Luxon and a Long Recession

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What are the economic and political implications if the New Zealand economy stagnates for five and more years?

Prime Minister Christopher Luxon told Morning Report that ‘We’ve got the worst recession* we have had in 30 years’. (Observe, he could have said ‘since the Rogernomics Stagnation which finished 30 years ago’, but some things may not be mentioned in public.)

One takes it that he is referring to assessments like Treasury’s 2025 Budget Economic and Fiscal Update which reports a three-year downturn from September Quarter 2022 ; although my impression is that everyone has become even gloomier since May. Treasury then did not expect the economy to reach the September 2022 per capita level again until September 2027 (a year after the next election). Treasury expected the decline to bottom out about now. But the return to growth is slow and if the Treasury is right, the economy will grow at about its earlier rate, with a track about 8 percent lower than in the past. That would mean it has lost about five years of economic growth in this ‘recession’. We are not having a business cycle fluctuation.

One can fiddle around with these figures, but the basic story would remain unchanged. Luxon is talking about a long recession; although he does not give an explanation as to why it is happening. (He mentions ‘the Covid hangover with all the extra spending’ but that simply brings the ‘recession’ forward; it changes neither its shape nor existence.) His promise to ‘fix the economy’ is without much explanation either. As my In Open Seas observed, trying to fix something without understanding what went wrong is a common approach in New Zealand.

There have been five great stagnations in the last 160-odd years. Excluding the Rogernomics one, which was unique to New Zealand and probably reflected policy incompetence, the other four were all associated with global stagnations, although excessive borrowing may have intensified the experience here. It turns out that currently most of the countries whose macroeconomics I monitor closely – America, Britain, China, the European Union, France, Germany, Japan, Russia – are struggling (as are many others). Germany, for instance, is beset with a recession and a not very robust governing coalition. (Holger Schmieding, chief economist of Berenberg, a German bank, said that the German premier, Friedrich Merz ‘is not an experienced politician, he acts more like a CEO’.)

Their difficulties could be – like New Zealand’s – attributed to the post-Covid unwinding compounded by the chaos that Trump’s tariff warfare is adding to the world economy, perhaps most by adding to decision-making uncertainty.

(A caution. We are only three years into this ‘recession’. While that makes it longer than a conventional business cycle. Treasury does not think it will last as long as our great stagnations.)

Observe that some economies currently in ‘recession’ were struggling before the Covid pandemic (in a way that New Zealand was not), tempting one to dismiss Covid as the underlying cause of the current difficulties but compounding them. What are those underlying processes?

First, leave aside China, whose astonishing growth phase seems to have come to an end. I am reminded of what happened to Japan, which also had an impressive growth burst which flattened out, leaving its economy struggling for decades. Warring Russia is also obviously a special case. The remainder are affluent economies.

I have discussed whether they are suffering secular stagnation. I shan’t go through the details; you can see them here and here. What is critical is that while affluent economies and their societies continue to evolve, it may be a different evolution from that with which we are familiar in the last two centuries.

So different that we are struggling to explain exactly what is happening. We need much more experience and data to be confident in our analysis. On the other hand, uncomprehending nostalgia tends to invoke the unthinking inertia of using a paradigm of the past. I am afraid that is what I hear from Luxon. I do not have a lot of respect for the policy thinking (if any) of the Ardern-Hipkins Government – and I have yet to be convinced that Labour in opposition is any better – but I credit them with trying to cope with evolving New Zealand even if they could not explain this to themselves.

Luxon campaigned on ‘back on track’ which was a return to the policies of the past with little recognition that things were changing. – not only in the economy. Morning Report headlined that he claimed that his government’s ‘policies were working to fix economy, raise living standards’, although how he was proposing to do so either does not appear to have been covered in the interview.

Obviously improving infrastructure, making regulation more effective and increasing trade opportunities are worthwhile, but they are not particularly related to the ‘recession’. (We may argue over increasing exploitation of depletables, as is Shane Jones’, ambition, but again the approach is not particularly about the ‘recession’.)  None explain why the ‘recession’ began in the early 2020s.

Luxon appears to be assessing the issue as being one of growth of GDP – the measure of market output – rather than wellbeing. Increased GDP is a goal welcomed by business because it increases profits – a lot of businesses are struggling at the moment. Moreover, increased GDP is associated with increased tax revenue, although it will also increase the need for additional public spending because of its downsides. Whether there is a net gain depends upon the degree to which the government responds to these expenditure pressures.

Indeed, the Coalition Government has reduced its commitment to the arts and culture, the environment (including reducing carbon emissions) and to public health, matters which the public will judge them on.

That political judgment occurs in just over a year’s time in the 2026 General Election. The indications are that the state of the economy – say, measured by the unemployment rate – will be a little bit worse than it was at the 2023 election but prospects may be improving, whereas in 2023 they were looking dimmer (and were made even dimmer by some of the actions the Coalition Government undertook).

However, the role of the economy in the election campaign may depend on the Labour Opposition – I doubt that a capital gains tax will be decisive either way, except perhaps to stiffen loyalists in either camp. Events over the next 12 months are likely to be more important. Key ones may be unpredictable. Ability to manage coalitions may be critical.

Even so, trying to understand and respond to our long recession will almost certainly involve our adapting overseas analysis for New Zealand’s unique circumstances. The affluent world may be entering on ‘secular stagnation’ as assessed by GDP. If so, we probably cannot avoid that fate either.

* Recession has various economic meanings. Traditionally, it referred to a particular stage in the business cycle but when the cyclical downturn is stretched out beyond the normal length it becomes something else, often called a ‘long recession’ (as occurred after the GFC) which may morph into a long stagnation (it did not in the case of the GFC). I have put recession in quotation marks to emphasis that Luxon and all are talking about a long recession where traditional business cycle analysis may not apply.

How Should We Organise Research?

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

A physician’s memoir describing a successful research program leads to pondering about research funding strategies.

A few years back, I was, in effect, commissioned to review the development possibilities of a local biotech industry, especially one for creating new pharmaceuticals. At the time, it was fashionable in every regional plan – anywhere in the world – to claim that local prospects of developing an innovating biotech industry were high.

From my reading I concluded that the United States did not have a biotech industry. Rather, a dozen of its large urban centres had one and everywhere else hardly mattered. That was because the industry had to function in a deep, skilled-labour market with numerous medical centres and tertiary educational institutions, and a variety of specialist ancillary services such as precision assaying (measurement) and patent lawyers. Smaller centres would not have enough work to support the specialisation. (The technical term is ‘economies of agglomeration’; they are central to economic development as my Globalisation and the Wealth of Nations explains.)

The population of the smallest of the US biotech centres was larger than Auckland, although if Hamilton was added it just exceeded the threshold (especially given the expertise in Ruakura). That led me to argue that good linkages between the two centres were vital – we are getting there – and it seemed likely we could further enhance the potential ‘size’ of greater Auckland by improving its connections with the rest of New Zealand. (At the time, the expertise for maintaining high air quality was in Wellington, a short air trip or overnight shipping away; broadband was to come.)

Even so, the biotech industry has not thrived as much as was hoped. My guess is that there has not been enough private venture capital to fund the development of a biotech industry which has a high rate of failure, while the government was unwilling to fill the gap. I moved on to other issues.

Reading Eric Espiner’s A Physician’s Journey: Chasing Hormones You Never Knew You Had, and Why You Need Them prompted a return. (A warning. The book is not an easy read; its target audience is those very familiar with general medicine. This layman struggled to keep up.)

Hormones (their study is called ‘endocrinology’) are one of a body’s signalling devices in which molecules flow between glands and organs which react to their signals. The known number is 75, but more will be discovered. Most people know of a handful – adrenalin, cortisol, dopamine, growth hormone, insulin, melatonin, oxytocin, oestrogen, testosterone … – and a handful of the glands which produce them – ovaries, pancreas, pituitary, testes, thyroid …

To my surprise, even the heart secretes hormones. (On reflection, I shouldn’t be surprised at anything in endocrinology.) In between his clinical duties as a hospital physician, Espiner (and his team) was a pioneer in the study of one of three hormones the heart secretes: the C-type natriuretic peptide (CNP), which plays a crucial role in regulating various bodily functions, including cardiovascular homeostasis, bone growth, and neuronal function. (I am afraid you’ll have to look up elsewhere if you want more detail; I don’t trust myself.)

This internationally pioneering research was based in Christchurch. It occurred, serendipitously perhaps, because, like Espiner, Don Beaven was a Christchurch boy, who established what is now known as the Don Beaven Medical Unit. His interest was diabetes, where he developed a world class reputation and he recruited to his medical unit endocrinologists in training such as Espiner. The unit was not just an isolated part of the University of Otago. It drew on other local institutions: the Canterbury hospital system, the Canterbury Research Foundation (which Beaven helped found), Lincoln University (a lot of the experimental work was done on sheep) and the University of Canterbury science faculty. It had good connections with other international centres of excellence; as well as the professional interchange, they used the Christchurch team to do some of their assaying.

Such a centre of excellence does not make Christchurch a biotech centre comparable to the American dozen. It is a reminder that centres of excellence can exist in just about any city. It is also a reminder that public policy has to be flexible. Who would have guessed that such pioneering medical research would arise in Christchurch? (There is other excellent research being done outside Auckland. The Dunedin Multidisciplinary Health and Development Study has recently celebrated its fiftieth anniversary to international accolades.)

I am not convinced that our approach to public research has been responsive enough. Espiner grumbles about the time he wasted making abortive research grant applications. (The Canterbury Medical Research Foundation could only make a small contribution but what it did was invaluable.)

I know of a lot of other quality researchers with similar grumbles. It’s partly the funding shortage, but also – in my experience – the way the research funding selection boards tend to favour the fashionable and the conventional; moreover they tend to support projects rather than programs in centres of excellence. The failure applies to the social sciences as well as the natural sciences. You would have to be Trumpish brain-dead to support the Ministry of Culture and Heritage’s abandoning Te Ara, Aotearoa New Zealand’s world-leading electronic encyclopaedia.

What about commercialising the research by a patent which produces something which could be sold, thereby paying a royalty? That was the background to my original investigation. Create a new medical drug and one can end up with zillions; the fashion did not notice that only a trivial number of chemicals investigated got as far as commercial use (which was why venture capital is so important). Espiner describes the difficulties patenting their findings – patent lawyers were hard to find in New Zealand – but ultimately there was no commercial firm that could see how it could make a profit from them; eventually the patents were dropped because of the expense of maintaining them. The intellectual property is available free to all endocrinologists and their patients.

That is characteristic of a lot of research. The findings may be immensely valuable but they cannot be commercialised. Einstein was working in the Swiss patent office during his 1905 annus mirabilis when he published four groundbreaking papers, including one which was foundational in quantum mechanics while another was his special theory of relativity. He could not take patents out on any of them.

Focusing public funding on commercialisable research – that which contributes directly to GDP rather than wellbeing – is very short term and, probably, not very rewarding. Some might conclude that we should abandon public research funding altogether (aside from some obvious exceptions such as into potential geological disasters). But that is thinking around the wrong way.

The work of Espiner, Beaven and their colleagues was vital for importing frontier endocrinology into New Zealand. Because they were doing quality research this transfer of international knowledge was more effective. That some research was pioneering increased the effectiveness of their interactions with overseas colleagues and the transferring of their findings here. The learnings from Christchurch flowed into endocrinology practice throughout New Zealand. We all benefited.

Tariffs Are Taxes

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What can Econ101 tell us about Trump’s tariffs?

Before reviewing the economics of tariffs as indirect taxes, here is a brief account of their constitutional role. In particular, in some jurisdictions, including New Zealand, taxes and therefore tariffs are the preserve of Parliament, not that of the executive or kings. England’s civil war is complicated – wars always are – but one factor was that King Charles I was raising taxes without the approval of Parliament. The issue was eventually settled in the 1689 Bill of Rights – now a part of New Zealand law – which clearly states that only Parliament can raise taxes. One factor in the American colonists’ revolt against Britain a century later was ‘no taxation without representation’, which is enshrined in their constitution in its first article.

It is true that sometimes Parliament or the US Congress gives the executive the power to raises some taxes in an emergency but that power is usually for circumscribed situations. President Trump has claimed that such situations give him the power to raise tariffs. One American court has ruled that the increases are not legal, although reverting tariffs back to the pre-Trump levels has been suspended until the US Supreme Court makes a ruling. There is a view that the Court will back down on the constitutional principle as fast as Taco Trump always chickens out.

It is necessary to go through this because it is not certain that the Trump-imposed tariffs are firmly in place, adding to the uncertainty that the world economy faces. This column is going to assume that the Trump tariffs are permanent – until the times do alter.

It is a routine Econ101 exercise to distinguish between the apparent incidence of an indirect tax – who pays it – and the actual incidence – who ultimately pays it. Excise duty on beer is paid by the brewery to the government, but they then pass the tax on in higher prices to the drinker who bears (most of) the burden of the excise hike. I have said ‘most of’ because consumers may reduce their consumption and that will affect the brewers’ profit. As the Econ101 student learns, this balance between the suppliers’ burden and consumer’s burden depends upon the elasticities (responsiveness) of supply and demand.

