Paper to the Fabian Society, 12 October, 2016


While we continue to chew over the carcass of the Fourth Labour Government – the Lange-Douglas one – we pay little attention to the subsequent Fifth Labour Government. Yet the Clark-Cullen one is greatly shaping the current Labour Opposition and the current National Government. It will, presumably, impact on the next Labour Government.

I am going to limit the topic by confining myself only to economic issues. And I am not going to talk about how to win elections; sometimes politicians are more obsessed with how to win office – how to command the LTDs – than how to use the power that office offers. This is a policy presentation.

I want to present a critical assessment of the Clark-Cullen government. In my judgement it was a modernising government, it was concerned about adapting the economy for changing social, technological and external circumstances. In that sense it was no different from the First Labour Government, the Third (Kirk-Rowling) one, and the Fourth (Lange-Douglas) one. I am less sure whether the Second Labour Government (Nash-Nordmeyer) was a modernising one – in many ways it was the fag end of the First Labour Government which had run out of puff. There is a sense that the Fifth (most recent) Labour Government also ran out of puff during its third term. The current National one certainly has.

Observe that I argue that the Lange-Douglas Government was modernising. Government policy, especially under Muldoon, had got grievously behind the evolving economy and society. What distinguishes the Lange-Douglas Government from the other Labour modernisers was that it was not concerned with sharing the gains and losses from the modernisation. Rather, it adopted an extreme neoliberal version of modernisation, which favoured the rich end of the income distribution. It was an odd political strategy because the rich were not going to support Labour governments and switched to supporting the more congenial National one in 1990, while Labour alienated its traditional – poor and middle income – supporters. It was an ideal strategy to destroy the Labour Party. All power to Helen Clark and Michael Cullen and those who stayed on to rescue it.

The Clark-Cullen Government was a modernising one, but one determined to repeal the extremist neoliberal measures. So it accepted the broad more-market strategy that came out of a post-Muldoon era and reflected the increasing diversity of society and the economy.

Yet it repealed only about two-thirds of the extremism, after which it seemed to run out of ideas. It was not entirely devoid of initiatives in its final term – neither was the First Labour Government. But it seemed to have lost interest in eliminating key neoliberal policies.

Why? Some say that as the government lost electoral popularity it became more cautious, some that it did not have the intellectual grunt to deal with the remaining challenges.

You can see this in the response of Labour in opposition. The incoming National Government has fine-tuned Labour’s legacy but has done little to progress or reverse it. Labour in opposition has largely agreed with them. Its characteristic criticism of the government amounts to saying that were they in government they would run the existing system better. Excluding a promise to be bigger spenders – fiscal generosity is the privilege of those out of power – it is rare for the Labour Opposition to set out a leadership position suggesting that the current system is not working properly and needs substantive changes.

Leadership has been sadly lacking. Have you observed how often when something goes wrong in the bureaucracy, a minister – often John Key – regrets what has happened and tells the bureaucrats to up their game? It is a shrewd strategy because it covers Key with Teflon. Labour usually responds by blaming him, but leaves no mark on the Teflon. The public is smart enough to appreciate that politicians cannot be responsible for every mistake bureaucrats make.

In particular, Labour offers no narrative of why it is the National politicians’ fault, just the not very plausible claim they could do better. There is little attempt to ram home the message that a goodly number of the bureaucratic failures are because the public sector is under-resourced – squeezed of funds without any reduction on the demands on it. (How often do you hear a complaint against the health system that mentions the huge squeeze on spending National has been doing?) The difference between just responding and offering an account – a narrative – of what is happening is the difference between office and power.

The major exception where Labour has shown leadership has been in housing, where it talked about what has to be done to the point that the National Government, in a policy panic, is reluctantly responding to their critique. It is salutary to recall that nine years ago John Key in opposition said there was a housing crisis, but how little was done when National became government. (We should acknowledge that the seeds of the current housing crisis were planted under the Labour Government. However the inflationary boom really got under way during National’s term.)

