sustain. Donald Trump implicitly admitted it when he demanded Europe increase its military spending, acknowledging that the US can no longer share the burden in the way it once did. As this column is written, an American carrier task force has steamed from the West Pacific to the Middle East in order to threaten Iran. Does that not mean that the US can no longer sustain contemporary operations in the two theatres? (As if to answer, the US has just announced it will be stationing fewer troops in Japan and South Korea.) The US once had 17 military bases in Greenland; today it has one.

The US dollar still dominates the international financial system, but yet again its role is diminishing. Its share of the currency reserves of the world’s central banks is falling, while the euro share is rising. The withdrawal from investing financially in the US may be accelerating. Most switchers emphasise that they are worrying more about the burgeoning US budget deficit – a sign of fiscal weakness – than politics.

The expectation in the past was this decline of US dominance would be steady but slow. China’s rising significance would be offset by India – with its population growth and greater productivity gains – becoming globally more important, while the EU would slowly – oh so slowly – get more coherence in its governance.

The expectation was that the rule of law would continue to underpin the world order. Trump has repeatedly and unashamedly flouted that framework, instead pursuing ‘might is right’ while overlooking that the US is no longer as mighty as it once was. Arguably, its current apparent strength comes from everyone else being unprepared for such erratic aggression.

It was not Trump’s intention to accelerate the US decline. Its consequence has been that China’s significance has been increasing more rapidly than expected. The authority of the EU and Indian offsets have not grown as quickly. The lack of coherence in the US strategy is illustrated by Trump imposing higher tariffs on India than on China, so India is trying to reset its fraught relations with China. The guests of honour at the 2026 Indian national day were from the EU.

It is difficult to predict the future world. Economists struggle to explain the workings of a market with four major players; markets do not have the added complication of politics and the military. However, the immediate new scenario is a duopoly of China and the US. Duopolies are easier, but still difficult, to analyse. How will the rest of the world respond, mindful of ‘whether elephants make love or war the grass gets crushed’.

Groups of countries are beginning to organise themselves. That was a popular interpretation of the outcome of the Davos World Economic Forum. Trump went a step too far over Greenland and the Europeans (and the US bond market) resisted. Taco Trump retreated. (Taco: Trump always chickens out.)

I am not going to predict the next political steps, especially as they depend on an erratic Trump. But we can try to think what the new architecture might eventually look like.

The Davos speech by Canadian Prime Minister Mark Carney, who has been the governor of both the Canadian and British central banks, was widely acclaimed for setting out the architecture issue. His critical point was that ‘nostalgia is not a strategy’.

Carney told a story by Czech dissident Václav Havel. A greengrocer has a sign in his window: ‘Workers of the world, unite!’ He does not believe it. No one believes it. But he places the sign anyway – to avoid trouble, to signal compliance, to get along. And because every shopkeeper on every street does the same, the system persists. Havel called this ‘living within a lie’. The system’s power comes not from its truth but from everyone’s willingness to perform as if it were true. And its fragility comes from the same source: when even one person stops performing – when the greengrocer removes his sign – the illusion begins to crack.

Carney argued that it was:

 ‘time for companies and countries to take their signs down. For decades, countries like Canada prospered under what we called the rules-based international order. We joined its institutions, praised its principles, and benefited from its predictability. We could pursue values-based foreign policies under its protection. We knew the story of the international rules-based order was partially false. That the strongest would exempt themselves when convenient. That trade rules were enforced asymmetrically. And that international law applied with varying rigour depending on the identity of the accused or the victim. This fiction was useful, and American hegemony, in particular, helped provide public goods: open sea lanes, a stable financial system, collective security, and support for frameworks for resolving disputes. So, we placed the sign in the window. We participated in the rituals. And largely avoided calling out the gaps between rhetoric and reality. This bargain no longer works. Let me be direct: we are in the midst of a rupture, not a transition.’

Trump was infuriated. He immediately revoked the invitation to Canada to join his Gaza ‘Board of Peace’, which is probably not of great significance to anyone other than Trump’s acolytes (a cruder writer might call them ‘bum-lickers’). Then he threatened to raise tariffs on Canadian products not covered by their free trade agreement (to be renegotiated this year) by 100 percentage points (effectively prohibiting Canadian exports to the US in those products) using the excuse of the Canada-China deal which he had earlier praised. The fury is understandable, given that geopolitically Canada and the US have been close – closer than even Australia and New Zealand. The prohibitory tariffs would just as brutally penalise US consumers as Canadian producers so, like as not, TACO will trump Trump.

That does not point to the new international architecture. Getting to it may be a bit like getting agreement from a herd of (frightened) cats. Carney listed the steps Canada is taking:

            – doubling defence spending by 2030;

            – diversifying abroad;

            – pursuing variable geometry with different coalitions for different issues, based on values and interests. (On Ukraine, Canada is a core member of the Coalition of the Willing; on Arctic sovereignty, it stands firmly with Greenland and Denmark.)

            – an ‘unwavering’ commitment to Article 5 of the NATO treaty agreement that an armed attack against one member is an attack against all;

            – forming a buyer’s clubs for critical minerals;

            – cooperating with like-minded democracies to ensure that AI does not force Canada to choose between ‘hegemons and hyperscalers’;

            – championing efforts to build a bridge between the Trans-Pacific Partnership and the European Union, creating a new trading block of 1.5 billion people.

New Zealand may take a small bow at his CPTPP-EU proposal. While it kept the required sign in its shop window, it has long been aware of how vulnerable it is given its size – Canada’s economy is about twelve times larger than New Zealand’s) – and position – David Lange famously described it as ‘a dagger pointed at the heart of Antarctica’.

So while supporting the rules-based world order as it appeared (keeping the notice in the window), New Zealand has pursued a backup policy of ‘open plurilateralism’ in economic relations. The noun is an alternative to ‘multilateralism’ (all countries) and ‘regionalism’ (New Zealand is hardly in any economic region). ‘Open’ is the notion that each deal is designed to enable others to join, as illustrated by Britain recently joining the CPTPP.

The CPTTP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) is perhaps New Zealand’s greatest contribution to this strategy (despite the US not finally joining). Success has many fathers but New Zealand was there and driving at the beginning. I recall my scepticism when Brunei, Chile, New Zealand and Singapore signed the first Trans-Pacific Strategic Economic Partnership Agreement in 2005. (What were these geographically diverse pipsqueaks doing?) It has evolved into a 12-member multilateral trade agreement covering more than14 percent of the global economy.

What Carney has in mind is not clear. Many CPTPP members already have free trade agreements with the EU. The economic barriers can be reduced (but don’t expect significant gains in dairy trade). What at this stage is critical is that New Zealand will be at the same table as 38 other countries which cover around 28 percent of the global economy. Add in some EU associates and it will be a kind of UN of mainly developed economies; the US will not be there.

Where this leads is uncertain. But as the (American) folk song says ‘step, by step the longest march can be won’.

* There are other European nations with hourly productivity close to that of the US. The EU economy is almost as big as the US economy, but it has a bigger population.

Central Bankers Club Trump

This entry was posted in Governance, Macroeconomics & Money, Pundit on by .

Why we want the Reserve Bank to operate independently.

Minister of Foreign Affairs Winston Peters was wrong to criticise Governor of the Reserve Bank of New Zealand, Anna Breman, for cosigning a statement with 14 other heads of other central banks (plus two from the Bank of International Settlement). The statement expressed support for the principle of independence of central banks and solidarity with the Federal Reserve System and its Chair Jerome Powell.