Trump wants to have it both ways. Part of his rhetoric is that the burden of his tariffs will be borne by the exporters, as a punishment for their country running a trade surplus with the US or for its (alleged) political misdemeanours. In which case, US consumers will not face price rises. Another part of his rhetoric is that it will stimulate competing US production, but that requires US consumers to face higher prices so that the US producers find it more profitable to increase supply.

Both will happen to some degree. The conventional wisdom is that most of the burden of Trump’s tariffs will be pushed onto consumers. The expected price hikes are only dribbling through because exporters and those purchasing from them are uncertain as to how long the tariffs will apply.

Given the complexity of Trump’s tariff changes it is difficult to assess their quantitative impact, especially over time. Among the educated guesses is that the impact on output in the long run may be small – a reduction in output of much less than 1 percent. It will be even smaller in the short run. There is a view that the distributional changes will be larger than the aggregate output changes. In particular, it is argued that the working class – who tended to vote for Trump – will be hit most heavily. The tariffs will contribute to government revenue (although not sufficiently to cover the deficit from the ‘Big beautiful bill’).

Trump’s tariffs may contract the world economy. The uncertainty of it all is probably its greatest difficulty the world currently faces. If you export to the US, do you start looking for alternative markets? If you are a US producer do you invest to expand production? The additional output will take time to come on stream and by then the tariffs may be wound back. Better at the moment to tai hoa. Thus, we may see extra US inflation which will affect US – and hence the world’s – monetary policy with some fall-off in demand. Trump prides himself on his ‘weaving’; his negotiating strategy is based on the uncertainty it generates. What this ignores is that businesses (generally) want as much political certainty as possible; it’s hard enough dealing with market uncertainty.

(The analysis is further complicated by what happens to the US dollar; it has fallen relative to the US’s trading partners since Trump became president – but no further than the level it was during the last two Biden years.)

The analysis of tariffs compared to other indirect taxes is complicated by only some suppliers being taxed. Think what would happen if only North Island brewers, say, were levied excise duties. It would be even more complicated if North Islanders north of the Bombay Hills were levied differently from those to their south. That is why every country wants to get the tariffs it pays to the US down. They are put at a competitive disadvantage relative to those countries where Trump has imposed lower rates.

Moreover, unlike in much of Econ101, external suppliers can look for alternative markets. After all, across the board the US only absorbs about 10 percent of the world’s exports even if it produces about 18 percent of the world’s output. (Large ‘generalist’ economies tend to export relatively less than small specialist ones; we don’t classify a sale of a New York-made product to California as an export.) The likelihood is that proportion will be even smaller in the future.

As an economist, I am enthralled by Trump’s tariff experiments; it allows us to test theories and measure magnitudes. As a citizen of the world, I am appalled.

The Kindness of Strangers: So Many Small Ones.

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This was submitted to The Guardian for a regular column they were running. They never replied.

This is about many small kindnesses to the elderly, rather than a single big one. For the record I am 82, suffer joint stiffness, walk slowly, have trouble with steps and use a stick.

I first noticed the kindnesses in my early sixties when in Hong Kong I ended up on public transport with my travelling bags. The locals were so helpful even offering to carry the bags. Getting back to New Zealand I became aware that our numerous visiting Chinese students were similarly supportive.

New Zealanders’ support was less obvious to me, although they would offer me a seat in a crowded bus. However, when I began walking with a stick, their concerns became more evident, perhaps because my capacity limitations were more obvious. I stumbled over getting into a bus. One woman not only helped me up but gave me a shopping bag, mine having busted in the fall. I still treasure that bag for her memory and the many other similar kindnesses I have experienced.

At first, I thought it was just nurses and ex-nurses having been trained in caring about the dangers of falls to the elderly. But I learned it was just about everyone.

A few days ago, I was negotiating a few outside steps with deep treads and no handrails. A bloke – twentyish and huge – leapt up from his table a few metres away (yes, people still eat outside on a good Wellington winter’s day) and offered me his hand.

All these small kindnesses add up. There is a trope that younger generations are dreadful. While there is no doubt they are struggling more than we did, while they continue to show such acts of generosity, I have more faith for the future than the trope suggests.

Aspiration Without Content

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

The Government’s Growth Strategy Seems to Have Little Analytic Content.

In 1990, the Prime Minister, Geoffrey Palmer, announced that he would halve unemployment – its rate was then more than 7 percent of the labour force. An OIA request turned up no technical papers. Apparently, the PM’s political advisers – jock wankers/politicos – thought the aspiration would go down well with the public.

More recently, the Minister of Workplace Relations, Brooke van Velden, presented a ‘Health and Safety Reform Construction announcement’ which proved to be, according to one exasperated journalist, ‘an announcement of an announcement you hope to make later in the year once you know what it is you’re announcing’. As the minister explained, her non-announcement (about the regulation of scaffolding) was ‘because people are really excited about this stuff. You should put it up on your website and see what response you get.’ Aspiration without content.

As Jonathan Milne in a Newsroom newsletter commented:

Banning cellphones in schools when schools already had their own policies restricting cellphone use. Setting up a road cone tip line, inviting people to dob in excessive cone use. Banning gang patches. Banning voters from enrolling in the last 13 days before polling day. They’re striking initiatives, guaranteed headlines and social media clicks. But what they have in common is the dearth of actual evidence behind them. They’re dreamed up in party-political strategy brainstorming sessions. There’s little reference to the subject specialists in the public service; there’s no prior consultation with the wider public and those who are affected.

An earlier, and perhaps more portentous, initiative was Christopher Luxon’s announcement that he was leading an ‘economic growth’ government.

Presumably he and his political advisers saw that the public thought the Luxon-led Government was drifting. (This is January 2025.) How could they seize the initiative? Economic growth was their suggestion, which Luxon adopted. But how to add content to the narrative? Cough, cough. ‘We’ll make Nicola Willis the minister for economic growth.’ As far as the politicos were concerned, the problem was solved. What was the analytic content?

Appointing Willis as Minister of Economic Development placed her in charge of the large amorphous department, Ministry of Business, Innovation and Employment, which had been created by Stephen Joyce in what was seen as a power grab. (It appears to have been partly to demote the previous minister, Melissa Lee, out of cabinet; I leave the politics to others.)

MBIE is really a ministry of miscellaneous economic affairs, with (over half the cabinet ministers holding or sharing its portfolios). It is not thought to function well and needs to get its various divisions to work better together. Handing it over to the Minister of Finance, who usually has enough on their plate, is odd. (Willis is also Minister of Social Investment.) In principle she is more powerful than Joyce ever was. I am surprised that there was no one else in cabinet to take the job.

Willis has not made much of a mark. She is in the public eye for trying to increase competition in the supermarket sector and reduce the price of butter, hardly matters central to the finance or development portfolios. David Cunliffe, when a junior minister in the Clark-Cullen Labour Government, was charged with increasing competition in the telecommunications industry (and got it right). Minister of Finance Michael Cullen told me he was right behind him, but the leg work was by the more junior minister. Willis is out front.

It is hard to see that the announcement has had much effect other than the ministerial reshuffle. The key ministers driving the government’s economic growth agenda are Chris Bishop, Shane Jones and David Seymour. The first two ministers are doing much as you would expect – improving infrastructure and exploiting resources. (Perhaps add Todd McLay, minister of trade negotiations, since thrust from the external sector is vital.)

Seymour’s involvement reflects a changing perception, here and overseas, of the determinants of economic growth. Economic theory has tended to downplay transaction costs – they are so difficult analytically. There are some Nobel laureates for transaction costs – notably Ronald Coase and Oliver Williamson – but there is little connecting their work to economic growth.

There has been recently an increasing focus on how transaction costs from public sector procedures are limiting economic growth. (Not a lot of attention is given to private sector transaction costs, which might suggest there is a whiff of neoliberal economics in the thinking.) There are a number of other ministers and ministries – over half a dozen on my count – who are also addressing regulatory standards. The most prominent, which does not mean the most effective, is Seymour’s Ministry of Regulation. In principle, its concern is improving the quality of public regulation. Sometimes the impression is that it is adding to the regulatory burden, as in the case of the Regulatory Standards Bill.

Of course, reducing the regulatory process may be a good thing if the resources it releases get usefully deployed elsewhere. But the gains are likely to be small in terms of GDP and not affect the growth rate. On the other hand, too little regulation can be a disaster. The reductions of building regulation led to the tragedy of leaky buildings, estimated to cost the housing sector alone between $11b and $33b plus a lot of heartache and some deaths.

I am not unsympathetic to the argument that some of our regulatory processes are unnecessarily burdensome and could be simplified. (I’ll address their impact on economic growth shortly.) But regulations serve other – often valid – purposes.

The most common justification is ‘market failure’ when unregulated market transactions damage GDP (as in the case of leaky buildings). Two others are often overlooked.

One is that where economic output is not the same as wellbeing, an intervention may shift economic activity towards higher wellbeing, albeit at the cost of depressing GDP. For instance, most healthcare interventions cannot be justified in terms of enhancing GDP but they add to longevity and the quality of life. Cut them back and since people will experience poorer health and die earlier, GDP per capita will go up.

Second, regulation usually has a distributional impact. In simple terms there are winners and losers. Changing regulation changes the balance between them. Abolishing them can abolish some people’s implicit property rights. For instance, some of the environmental regulations give the public, collectively, entitlements to environmental resources which they do not privately own. The effect of the Regulatory Standards Bill is to prioritise explicit private property rights over implicit ones. (The bill would be a better if it made this trade-off more explicit by requiring the reviewing process to identify them.)

I have long been looking at whether regulatory changes affect New Zealand’s economic growth rate. There have been constant promises to improve the growth rate, but there is not the slightest evidence that anyone has succeeded. (By ‘slightest’, I mean within the known margins of measurement error – say plus/minus 0.2 percent p.a..) I concluded that good economic policies keep the boat moving forward but no faster.

That was especially true with the major changes to regulation implemented by the Rogernomes. I had expected there would be gains and tried so hard to find them; I could find none. (I found some improvements in the ‘quality’ of output which are not incorporated in the measurement of GDP.)

Given the way the economy is tracking, I shan’t be surprised if per capita GDP is much the same at the time of the next election as it was when Luxon announced that economic growth was the government strategy (the level will be lower than it was in late 2022). Probably output will be moving up in late 2026 after stagnating this year. No doubt there will be confusion between a cyclical recovery and sustainable growth; a common mistake which politicians in charge like to encourage.

The Luxon-led Government’s political advisers may well be looking for a new slogan. At the National Party conference, he announced that the New Zealand economy was ‘turning the corner’. One is reminded of Muldoon’s announcement of there being a ‘light at the end of the tunnel’. It proved to be a train coming the other way. We don’t know what is around the corner.

The Size and Borders of Nations

This entry was posted in Globalisation & Trade on by .

This Review was submitted to NZIR but proved to be outside the criteria for reviews. The writing was completed in August 2025 and has not been update for the turmoil caused by the Iran war.

The Size of Nations by Alberto Alesina and Enrico Spolaore (2003: MIT Press)

Economists tend to assume that the political borders of nations are fixed. They know that borders matter. Canadian provinces trade more with other provinces than with closer American states despite the common border being judged the most friction-free in the world.

Economists have put much effort, beginning with David Ricardo, into studying how international exchange mitigates, but does not eliminate, the economic impact of borders. There is a literature on optimal currency areas but generally the focus of economic analysis has been so short term that borders can be taken as given. An economic historian has to be more sensitive since few borders have been stable in the long term, natural borders like the sea aside.

Alberto Alesina and Enrico Spolaore, American economists but both Italian immigrants, are innovative by providing an economic analysis of the impact of national size (which they measure by population). Their book is, I’m afraid, not an easy read for the non-economist. They give what are intended to be nontechnical summaries but their resort to mathematics even there may be beyond many readers. Yet the book provides some insights of interest to New Zealanders despite our borders being among the most stable in the world. (Even so, there are those who think we should merge with Australia.)

Being economists, the authors pose the issue of the size of nations in terms of a trade-off – in this case between public goods and internal homogeneity (mainly modelled here as regional diversity). The provision of a pure public good is independent of the population size. An example might be military spending where cost is – in principle – independent of the population which has to be defended but is a function of the physical location of a nation and the threats it faces. It is a matter of economy of scales: a large population reduces the cost per head of a pure public good. (There are many not quite pure public goods when substantial fixed costs combine with population-based costs. So, to the fixed cost of a national broadcasting system is added the costs of reaching out to ‘minority’ regional, ethnic, language and religious groups.) The more diverse a nation, the more complex and costly is its governance.

