Another Think Coming

Unfortunately, there’s no magic bus to accelerate us to Australian levels of income.

Listener: 15 August, 2009.

Keywords: Growth & Innovation;

Sometime in the 1960s, New Zealand economic growth went through a “climacteric”, a point when the growth rate started slowing down. Think of it like driving your car up a hill. Once it starts running out of momentum from the run-up, it decelerates.

The climacteric probably occurred when the sheep-based economy that had driven New Zealand for a hundred years ran out of puff as synthetics took over from wool. But more research needs to be done to help us understand the details.

Now National and Act have agreed to set a “concrete goal of closing the income gap with Australia by 2025”, 16 years away. The historical record shows the divergence from Australia began in 1966, 43 years ago. So they expect we will catch up two-and-a-half times faster than we got behind. Yeah, right.

Some people think they have the answers, but only because they don’t bother with research. The facts present them with too much of a challenge.

When politicians claim their policies will accelerate economic growth, how do they know and, more important, by how much? Take some contentious public policy issue – say changing the Resource Management Act (RMA). Advocates of the change say this will enhance New Zealand’s economic growth prospects. It would be helpful if they were to specify the amount.

I cannot think of any rigorous scientific means of calculating how much. Proponents and opponents of such reforms typically depend on a handful of anecdotes linked by faith. One approach is the Delphic technique whereby a panel is asked to guess.

Recall the political advertisement that listed a number of policies with a claim of how much each would accelerate the economic growth rate? There is no way the numbers could have come from a scientific forecast; perhaps a group of advertising executives made them up to suit the client.

So, yes, the composition of the panel counts. One consisting of businesspeople guessing the impact of the RMA changes will have quite a different forecast to one consisting of, say, greenies.
This shows how critical the Government’s proposed “2025 Commission” (or whatever it to be called) will be. It’s purpose will be to tell the Government how to attain income parity with Australia by that year. By choosing the right members, the Government should be able to get the answer it wants.

However, the commission faces a number of sobering reports that have tried to work out how much productivity could be accelerated. One of my favourites – I was not involved – is nicknamed the “magic bus”, referring to the song by the Who, which goes: “I want it, I want it – you can’t have it!”

One of its many merits is that it goes as far back in time as the official data allows – before the climacteric of the 1960s. Far too many other productivity studies use too short a time frame, leaving out or ignoring the periods of poor performance that contradict the efficacy of the policies being explicitly or implicitly advocated.

It is going to be a real challenge for the 2025 Commission to meet the Government’s requirements and maintain high standards of analytic rigour.

Finance Minister Bill English has given the commission an out by saying he wants more “freethinking”. No, he was not saying the country is so broke it can’t afford to pay Treasury officials. Rather he wants independent, creative and – may I surmise – rigorous thinking.

That means any member of the commission – indeed the entire commission – is being invited to say there is little we can do to attain income parity with Australia by 2025. That is the research evidence, and is almost certainly what any freethinker will conclude.