The statement was

‘We stand in full solidarity with the Federal Reserve System and its Chair Jerome H. Powell. The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve. It is therefore critical to preserve that independence, with full respect for the rule of law and democratic accountability. Chair Powell has served with integrity, focused on his mandate and an unwavering commitment to the public interest. To us, he is a respected colleague who is held in the highest regard by all who have worked with him.’  

Peters said that the RBNZ ‘has no role, nor should it involve itself, in US domestic politics’ and urged Breman to ‘stay in her New Zealand lane’ and focus on domestic monetary policy. He cannot have been fully aware that the heads of central banks belong to one of the most exclusive clubs in the world. Like many such clubs, most of the time it is about conviviality, gossip and respect, but during an international monetary crisis it really matters.

During the Global Financial Crisis there was a threat of international liquidity becoming totally jammed which would have meant exports, imports and international debts could not have been paid, and then, well who knows … The club dealt with the threat by currency swaps which, in our case, enabled the central banks to exchange NZ dollars and US dollars, giving us the liquidity we required (although, as it happened, we did not have to use the facility). The personal knowledge and respect generated by the club meant the deals were done efficiently and quickly (‘instantaneously’ compared to most international negotiations). Those swaps unwound the potential monetary catastrophe.

So the statement was only tangentially about American domestic politics. It was about the international monetary system. Any domestic policy side was because the US dollar remains at the centre of both. Mind you, Trump seems to confuse the two. If there was a ‘domestic’ purpose of the statement, it was each governor signalling to their government not to get politically involved in operating a central bank (although Peters failed to get this point).

Breman is probably the newest member of the club; previously she would have been, as the First Deputy Governor of the central bank of Sweden, an associate member. By signing the statement, she affirmed her membership. (Peters would have had a justified gripe, had she unilaterally made the statement. There also seems to be an issue about when she advised her Minister of Finance of the signing; the ‘no surprises convention’ is so ministers are prepared when journalists raise a matter with them.)

It was not just a political decision. Breman personally and profoundly believes in the necessity of central bank independence. As do almost all New Zealand economists who recall the Muldoon years. The then Prime Minister and Minister of Finance, Rob Muldoon, had a practice of telephoning the Governor of the Reserve Bank (as well as the chief executives of the commercial banks) directing them as to what their interest rate settings should be.

A political dimension is very disruptive to money markets, which have to make complicated decisions about the future. Such uncertainty leads to higher interest rates which really reflect the poorer efficiency of the resulting monetary system.

That is why in the 1980s, after Muldoon lost power, the Reserve Bank of New Zealand was given statutory operational independence. Nowadays, the government sets its objectives and leaves the operational pursuit of those objectives to the Bank’s expertise and judgement. The government may only communicate its requirements in writing which is tabled in Parliament. (Such is the statutory rigour that Ruth Richardson relates in her memoir that when she was Minister of Finance, she got a legal opinion as to whether she could dine with Governor Don Brash – they were old friends; he was appointed to the position before she became minister.)

Other central banks will have slightly different arrangements to ensure their independence.  (The American Federal Reserve Board, for instance, has a majority of members not appointed by the President.) One can support the principle of an operationally independent central bank without agreeing to the objectives it has been given or to the judgments it makes applying them. (Because these are technical issues, politicians tend to be more personal in their criticisms.)

The point is that politicians – including Muldoon and Trump – are not competent to make those judgements, any more than they are competent to fly a plane. It is you, the passenger, who target your destination by your choice of plane; the pilot operates gets you there. (Coupling Muldoon and Trump does not mean they behave similarly, although both have a penchant for interest rate controls. Muldoon’s directions were for short-term electoral gain, never for personal aggrandisement.)

Once it was claimed that the Reserve Bank Governor was the most powerful man (as he was in those days) in New Zealand, confusing the destination and the piloting. The nonsense ended when Governor Brash stepped down to go into Parliament with the ambition to be prime minister.

I suppose Peters made his criticism partly because he thinks he has to keep reminding us that he is in charge of foreign affairs (although he is subject to collective Cabinet decisions). Additionally, Peters – and everyone else – is anxious that New Zealand does not to come to Trump’s attention; keeping a low profile helps. That is a sensible judgment given that Trump bullies everyone and the smaller you are the easier it is to bully. However, Breman was low on the list of signatories. (That may reflect her assenting at 3am, presumably a little sluggishly.) Given Trump’s notorious lack of focus, he would have given up reading the statement before he got to her name. He is probably much more concerned with the criticism of the chief executive of JP Morgan whose line was similar to the central bankers’ statement. Clinton adviser James Cargill, said that if there was reincarnation, he wanted to ‘come back as the Bond Market. You can intimidate everybody.’

Addendum. Since the column was posted, Breman has apologised to Peters. I have only seen one news report but not the official statement, so I am unable to assess it. In any case, I stand by the column’s conclusions.
Peters may have inadvertently raised New Zealand’s profile in the Trump administration. It is quite possible that had he said nothing, Breman’s cosigning would have been unnoticed. However, the US embassy would be duty bound to report the interaction to Washington. Not that Trump would notice this either.
About the same time Peters praised the United States for withdrawing from the World Health Organisation, questioning whether it is worth New Zealand’s continuing to support it. This may be NZF policy or be Peters trying to show support of Trump. Hopefully he will be pressed on the matter.
Brian.

Trading with India

This entry was posted in Globalisation & Trade, Pundit on by .


Free trade deals can be complicated; so is their analysis.

We must celebrate the achievement of a Free Trade Agreement with India, but only the uninformed attribute its success solely to the current Prime Minister, Christopher Luxon, and to Todd McClay, the trade minister. The negotiations took a couple of decades involving many more politicians. Even less recognised – and more crucial – have been the diplomats who have been slugging it out over the years dealing with intricate details, spending their lives flying between the countries and in anonymous hotels. Salute to them too.

With a population smaller than even a middle-sized Indian City, New Zealand was never going to be in the forefront of candidates for India’s trade deals. Australia’s FTA came into force more than three years ago, and many larger countries have already settled too. We were not high on India’s list partly because we are tiny, partly because we have not had a lot to offer in exchange. That is why a major concession by New Zealand has been better visa access for Indian workers.

(When the neoliberals abandoned tariffs in the 1980s and 1990s, they gave up what could be traded in international trade deals. They thought there would be significant gains from the abandonment. There wasn’t. They expected other countries to see the benefits and follow suit. They didn’t. Their response has been likened to someone stripping naked, saying ‘follow me’. Everyone looks at the sight and puts on another jumper – in the case of Trump, full armour.)

One of the things holding up our deal was, as in the case of others we have negotiated, an unwillingness to give concessions to our dairy industry. We reluctantly gave up insisting on the inclusion of dairy (there are some very small concessions).

There is a view that this obduracy by India reflects the significance of cows in Hindu culture. The economic analysis is more insightful, relying on a more subtle interpretation of the ‘gains from trade’ analysis than the ideologists allow. The static theory shows that the elimination of protection increases effective output. That only results in an unequivocal increase in welfare if the losers are compensated by the winners.

Often the static gains from a trade deal are so small and the costs of the transfers to compensate losers are so expensive that the compensation does not happen except that the changes may be phased in, giving the losers time to adjust. But where the losers are numerous or politically powerful, their interests may block a deal.

Around 650m Indians depend on agriculture – that is more than there than the entire populations of any other country – China excepted. (India has an estimated 75 to 80 million dairy farms, which are predominantly small-scale, family-owned operations, typically with two to five cows or buffaloes.)

Well over 500m of rural dwellers suffer economic distress. India has no easy means of compensating them if its food sector was opened to international competition. Hence its reluctance to negotiate trade deals which compromise its farmers, even if the urban population would benefit – as it would have, had they access to high-quality, cheaper, dairy products.