Not surprisingly, the authors show that the trade-off outcome reflects the form of governance. A dictatorship wants a larger nation because it can accumulate more power and wealth; a democracy is likely to support smaller nations because it is harder to deliver services and formulate policy. Hence the democratic pressures for regional separation in order to seek greater homogeneity, while dictatorships want to impose uniformity and extend their borders. (Instructively, the book has been translated into both Catalan and Chinese.)

The empirical evidence is that being a small economy is not a handicap to affluence. Many of those with highest income per head do not have large populations. Consistent with the book’s theory, the small economies have larger public sectors and are more open to international trade.

New Zealand appears to be an exception. Our public sector as a proportion of GDP is relatively low for an affluent economy, as are our exports and imports. (The latter result may be attributed to our geographical isolation, which is not a factor the authors consider.) Another exception is that while the book predicts that democracies are more decentralised, New Zealand politics is generally considered as being concentrated at the top. (However, economists may have a different definition of the notion from that held by political and constitutional analysts.)

The authors cite another study which looked at merging two countries. Of the 123 pairings it considered, in only 14 cases would both countries economically gain from full integration. New Zealand would gain, but Australia would lose in an Australia-New Zealand merger, a common situation accounting for 92 of the 123 cases. In the remaining 17 cases, both countries would have lost. (Spolaore &Wacziar, 2002)

More generally, the book argues that in a peaceful world smaller economies can thrive providing they are internationally open, thereby benefiting from specialisation overcoming the lack of industrial scale in every industry. They have a particular interest in a word economic order organised around a liberal trade regime (and the rule of law). Where there is warfare, bigger is better.

On the whole the book’s notion of warfare is of the military kind. It does not address sanctions, nor the use of tariffs as an instrument of economic and political warfare, as the President of the United States is currently pursuing. In any bilateral negotiation the bigger bully is likely to succeed although at some point a tariff hike becomes so high further increases have no effect. Even so, it is far from obvious who suffers most, since domestic consumers may pay the tariff (just as military aggression is costly domestically in people terms and in diversion of output from consumption). But this is only the beginning of the analysis since tariffed products can be diverted to markets elsewhere, while smaller economies may work together both to resist the bully and to increase trade among themselves. That is a rich area, hardly yet explored by economic theorists. The analysis in the book may be its foundation although, but alas, Alberto Alesina died in 2020.

New Zealand cannot do much about its size nor its borders. We can ask why it does not more closely conform with the model’s prediction; as a country vitally dependent on international trade we need to understand how the rest of the world economy operates.

Reference

Enrico Spolaore & Romain Wacziar (2002) Borders and Growth. (NBER Working Paper 9223 http://www.nber.org/papers/w9223)

How Important is Distributional Economics?

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

Angus Deaton’s Economics in America challenges the direction that economics has taken.

In 2015 Angus Deaton was the sole awardee of the Bank of Sweden’s Prize in Honour of Alfred Nobel, for his contributions in the study of ‘consumption, poverty and welfare’. (It has been relatively rare for this Nobel to recognise poverty or welfare; nowadays the award covers a slightly wider remit than just economics.) The Royal Swedish Academy of Sciences, which makes the award, said that ‘more than anyone else, Angus Deaton has enhanced this [understanding of economic policy intended to reduce poverty]. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics’.

Deaton described himself as ‘someone who’s concerned with the poor of the world and how people behave, and what gives them a good life’. His Deaths of Disease and the Future of Capitalism, which he coauthored with his wife Anne Case, illustrates both his concerns and how innovative he (they) can be.

He grew up in Scotland, going to Cambridge University where he graduated with a doctorate. Forty years ago he took up a chair at Princeton University near New York. Thus he is both an immigrant and well embedded in American life, which is a good place from which to provide an insight into the state of economics and US, as his memoir Economics in America: An Immigrant Economist Explores the Land of Inequality well illustrates. (If you think ‘civilised economist’ is an oxymoron, you have not read this book.)

Of course, American economics is not the whole of economics, but some 71 of the 93 Nobel laureates were born in the US, and a goodly number of the remainder spent most of their working lives at American universities; American economics dominates the economics profession.

Deaton reports that when he shifted to the United States from England, he was struck by how little attention was paid by American economists to distributional economics, which perforce means by the economics profession as a whole. I won’t say he has trod a lonely path, but certainly it has been the path less trodden.

For example, some years ago, I was looking at some New Zealand research which was trying to estimate the gains from reducing border protection. The assumptions in the model ensured there would be gains; at issue was how much? The research concluded that they would amount to an increase of about 0.3% of output. What the research did not notice was that the changing shape of the economy had real wages falling by about 5% and profits correspondingly rising, which meant that the distributional impact of the proposed policy change was far greater than the gain in efficiency. The winners gains from the redistribution far exceeded the gains from greater allocative efficiency. 

I am not arguing these figures were correct. The point here is that the researcher did not notice the distributional implications of the research. Had I raised it with him, I would have been dismissed by the argument that workers could be compensated for their loss of income, but there would have been no consequent discussion of how the compensation would be implemented – that would involve raising taxes.

That is the story of much public discussion about the economy since. Lots of attention to efficiency gains – which are often quite small (and promised rather than measured) – and no attention to distributional impacts, which can be quite large. I often observe advocacy based upon efficiency gains – promised but not measured – without any attention to the effects on equity. Surprise, surprise; the advocate would be one of the beneficiaries from the gain. Even less surprising, the change is resisted – to the incomprehension of advocates – by those who will be made worse off; advocates attribute it to ‘politics’ (which they pretend to be above). Distributional economics is one of the most complex and difficult parts of economics, but that is no excuse for ignoring it, especially if the analysis is about policy.

Take, as but one example, the Regulatory Standards Bill and let us assume the charitable interpretation that its purpose is to provide a more systematic review of a regulation when it is being introduced. I would have thought that any systematic review would identify winners and losers but there is hardly any reference to that in the proposal. The exception is that a review is required to identify the losses (but not the gains) of those with property rights – commercial capital. One might have expected a similar provision for losses for those with human capital – their earnings. On that the bill is silent. (Even that addition would not cover wider distributional issues such as the degree of income and social inequality and poverty.)

Such criticisms are not peculiar to New Zealand; much of our economic debate echoes that in the US and elsewhere. That is what Deaton is challenging in public policy, area after public area, including health economics, which combines distributional issues with challenging technical ones. Deaton points out that while the healthcare sector consumes about 15 percent of US output (less in New Zealand), there are comparatively few health economists, and they generally have lower status (also true in New Zealand).

Deaton is not a minor economist. Among his recognitions are that he holds a prestigious economics chair at Princeton University, which is globally ranked among ten universities for economics and econometrics (most of them are American). He has been elected president of the American Economic Association. Deaton is an insider writing from the inside.

A great autobiographical memoir describes a journey through life, its vistas changing. Last year, Deaton wrote that he had changed his mind on large parts of the mainstream economics he had previously supported. While acknowledging that economics had achieved much, he concluded, that economists’ mistakes showed how ‘economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did.’

The final chapter of his memoir, entitled ‘Is Economic Failure a Failure of Economics?’ is as an impassioned and informed essay on the state of economics as I have come across for some time – Keynes would have been proud to have written it. It is so dense, balanced and thoughtful that any paraphrase would be inadequate. I suggest you sneak into your local (good) bookshop and begin reading it. I bet you buy the book.

Politicos vs Wonks

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Winning office is not the same as achieving change.

A recent Economist columnist divided politicians and their political advisers into either ‘jock wankers’ or ‘nerd wankers’. It’s a distinction which I use here, but with the less pejorative ‘politicos’ and ‘policy wonks’.

In opposition, the politicos are primarily concerned with getting their party elected; in government their concern is maintaining party support to get the government reelected. The Economist recalls ‘a period of swaggering jocks, charming or bollocking journalists until they wrote something nice about Sir Tony Blair’.

The policy wonks are concerned about the development of effective policy. Of course there is overlap between the two but it is characteristic of the politicos to be concerned about articulating (often poorly defined) policy goals which sound plausible but are not implementable. Think of boot camps for which there is no evidence of their effectiveness – let alone cost effectiveness – but resonate with the public and so win votes. How many policy proposals of this government – indeed of every incoming government – are on the list of such examples?

Very often the politicos have studied politics at university and pop up in advisory positions to incumbent politicians. There are lots of good reasons for studying political processes but, alas, understanding how policy is made is not one of them in New Zealand. In principle, one can take policy studies courses, but my impression is they don’t contain enough gritty case studies – the devil is in the detail.

A salient example of the approach of ‘politicos’ is Elon Musk who having helped Trump get elected, wanted to downsize the US government. Even if we ignore his exaggerated promises typical of the Trump administration, his attempts were a failure because he had no understanding of how the bureaucracy worked; the outcome has been damage followed by (often ineffective) damage control.

The distinction is useful to understand the ‘paradox of Jacinda’. Ardern with a degree in communications and politics and an adult life spent in politics, was a prime minister who was superb in her first term to the extent that her party won a majority of seats in the election at its end. But in the second term, it lost support to the point that she retired early and her party was electorally demolished.

A common trope is that her loss of popularity was because she was a woman, but that has not applied to the same degree to Jenny Shipley, Helen Clark or Judith Collins. The Economist dichotomy provides useful insights, although it is not a perfect fit.

As signalled by the title of her memoir, A Different Kind of Leadership, Ardern saw herself as a leader, skills greatly required in her first term during a number of crises, notably the Covid pandemic and the mosque massacres. (I just marvelled at her handling of the latter, although it is likely that Bill English, say, would have done as well leading during the brunt of the pandemic.)

Her Labour Government could excuse itself for not having much policy during its first term because it was generally quite unprepared for winning the 2017 election. A few – very few – ministers were prepared but their achievements did not amount to an overall direction. Ardern promised ‘transformation’ but that was aspiration without content.

Fortunately for her, and for her Labour Government, the first term was riddled with issues where leadership was vital; Ardern handled them well. Hence the election of a majority Labour Government in 2020. Now was the time for policy which would lead to the promised transformation.

It did not happen. It was not so much that the government was unprepared for policy changes but there was no coherence in the overall direction and some, especially the penchant for centralisation, were in the wrong direction. I have detailed this in my book In Open Seas.

Ultimate responsibility rests with Ardern and her Minister of Finance, Grant Robertson. They may be contrasted with their predecessors, Helen Clark and Michael Cullen, both of whom were policy wonks. (That I give them this attribute does not mean I support all their directions. I have various hesitations with Clark; Cullen I am more comfortable with. Bill English was a policy wonk too; Key was not, as his abortive attempt to change the flag demonstrates – his role was political leadership.)

It is instructive that Ardern’s policy achievement with the greatest transformational potential was the 2018 Child Poverty Reduction Act which gets little mention in her memoir (see my Chapter 22). Arden was not the policy wonk to implement its strategy; she largely employed advisers like her. They were rich with goodwill towards the ambition, but they did not understand the technical issues – the devil is in the detail. The act became aspirational and has achieved little.

I puzzle over Robertson. He too was a politics graduate but had more experience outside the political system. (I am not judging his macroeconomic management here.) In the end I conclude he was not a policy wonk like Cullen or English. He too proposed a transformational policy, probably driven by work which began in Treasury even before English. But the promise to pursue wellbeing rather than output was never bedded in, despite it being, in my view, the economic approach of the future. (See my Chapter 2.) Instructively, it was hardly mentioned in Labour’s 2023 campaign (poverty reduction couldn’t be because there was hardly any). There was not the sort of dual leadership which characterised the Key-English Government.

Instructively, the current Luxon-led Government has wound back most of the Ardern-Hipkins legacies. It was partly because some were misconceived, but also because the current government has a quite different account of the economy and its future. They have yet to convince us it is forward looking.

Neither Christopher Luxon nor Nicola Willis are policy wonks, although some ministers are dealing with their portfolios more than competently. Luxon’s ‘going for growth’ strategy seems to have come from the politicos among his advisers. They are all sizzle and no sausage. Thus the increasing dismay of the public towards the government. Same happened to the recent Labour Government in its second term.

If there are any policy wonks near the current government, they may be advising ACT although they show little of the political judgement of politicos. 

It is too early to judge the efforts of the Opposition – whether Labour has learned from its failure in government. (It should read my book; even if I have it wrong it may stimulate them to get it less so.) Aotearoa New Zealand is going through a rapid social and economic transition but most of the public discussion is backward looking.

The choice between politicos and wonks is that the politicos are better at attaining and maintaining office, but their policy achievements are aspirational and rarely effective; policy wonks find it harder to get elected but when they are, they have the power to change. The Economist article is about getting the balance right.

The Reality of Fiscal Constraints

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Why is the British Labour Government penalising its poor?

We have the spectacle of the Starmer-led British Labour Government taking measures which are making some of the most struggling Brits worse off. It has got to the point where Labour’s parliamentary backbench is revolting and the government has had to make partial concessions – the latest is a backdown over cutting disability and sickness benefits. It’s hard not to see Keir Starmer and Chancellor of the Exchequer, Rachel Reeves, practising fiscal austerity.