Before listing some of the modernisation issues which need to be addressed soon, balance requires mention of some of the Fifth Labour Government’s successes. I focus on the big one. Cullen and Clark did more to win the 2011 election for the National Government than any other two politicians. In 2008 Cullen left the government finances in such a sound condition that the incoming National Government was able to ease our way through the consequences of the Global Financial Crisis without too much hardship. If there is another one soon, we shall not be as well placed. Meanwhile the Clark leadership created the free trade deal with China which hooked us into a large prospering market when the rest of our external world was stagnating. Whether it was wise for their successors to be so oblivious of the resulting overvaluation of dairy land is another matter.

Although I shall shortly be drawing attention to some deficiencies of the Fifth Labour government, even in its third term it was gingerly responding to some issues. Kiwisaver is an example – it is just so sad that the National Government has not continued its development, particularly as the domestic savings deficit is one of the greatest threats to New Zealand’s sustainable prosperity.

There is not the time and space to go through every economic point which needs attention. Tonight I shall look at five big ones: monetary and fiscal policy, the environment, globalisation, economic inequality and market regulation. Each would justify more than a session in its own right. Instead I shall just sketch the argument.

Monetary and Fiscal Policy

The very joining of monetary policy and fiscal policy in a single phrase is a criticism of the neoliberal macroeconomics. The reconfiguration under Rogernomics assumed that the two could be administered independently of one another, and gave an authority and power to monetary policy beyond what any reasonable analysis would conclude. It did exactly the opposite to fiscal policy assuming that the management of taxation, public spending and public debt can do little to sustain the economy or contribute to public welfare, except by keeping each as low as possible. That is not the view of today’s serious analysts who have become much more vocal since the Global Financial Crisis.

However, the crude neoliberal – monetarist – position continues to dominate the New Zealand public discussion even though, if you follow it carefully, the Reserve Bank takes a far more sophisticated approach. Sadly the Fifth Labour Government left the framework largely in place, even appointing monetarists to the RBNZ board.

The fact is that the Reserve Bank has much less power than the monetarists think, especially when two key prices – consumers prices and housing prices – having different inflationary tracks. But even were they in sync, the Reserve Bank’s influence over the economy is limited as long as New Zealand is a small part of the international economy.

Imagine Te Awamutu establishing its own central bank with the belief it would have a massive effect on the local welfare, independently of what the Reserve Bank of New Zealand was doing. As absurd as that assumption is, New Zealand has about the same relative size in the world economy as Te Awamutu has to the New Zealand economy.

The fact is that Te Awamutu cannot issue a currency which is independent of the New Zealand dollar. The New Zealand dollar has about the same independence of the international currencies used in the world economy.

Yet much New Zealand commentary ignores such obvious facts, pretending that our Reserve Bank has the same power and influence as has, say, the US central bank. The Federal Reserve has the power to issue an international currency, which New Zealand’s central bank has not.

As I warned, I am going to have to be sketchy so I shall focus on a single problem which illustrates the interdependence between monetary and fiscal policy. Many people say, why cant the New Zealand government run a fiscal deficit? After all, the New Zealand government debt is low by international standards – very low actually. What the advocates do not connect is that the offshore debt of our trading banks is high by international standards. All that international banking debt could end up a charge on the New Zealand government.

That is because trading banks can go to their central bank if they get short of cash when access to international funds dries up. That may solve their immediate problem but the effect is that the central bank, and therefore in our case, the New Zealand Government, becomes liable for the international debts of the trading banks. Those liabilities are, of course, matched by assets, which are liabilities of the trading banks. The catch is that the Reserve Bank assets are in NZ Dollars, but its liabilities are in US ones.

That almost happened during the Global Financial Crisis. In the circumstances the Reserve Bank and the Treasury handled the situation brilliantly – much better than any business commentator could even understand. At one stage the government ended up owning, in effect, a chunk of the house mortgages of New Zealand – including, probably yours.