The static economic analysis tells only a part of the whole story. There are two bigger benefits from trade deals. The first is international diversification. Currently, we are overly dependent on the Chinese market. We learned the lesson many years ago when we were overly dependent upon the British market. That went well when Britain boomed but when it suffered, the New Zealand economy suffered with it. We also found that economic dependency intensified political dependency. (China’s share of our exports is about half what was Britain’s share in the 1960s, when our dependence on it began to collapse – it had been even higher.)

Over the last twelve months, Trump has demonstrated that the world has been too dependent on the US. For some reason – the analysis of which defeats rationality – he has been been pushing everyone – New Zealand included – into China’s arms. India – the fourth largest economy in the world after China, the US and the EU – has become more responsive to trade deals as a part of this changing political economy. We, and many others, have been happy to take up the opportunity.

India is also keen to open its economy as a part of a modernisation. India focused on self-sufficiency when it gained independence. It is an easier strategy for such a large economy, but it failed to lift its productivity in the way that China lifted its performance, following Deng Xiaoping’s opening it to the global economy four decades ago.

The modernisation process depends on the circumstances of the economy, but underlying it there is the second reason for trade deals. Businesses in an open economy are under pressure to perform better because of competition from other international businesses; meanwhile, they are also given opportunities to perform better. (The reality means that poorly performing businesses wither.) These are the dynamic gains from a trade deal which, in the long run, are far more important than any static gains.

There will be resistance to the Indian FTA (as there is to every trade deal). As the economic analysis says, some will be made worse off. Others may object to the type of economic growth it will generate (for instance, it may put extra pressure on the environment) but that is really a matter of how we handle economic growth, not especially about an open economy.

The third doubt is that the open economy means a loss of sovereignty. All trade and exchange involves some loss of independence. You have less personal sovereignty if you get your veges from the supermarket. There is, however, a paradox in that an FTA which passes some sovereignty to India reduces the power of other economies, such as China and the US, over us.

The main leader of the resistance is likely to be Winston Peters. One is not sure how really serious he is. Is he merely trying to gather the grumblers under the New Zealand First umbrella? (One can think of instances where he did little in office to support the grumblers who voted for NZF.) Would he veto the deal if he could? Peters is widely optimistic if he thinks that he could take the current proposed FTA back to the Indians and make a significant change to it (without their extracting more concessions in return).

Labour is likely to support the deal when it comes before Parliament (although the other leftish parties will not). That is a consequence of the other, often ignored, side of negotiating a trade deal. There is always a considerable effort by the officials and the politicians to discuss the issue with domestic pressure groups and the Opposition. Labour has already probably indicated that it will support the deal while, of course, saying that had they been the government they would have negotiated a better one.

Were New Zealand significant in the world economy, the world would need a NZ-India FTA. It needs a more modernised India, as indeed do the poor of India who have seen a modernising strategy lifting hundreds of millions of Chinese out of gruelling poverty. The world, and New Zealand, need a more economically successful India to offset the economic power of China, the EU and the US. Four bullies are better than three.

It Aint Easy Being Small

This entry was posted in Business & Finance, Literature and Culture, Political Economy & History, Pundit on by .


New Zealand is a small, isolated nation and needs to design itself accordingly. We should avoid uncritically imitating larger nations.

Among the news websites I read is a British daily which once a week interviews a local writer on the books they grew up reading and which influenced them. That’s fifty-odd a year; most interviews are of high quality – rarely are the subjects mediocre.

If a New Zealand news-site were to do the same, it would struggle, on a per capita basis, be able to identity such four attractive writers a year; the remainder would be mediocre – which my thesaurus couples with ‘banal’, ‘indifferent’, ‘pedestrian’, ‘undistinguished’ and ‘uninspired’. Fortunately, no local news-site tries but there is a tendency to assume that many more of our writers have achieved levels as good as that British fifty.

True for our politicians. It is unreasonable to assume that we have the same number of competent ones as larger democracies. Not surprisingly Stuff recently concluded that the majority of a New Zealand cabinet is very average. (Even so, many would think that the grades were generous or Stuff’s average standard was low.) That has been true for just about every cabinet I can recall. Yet we pretend that most New Zealand politicians are of some ability.

That is also true for our business leaders. This is not to argue that we have no world-class writers, politicians or business leaders (or economists for that matter), but we have far fewer than we pretend. With 46 weeks or whatever to fill in, we upgrade a lot of mediocrities to a significant eminence they do not deserve, debasing the currency.

As M. K. Joseph wrote 70-odd years ago, we ‘worship the mean, cultivate the mediocre.’ But by doing so, we downgrade our exceptionals and discourage striving to achieve better, insulating our judgement from international standards while pretending we are up there with the best.

Sport offers a different approach. We do not select politically correct mediocrities for our national teams. Because we care about sport, we do relatively well (and women and the disabled seem to do even better because we have put more effort into promoting them relative to other countries).

In some sports we are near the top – rugby for instance – because most other countries do not play them to the same extent. Soccer is perhaps the most universal sport (if we allow for a relative lack of interest in the US – it’s growing). I am not uncomfortable that the All Whites are currently 87th and the Football Ferns 35th in FIFA’s world rankings, given the nation’s size. (Of course we have had some international class soccer players, but they play overseas.)

It’s not just population. NZ soccer has hardly a competitive local league. Or to go back to the opening example, it would be difficult for a NZ journalist interviewing four excellent writers a year to hone the skills the British equivalent does on fifty. Moreover, there are at least a dozen capable British journos pressing to do the job instead.

High quality is not merely innate ability but there also has to be an environment which cultivates excellence. It is a miracle that we have world-class writers and businesspeople and even politicians who live here. On the other hand, if we promote mediocrity we will achieve mediocrity; the best will tend to emigrate.

Sadly, the mediocre often have the power to block excellence. When did you see an average professor make way for an up and coming academic? It is not only that we have little career development for public servants; some get blocked and go overseas, while we import some not very successful chief executives. (The quality of management is probably a key factor in explaining why we have poor productivity – but this is not a matter for public discussion.)

The small size can mean we end up with monopolistic gatekeepers who control a key topic and allow no competition. In one case, an eminent academic said they would not have approved a doctorate if they had known the extent to which the holder ended up controlling the public discussion. One is haunted by Ronald Hugh Morrieson, one of our top novelists who said ‘I hope I’m not another one of these poor buggers who get discovered when they’re dead’. There are others like him who will be remembered long after the gatekeepers who suppressed them are forgotten.

While competition is a key element in promoting intellectual excellence, it must be a culture of creative innovation rather than lazily promoting a conventional wisdom which lags behind the changing world. It needs to avoid the colonial-inferiority mentality where so often the mediocre lapse into imitating uncritically the fashions beyond our shores.

Similarly, competition is not always a solution to our economic woes. When it was proposed to break up the Electricorp monopoly, I looked around for evidence of the optimum size of a firm in the industry. (In a competitive market all mature firms will be operating near the optimum.) The US electricity market is reasonably competitive – there are caveats. The typical size of one of their businesses was about the same size as the entire New Zealand industry. It did not make sense to imitate the American electricity market. We did.

Older readers will recall the opening of home milk delivery to competition (younger ones need to know that once a monopolist delivered bottles of milk each morning). The promise was for lower prices; the reality is that home delivery no longer occurs. Rogernomes repeatedly promised lower prices from competition. They never happened. (Sometimes there were gains in the quality of the services being supplied.)

An extra player when there are only a few businesses in the market may add to ‘competition’ but it usually does not lower prices. Adding an extra commercial bank or supermarket chain is unlikely to lower prices or profits. Oligopolistic markets do not behave like purely competitive markets with lots of players and ease of entrance and exit. After the new entrant arrives, we will still be grumbling about the banks and supermarkets.