The underlying reason is that the British economy is stagnating. Since the 2008 Global Financial Crisis there has been no real growth in British per capita GDP. The economy is producing a quarter less than it would have if the pre-GFC trend had continued. (There are other affluent economies which are similar, so it is not just Brexit.)

You may think that if per capita GDP is flat, then things are not getting any worse, and ask why some people have to be made worse off. Leave aside that when there is an average of zero economic growth there are many people whose income is decreasing (offset by those whose incomes are increasing); averages can be misleading.

As this column has had occasion to point out, when focusing on the average, output (income) is not the same as wellbeing, nor does an increase in output necessarily mean progress. Indeed some rise in output may be associated with making things worse.

The most recent example was how smartphones – which have added to GDP – seem to have made adolescents worse off. Once young adults reported themselves happier than mid-age adults and about the same as the elderly. It was described as the ‘U Curve’ of wellbeing by age but today’s generation say that on average they are more miserable than all those older – happiness increases with age. The youth’s state may not be economically induced – we do not have the research evidence although one can think of causal processes – but it illustrates how ‘progress’ may not be progress. This is but an example. Do be cautious about equating GDP growth with social progress.

Additionally in Britain, and for much of the West, there are plans to increase military spending – mainly as a result of Russian aggression but not helped by Trump or Netanyahu. The output may increase national security but I doubt that people think it adds to their personal wellbeing. However, it diverts public spending from activities that they think will do so.

A further ongoing issue is that during a period of fiscal austerity some measures are delayed – in New Zealand we have held back on building public infrastructure – and the consequences of the failure eventfully catch up, adding to the fiscal pressures.

The British fiscal position is gloomy. Currently the budget deficit is about 5 percent of GDP while the public debt-to-annual GDP ratio is near 100 percent. While these figures may be defined slightly differently from New Zealand’s, they are certainly higher than ours. So the economy has little room for a boost in private and public spending. What to do?

The easy option is to talk about boosting sustainable economic growth, but despite the clamour of (conflicting) policy proposals, few are based on evidence or even explain the current long-term stagnation (and, to be honest, I am puzzled too). Even those policies which might boost growth will do so sometime in the future (when the current proponents are no longer in power).

Why not borrow more? This would amount to future generations paying for current consumption (and might explain why young adults are so melancholy). But most countries are nearing their public borrowing limits, in that lenders are becoming increasingly reluctant to hold more government debt. In a curious way (and presumably unintentionally), lenders are guarding the interests of future generations (although not out of benevolence). *

Britain’s independent Office for Budget Responsibility has warned that British public finances are in a relatively vulnerable position, with pension costs, climate change and volatile bond markets all posing significant risks. It observed that the UK has ‘the sixth-highest debt, fifth-highest deficit and third-highest borrowing costs among 36 advanced economies’. There is not a lot of room for fiscal manoeuvre, so Reeves has had to restrain or cut national expenditure.

That need not be public expenditure. Private expenditure could bear the burden by raising tax levels. Thus far, Reeves has been unwilling to do so in a major way, although she introduces increases where she thinks she can get away with it. (Jacinda Ardern ruled out her government raising tax rates, thereby drastically limiting Labour’s ability to implement the policies its supporters wanted including reducing inequality and child poverty. Nevertheless, desperate for revenue, her Minister of Finance, Grant Robertson, inched in new taxes whenever he could get away with it.)

I am not sure why Reeves and Starmer are so loath to raise tax levels other than the usual one that taxpayers don’t like them (but they don’t like the alternative policies of inadequate public services either). In New Zealand there are also vociferous neo-liberal lobbies which are opposed to any increases in taxation and therefore, being good fiscal conservatives, support cutting government spending. (Some of their work identifying shoddy government spending is to be applauded. They should be on select committees.)

So a Cabinet has to make choices. Think of it having a list ranging from the unavoidable (say, in the British case, increased military spending) to the nice-to-have, each accurately costed. (Actually they don’t; this is a simplification.) The list will include possible public spending cuts with financial gains. Tot up how much money there is to spend, go down the list until it is all spent, and cut off all those below it. It is not as simple as that but it illustrates the spirit of the exercise.

There will be divisions within cabinet. The amount of consultation outside will vary both directly with caucus and indirectly by budget leaks. The 1958 Black Budget was notorious for there being little consultation; the following Holyoake Government had very full consultation with its caucus. That would be difficult given the British Labour caucus totals more than 400 MPs.

Whatever the extent of the consultation, over 100 members of the caucus threatened to vote against some of the recent measures. The Starmer-Reeves Government made concessions. (There had been earlier upwellings but the Labour Government did not pay them enough attention.)

I’ve laboured through this process – even then it has been simplified – because the nature of the resistance is similar to what commonly happens here. The criticism was about a particular policy but there was no attention given to the underlying cause of fiscal restraint and no mention of how any alternative policy was to be funded. It was likely that the Labour cabinet was not enthusiastic about the cuts. They just had higher priorities on their list – healthcare would have been one (and the dissenters would have been just as unhappy had some healthcare programs been cut).

The economist who sees tradeoffs – there is no such thing as a free lunch – finds such public debates uncomfortable. There are almost overwhelming demands for the government to spend more (or to cut taxes so the private sector can spend more) but the constraints it faces are typically ignored or vague. Curiously, the ‘left’ tends to be more precise, with more specific proposals to raise taxes to fund their spending demands; the right tends to be vaguer about what public spending should be reduced to pay for their demanded tax cuts. Both drift towards taxing future generations – that is, borrowing.

The Starmer-Reeves Government plans to fund the concessions they made to their revolting caucus have been deferred to the end of the year. The hints are that there may be a tax increase. It is not easy governing in times of stagnation – being in Opposition is almost better and certainly easier.

* There is a crude Keynesianism that governments are borrowing from their public and have almost unlimited borrowing power. It would be tiresome to detail all it faults – Keynes would have been appalled; he spent a lot of effort negotiating US loans for Britain – but a key one is that countries are open to the world and are borrowing directly or indirectly offshore.

Is Progress Progressive?

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Pundit, Social Policy on by .

We should not assume that all adopted innovations are progressive. Jonathon Haidt’s ‘The Anxious Generation’ illustrates that sometimes they require social measures to enhance well being.

The Anxious Generation is a book which probably everyone engaging with adolescents should read. Haidt’s thesis is that smartphones replacing flip phones led to a marked deterioration in the wellbeing of American adolescents, causing an epidemic of mental illness. He is a social psychologist so I am not qualified to judge how right Haidt is but he certainly appears convincing. (I also greatly admired his The Righteous Mind, where he is acting as a public intellectual.)

The thesis reminded me of the wider problem of how to deal with technological innovation. Smart phones are an impressive technology, but do they improve wellbeing? Are they progress?

Progress is a relatively recent notion in the history of humankind. Plato described how once there had been a golden age, and how things have gone downhill since. When Copernicus proposed that the earth went around the sun, the conventional wisdom comforted itself that Pythagoras had already thought of that; it couldn’t be new knowledge, could it?

About five hundred years ago, the view developed that not all valid knowledge was imbedded in the past – in books – but that it would evolve out of empirical investigation. An early proponent was Francis Bacon in his Novum Organum (written a decade after the King James Bible, but in Latin). That approach has since driven science. In a meaningful sense science is progressive because it builds on past results modifying and discarding old theories.

This is nicely illustrated by the suggestion that were Plato to be reincarnated there would be a bidding war for him – no doubt won by Harvard, the world’s richest university. (This is not to say that there have been no great philosophers since but I would go to a lecture by Plato – providing it was in English and not Greek.) However a reincarnated Archimedes, the greatest Greek scientist, would be relegated to a 14-year-old’s maths class. Science progresses.

Science creates technologies – ‘blueprints’ for doing things which get applied to human endeavour, most notable with the economy. Before science, per capita economic output had been constant for millennia. Had economies stagnated at that level, today’s per capita output would be a fifteenth of its current level. (That does not mean we are fifteen times happier, or even any happier. But we have undreamed of choice and opportunity, and live longer and healthier lives.)

Thus we think of technology as progressive too. But is it? The answer has to be cautious. Just because someone is promoting the new, it is not necessarily beneficial. Very often the real benefit comes after we have provided a social framework for its use.

That’s what Haidt is saying about smartphones. He is not against them but thinks that there should be rules for their use:

            1. No smartphones before high schools;

            2. No social media before 16;

            3. Phone-free schools;

            4. Far more unsupervised play and childhood independence.

I am not in a position to assess these policies, but an economist notes that the first two cannot be implemented by the state and yet are not simply a matter for individual parents since they won’t want their child to be left out if everyone else has them. The third could be state-imposed, but in my view it’s a direction to be implemented by individual schools to allow for local particularities (and to work with parents to effect the first two recommendations). The fourth is very much parental – read the book about how it fits in.

Sometimes greater state intervention is necessary. Laissez faire does not always work especially when a new technology arises. But a caution: we don’t usually know when a significant new technology appears how to regulate it. Smoking is a good instance.

Legislation was passed in 1907 to ban tobacco sales to persons under the age of 16, as it was feared that tobacco would ‘stunt’ a minor’s growth. It was a response to the introduction of cheap cigarettes. A feature of the parliamentary debate was that MPs said that smoking was appropriate for adults (i.e. themselves) but they were concerned for adolescents. They had no evidence.

It took half a century for scientists to be sure that smoking was harmful to the smokers. By then, there were powerful tobacco companies which not only opposed control, but deliberately suppressed their evidence that smoking was damaging to health. Given that tobacco is also addictive, it has taken till now to reduce tobacco usage substantially.

The new development is vaping. We don’t know how damaging it is – it will take a generation of vapers to assess its impact on their health with confidence; the 1907 debate indicates that initial assessments can be very wrong. The current advice is that it is better to vape than smoke but who knows? Best give up both.

Vaping is but one recent innovation with puzzling impacts. Make your own list of concerns: AI, social media, microplastics, smartphones … it goes on.

This column appears to make conflicting recommendations. One is that almost every significant technological change will need a public policy response which the longer we leave, the harder it will be to overcome entrenched interests. But second, identifying appropriate policy responses early is difficult and we may get them very wrong.

It must be a concern that we do not have much capacity to introduce early responses. The changes that this government has made to science funding have virtually closed down serious social science research except what can be funded under the medical science remit. (Much of what was previously funded was so woke it hardly counted as serious research, but that should have been addressed by tightening up criteria and appointing more credible selection panels.) We are left very exposed to failing to use many new technologies in a socially effectively way.

Importing findings from other countries is hardly the whole answer. We need local research capacity to channel overseas research into New Zealand for responses to the innovations may be affected by cultural circumstances. This is nicely illustrated when Haidt describes quite different responses by boys and girls to smartphones (although both end up with higher rates of mental illness). Readers will not be surprised by the differences; Haidt does not tease out why. If there is this difference within America – Haidt mainly focuses on American Whites implying that things may be further different for Blacks and Latinos – then how much of his analysis is relevant here in Aotearoa New Zealand? (The answer must be some – but which?)

The government’s focus on economic growth means it is concerned with technological innovation. Given there is no certainty that the innovation will enhance wellbeing and that some will be detrimental, it is unwise not to strengthen relevant social science, instead of relying on the laissez faire of low government involvement. Haidt’s The Anxious Generation illustrates its dangers, while the book’s drawing on a wide range of American social science research illustrates that neglecting it here will compound those dangers.

Investing in the Public Health System

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What can you do when you have hit your borrowing limit and still want to spend?

One option is to cut back on maintenance of your capital – say, to delay repainting the house or keeping the car in tip-top condition. The government does the same. Hence our three water systems leaking, polluting and flooding; hence the deteriorating quality of the state housing and other buildings such as schools and hospitals ….

Another option is not to add to your capital assets – the car is still outside because you can’t afford to build a garage. Government does the same. Roads, schools and hospitals are crowded when they should be extended …

Or you can borrow sneakily on a credit card or by hire purchase. This is much more limited in the case of the government. The standards set by the 1989 Public Finance Act require reporting all borrowing including that in Public Private Partnerships (PPPs). Part of the reason for the 1989 change was that previous governments – especially Robert Muldoon’s – had been de facto borrowing by giving guarantees to private borrowers which were not reported to Parliament. That failure screwed up the debate of the ‘Think Big’ major projects; had the public known, the resulting decisions would have been different and less costly to the public purse.

But there is a more cunning form of de facto sneaky borrowing which is even more expensive. You can only afford to buy a house an inconvenient distance from the job, so you pay through the nose in the costs of travelling to and from work; you cannot afford to buy a house, so you rent from a landlord who in effect buys it for you and charges you a rent, the total cost of which is higher than if you had purchased the house yourself. The current government seems to be reduced to pursuing such strategies.

For that is the consequence of the Minister of Health’s announcement that he expects Health New Zealand (HNZ) to take out ten-year contracts with private health providers to deliver surgery. This is structural outsourcing, a form of privatisation (although the minister would deny the claim). Since a public hospital could hire the labour inputs directly, the essence of such HNZ ten-year contracts is the government hiring buildings and equipment it cannot supply itself (while giving the private hospital the security of cash flow to be able to borrow to acquire the buildings and equipment).

