Manure and the Modern Economy: Has Economic Policy Hardly Changed?

Listener 7 September, 2002.

Keywords: Macroeconomics & Money;

Don Brash recently claimed that ‘almost none of the big changes of the late 1980s and early 1990s have been reversed’ and described those who denigrate the economic policies of the 1990s as talking ‘cattle manure’. This may be inappropriate language for the National Party’s front bench economic spokesperson, but the greater worry is that he seems to be keener to repeat the past, than to learn from its mistakes.

The list of policy reversals is impressive. The benighted health reforms of the early 1990s have been almost entirely structurally reversed, even if some of those running the District Health Boards have not always noticed. The back-tracking in the tertiary education sector is taking longer. But the existence of a Tertiary Education Commission, the roll-back of competition, the focus on quality, and the relief of student debt are all reversals. Some reversals are not evident to the public. Science funding has changed dramatically from its intended path of the early 1990s. The impression is there is a serious attempt to modify a raft of changes that damaged the quality and solidity of the public service.

Brash specifically cited that privatisations were not being reversed. The government has not had the cash, otherwise serious consideration might be given to renationalising the electricity sector and railways. Kiwibank has been established, as a replacement to the old Postbank. Air New Zealand was so badly managed by its private owners after the 1992 privatisation, that the Crown had to renationalise it. Electricity and telecommunications commissioners have been appointed to regulate each industry. The government also reversed the ACC privatisation. Fortunately – because the biggest private insurance sector player HIH has collapsed in Australia with unfunded liabilities of over four billion dollars.

Both of the electricity and ACC reforms seemed to break a basic rule of good government policy: ‘if it aint broke, dont fix it’. (They may have both got broken as a result of the ‘reforms’.) Even National is sufficiently ashamed of its Employments Contract Act, with its promise of giant labour productivity gains that never appeared, to announce it will only amend rather than repeal it.

Some of the past 15 years reforms are unlikely to be reversed by this government. It is improbable that border protection will be raised. Labour’s leadership is committed to the open economy, a tradition that goes back at least to Norman Kirk. But there is a difference from the previous government. Tariffs on the clothing and textile industry may be reduced, but not with an overnight raid as happened with cars. Instead, there is a program aimed to get the industry’s productivity up and into products (like fashionware) where it can compete with the rest of the world on merit and high wages. More fundamentally, this government is committed to a ‘hands together’ industrial assistance strategy, most of which would have been inconceivable a decade ago: sectoral indicative planning and cooperation, regional assistance, research and development subsidies, start up support, venture capital …

Brash says there has been no reversal in the macroeconomic framework, with the Reserve Bank and the Fiscal Responsibility Acts remaining intact. One reason is that each is reasonably flexible so they allow a variety of possible policies. Watch how the Minister of Finance, Michael Cullen, modifies the approach again when he signs the policy targets agreement with the next Reserve Bank Governor. It wont compromise the operational independence of the Governor that is the corner-stone of the act, but he or she will have clearer guidelines to operate within. (If anything has compromised the Governor’s independence, it was the swift shift of Brash for Governor to MP. The international reserve banking fraternity is aghast.)

Macroeconomic policy has not had to change because the economy has been flourishing. Virtually any policy works during a boom. The real test will be as the world economy turns down (if the Reserve Bank’s lifting of interest rate does not precipitated an earlier domestic contraction). Do not be surprised if the framework is modified as a consequence.

And sure, as Brash has pointed out, the government has not restored the savage 1991 benefit cuts. It has rejigged housing support, and is making an effort to pay people their benefit entitlements. (Apparently only 15 percent of those entitled to special benefits get it – double the rate of three years ago.) Fiscal prudence and the constraint of tax revenue (despite a small hike in the top tax rate) has given little room for manoeuver. We may see changes in the next three years as funds become available. Expect the major reform to involve family assistance.

It is no surprise that the Labour-led coalition government has not been able to reverse in three years all the liberalisation changes of the last fifteen. In some cases it does not want to. The skill is being able to identify the reforms which worked rather than uncritically accepting that every one was a success.

Brash probably thinks this column is cattle manure. Many readers will agree. They know that manure worked into poor soil, leads to luxuriant vegetation growth – and economic prosperity.