New Zealand is going to have fewer players and less effective competition than the economies we admire. Rather than mindlessly imitating, we need to devise our own, perhaps unique, form of market regulation. We have to think small when we are designing New Zealand systems rather than imitating the big. It may be small, but thinking for ourselves is ambitious – and it is hard.

Summer Thoughts

This entry was posted in Environment & Resources, Growth & Innovation, Political Economy & History, Portraits, Pundit on by .

This column is a response to the complaint that we have poor economic performance because we have summer holidays. It praises them.

Summertime, and the living is easy. We used to take our kids to Coes Ford on the Selwyn River near Christchurch for mucking around in the water. Great memories. Apparently, you can’t nowadays. Often the water is too low because of the draw-off by the thriving dairy industry and, in any case, one is advised no swimming because of pollution. True for other Canterbury swimming holes.

The Canterbury economy is currently booming – more so than much of rest of the country – in part because of that dairy industry. The downside is that, like elsewhere, the province has lost some of its past recreational areas. Of course there are alternatives; building swimming pools may add GDP, but they would be less necessary had we Coes Ford and all.

GDP growth is not only associated with environmental loss. How much is our road building program about easing the congestion on previously adequate roads which have become congested by the increased use of cars and by the bigger population?

This list is already sufficient enough to remind us that economic growth is not always an unmitigated benefit. The technological innovation which drives growth is neither ethical nor unethical. A laboratory may produce a life-saving medicine, or it may produce a recreational drug which is addictive and destroys life. Businesses which implement the innovations are not particularly ethical either. Their managers may be, but the profit driver does not give many rewards for ethical achievement except when there are outside pressures on it.

For over two millennia philosophers have pondered on the connection between private ‘vice’ and public ‘virtue’. It was Adam Smith who explained how competition between self-seeking individuals could result in the public benefiting. (Because he had a theory rather than just piety is treated as the ‘father of economics’.) But he said ‘frequently’, not always. For a quarter of a millennium, economists have investigated when competition has a beneficial outcome to the public. There are numerous caveats to get favourable outcomes, far more than the conventional wisdom acknowledges. That is why the government is continually intervening to align market decisions with the public good.

Looking over that last quarter of a millennium, one can conclude that those living in affluent nations at first benefited from economic growth, albeit at a cost of environmental degradation and human disruption. My sense is that the proposition is less true today, although it may still be true in less affluent economies (and for the poor in affluent economies).

Even so, technological innovation continues and businesses seize the opportunities it creates. But we may be no better off if the unmeasured downsides offset the GDP gains. Yes, we have more things, but it is not evident we think we benefit as a result.

We may be better off with more opportunities which liberate our capabilities – the luxury of being able to reduce work and income to, say, write a novel if that is what you really care about. We may be better off with widening experiences. You may visit by web the Botticelli exhibition in Florence – once you would not have heard of it anyway and, in any case, the showing could not have been brought together in the past. (But there is a offset of losing experiences like Coes Ford.) A lot of people feel better off if they can demonstrate they have more things than their neighbours have. (The term ‘conspicuous consumption’ was coined an eighth of a millennium ago by Thorstein Veblen.) It enables individuals to express their diversity. One obvious wellbeing gain has been increased longevity with proportionally fewer life-years of disability.

Yet the conventional wisdom is that we should concentrate on increasing GDP. The Luxon Coalition Government seems to have nailed its justification that it will do so. (There may be an upturn this year – it will be well trumpeted. Even so the per capita level will be lower at this year’s election than it was when the coalition took over, three years earlier.) There may be wellbeing gain from a little less unemployment. What it is unclear is the extent to which the government is willing to sacrifice the nonmarket downsides in its pursuit of economic growth.

This leaves the election year economic rhetoric in a strange situation. It will centre on economic growth performance; people will say that the growth is important but the likelihood is that it will not be much of a factor in determining their political choices. Which is one reason why the political parties are likely to turn to cultural issues – explicitly or by dog whistling. There will, of course, be the usual struggle between who should be winners and the consequential losers – although that is in unmentionable in polite company. In the end, voting may reflect assessments of who will govern the least badly.

What I do not see is a paradigm evolving which focuses on a replacement to the emphasis on uncritical economic growth. That involves some notion of wellbeing rather than just the consuming more. But the notion is a bit woolly and requires a lot of careful thought.

Our grandchildren may have more things than we did, but since I don’t expect to see them swimming in Coes Ford; they may be worse off.

Consolidating the Fisc

This entry was posted in Growth & Innovation, Macroeconomics & Money, Political Economy & History, Pundit on by .

The government is still borrowing for consumption.

I do not think anyone understands the politics of the spat between Ruth Richardson, who chairs the Taxpayers Union, and Nicola Willis – including those two. The underlying economic issue is analytically clearer.

The technical term for it is ‘fiscal consolidation’. It is easiest to understand it by focusing on the government’s net worth the value of its assets less its debt. No measure is without its problems, but net worth is a better measure than net debt as I explain here and here.

In a typical year you would expect the government to increase its net worth, accumulating more assets than debt. A government needs to allow for a growing population and for a growing economy. It would be saving and investing some of its income just like the prosperous household of a working family. If it is not saving, it is borrowing for consumption, which is likely to be imprudent (except in an emergency) and unfair to future generations when the cost of the borrowing comes to charge. We expect the government to save except in emergency years. In practice it usually does.

The government savings series goes back to March year 1948. (Dennis Rose has done the sterling work but nowadays both Treasury and Statistics New Zealand provide updates.) In 2010-2013, there was a three-year ‘emergency’ period of slight dissaving, because of the shocks of the Global Financial Crisis and the Canterbury earthquakes.

However, there was a seventeen-year period from 1978 to 1995 in which the government dissaved every year – spending more on consumption than its revenue. This was the Muldoon era followed by Rogernomics. There were no shocks so severe that could justify the period as an emergency. Rather, Robert Muldoon was asking future generations (you and me) to fund some of the consumption of his times, increasing debts and running down assets. The Rogernomes reduced the level of dissaving but did not get back into the black. It was Ruth Richardson who did, by savagely cutting real levels (which doubled child poverty) and other spending. Getting back to a government surplus (which increases Net Worth) is called ‘fiscal consolidation’.

We can trace the recent path of Net Worth in Treasury’s Half Year Economic and Fiscal Update 2025 (HYEFU). The Treasury’s independent forecasts  have the economy running flat following a biggish fall in early 2024; per capita GDP is not expected to return to the September quarter 2023 peak until December 2026 which means three years of stagnation.** The orthodox explanation for this stagnation is that the Reserve Bank had to squeeze out with high interest rates the inflation which was a consequence of responding to the Covid pandemic.

Stagnation was the cost of the squeeze. HYEFU thinks that by end 2026 the economy will be growing at a rate similar to the pre-Covid growth rate. But the GDP track will be about 7 percent lower.

Last week, I described the difficulties of fiscal management in Britain as a consequence of the Brexit shock. Our Covid shock was of a similar magnitude; it faces Willis (and Grant Robertson before her) with severe fiscal management challenges.

In particular, she has been borrowing for consumption (as did Bill English facing the GFC and Canterbury earthquake shocks fifteen years ago). HYEFU expects Net Worth to fall every year from $182b in June 2024 (the last year fiscally determined by the Ardern-Robertson Labour Government) to $169b in June 2029.* That is five years of dissaving; five years when we have been borrowing to consume, rather to invest.