The minister could have given a direction to HNZ that it install the buildings and equipment for itself. But that would have involved funding public investment and the government judges that it has reached its borrowing limit. It is behaving like a credit-limited person.

At this point I have to deviate from the economics column and discuss whether the outsourcing will compromise the public health system. There are many with far more expertise in the area than this columnist who think that it will. (For instance, Ian Powell argues that ‘increasing the use of private hospitals for elective surgeries will normalise a two-tier system and enable the Government to perpetuate the continuing neglect of public health and further running down public hospitals’.) *

Only an ideologue thinks the private sector will necessarily be more efficient that the public sector (and sufficiently so to pay its higher cost of capital) without evidence. I have not seen many studies and those I have compared delivery where the treatment has been routine rather than complex. Moreover, it is rare for them to allow for the costs of professional training, which public hospitals (mainly) do.

Complexity would appear to be critical. I’ve just read Ivor Popovich’s A Dim Prognosis: Our Health System in Crisis — and a Doctor’s View on How to Fix It, which is salutary for somebody who has never worked in a hospital (and also a bloody good read). Admittedly, as he says, he highlights the medical crises and not the more boring bits. Popovich works in intensive care and there are currently no proposals to outsource that sort of care. But any operation can go wrong and as its complexity goes up, most of us would prefer to be near an ICU.

There are two issues an economist might raise. First is that these ten-year contracts amount to PPPs. I leave it to the accountants to decide whether they should appear as a liability in government accounts, but in economic terms they are an indirect borrowing for capital investment as a consequence of the government’s borrowing being restricted. We should consider costs when making outsourcing healthcare decisions, but it is ridiculous that the primary determinant should be some arbitrary borrowing rule.

(At this point it might be useful to reread last week’s column which explains how lenders function and why the government faces a borrowing constraint.)

So I want to suggest a way around the rule acceptable to the lenders, which means it will have to be transparent and sensible.

During the attempt to commercialise the public health system in the early 1990s – one could argue that the minister’s new directive is related to the notions driving that commercialisation – I argued there was a case for separating out the management of hospital buildings from the management of healthcare services. This corporatisation – for they would still be public-owned entities – would have involved the (then) AHBs renting the buildings from the hospital building owners, who would be managing them as commercial properties. The separation was to get AHBs to focus on healthcare delivery, which is quite a different exercise from managing buildings. As a general rule, ask an agency to do two such different tasks and it will do both badly.

This is not as extreme a proposal as it might at first seem. That is already how private hospitals function. The doctors using them lease facilities from the hospitals; they don’t own them. Moreover, it is not too different from the debt proposals of the previous Labour Government’s three waters scheme – that had other weaknesses.

The State Owned Enterprise would borrow for extensions. The resulting debt would appear on the government books. Lenders would be more relaxed about this addition, not only because it would be transparent also because it was set off against tangible development. In effect lenders would accept a higher public debt-to-GDP ratio because in the end it is not the number which matters but whether the debt is well managed.

To be clear, I am not trying to get the government to borrow sneakily. That is inefficient, it distorts decisions and is anti-democratic. But we need a regime which treats the provision of quality healthcare on its merits, undistorted by the need to get around accounting and banking rules.

* I am not ideologically opposed to outsourcing. Almost everyone agrees that the public healthcare system should be outsourcing to primary care. Too often patients are turning up at hospital emergency departments because they have not seen their general practitioners or went to see their GP far too late. That is both inefficient and also compromises the public’s health.

Constraining Fiscal Management

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Why Government borrowing is limited

This column started out to explain how the proposed structural outsourcing of public surgery was partly a consequence of the peculiarities of our fiscal borrowing practices. In summary, the restriction on the government’s debt level means seeking indirect ways to provide the required capital. One way of doing this is ‘leasing’ the capital from the private sector. Next week I’ll explain how that is done in the healthcare sector; this week is to explain where the debt constraint comes from.

The consequence is that we either make some hard decisions or we undermine the future of the New Zealand economy by having too much debt and not enough capital. Wilkins Micawber reminds us it is not much fun being a debtor.

New Zealand’s Debt Strategy

The asymmetry between borrower and lender is well illustrated by Keynes telling the New Zealand Minister of Finance, William Downie Stewart, that New Zealand should borrow as much as it could to offset the Great Depression, but if he (Keynes) were a lender he would probably not be prepared to advance New Zealand any more.

Each lender has to make an assessment of the borrower’s ability to service and repay the loan in the future. The lender is likely to be more cautious about that prospect than the borrower. Arguably, the financial cost to the lender of failure is greater than the cost to the borrower. (However, the human cost may be less, although this is not usually a major consideration in such financial decisions.)

This superior position of lenders frames New Zealand’s debt policy. The government judges that its net-debt-to-annual-GDP ratio should not exceed 50 percent (based on its chosen debt measure). Because there is a need for a margin for emergencies – like the Great Depression – the government targets 30 percent. Currently the ratio is about 40 percent as a result of measures taken during the Covid pandemic.

In my view a 20 percent margin for emergencies is reasonable, so I focus on the 50 percent ratio. It largely comes from discussions with credit rating agencies (CRAs) and larger lenders. A credit rating saves every potential lender going through the same process of assessing the risk of default. The awarded grade help sets an industrywide benchmark – the higher the grade, the lower the risk and the lower the interest rate charged, not only for the government but for private borrowers too. As Keynes indicated, their judgement is decisive even if it is irrational (which it need not be).

I have never been at an assessment meeting with representatives of a CRA but I have had discussions with a number of those that have. I was told that the raters are sophisticated and knowledgeable; their questioning can put the New Zealand team under considerable pressure (which, those who have told me to their chagrin, is usually justified). CRAs do not just look at the government-defined debt ratio (which has varied under different regimes) and they include the NZ Super Fund assets in their assessments. They also look at private foreign debt, especially the offshore debt of the private banking system, because it can affect the ability of the government to service its debt.

This was well illustrated during the GFC, because a deterioration in the liquidity of foreign exchange markets meant the banks might not have been able to roll over their maturing offshore debt and could have turned to the Reserve Bank, forcing it to do the international borrowing instead.

I am certain that the CRAs are tetchy about borrowing for consumption. I’d like to think they accept that such borrowing can be temporarily justified during an emergency, as occurred with the GFC and the Covid pandemic, just as you would do during a household crisis. But, as I reported in an earlier column, the government’s relative net worth is projected to decline from about 40 percent of GDP this year to under 36 percent in 2029. That suggests we are borrowing for consumption and running down the public assets.

Borrowing for Development

Credit rating agencies are more benign towards funding investment for development (providing politicians are not syphoning off funds for personal use). Even so, there are caveats which mean that there will still be limits to how much lenders are willing to advance. Vogel’s publicity, aimed at lenders to fund his ‘think big’ development, insisted that New Zealand’s total debt was not high. Attitudes have not changed much since.

Consider the Ardern-Hipkins Government’s three-waters proposal which involved $10b and more of funding for future investment on fresh, waste and storm water systems. It would have made no sense to load onto this generation the cost of the infrastructure which provides for four and more generations. It seems that the Treasury was keen to keep the debt off their books and potential lenders were asked to advise which of the various funding options was most acceptable to them. This was one of the sources of the contorted policy; politics was another. The lesson is that funding arrangements affect the ability of New Zealand to develop.

Can we do better? First, because it is generally considered last, the private sector has a role. The more it borrows overseas, the more it compromises our credit rating, making it more expensive for the government to borrow. The more we save, the less we borrow overseas. There are some fine-tuning options. For instance, foreign direct investment in businesses is considered less compromising than bank borrowing. (Since the GFC, the Reserve Bank has reduced the exposure of the banking system to short-term international crises.)

Second, the CRAs probably think the government accounts remained exposed. (The government goes on and on about reducing borrowing but it is the debt and net worth levels which really matter; perhaps they don’t want the public to notice that net worth is deteriorating.)

Third, it seems likely that lenders would be more willing to make advances where it is transparent that the funds are being invested competently in real infrastructure. That suggests that separate entities may be relevant. I illustrate this in regard to hospitals next column.

The measures outlined require sacrifices to implement. But there is no easy alternative unless compromising the future of New Zealand is easy.

Footnote: I would not expect my readers to make this mistake, but they may have to remind friends that the government issuing cash is borrowing. In effect a banknote is an anonymous deposit in the Reserve Bank. (Issue too much cash and people try to dispose of it for goods which can contribute to inflationary pressures.)

Will and Resources

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

Trump may be accelerating the decline of US power.

In the 2004 film Downfall (Der Untergang), which portrays Hitler’s last days in a Berlin bunker, he says that if the German people are weak they deserve death. It is a view from philosopher Friedrich Nietzsche who argued that conflicts are won by those with the strongest will. The particular situation shows the flaw in the argument. Whatever the will, there is not always a way; there has to be the resources. The film has Hitler ordering his non-existent armies to resist the allies, but they had already been overwhelmed by Russian boots and American weaponry.

I was reminded of Downfall by Fintan O’Toole’s description of Trump’s version of history that the default condition of American capitalism is global capitalism; if it has been lost, it can be restored by sheer political will. I do not equate Hitler and Trump – there are parallels and there are perpendiculars. I am drawing attention to the parallel of the importance each ascribes to political will and the danger of not having the resources to back it.

Therein sits the inherent failure of the Trump strategy to make America great again. He is correct that America is not as relatively powerful as it was once – say after the Second World War, when the US share of world GDP was 27 percent while next down were the Soviet Union and Britain at about 7 percent each, and only the US had nuclear weapons. Currently, China’s GDP is about 19 percent of the world total, with the US at 15 percent, fractionally ahead of the EU. Russia and Britain are in the 2-3 percent group with Indonesia, Brazil and Turkey, while India (8%) and Japan at (4%) sit above. (GDP is measured in common prices.)

This column is about economics but there is an endnote about military strength; in the long run it also depends upon the economic base. A second endnote reviews the international monetary world order; this column focuses on trade.

Economists have a reasonably coherent account to explain America’s falling share of world output. To simplify, it is hard to progress the technological frontier which drives economic growth at the top of the affluent economy hierarchy; it is easier to import existing technologies and apply them once local governance is favourable. (There are lots of complications and caveats, many of which I wrote about in Globalisation and the Wealth of Nations.) But basically, we should not be surprised that the US share has decreased as other economies have grown faster. It happened to Britain in an earlier era, as America and the European continent with their larger populations overtook it. I shall not be surprised if eventually the world returns to the pattern of 1750, when the relative size of economies roughly corresponded to the relative size of their populations; of course there are complications and caveats.

Trump and many Americans have an entirely different explanation for America’s relative decline. They think politicians (of both parties) and the Washington bureaucracy have not had the will to maintain the US hegemony, making concessions to other countries at the expense of America. A leader with strength of character and purpose will not just stay the decline but reverse it, making America great again.

An economist finds this a difficult proposition; here I focus on the policy responses. The logic of this success-by-strength approach is for the strong to operate bilaterally. In a bilateral negotiation the stronger party can win by bullying the weaker one. Trump repeatedly tries this approach, hence his abandoning the multilateral trading system. The US is usually stronger than the other party, but in the case of China the two contestants are more equal. (This is also true for the European Union but its clumsy political structure, which gives many of its countries a near veto, has led to Trumpian America interfering in domestic politics to create regimes more favourable to MAGA.)

Other economies are much smaller and offer the possibility of successfully divide and conquer. Thus far the strategy has hardly worked because the smaller have sat tight rather than settle. Some have concluded that by working together they can resist the bullying. ASEAN, a loose federation of 10 South East Asian economies which collectively make up about 6 percent of the world’s GDP, is aiming to increase cooperation – including that none will make concessions to the US which harm the other nine – and to diversify which means working more closely with China, the EU and Japan. China is particularly keen because it would welcome a greater leadership role in the international economy, although it faces a number of limitations. (Who wants to replace one bully with another?)

Regrettably, much of our public discussion on international relations ignores its economic dimension (it’s a bit like Hitler and his armies) Meanwhile, the government has long been pursuing international cooperation and diversification, which will be vital in these troubled times. But Australia aside, we have few natural allies and Australia at about 1 percent of world’s GDP is only a larger tiddler – we are a sixth of Australia. (Sure, we may have special responsibilities towards nations in the South Pacific but they have even less economic leverage.) Our preference is for a multilateral world order based on the rule of law. That is not Trump’s, nor have recent US presidents – and, especially, the US Senate – seen it as a priority.

That is the irony of MAGA. It will not reverse the long-term diversification of the world economy but it may speed it up. The US will increasingly need friends too, but ‘America First’ is alienating them. It is certainly not going to make the country great again. Trump’s policies are undermining the arts and literature, science and technology, universities and its moral leadership, which is what has really made America ‘great’. While he may be trying to make America dominant again, the logic of the world’s economic development is that the dominance objective will fail whatever the strength of will of its leadership.