As sketchy as I have been, I think we can draw some lessons. First, the New Zealand government is exposed to substantial foreign exchange denominated debt. This is quite in contrast to the neoliberal position that private debt has no relevance to government affairs, which is yet another example of neoliberal economics crashing as forcefully as did the world financial system during the Global Financial Crash.

Second, there is not nearly as much room for running a fiscal deficit as it might seem. In my view any additional spending causing a deficit should be on investment, especially income generating investment such as (affordable) housing or some types of infrastructure.

Third, New Zealand will not be so well placed if there is another local or global financial crisis as it was in 2008. The Reserve Bank is to be commended for the prudential measures it has taken but there is no longer the fiscal room we had then.

Sadly, much of the overseas borrowing has not gone into income-generating investment but into the transaction costs of housing speculation – on real estate agents, valuers, conveyancers and the like. When housing prices turn soggy, or worse, it will not be possible to recover that spending because it is not really an investment; it will also be difficult to levy those who benefited from the capital gains from the speculation.

This is a serious caution; there will be a future New Zealand government whose agenda will be dominated by such issues. Those on the watch whose negligence has caused them will be out of power and hardly held to account.

The Environment

I could say more on the monetary and fiscal issues that challenge us but I move onto to discuss briefly some environmental ones, where the same issues face us. Those on the current watch have failed to tackle long-term challenges.


New Zealand is too small to have much impact on the aggregate of international emissions which are generating climate change, but we need to be a good international citizen. We could have been a world leader by introducing a taxation regime on the consumption of products which generate those emissions. But even had we had more modest objectives, we are failing to take measures to mitigate the rising sea levels which are a consequence of the climate change. We dont even have a national conversation.

We have more control over our national water system yet, again, we have been negligent about its quality and allocation. It is the repeated story that there has been little foresight in the management of the environment, just as we have failed, in a similar way, on the economy. Future generations will pay the price for that negligence.

Fundamentally we are being driven by Aesop’s grasshoppers enjoying summer; we need more ants who know there is also winter. Ants know that the current economic and environmental strategy is unsustainable; grasshoppers dont care.


Globalisation is proving to be a great challenge to the left as well as to everyone else. I think that is because it is the contemporary equivalent of nineteenth-century industrialisation, which was at the heart of the rise of the left in that century.

At first there were seen to be two broad paths. One, most evident in the writings of Pierre-Joseph Proudhon, was to abandon industrialisation and revert to a rural arcadia, albeit an idealised one. Instead the left accepted that industrialisation was one of the great driving forces of the world which could not be prevented but could be harnessed for social ends.

Social democracy was the left’s solution to that harnessing. Neo-liberals aside, most accept that much of their response was successful – although in practice considerable economic activity remained in the hands of the private sector. The left approach has been to use the market to regulate the economy.

Perhaps less obviously, a key element of the harnessing was the nation-state. The left, of course, is politically internationalist, but economically it has been more concerned with fostering a democratically controlled economy for the social good.

In contrast, the neo-liberal approach is to relegate the nation-state to a minimal role; you will recall that approach during the Fourth Labour (Lange-Douglas) Government. It was not entirely successful but the pressure to neuter the nation-state remains; trade deals can be a way of castrating it.

The independent nation-state was always an ideal rather than a reality. We were once a colony and then a neo-colony of Britain. As it lost its global dominance, we became dependent upon the wider international economy led by the US. We are not alone in this transformation. Other countries face the same challenge and everywhere we are seeing a considerable pushback against policy responses to globalisation which undermine the nation-state.

For the nation-state, as we have traditionally understood it, is not well-adapted to the pressures which globalisation generates. In order to trade, it is necessary to give up some national autonomy; that is the nature of trade deals and, indeed, a myriad of other international obligations we take on – such as on climate change or human rights. Each limits the ability of the nation to pursue its own ends unilaterally.