In her recent Budget Policy Statement Willis defended her fiscal consolidation strategy as a squeeze. Even so, there has been substantial cuts to some government spending.*** Because of the international situation New Zealand is to spend more on the military. The rise is from $3.2b in Labour’s last year to $3.7b in 2030. Even so, as a proportion of GDP, defence spending is falling from 0.75 percent of GDP to 0.66 percent in 2030. Yet Willis highlighted this as an achievement. (Don’t tell Donald Trump.)

Richardson is advocating more cuts (including measures which would put a lot more children into poverty), in effect repeating her 1990-1 one-off slash. While she is proud of her courage, her National colleagues were probably a bit more rueful because her measures were major contributors to National losing a quarter of its voter share in the following (1993) election. (It sneaked back into government because it was the pre-MMP era with the Left vote deeply divided.)

We are much closer to the next election; the 2026 budget will be just six months before it. Willis probably judges that the sort of cuts the Taxpayer Union wants would be electoral suicide, even more damaging politically than Richardson’s.

In fact, HYEFU does not bode well for the Luxon Coalition Government’s prospects. Yes, it expects some economic growth towards the end of 2026 but unemployment will remain around 5 percent of the labour force. The government is already committed to cutting back public spending, and Willis is promising further cuts. There appears to be no room for sweeteners such as tax cuts, just unimplemented promises.

While HYEFU considers some risks in its forecasts, it does not consider the possibility an international financial crash. Treasury’s grim response is likely to be that if the crash is as big as some fear, then all bets are off. And yet the possibility of a major crash hangs over us. An economy which is already borrowing for consumption will have reduced room for responding to international chaos. That is one reason for the fiscal consolidation; the other major one is long-term sustainability.

There is an irony in the dispute between Richardson and Willis. Had there not been the threat of a major credit downgrade, Richardson would not have needed to slash.  We now know there was no major shock for more than a decade, so a Willis squeeze would have worked with much less political damage. On the other hand, we will be astonished if the next significant shock is over a decade away, so Willis pursuing a Richardson slash makes more sense from this perspective than it turned out in 1990-1. (The ‘slash’ need not be cutting further government spending as the Taxpayers Union has advocated; it could be increased taxation.)

While HYEFU is a sober presentation, does one detect in other Treasury-sourced statements an increasing concern about a nearing great international financial crash? It is certainly anxious about the need for faster fiscal consolidation.

*The Net Worth to annual GDP ratios are 43.9% in 2018 when Labour took over, 43.3% in 2024, and 32.2% in 2029 and in 2030. The ratios may not be inflation-adjusted.

** The HYEFU forecasts were prepared in October. I doubt that Treasury would dramatically change them in the light of the recent September 2026 GDP release which suggests the mild recovery which it is forecasting.

*** Between the 2024 and 2030 fiscal years the following areas are projected to fall (in nominal terms – further in real terms):

Core government services (down 24%)

Transport and communications (down 11%)

Economic and industrial services (down 26%)

Heritage, culture and recreation (down 11%)

Primary services (down 3.5%)

Housing and community development (down 37%)

PS. I shall take next week off; returning to columning in the new year.

Lessons from Brexit

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How we connect economically with the world is critical.

The British Labour Government is struggling. Partly it is because they were badly prepared in opposition; the Conservative Government was making such a charlie of itself that Labour expected that it would do better and gave little thought as to how it might. But while it was ill-prepared in opposition – a common problem in New Zealand too – the miserable state of the British economy is not helping.

I dismiss the conventional wisdom that the poor performance of the economy is due to the government. It is more complicated. In the 1930s and 1940s governments discovered that they could make a difference by smoothing out economic fluctuations. Everyone then leapt to the conclusion that governments could make a difference to economic growth as well. The evidence is they cannot – well, not generally; I shall relate one exception below. Despite the evidence, the conventional wisdom insists they can, pointing out that productivity growth is low (usually true) but there is little evidence that the (often ideological) nostrums they advocate will work.

It is true that British economic productivity has been growing slowly. The relative slowdown seems to have started from about 2016, which, not coincidentally, is when the Brits voted by a narrow margin to leave the European Union, their largest trading partner. At the time, Remainers warned that an exit would damage the British economy, but they left the impression that the public would wake up in the morning after voting for Brexit to find an economic disaster. That did not happen. The economists’ forecasts actually were that there would be a reduction in output (GDP) in the medium term.

Britain is now in that medium term; those forecasts have proved broadly correct. There remains some uncertainty as how much the British economy has suffered from the disconnection but the range of GDP reduction following Brexit seems to be between 6 and 10 percent. I take the figure as 10 percent because it’s a round number. It amounts to a substantial loss of annual productivity growth of about 1 percent a year. (New Zealand’s long-run productivity growth has been about 1.5 percent annually.) The indications are that loss will continue.

Imagine the transformation to the standing of the British Labour Government, if its Chancellor of the Exchequer was told the British economy was actually 10 percent larger so that her government could spend 10 percent more, including hiking social transfers by that amount. If she was more restrained, she could add in some tax cuts, although private incomes would already be around 10 percent higher.

The irony is that the beneficiary of the current poor standing of the British Government has been the Reform Party, who, in an earlier guise as the United Kingdom Independence Party, had been a key advocate of Brexit. Reform now has hardly any economic policy ambitions (which is probably a good thing given how inadequate they have been in the past); it is a grievance party with a social agenda including strongly anti-immigration.

Brexit is a natural economic experiment where, for political reasons, an economy withdrew from a close association with its largest trading partner. As such, the experiment provides insights about the role of the external sector in medium and small economies. Much research is yet to be done; here is my take on what it may find.

My In Stormy Seas: The Postwar New Zealand Economy (1996) showed how the performance of a small open multisectoral economy depended upon its external sector. It has to trade its specialised production to acquire the foreign exchange to pay for its imports. It is no different from, say, Te Awamutu, which is a part of a wider economy and has a big import bill (although New Zealand has its own central bank).

The history of the New Zealand economy since the European arrival shows that its performance has been intimately affected by the world economy. Where domestically we can make an economic difference is by engaging effectively with the rest of the world.

Thirty years later, I see no reason to change the book’s theme. Among the things I have since learned is that the broad analysis also applies to medium-sized economies such as Britain (with modifications for the different economic structures).

I have also acquired a more detailed understanding of the mechanisms involved. The engagement of individual firms is not static but intricately dynamic, responding to a changing competitive environment posed by actors in other economies – if they don’t innovative, they perish.

Brexit was not simply a one-off shock. There was a process of adaptation. Initially it was about finding new supply chains and– often costly – ways around the extra barriers to trade. Then firms hunted for alternative markets (with limited success). Increasingly, businesses found better arrangements by moving activity elsewhere. I do not get the impression that there has been a marked increase in import-substituting industries in Britain. (Trumpism may find its tariff walls do not have a great effect either.) Post-Brexit, British tradeable businesses have been moving their investment and activities offshore, reducing the growth of British economy – hence the relative loss of GDP and counting.

Reflecting, I underestimated the importance of supply chains. Thirty years ago they were not so common (but the book has a discussion of the related intra-industry trade). New Zealand is not as well located in the world economy as Britain; we tend to be at the end of chains, not in the dynamic middle.

The Starmer Government is considering further cosying up with the EU with the aim of getting more involved in the business chains of its most significant neighbour. Any agreement is fraught with technical and political difficulties. It is unlikely to generate an immediate boost to the British economy but it may see a growth boost (as occurred to the peripheral economies when they joined the EU). There may not be a total recovery; it is easier to destroy than to build.

What are the implications for New Zealand other than reinforcing those conclusions of thirty years ago? As far as the supply chain lessons are concerned, I am pessimistic. Because of its location, New Zealand will be at their beginning and end, rather than in the middle where the action is.