Endnote on Military Spending. The military story is slightly different but as revealing. The US totals about 22 percent of the world’s military spending at common prices, compared with 12 percent for China and 9 percent for Russia, together almost equalling the US total. But NATO, excluding the US, pitches in another16 percent. What is unusual about the US spend is that it is worldwide, whereas most other countries’ military are focused on their backyards. Ukraine uses just over 5 percent (including that supplied by NATO countries) so there are other factors which affect the effectiveness of the spend, but only by so much. That the US is insisting its NATO allies spend more suggests that it judges there are severe limitations to its ability to police the whole world.

Endnote on the International Monetary Order. The US dollar dominates the world monetary system more than the US dominates the world economy. The issue is not that the US dollar is internationally the common unit and means of exchange. Critical is its share in international currency reserves. That is steadily diminishing as central banks reserves increase the share of other currencies (especially the euro). Nothing Trump has done will reverse the trend. His ‘big beautiful’ budget measures may accelerate the decline since it not easy to see how a reserve currency can be backed by a government with trillions of dollars of debt. However, in the immediate future the world will still depend upon the US Fed (Federal Reserve) in an international financial crisis, as it did in the 2008 GFC. In turn, the Fed has to be backed by the US Government which may this time be less reliable, especially if a cabinet of billionaires is more concerned with its personal fortunes rather than the world’s. The central banks governing the euro, renminbi and yen have been strengthening their abilities to play a greater role than in 2008, but they are not there yet.

A Note on the Fiscal Implications of HNZ Outsourcing Contracts for Healthcare

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

Circulated to colleagues

The Minister of Health has announced that he expects Health New Zealand to take out ten-year contracts with private health providers to deliver surgery. This is structural outsourcing; it is a form of privatisation (although, no doubt the minister would deny this claim).

Whether such long-term outsourcing is efficient is a complicated issue. We have yet to see the policy advice the government received while the public discussion on the policy is just getting underway. It will probably focus on the extent to which the outsourcing will undermine provision in the public hospital system.

This note has a more limited ambition. It explains why a fiscal strategy decision, which has nothing to do with the quality of healthcare, forces a government towards outsourcing or privatising the provision of healthcare.

In summary, the restriction on the government’s measured level of borrowing (and the associate level of government debt) results in it seeking indirect ways to provide the capital requires. One way of doing this is leasing the capital from the private sector. The proposed surgical outsourcing is even more indirect. Private health providers supply the buildings and equipment together with the personnel who would work in the public health system if there was not the outsourcing.

This analysis does not require the private provider to be more efficient than public provision – some would argue it is more costly. All it requires is that the public sector is constrained from borrowing to provide the capital.

This paper explores the issue from first principles. Insofar as it has a conclusion, it suggests that New Zealand needs a new public debt strategy which is neutral to outsourcing. Perhaps it needs to be emphasised that the paper does not challenge the need for a public debt strategy; its focus is on the need for a new one.

New Zealand’s Debt Strategy

The asymmetry in the borrowing transaction is well illustrated by an interchange between Keynes advised New Zealand’s Minister of Finance, William Downie Stewart (Jnr) during the Great Depression. New Zealand should borrow as much as could to offset the downturn, but if Keynes were a lender he would probably not be prepared to advance New Zealand any more.

Each lender has to make an assessment of the borrower’s ability to be able to service and repay the loan in the future. The lender is likely to be more cautious about that prospect than the borrower. Arguably the financial cost to the lender of a failure is greater than the cost to the borrower. (However, the human cost may be less, although this is not a major consideration for financial markets.)

This superior position of lenders frames the New Zealand’s debt policy.  The Government judges that its net debt to annual GDP ratio should not exceed 50 percent (based on its chosen measure). Because it sees the need for a margin for emergencies – like the Great Depression – it targets 30 percent. Currently the ratio is about 40 percent as a result of the emergency generated by the Covid pandemic and is not expected to fall much in the next few years.)

In my view a 20 percent margin for emergencies is reasonable, so I focus on the 50 percent ratio. I take it that largely comes from discussions with credit rating agencies and larger lenders and accept that, as Keynes indicated, their judgement is decisive even if it were  irrational (which it need not be).

I have never been in an assessment meeting with representatives of a credit rating agency but I have had discussions with a number of those that have. (A credit rating saves each lender going through the same process of assessing the risk of default. The grade awarded help sets an industry-wide benchmark – the higher the grade, the lower the risk and the lower the likely interest rate, not only for the government but  for all international borrowers in its jurisdiction whose interest rate is the government one plus a margin for their additional private sector risk).

I am told that the raters are sophisticated and knowledgeable, whose questions can put the New Zealand team under considerable pressure (which those who have told me, to their chagrin, is usually justified). They do not just look at the government defined debt ratio (which has varied under different regimes) and include the NZ Superannuation Assets in their assessment. Moreover, they do not just look at the government balance sheet but private debt as well. On accessions they have been pointed about the substantial offshore borrowing by the private banking system, judging that it could affect the ability of the government to service debt. (This was well illustrated during the GFC when the banks, with the threat of being unable to rollover their offshore debt because of a deterioration in the liquidity of foreign exchange markets could have turned to the Reserve Bank forcing it to do the borrowing. (Subsequently, there have been a number of measures to reduce this particular exposure, which the credit agencies no doubt take into account, but I do not recall any public discussion about the threat prior to the GFC which leaves open the possibility that there is another such threat that we are not discussing today.)

I am certain that the credit rating agencies are tetchy about borrowing for consumption. I’d like to think they accept that such borrowing is temporarily justified during an emergency as occurred with the GFC and  the Covid pandemic just as you are during a household crisis. But they expect the government (and the household) to stop such borrowing and indeed to repay some of the incurred debt once the crisis is over, reducing the level of debt.

In my assessment we have not done this since the Covid pandemic and I would be astonished if the credit rating agencies thought differently. For these purposes it is unnecessary to assess whether the over-consumption is from government spending or household spending. In any case, unfortunately neither the accounting practices in the government’s financial statements nor the SNA accounts make this easy to assess.

Borrowing for Development

Credit rating agencies are more benign towards funding investment for development (providing the jurisdiction does not have the reputation of politicians syphoning off funds for their personal use). Particularly attractive are funding projects which might be privatised since this gives the lender further security. However most such projects would be attractive to a direct commercial lender; infrastructure typically is not easily privatised.  

Again there are caveats, such as the investment may not directly generate the revenue to service the debt. This means there will still be limits to how much lenders are willing to advance. Recall that Vogel was very aware of this; his publicity insisted that New Zealand’s total debt was not high. Matters have not changed much since.

At this stage one could discuss the funding intricacies of the Ardern-Hipkins government three waters proposal. Funders were even asked to advise which of the various options was most acceptable to them. It also seems likely that the Treasury, in particular, was keen to keep the funding arrangements off their book; one wonders whether that would deceived the credit rating agencies and assuming the likelihood it would not have, how they would have treated the substantial projected borrowing. (Since the water companies would have been able to raise revenue by water rates and levies, the lenders may have been more comfortable making advances.) 

Why Wellbeing?

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Pundit on by .

The Government’s plans to remove the wellbeing provisions in the Public Finance Act represents a reversal of the way society is travelling.

I welcomed the Ardern-Robertson’s Government decision to focus on wellbeing in its budgets. It went on to amend the Public Finance Act to require the government to state the wellbeing objectives that will guide its Budget decisions. The Luxon Coalition Government has a bill before a parliamentary select committee to repeal that provision.

My support for wellbeing as a more relevant notion than simply income evolved over the years. I was taught that the main determinant of utility (the notion we had then for wellbeing) was material spending, which was a function of income; perhaps it was the only economic variable which mattered. The basic model was so pervasive it seems to be hardwired into many people’s thinking and many economists’ models. There were some obvious extensions such as goods and services supplied by other sources like the government and whether the decision unit is the person or the family, while a time dimension is needed, but they do not undermine the model.

The difficulty with the proposition is that in an affluent economy additional income does not seem to add much to individuals’ life satisfaction (caveats to come). There is an effect but it is tiny – doubling one’s spending power gives about the same lift to happiness as an average marriage. Moreover, using American data which goes back to the 1940s, it does not seem that the average level of happiness has lifted much even though average real incomes have about trebled.

There are two major caveats. It would seem that a lift in the incomes of the poorest fifth of the population will increase their life satisfaction. There is nothing in the research or this column to suggest that we should ignore poverty. Second, there is evidence that happiness rises with rising incomes in economies which are much less affluent than we are (so poor nations are right to pursue rising material incomes to improve wellbeing). That suggests that in the late nineteenth century when the equation between well-being and income was being bedded into economics, equating material satisfaction with life satisfaction may have been a plausible assumption. With growing affluence we have gone past that simple equivalence. Those who still cling to the first proposition may not be so much wrong, as they are a century out of date; their economic models are increasingly irrelevant to the challenges we face.

Sure, income is a relatively precise notion and economics knows quite a bit about how it increases. Wellbeing is a much less rigorous notion. Keynes pointed out that it is better to be vaguely right than precisely wrong.

The task facing twenty-first-century economists and other social scientists is to improve our understanding of wellbeing, based on evidence rather than a nineteenth-century dependence upon introspection and anecdote. Probably economics goes only so far. The wellbeing chapter of In Open Seas uses Maslow’s hierarchy of needs to show that the economy provides only the foundation of wellbeing, not its totality. It’s a humbler task than that which economists tend to claim; we can do it better.

Progressing these insights is not easy, but they are fundamental to thinking about the future of the economy. That is why the first analytic chapter of my In Open Seas is titled ‘Wellbeing’ and explores and extends these issues in far more detail than there is room for here.

This does not rule out economic growth measured, say, as hourly labour productivity. But we might expect that the benefits of growth to appear increasingly in fewer hours of paid employment rather than in increased material consumption and more expenditure on public goods. (I did not use the term ‘leisure’ because many seem to use much of the additional time in the non-paid labour force.)

I am not alone with these concerns. The New Zealand Treasury grappled with them under Bill English with its ‘living standards framework’ which had a pentagon of economic growth, sustainability, increasing equity, social cohesion and managing risks (here and here). I am not saying they got it right but that they recognised the issue. Treasury was responding to thinking at the OECD.

Where the Ardern-Robertson Government got its commitment to a wellbeing budget is not known. (Presumably Treasury advice was one source.) I am not sure that ‘commitment’ is the right word. While in office, it hardly did anything – such as the creation of new institutions – to bed in the notion and there was not much mention of it when Labour campaigned in the 2023 election. (One could argue that the success of its Covid campaign was a triumph of wellbeing being prioritised over narrow economic concerns, even though the unwinding was badly managed.) Whatever, I keep stumbling across overseas comments that the Labour Government was an international pioneer in promoting wellbeing: I wish.

The incoming Luxon-Coalition Government has been very uncomfortable with the approach. When the incoming National Minister of Finance, Nicola Willis, presented her first budget policy statement she grumpily footnoted that a ‘2020 amendment to the Public Finance Act requires the government to state the wellbeing objectives that will guide its Budget decisions’ and made but two desultory mentions. Her 2025 Budget Policy statement identifies three traditional (and worthy) overarching goals: building a stronger more productive economy, delivering more efficient, effective and responsive public services, and getting the government’s books back in order. It added that the goals are ‘the Government’s wellbeing objectives, as achieving them is the most important contribution the Government can make to the long-term social, economic, environmental and cultural wellbeing of New Zealanders’. We are back to judging wellbeing in narrow economic terms.

Labour also seems to have lost the wellbeing plot. In her post-2024 Budget speech, Labour’s spokesperson on finance, Barbara Edmonds, said her focus would be on household costs, small business, climate change and roads. There is a glancing mention of well-being, equating it with inter-generational issues. No doubt Labour will contest the removal of the wellbeing provisions from the Public Finance Act.

One infers from the Minister of Finance’s public statements that she is uncomfortable with the notion of wellbeing. She has said that she wanted the Treasury focused on economic and financial advice. But wellbeing is a subject which economists can – and must – advise upon, even if many are stuck within the old paradigm.

The Treasury supported deleting the wellbeing provision in the Public Finance Act, arguing in its Regulatory Impact Statement that ‘on balance, we consider [that] it is most likely to improve the clarity and effectiveness of Section 26M

[about budget policy statements]

, without restricting flexibility. The introduction of the wellbeing requirements in 2020 have added complexity to how the Government can articulate their priorities and objectives, but it is unclear if they have brought about a clear increase in accountability that the changes initially intended.’ The RIS makes an allusion to the Treasury Living Standards Framework but it is unclear how that articulates with its decision. The impression is that there was a vigorous debate within Treasury with the balance favouring abolishing the extra work that is currently required.

But the issue will not go away. Economics and public policy has to struggle with the evolution of wellbeing and living standards and its implications. It is disappointing that the government is scrolling back its contribution. The likelihood is that there will be an increasing divergence between reality and the narrower economic public discussion. The Luxon Coalition Government’s ambition to get us back on track, appears to be getting us back past Bill English, possibly back to the nineteenth century.

Taking Economics

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

ACT ‘s neoliberals are still trying to sneak in a change to the constitution.

When ACT – the Association of Consumers and Taxpayers – was formed, its then party leader, Roger Douglas, with an optimistic exaggeration which marked his time as Minister of Finance, announced that he was sure it would get more than 50% of the vote. Its share of those on the electoral roll averaged about 3% across the ten MMP elections.

A major factor in its voter share has been how well the National Party is seen to be performing. There are a number of ironies here. By gifting a seat (mainly Epsom) to ACT, National has ended up in an uneasy coalition with ACT (and NZ First). It has also probably cost National funding, for ACT is exceptionally generously supported by the wealthy.

ACT’s lack of political support from the public for the core ideas of its neoliberal founders has led it to spread its interests.* Under the leadership of Richard Prebble it added ‘law and order’ populists; more recently it has absorbed the gun lobby. Not all its initial supporters were enthusiastic, but there are so few New Zealanders who are neoliberal that they need allies.

Its current leader, David Seymour, who has just become deputy prime minister, is best classified as a libertarian. Perhaps that explains his outstanding achievement of the End of Life Choice Act. As a minister he has handled the Pharmac portfolio effectively, but much as a conventional conservative politician would. He has been less successful as minister of early childhood education. (Curiously Luxon took a more ‘neoliberal’ approach of shifting responsibility onto individuals when he said that parents should provide their children lunch by an apple and Marmite sandwiches – presumably without butter.) His promotion of charter schools would be supported by neoliberals, but is as much libertarian. His Ministry of Regulation has brought out the mouse of reducing regulation of hairdressing.

Seymour may not know much economics. Most of his economics statements could have been written by Chatbot, but that is true for a lot of what purports to be New Zealand economic commentary. (The approach of ACT’s deputy-leader, Brooke van Velden, is a neoliberal economist constrained by political reality. Whatever you think of it, you know where she stands.)

ACT was founded as a party advocating neoliberal economics; neoliberal economists still advise it, even if many of its members do not always appreciate the economics they are signing up to.

Very often what may seem to be a populist cause involves ACT sneaking in its neoliberal agenda.  It campaigned in the 2023 election on an interpretation of Article Two of Te Tiriti o Waitangi that ‘the New Zealand Government will protect all New Zealanders’ authority over their land and other property’ which has hardly connected with either the original text or the intentions of those who were agreeing to it. It only makes best sense as a neoliberal attempt to slip into New Zealand law the ‘takings’ issue discussed below.

This principle two was so out of touch with history, that it was replaced in the bill that went to Parliament by ‘Rights of hapu and iwi Maori – the Crown recognises the rights that hapu and iwi had when they signed the Treaty/te Tiriti. The Crown will respect and protect those rights. Those rights differ from the rights everyone has a reasonable expectation to enjoy only when they are specified in Treaty settlements.’

(I leave others to explain the force of this Article 2 had it been passed into New Zealand law, since in the 185 years following the signing of Te Tiriti the Crown repeatedly failed to uphold it.)

Seymour, the libertarian, has campaigned on the importance of the third principle: ‘All New Zealanders are equal under the law, with the same rights and duties’. If he really meant that was his sole commitment, he would advocate the principle being incorporated in, say, an amendment to the Bill of Rights Act.

The latest neoliberal attempt to shape the constitution is ACT’s Regulatory Standards Bill, which is before Parliament at select committee. Their crucial notion is in subsection 8(c) ‘Taking of Property’, which reads

legislation should not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless –

 (i) there is a good justification for the taking or impairment; and

 (ii) fair compensation for the taking or impairment is provided to the owner; and

(iii) the compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or impairment.

Put simply, Clause 8c(ii) says that the government has to compensate the owner for any loss of value to their property from its action. Perhaps this is an extreme example, but suppose a government budget had a measure which resulted in share prices falling. The courts might rule under 8c(ii) that the government had to compensate the shareholders for the loss. That could be true if the measure was as direct as the introduction of a capital gains tax, but it might also apply if the share market disliked the deficit track the budget announced.

I explored the direct notion with an example. (At that stage – the bill had not been introduced to Parliament – the proposal was simpler.) This column looks at some wider issues.

However, if a measure – say the revised deficit track implied in the Finance Bill – resulted in a rise in share prices, there is no offsetting clawback to the government. The effect of the legislation is to protect property owners from the downside of government while leaving them to benefit from the upside. (Remember the vision of socialising losses and privatising profit?)

A useful test of proposed legislation is to consider its impact had it been introduced earlier. Suppose it had existed in 1984. It would have prevented almost all the legislation introduced under Rogernomics. Ironically, ACT’s first two leaders – Douglas and Prebble – were the chief instigators of the changes. Is their party now denying them?  In the time since the bill was introduced to Parliament, the Government has passed legislation with ACT’s approval which would cost them a fortune if the Regulation Standards legislation was in force.

Or consider what would have happened had the principle of compensating all takings been practised since 1840. Māori property rights have been repeatedly breeched since then. Perhaps Māori would support the bill if it had a clause which said its provisions should apply back to 1840.

In effect, the act would be a new treaty which set out property arrangements just as te Tiriti o Waitangi did. It would wipe out all past uncompensated property actions of the Crown, starting afresh, an action of much merit as far as all the major beneficiaries of the unjust actions would be concerned.

The legal meaning of ‘property’ has evolved over the years. Intellectual property laws were primitive in 1840. What actual property rights means in the Bill would be a matter to be settled by the courts.

Economics and law may diverge as to what is meant by property rights, so this paragraph has to be cautious. During the debate introducing the bill, MPs talked of ‘private property’. However, the courts may have a wider, or a narrower, interpretation. For instance, they might deem that what Iwi call their ‘kaitiakitanga rights’ – their guardianship of the environment in their rohe – are property rights under the takings provision.

The Finance and Expenditure Select Committee, which is dealing with the bill, has only one lawyer among its 11 members (ACT’s Todd Stephenson). It is hardly competent to deal with the constitutional issues the bill raises. Yet the bill was not referred to the Justice Select Committee – one may assume that Seymour was burnt by its treatment of the Treaty Principles Bill. Parliament has given the public but 20 working days to make submissions.

Is this another case of neoliberals trying to sneak in a revolutionary constitutional change, as was the original intention with their Treaty Principles Bill? Will Seymour argue the case for ‘good regulation’ diverting the public’s attention from the Bill’s critical purpose to increase property rights – as he did with the Treaty Principles Bill? Is a group of neoliberals, who at best got 6.8 percent of those on the enrolled to vote in 2023 – and probably a lot less given ACT’s support from other lobbies – levering its position in parliament to pursue its minority vision, without explaining to the public what it is doing? Sounds like Rogernomics repeating itself. As David Lange said of neoliberals ‘rust never sleeps’.

* As this was going to press I found this review of Hayek’s Bastards: The Neoliberal Roots of the Populist Right by Quinn Slobodian, which argues that Hayek’s vision has been corrupted. I have yet to read the book, but I don’t think any ‘corruption’ of New Zealand ACT is quite the form that Slobodian analyses, but the reasons may be similar. 

Researching Inequality

This entry was posted in Distributional Economics on by .

This is a note I circulated to some colleagues.

I have pondered whether I should write a book on economic inequality in New Zealand following the research over the last six decades.

The difficulty is that there is no market for such a book. Sure, there is a thriving market for popular books on inequality which ignore and mangle the research (see below). The market for serious books is quite narrow in NZ. I cite A Shakeup Anyway, a very solid book about the university changes up to 1994, written by Ruth Butterworth and Nicholas Tarling. I’d have thought every academic would have bought and read it, but it did not sell well.

But second, when I returned to NZ, as reported in In Open Seas, ‘I chose to research distributional economics. It was a good choice and a bad choice. It was a good choice because not only was there so much to be done, it also opened up into virtually every field of economics ranging from macroeconomics and growth to social policy so I ended up working in all those fields too. But it was a bad choice because it was unfashionable, and I was often alone professionally. Economists tend to avoid distributional economics because it is difficult and because it is treacherous since one is always near value judgements.’

Unfortunately, because I was almost always alone, the putative book would be dominated by the ‘I’ word despite my natural propensity to suppress it (this email is not a good example).

The popular discussion on economic inequality is embarrassingly awful which one supposes is a consequence of economists not being involved in it (there are some notable exceptions, bless them). Most writers have a political agenda and selectively grab any data which seems to support it.

They have no understanding of the data they are using here is an incomplete list:

            There is common to label statistics poorly; one book even overlooked labelling graphs (the text was not really using them);

            Flows and stocks are often confused, particularly income and wealth;

            They frequently ignore the difference between people and households and between market and disposable income. Sometimes it is hard to work out what they are talking about;

            Typically they do not identify the population they are describing (like whether they including children, but also not reflecting on how to handle offshore ‘New Zealanders’, not to mention omitting key groups like the self-employed). Even the better ones can ignore cohort differences, which can be critical in the wealth distribution;

            It is usual to push the data past its limits (like ignoring measurement error and ignoring the difficulties involved in measuring the top and bottom tails of the distributions);

            Nor do they understand any summary measures they are using such as the Gini coefficient. (I was recently reviewing a book – by a Rogernome as it happened – which described an income inequality increase as ‘slight’ when it represents a doubling of the coefficient of variation of a log-normal distribution; there was no source for the data and no indication what it was actually measuring or the period involved);

            It is common to draw on overseas material which obviously does not apply to NZ. Proper international comparisons are erratic;

            There is a constant confusion between correlation and causation, while consideration of alternative explanations-hypotheses are ignored;

            Often the commentariat claim expertise in areas where they have no research publications.

Let me stop there. I can feel the internal tension rising, especially as I sorted out most of these issues in the 1970s, publishing them in 1983 in Income Distribution in NZ.

You will all be familiar with these sort of things for they are common throughout the economic commentariat in the areas you follow closely. The difficulty is that a scholar writing a book for the general public is bound to raise them and bore the pants of the average reader.

Let me end more constructively. As I have said, much of the public commentary has an agenda and grabs statistics that support it, ignoring that which does not fit the story being told. But there have been some econometricians who have been involved in careful measurement of some statistics (and one is ever so grateful to the SNZ statisticians for their steady accumulation of data). Yet there is a bigger task for an economist – to explain why the changes in the distributions (and, in some cases, to explain why there has not been changes).

That is the merit of Krugman. He is thinking like an economist, trying to model what is happening as a causal explanation. I am not sure he is always right – I’m not that knowledgeable about the US economy – but full marks for having a go. And salutations to Simon for working in the same spirit.

If we are really interested in the economic distributions, we should be investigating how the economic distributions are evolving. As I said at the beginning, it leads into virtually every field of economics ranging from macroeconomics and growth to social policy. You kind of become a nineteenth-century political economist using the instruments of twenty-first-century economics.

Kia ora, Brian.

PS. The last four decades of most of my published writings on distributional economics (research, reviews, columns) is here:

            This is a consolidated index, but only up to 2003. Perhaps I should update it (I have done more since): 

Economic Bullies

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

Monopsonies – dominant purchasers – need to be restrained as much as monopolies – dominant sellers. That is what pay equity is about.

This column is not about you-know-who. There are many other political bullies offshore; sometimes there are local ones, as when a politician attacks a group which cannot defend itself or a cabinet minister has a crack at local government. Nor is it a column about personal bullying such as at school, in social media or in the workplace – unacceptable though such bullying is.

Economic bullying occurs when an economic agent with market dominance imposes on others. Its most familiar form is the monopoly, the dominant supplier of some good or service which uses its position to extract ‘super-normal’ profits, often with a poor service. The alternative is competition, where there are sufficient alternative suppliers so the customers can go elsewhere. If there is insufficient competition, the state often intervenes to regulate the market competition. (Sometimes no business is dominant, but a handful of firms – of oligopolists – behave in a way which gives them a collective monopoly power to overcharge.)

However, this column is about a monopsony where the agent dominates a market by being the sole or major purchaser rather than being a monopoly seller. (The term ‘monopsony’ was introduced by Cambridge economist Joan Robinson, who would have been a Nobel economics laureate except for political reasons; prizes are not always awarded to the most worthy by a monopoly panel.)

The conventional monopsony is the business which employs workers for whom there is little alternative work. So just like a monopoly, it can increase its profits at their expense. The traditional means of offsetting such monopsony power is for the workers to unionise. The union is a monopoly with a countervailing power to the monopsonist. That is not a perfect solution, but it is better than leaving the monopsonist to exploit workers.

For various reasons, including changes to the law, unionisation is less widespread nowadays. Partly to offset this, there has been until recently a more active raising of the minimum wage, which is a floor price for labour.

The biggest monopsonistic employer is central government. It is sometimes the sole employer of an occupation, can be the largest employer by far, and very often its funding also sets remuneration rates in the private, local government and voluntary sectors. Among the affected occupations are those in education, healthcare, libraries and social work. Each is dominated by women (as Joan Robinson might have ironically observed).