The big concern must be whether New Zealand’s external sector will be large enough to support the population and affluence to which we aspire. Thirty years ago I was pessimistic about the future of the world food sector. Nowadays, with rising East Asian affluence from industrialisation plus similar prospects in other economies, together with the struggles of other food supply sectors, I am more optimistic. However, ours now faces serious land and water resource constraints; there are limitations of forestry and fishing too. (One gain is to substitute oil imports with local renewable energy.)

What exports can fill the gap? Probably not manufactures to any great extent. We are not large enough to have the economies of agglomeration which are integral to high value manufacturing.

Many services suffer from the same limitations. Tourism – a kind of primary industry – may be capacity-constrained; our distance may not help. Our international broadband capacity may generate a thriving IT service industry, as it has for India, but because of competition, remuneration may not be as great as we might hope.

The point of the last few once-over-lightly chapters is to demonstrate a problem which we are not addressing. Blindly leaving things to the market may as blindly immiserate the economy.

Is New Zealand the Best Place to Be?

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The Minister of Finance says it is but, parochialism aside, are we doing anything to ensure it really is?

One of the necessary skills of a politician is to hold on to at least two contradictory positions at once.  * Consider how, following the report of 72,000 New Zealanders ‘permanently’ leaving the country in the past year, Minister of Finance Nicola Willis said that New Zealand is still ‘the best place to be’. Given the evident superiority of Australia on most material/economic measures – even though many of the popular comparisons are oversimplified – she is presumably arguing that New Zealanders experience higher wellbeing than Australians (a much more difficult comparison to assess).

Meanwhile, the same minister is amending the Public Finance Act to remove reference to wellbeing as a relevant government goal. Apparently the government is confining its economic management to material output, where New Zealand is doing badly, and washing its hands of wellbeing where it says New Zealand is doing well. Huh?

Let’s leave the resolution to the politicians but reaffirm the minister’s view that material consumption does not capture the totality of wellbeing. Consumption can go up and wellbeing go down (as we are reminded when GDP rises and yet another swimming hole of our youth is closed because of pollution).

Is wellbeing higher in New Zealand than elsewhere? People migrate for wellbeing reasons rather than just higher material income. I puzzled over this when I was writing Not in Narrow Seas: The Economic History of Aotearoa New Zealand. One chapter, ‘Why Come to New Zealand?’, concluded that, as best we can compare, there was not a lot of difference in real incomes between New Zealand and other migration destinations at the end of the nineteenth century. (Perhaps New Zealand, the most distant, was the least attractive.) Yet people came. Sometimes there were special reasons but the chapter concludes that the general reason was for lifestyle and opportunity. Immigrants were not attracted to industrial urban living (most came from rural backgrounds) and they saw opportunity (especially of acquiring their own land).

One assumes the outflow of New Zealanders reflects similar assessments, aside from those who are on OE and plan to come back. Some of those who plan permanent migration will be disappointed and return too. But the outflow signals that many see leaving New Zealand as a means of improving their lifestyle and opportunities. It is blind chauvinism to assume that New Zealand is the best place to be.

Of course, there are those who are keen to come to New Zealand, but most are from countries with levels of wellbeing lower than New Zealand. They are not places where New Zealanders are typically migrating, OE aside.

This raises an issue which I sketch here. Could we solve our population-aging challenge by higher immigration of younger people? The statistical projections suggest it might work for a couple of generations, after which the new migrants would be aging too, while their fertility levels converge to ours.

Immigration may solve the headcount issue (and provide enough staff for us when we are in our nursing homes). I’ll leave aside the question of to whether the economy can generate enough foreign exchange for the standard of living necessary to sustain the larger population; there is surprisingly little analysis on this.

But we also need to think about the changes to culture that a high migrant inflow would generate. It is already happening; the increasing cultural diversity need not be bad but there seems to be a limit to the rate at which a community can absorb different cultures; that limit would be exceeded if the inflow was enough to compensate for the age imbalance. Above that limit there may be a nasty backlash against immigrants, as is happening now in Europe and the US.

(This is a matter for sociological expertise, but an economist would be remiss not to draw attention to the challenge. I’ve had to think about it, because in the nineteenth century, the immigrant culture from Britain soon overwhelmed the culture of the indigenous population. It was not so culturally inflammatory – although some pretty harsh things happened to the first peoples – for two major reasons, as well as a high rate of intermarriage. Māori voluntarily and rapidly absorbed much British culture including Christianity, new technologies, market-based commerce, and literacy. (In the mid-nineteenth century proportionally more Māori were literate than settlers.) Second, the settler and Māori populations largely lived in different areas – town and country. Neither applies today; New Zealanders are not nearly as adaptable as Māori were, while migrants flood into the cities where New Zealanders live.)

Part of the solution could be the return of some of the New Zealand diaspora. It is estimated to be as high as a million although that seems to depend upon a generous definition. When I looked, the number seemed to be in the 300,000-500,000 range, up to 10 percent of the domestic population.

Of course, we want New Zealanders to engage with the world and OE is a vital part of that, although aspiring Ernest Rutherfords and Kiri Te Kanawas will hardly flourish if they remain based in New Zealand. But for lesser mortals it would better for us and them if they were back home. (The retired returning are not as attractive in this regard as those of working age; while they bring their retirement income, they add to the demands on the already limited workforce.)

And so we return to the minister’s claim that New Zealand is still the best place to be. Clearly many of the diaspora and those contemplating joining it think she is wrong.

What we may ask the minister is what her government is doing to improve wellbeing. Her response might be that it is trying to get the economy working better. But doing so is often at the expense of activities which promote wellbeing.

Once New Zealanders said we were the best place in the world for children. We would not be so confident of that claim today. Once New Zealand prided itself that it was a society in which people could get good jobs; we don’t today (we get them in Australia). Once we skited that New Zealand was an egalitarian society in which Jack was as good as his master (in those days we were not gender sensitive) while everyone had the opportunity to use their capabilities. Once we had a public service we were proud of. Once our cultural aspirations were supported by, promoted by and funded by the government. Once we had a social objective to enable everyone to participate in and belong to their community. Those onces seem to be a long time ago.

* Scott Fitzgerald wrote: ‘The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.’ I leave the reader to judge the extent to whether our politicians function well.

The Politics of Different Economic Strategies

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The tensions between different approaches to the economy are surfacing as the election nears.

As we head towards next year’s election, the tensions between the coalition partners are becoming increasingly evident. There are always these tensions, even before MMP when there were but two significant parties, but they were hidden within the caucuses. For instance, before the 1984 election, Labour’s caucus was torn between two economic strategies which were papered over for the election campaign. (After it, a handful of senior ministers seized power and pursued the one we call ‘Rogernomics’, leaving the modernising alternative – more like that which the Clark-Cullen Government pursued – stranded.)

Today’s tension is most public in the different economic strategies of the ACT wing of the Coalition Government and the NZF wing. ACT’s is unashamedly economically neoliberal, although perhaps the current caucus does not have the same technical command as earlier ones did.

The NZF economic framework seems to be close to that of the traditional National Party (and its predecessor). I’ll call it the ‘Holyoake’ approach, after the Keith Holyoake governments which, sometimes with another prime minister, ruled almost continuously between 1949 and 1972. It was also Muldoon’s approach but the difficulties he faced following the 1966 wool price shock and the resulting inflation gave his record a bad reputation. (The challenges from the shock would have made any mode of economic management difficult, particularly if the politics was concerned with winning the next election.)

The Holyoake approach was highly interventionist, although the interventions were not always well designed. (The first wage freeze was imposed by Holyoake and Jack Marshall.) It was nationalist and centralist with a bias towards private enterprise. It had more in common with Labour’s economic framework than the rhetoric proclaimed.

I was struck by this commonality when looking at total government spending as proportion of GDP between 1939 and 1990. There was a rising trend but with one exception, you cannot tell in which years there was a National Government in charge, in which Labour. The exception was transfers – social security benefits and the like. As far as economic analysis is concerned, transfers are negative (income) taxes so – not surprisingly – you can see a distributional difference between National and Labour; the former favouring those at the top, the other those at the bottom.

What was surprising was that total expenditure (excluding transfers) did not seem to differ by the politics of the government. Perhaps a finer investigation than the database allowed might have shown patterns of differences within the total, such as National relying more on outsourcing or it jigging the expenditure spending towards the rich while Labour directed it more to the poor. The rhetoric of Labour being spendthrifts and National being more frugal is not evident in that data.

Yet the common agreement was not in the rhetoric. In opposition Labour bewailed National Government cutbacks although in government it too tried to control its spending. In opposition National criticised Labour for profligacy; in government it spent every dollar it had available.

The pattern seems to have broken after 1990. The secular trend of public expenditure growing faster than GDP ceased, while the public expenditure of the centre-left governments seems to have grown perhaps two percentage points faster than it did under the centre-right governments. This is a preliminary finding, but it probably means that reality now more closely aligns with rhetoric.

That there was a break following Rogernomics and Ruthanasia is hardly surprising. It might be summarised that there was no longer a consensus to minimise unemployment because neoliberals say the government can’t, that the distribution of income should be relatively narrow because neoliberals say pursuing that goal damages economic performance, that the state does not have a major role in economic management because neoliberals say the state overly infringes liberty.

The disagreements occur within the main parties as well as between them. Let’s call National’s disagreement as being between ‘Old National’ and ‘New National’. Old National is the modernised successor of the Holyoake approach (think Bill English). New National is closer to neoliberalism.

There were some neoliberals in the pre-1984 National caucus (although we did not then use the term) but hardly in its government policies. Ruthanasia introduced them in 1990 to 1993. Today the neoliberalism of New National is much more prominent. Recently a survey asked National voters to choose between a National-ACT coalition government and a National-NZF one. The balance favoured the neoliberal option.

NZF pulls the National-led Government towards the centre, offsetting the pull from neoliberal ACT. Being in coalition – a sort of public caucus – means swallowing dead rats, as Winston Peters has said NZF had to over the Regulation Standards Act. David Seymour has been quieter about the dead rats ACT has swallowed.

Peters’ handling of the Cook-Strait ferries replacement has been very much in the Holyoake tradition. Shane Jones is today’s promoter of a state development strategy. We think of Muldoon (and Bill Birch) as its Think Big promoters, but the postwar tradition began with the pulp and paper plant at Kawerau in the Holland-Holyoake era. Later there would be the steel plan at Glenbrook and the aluminium smelter at Tiwai Point, both of which involved substantial government interventions. (All were generally supported by Labour.)

While I am nearer the social democratic centre than most neoliberals, I am uncomfortable with NZF’s economic style. My preference is for restrained rational interventionism contrasting with its more reactive approach. Too often NZF goes down a popular and fashionable path without thinking through the implications and hoping that the rational analytics will eventually turn up. They don’t always and sometimes the implications turn out unpleasantly unexpected.

The populist approach is a centralist strategy which is integral to New Zealand’s governing culture. Even ACT directed who would provide school lunches.

Populist interventionism is not confined to NZF. National seems prone to it, especially with publicity which smooths over the reality – often accompanied by a hi-vis jacket. So is the Left. Once we relied on the public service to inject some rationality into the process of policy development; that is less true today.

We cannot know to what extent the economy will affect the 2026 election. The expansion of production might have begun (but there may be an international crisis). From some of the Minster of Finance’s signals the 2026 budget will be tight; it will not lack hi-vis jackets.

Of course, the economy may not have much electoral impact. There are populist issues, political ones (including party breakups), scandals and governing competence issues which may be more decisive. We can be certain, though, that the tensions about economic direction will continue after the election, and are likely to be exposed in the next coalition government too.

Should We Privatise More Government Businesses?

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Pragmatic analysis says maybe we should, but we should also consider nationalisation. We should certainly consider better regulation.

An earlier column argued that we should make the government’s net worth – the value of its assets less its liabilities – more prominent in fiscal policy. Net worth is also fundamental when we are discussing whether an asset should be privatised or nationalised.

The privatisation boom began with Rogernomics, but as Roger Douglas later confessed, ‘I am not sure we were right to use the argument that we should privatise to quit debt. We knew it was a poor argument but we probably felt it was the easiest to use politically.’ Then we had no measure of net worth for the government accounts so it was difficult to explain that while privatisation would reduce public debt, it made no difference to net worth. (There was a similar difficulty explaining corporatisation, which involved the government reshuffling its balance sheet; this is all a long time ago, it but left a scar on those whose task it was to explain to the public what was happening.)

Douglas’s real argument was that private businesses would perform better in private hands. Actually, there is not a lot of evidence for his better-efficiency proposition if one compares the privatised companies with when they were publicly owned corporations. There is more evidence of gains when comparing the public corporations with the ramshackle public management of the Muldoon era.

Here is how I got to the pragmatic position on which the following analysis is based. In adolescence I believed the fashionable, but ideological, position that there should be more nationalisations. This was challenged by Arnold Nordmeyer, then leader of the Labour Party, who once asked a meeting of students whether they should nationalise everything including grocery stores (which had yet to be replaced with supermarkets). I concluded there was a line to be drawn where on one side the economic activity should be left to the private sector and on the other it was better left to the public sector. I have spent the following sixty years thinking about that line. While there are some clear examples for either side, there is much fuzziness about the exact line. People of goodwill can disagree, even using the same evidence.

At that time there was a debate over ‘Clause Four’ in the constitution of the British Labour Party which stated the party’s aim was of ‘the social ownership of the means of production, distribution, and exchange’. I was persuaded that the clause should be replaced by ‘the social control of the means of production, distribution, and exchange’.

Social ownership is a means of social control but it is not the only means and not necessarily the most effective one. Often that could be achieved by ‘workable competition’, where the state sets up a framework which results in the industry meeting the social goals in the market. The ownership of a store in a competitive market does not give the owner a lot of significant social control. That should be generally true for ownership in a properly regulated market. So there is no need to nationalise grocery stores.

Economists have a more rigorous notion of ‘competition’ than popular sentiment, which is happy to adopt the economists’ conclusions derived from competition theory even when they do not apply. A monopolist will say they are ‘competitive’, but that is not what an economist means.

To simplify, economists refer to pure competition when there are numerous firms in the market, that it is easy for them to leave and new ones to join and where customers are reasonably informed. The economist’s conclusion is that this result in maximum efficiency – use of resources to attain a given output – and, under certain assumptions (which are not always applicable) a high rate of innovation. There are downsides. For instance, the economic outcome may not be equitable. Some economists recommend addressing fairness with other policies; others just ignore it. (I leave you to work out their politics.)

Practically, many markets are not ‘competitive’ in this economic sense. This is particularly true in a small economy like New Zealand; we cannot adopt the conclusions from larger economies without considerable adaption. Instead, we look for ‘workable competition’, for market structures which are near enough to be fully competitive to reap similar benefits. Typically, that involves at least five firms (more if they have very different production technologies). With fewer than five, each firm can game one another at the expense of the public. So as numbers of actors in a market get smaller, the case for intervention gets greater. One form of intervention may be public ownership.