This is not the same issue as equal pay, where women in the same job as men were discriminated against. In the above occupations, men working in them also have their working conditions depressed, which discourages them seeking careers there and so increases the concentration of women in the occupations. (Some 47% of female workers are in occupations where 80% or more of the employees are women.)

Note that there are occupations where the government is the direct (or indirect) remuneration-setting authority but it is unable to use its monopsony powers. Were it to treat doctors as it treats nurses, they would all move off overseas. Lower skilled women are less internationally mobile. A major issue is whether there are alternative employments to escape the monopsonist’s power. Many workers can leave an exploited occupation, but they lose using their – often socially valued – skills.

In this case the government is behaving just like a business, minimising its costs. Its benefit is not profit, but lower taxes. Taxpayers are the ultimate beneficiaries of the government using its monopsony power.

Should the government use its power to bully? That is a political decision. My impression is that the majority of the public says it should not, although many might not be as enthusiastic if they understood a ‘no’ meant higher taxation.

There has been legislation to offset the bully-power. In 2020 the Ardern-Robertson Labour Government amended the Equal Pay Act to replace the government using its monopsony to set wages by an alternative wage-setting process called ‘pay equity’, where remuneration is set so that there is similar remuneration between occupations in which different work is deemed to be of the same ‘value’. It is another irony that the Luxon Coalition Government has just repealed the pay-equity process (without even going through the select committee), using its monopoly power in Parliament to legalise using its monopsony power in labour markets. (Here is an example of application of the principle is the 2017 pay-equity deal for aged and residential care workers.)

Any comparison of the ‘value’ of different occupations is fraught with difficulties. To give a simple example, suppose the government was a monopoly supplier of oranges and used its market power to set their price. (The example is not quite a parallel, since one does not have to consume oranges – not as true for, say, healthcare.) Suppose it was decided that the government power to set the price of oranges should be replaced by pricing oranges to make them of equal ‘value’ to other fruit with the same characteristics. Except that there is no fruit quite like an orange. (OK, there are mandarins but assume that the government is a monopoly supplier of them too.) Any price-setting exercise is going to be complex and contentious.

It is even more complicated in the case of an occupation. The approach is to break down each job into components of efforts, skills, responsibilities and working conditions and compare each component with a job in the labour market where it is more competitive. The individual components in an occupation will be numerous and some will be unique or near unique. Sometimes the private sector comparison occupation seems weird but it may be only looking at a single component and other occupations will be used for other component comparisons. Then there is the complicated exercise of combining the individual comparisons.

Yes, the exercise is difficult but that is not a justification for the state, or any other monopsony, using its power to suppress workers’ wages, any more than a monopoly should be allowed to use its power to hike prices. That’s my opinion, anyway. I abhor all bullies.

 Note. The Treasury estimates the fiscal savings from repealing the pay equity legislation is $1.8b in the 2025/26 fiscal year. That is sufficient to fund its Investment Boost initiative costing $1.7b and have a little bit over.

Has the NZ Productivity Growth Rate Slowed Down?

This entry was posted in Growth & Innovation on by .

This is work in progress. Hence the informal presentation.

Secular Stagnation

Sometime, 20-odd years back, Larry Summers alerted us to the possibility that the growth rate of affluent economies was slowing down – it was even possible it was zero for all practical purposes. Robert Gordon was another growth pessimist. Their analyses were interesting but not decisive.

I began exploring that issue for New Zealand. A paper I presented in 2011 partly reported on that exploration. I thought I had almost found the slowing down here (using the very long series of per capita GDP going back to 1858) but more intensive work concluded that I could not find it – at best it was too soon to tell.

My subsequent writing on the issue has been cautious (e.g. see Chapter 7 of In Open Seas). However, there is a persistent trope in most affluent countries’ economic debates that productivity growth is stalling. True in New Zealand, although it is not helped here by a confusion between low productivity (relative to other affluent countries) and low productivity growth. (The confusion between stock and flow – level and change – is not uncommon. It would be reduced if greater care was taken when reporting time periods for data.)

I put off further exploration because a much longer time series was needed. I have just returned to the issue using a different time series – the SNZ TFP series – which, alas, is only 35 years long. (All years reported are March years ended.)

My conclusion is that, on the whole, it seems less likely than I expected that there was evidence of a growth slowdown, but it could not be fully ruled out.

The note ends with a future possible work program arising out of this effort.

The Data Series

Statistics New Zealand publishes an annual series of volume output (GDP), and volume capital (K) and labour (L) inputs together with Total Factor Productivity (TFP), which in the Solow growth model measures the contribution of factors other than capital and labour (more below). It provides figures for individual sectors, as well as the economy as a whole.

The longer series is from (March Year ended) 1978 to 2023. There is a shorter series from 1996 to 2023 which closely replicates the longer series but has a greater decomposition of the services sector.

I followed the standard research rule of using the longer series but with the caution of taking care over the start and ending of the series. Moreover, the series is regularly revised. The 2023 version I am using reported revisions for 11 years going back to 2007. (I have not checked, but presumably they are minor ones; almost a quarter of the observations were changed. ) The 2023 estimate is ‘preliminary’.

Because this is an exploratory study, I have only investigated the aggregate GDP series. At some stage it may be worth checking the individual sectors.

The Result

The basic result is summarised in the accompanying graph. It tells the following story. Bother, the graph wont insert, although it appears when I am editing.

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The overall trend rate of growth of TFP was 0.94% p.a..

(I tested whether there was curvature in the linear trend by fitting a quadratic. The curvature was statistically significant, but very, very small. I am loath to rely too much on this result because it depends very heavily upon what was happening in the first six years. We need to push the series back to before 1978.)

Three phases can be discerned:

1978-1993: There was relatively slow TFP growth. I am cautious about the first few years (1978-1985), where you could argue the growth was stronger with a cycle around it, but it is the start-up period of the series; one really needs a longer series to draw a conclusion. The series certainly flattens out thereafter. This is the Rogernomics Stagnation. Perhaps there is a very mild increase towards its end. (Presumably it does not appear so much in the GDP figures because the high unemployment meant there was less labour input. This can be checked.)

1994-1998: This is a period of rapid TFP growth of 2.5% p.a. for four years. I give my interpretation below. In the interim, note that a rapid TFP growth will happen during the recovery phase of a cycle following increased utilisation by capital and labour held and retained by businesses but which they had not been able to fully deploy.

1999-2023: Over the quarter of a century, the trend TFP growth was 0.058% p.a., lower than that of the entire 1978-2023 period. Observe that response to the Asian Crisis of 1999 dropped the TFP measure, but it returned to track shortly after the cyclical recovery. That may happen after the 2022 downturn, but it is too early to tell.

Interpretation

I give two broad interpretations.

1. The long-run growth of TFP has been broadly constant and near 1.0% p.a., with a cycle (including the Rogernomics stagnation) imposed upon it.

2. The long-run growth of TFP has been constant at around 0.6% p.a. except that the ‘Rogernomics’ changes lifted TFP by a total of 4 percentage points between 1994 and 1998. However, the policy changes did not increase the subsequent growth rate.

Either interpretation leaves a mystery. We know that the GDP growth track dropped by about 15 percent between 1985 and 1995. It is hard to see from either explanation that TFP contributed much to this drop. How to explain it?

Neither explanation suggests there was a TFP growth slowdown of any magnitude (which was the original reason for the investigation).

For Further Study

1. The period before 1978 needs to be explored. I am guessing that Bryan Philpott’s work on productivity may be useful here. (Warning there is a problem with the splicing together of the GDP series before and after 1978.)

2. There is a need to reconcile the above findings with the drop in the GDP track during the Rogernomics stagnation. Extending the analysis back before 1978 is vital, but even with the current SNZ database it may be possible to make progress by taking into account the volumes of labour and capital (they are in the database). (Almost as an aside, during the period the stock of capital grew faster than GDP – so the capital to output ratio rose. What is going on here, and what are the implications?)

3. It may be worth investigating the extent to which different sectors had different TFP experiences. Additionally, it may be that a changing balance between the sectors is sufficient to affect aggregate TFP growth. (The rise of ‘low productivity’ service sectors relative to ‘high productivity’ goods sectors is a common explanation for the growth slowdown.)

Budget 2025

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

Perhaps the state of the economy is not as sound as we are being told.

There was an odd little story over the 2025 Budget, hardly worth relating except that it tells something about budget politics. The original invitations to the lockdown, the meeting which gives a preview of the budget to the media so they can prepare for the release of what is a complicated set of documents. (Lockdown rules mean their reporting is embargoed until the budget is delivered in Parliament.) However, the usual invitation was not extended to analysts – economists often based in organisations such as the NZCTU and NZ Initiative – who have the skills to dissect the budget. Perhaps there was something to hide or the government was trying to manipulate public understanding. There was an outcry and the government promptly backed down. The lockdown went ahead, much as it has done for forty-odd years.

Of course, a budget is a political document but it is founded on the Treasury’s independent account of the economy, Budget Economic and Fiscal Update (BEFU). They set it out without comment. The politicians try to frame perceptions.

Hence the minister’s description of the 2025 budget as being a ‘Growth Budget’. It is hard to draw that conclusion from Treasury’s economic forecasts. The economy seems to be in the recover phase of a standard cyclical recovery, but the economic track after is markedly below what it was before the current downturn – perhaps by 6%.

Distinguishing the upswing from the long-term trend is critical. Remember the distress of the Bolger Government when the strong upswing ended and the economy toddled along a low growth path? * (It was just before an election.)

Moreover, the Treasury projections do not see any catch up, and their projected labour productivity growth rate is about 1% p.a. which is below the long-run trend of 1.4% p.a.. (In every affluent economy I follow, everyone reports a lower productivity growth rate so the slowing may not be unique to New Zealand.)

Illustrating the difficulties of raising the growth rate, the minister highlighted the ‘Investment Boost’ policy, costing an average $1.6b year, which lifts the per capita GDP growth rate by .05% p.a. over the next five years (i.e. from 1.275% p.a. to 1.280% p.a.)  and by a similar amount over the following 15 years. In two decades GDP is expected to be 1% higher because of the new policy.

In fact, there are signals that the economy will struggle with even that projected growth rate. Much has been made of the government’s measures to boost social, housing, social and transport infrastructure. Without adequate infrastructure, economic growth will stall.

The Treasury projects that its property, plant and equipment (excluding specialised military equipment and cultural and heritage assets) will increase 11.1% in real (that is, excluding price changes) terms between June 2025 and June 2029. Real GDP is expected to rise 11.2% so the public sector investment is barely keeping up with, rather than driving, growth.

Even so, to fund this investment the government has had to restrain public consumption to outraged responses from those sectors which have suffered.

This investment adds to the net worth of the government. The Coalition Government has stated an ambition to keep net worth’s level near 40% of annual GDP. In June 2025 it is expected to be at about 39.9%, down from 43.2% in June 2024 and 45.3% in June 2023. For a technical reason, Treasury does not really forecast the ratio for June 2029 but I estimate it to be about 35.5%, well below its target ambition. **

That means that the government is still borrowing to sustain public and private consumption. (Public consumption directly, private consumption insofar as the government can raise taxes to maintain its public consumption ambitions.)

As a result the net-debt-to-annual-GDP ratio remains high. It is currently 42.7%, which is higher than at any time in the last decade. In 2029 it is expected to be 45.5% of annual GDP. Contrast that level with the target of 30% (but I remind you I would accept a higher rate, were the government funding infrastructure). It is also moving towards the 50% ‘ceiling’ where it is thought lenders would get concerned. As the Minister has stated, such high debt levels leave little leeway to borrow to ease us through the next large shock. ***

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The commentariat focused on budget winners and losers – as they always do. Little attention was given to the underlying issue that despite the government’s cheerfulness it had little room to manoeuvre – that there had to be serious losers. By highlighting them the commentariat obscured the main economic issue – the poor underlying economic performance and that it was not improving.

This column reports a gloomier picture of the state of the economy than the Luxon Coalition Government is trying to sell. But it is based on the professional judgments of the Treasury economists and accountants. Their forecasts will be near the professional consensus; the Treasury is just more expert, informed and detailed. Even if the government’s 2025 budget sales pitch succeeds, it may find itself struggling with the 2026 one, a few months before the next general election.

* Not only the government. One editor complained that nobody warned him of the distinction between cyclical recovery and long-term economic growth. Ironically, a few years earlier he had banned from his newspaper the economists who were already giving that warning.

** The Treasury does not adjust its forecasts of its assets for price increases, but it does for GDP. I have assumed that the asset prices inflate as the same rate as GDP.

*** Treasury’s draft 2025 Long-term Insights Briefing reports that the 2010-1 Canterbury earthquakes had an identifiable fiscal impact of 11.3% of annual GDP. For the 2020-2 COVID-19 pandemic it was 20.4%. The briefing gives no estimate for the 1996 Wool Price shock, nor the 2008-9 GFC shock.