The stupidity of ignoring these regulation issues is illustrated by the privatisation of Telecom in 1989, when government did not even have a paper which addressed them. When, following the restructuring of the Post Office, telecommunications had been split out into Telecom, a publicly owned corporation, the government had directed the business to operate in ways which reduced the monopoly’s ability to exploit its market dominance. It had a natural monopoly of the lines connecting telephones which it could use to control service provision and exploit its customers. Sold off into the private sector, Telecom promptly abandoned those directions.

Some will tell you that Telecom was very successful, citing its profitability, but that may mean it was exploiting its monopoly and overcharging. There are three major indicators this was the underlying situation. First, business customers and consumers grumbled about Telecom’s services. Second, it manifestly failed to get the broadband rollout under way. Third, in order to achieve the rollout, the government separated the line part of the company (now Chorus) from the service part of the company (now Spark). The share price promptly crashed because shareholders knew that Telecom could no longer exploit its monopoly power. Today, Spark is a very ordinary company.

This example illustrates the difficulties of market design. Typically, the businesses which the Treasury Investment Statement says are being reviewed for privatisation are in complicated market structures. The pragmatic decision is complicated.

How the Treasury will work through the list is not known. First, it should sideline those agencies which primarily have social objectives which the market does not capture well, despite the government having put them into a corporate ‘for-profit’ form. They include HealthNZ and RNZ. Considering social objectives in other businesses is important too. I was not initially a fan for Kiwibank but I was persuaded by the failure of the commercial banking system to provide for the needs of modest income households.

Second, there should be far more attention to the regulatory framework than was given at the time the Rogernomics privatisation. (We especially need to move away from the nonsense that adding one more to a handful of competitors is a full solution to a lack of competitiveness.)

Third, a non-ideological review will also look at the possibility of nationalising (or re-nationalising). There is a case, for instance, for there being a single electricity business like Electricorp, rather than a handful of businesses gaming one another in the short term when the industry needs a long-term strategy.

Fourth, we should accept that the line between what should be in the public domain and what in the private domain is fuzzy and will be resolved in part ideologically (a.k.a. who you vote for). One consequence is that any analysis should not rest only with the Treasury, as it would if the only concern was the government’s debt position, but requires the involvement of other agencies including the Ministry of Business, Innovation and Employment and the Ministry of Regulation.

Apologies if this column’s conclusions do not align with your ideology. It should inform it.

The G85 Economy

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The pressure to globalise is consolidating towards a global world in which the US is a marginal player.

There is a trope (or should I say ‘wishful hope’) by some that globalisation is coming to an end. While it may no longer moving towards a comprehensive integration, there are sites where it continues to expand. (There may be one major retreat which I discuss towards the end.)

Broadly, it seems to be going into a consolidation. Yes, there are some contractions (if you oppose globalisation you can point to them) and some expansions (the uncritically favourable list those instead). The rest of us of us observe that consolidation may still be an evolution.

The central issue is what Dani Rodrik called the ‘political trilemma of the global economy’. Countries cannot simultaneously have economic integration, democratic politics and full national autonomy. The more embedded global rules become, the less freedom governments have to set their own policies. Integration and sovereignty pull in opposite directions. Rodrik could have added that without a degree of economic integration, small countries, especially, cannot get the specialisation in their tradeable sector that their prosperity depends upon.

Trump acknowledges the trilemma as he uses America’s economic power to ignore the global rules, flouting the trading system’s most basic rule of nondiscrimination using tariffs and bullying as political weapons.

The reaction of almost every other country is just about exactly the opposite. With the exception of China, they don’t have the power to bully. (China uses its power much less openly; it is proving increasingly successful compared to the US.) As a consequence, all around the world negotiations which have stagnated for years are being clinched.

That does not mean the all the issues that had been holding up the deals have been resolved. Rather, they are being put aside. New Zealand may soon get the long-pursued trade deal with India, but it will not contain much about the sticking point of dairy trade. The same thing is happening in other trade deals. Trump’s bullying is generating an urgency to get them done. They are not ideal, but the diversification reduces America’s global economic power.

A complication is that the US has not been approving appointments to the World Trade Organisation Appellate Body so the court is unable to make binding resolutions of trade disputes. The issue has been evident for years – it is pre-Trump, going back at least to Obama. Increasingly trade deals provide arbitrations procedures. They work. New Zealand has successfully dealt with Canada over a ‘glitch’ using those in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Trump may be getting short-term wins but he is undermining the US in the medium term, nicely illustrated by his announcement that the US will not attend the next G20 meeting to make a political point (about the treatment of white farmers in South Africa, where the meeting is to be held). So be it. The G19 – we are not one, but we will be involved as much as we can – is symbolising a globalised world of (almost) everyone except the US. (Actually, G85 might be a better label; the US share of global trade is only 15 percent – smaller than its 25 percent of global GDP.)

Over the past eight years, more than four of every five nations – developed and developing – have seen trade rise as a share of their national GDP. In the US it has been falling. Whether the falling share is a good thing for the US – a large economy can be more self-sufficient than a small one – is for a later column. In any case, the aggregate measure may miss a critical element from the benefits of trade – the flow of ideas.

For example, the Chinese pharmaceutical industry seems to be developing fast. Trump is blocking access to Chinese innovation. Not only will this handicap the US pharmaceutical industry which, for instance, heavily draws on the European one, but it is likely to damage Americans access to new drugs and ultimately damage their health.

As mentioned earlier, there is one dimension where globalisation may be retreating. We are seeing increased resistance to international migration. Communities appear willing to consume foreign produce but unwilling to allow foreign immigrants. Arguably, the globalisation of migration peaked before WWI, but there has been rising pressures for greater migration in post-WWII. The EU, for example, has made the free flow of people central to its integration. (It is the main reason Britain left the EU.) But it increasingly rejecting flows from elsewhere.

The interfacing of new and old communities is not well studied by economists, so I must be cautious. One economic conclusion is that there is much less evidence of new migrants causing unemployment among the locals than is widely believed; after all the population increases demands and jobs while very often the new migrants fill positions where there are domestic shortages. (I greatly admire the energy and vigour many new migrants bring with them.) It is the social interface which seems troubling.

I expect we shall see increasing restrictions on and discouragement of international migration with increasing emphasis on high and specialised skills. Ironically, that flow can go both ways. America has been a great attractor. Some 40 percent of US Nobel prize-winners have been born elsewhere. Now some of the very able are leaving. One of the many beneficiaries are Chinese pharmaceutical industries.

New Zealand’s migratory history has been more open than many other country histories; about 30 percent of its residents were born overseas. It seems likely that our future will involve even higher proportions of people of Asian and Pasifika descent – many born here. But I do not discount what happened in the US. It was once the world’s greatest destination for migrants, but it is now turning its back on them.

New Zealand has long been aware of its limited weight in the international economy. The spaghetti of trade deals we have with many countries is indicative of our response; the biggest omission in our network is the US which reminds us that the problem has not been simply Trump. (We are so small and strategically irrelevant that we have not been a priority while suffering from protectionist urges in the US Congress.)

We have also built up relationships where trade may be integral but is only a part of the whole. When the Closer Economic Partnership with Singapore was announced in 2001 it seemed one trivial country aligning with another. (Perhaps that is a little unfair to Singapore, but you get the picture.)

However, the deal was not only a step on the way to the 2018 12-country CPTTP and the 2022 15-country Regional Comprehensive Economic Partnership (RCEP) are also sectoral initiatives which are plurilateral – designed to allow other countries join them. (More here.)

While diplomacy has been crucial in our trade negotiations, the trade deals also helped our diplomacy. A quarter of a century ago – well before Trump or our current collection of politicians – New Zealand was pioneering what may be the next phase of globalisation – open plurilaterism because we cant have multilateralism. The pioneering was because we looked to the future and thoght about our particular circumstances, rather than just followed the fashions.