Thus the notion of a nation-state which is independent and has total sovereignty over its economic activities is becoming increasingly obsolete. While this was always true for small entities such as New Zealand, increasingly large entities, such as the United States, are realising the limitations. Much of the Trump anti-trade rhetoric reflects the anger about this reality, although it does not offer a resolution other than the nostalgia of a retreat into an idealised past. The Brexit vote was a similar response.

I watch Britain with great interest as it struggles to square the circle of a nation-state in a globalised world. The challenge before us is to redefine the nation-state and its role in the world. Again it is a topic which is larger than I can deal with here, so I offer a few fragmentary remarks.

First, New Zealand is going to have to be an open economy (and open society). That does not mean total global subservience but we do need to engage economically with the rest of the world as long as we need to import products which we cannot realistically make ourselves and perforce export to pay for them. Offshore borrowing only further compromises our sovereignty.

Trade is a bit like marriage. One gives up some sovereignty for some other benefits. Pretending you can enter marriage or trade and not compromise your independence is a romantic notion. Practically you should ask whether the result makes you better off.

But we need not accept every trade deal on offer. The TPP involves pushing economic integration deep beyond the borders; I am not sure that is always wise. Others share those doubts. They will probably be sufficient to scuttle the TPP. That saves us facing the difficult tradeoff of better access for our farm exports in exchange for ridiculous extensions of copyright law and a clumsy investor-state dispute procedure. It is unlikely that some other deals we are negotiating – such as RCEP with 15 other Asian economies – need be as intrusive.

How deep should globalisation go behind the border? A good principle is surely ‘subsidiarity’, that decision-making should be left to the lowest practical level – where possible to the nation-state rather than to international arrangements, to the locality rather than central government and to the private individual rather than to public institutions. I hope the mayors of Auckland, Christchurch and Wellington hold the central government to the principle of subsidiarity rather than it trying to run localities through centralised bullying.

To finish briefly on a couple of issues leaving many others uncovered. We need to think about what it means to be a nation in a globalised world where factors and individuals are mobile. And yet we need to avoid chauvinism. The current government places a lot of emphasis on sporting achievement (especially men’s rugby) and war history. So did the Clark-Cullen Government although they also gave greater significance to culture and heritage, albeit more at the elite than the popular end. Even so, I never had a sense that either was conceptually grappling with the issue of identity in a nation-state.

While there is not the space to develop this here allow me a couple of minor points. First, I celebrated our national success at the Paralympics. I do not wish to diminish the achievement of individuals in it or the main Olympics. But that so many of our para-athletes did well, reminds us of a national commitment to enable those with difficulties to live as normal lives as is practical. It is an approach we should pursuing in many other dimensions of public policy.

Second, I remind you of the truism that ‘taxation is the price of citizenship’. Conversely, those who choose international mobility as a means of avoiding paying taxes here do not deserve the rights of full citizenship. There are obligations which go with it.

My final teaser on the globalisation issue is that the economic growth which the rich world has become used to may be coming to an end, and that there will not be substantial rises in per capita GDP over the next decades. I do not think this means improving living standards is coming to an end, but it means it is pointless pursuing conventional economic growth at any price.

It is a political fact that much economic rhetoric promises to increase the economic growth rate. It is an economic fact that there is no evidence that any New Zealand government has increased the sustainable growth rate. Closer analysis shows that the growth advocates’ policies usually promote their self-interests at the expense of others, and very often at the expense of compromising the quality of lives of those others.

We need to give a broader definition to living standards and not that it is just a higher per capita GDP. We should never forget that the government can influence the composition of output, including by public spending, in order to produce higher welfare. The neoliberal focus on individual spending is a promise of a life which is nasty, brutish and short.

Income Inequality

One of the central puzzles about the Fifth Labour Government was its failure to tackle inequality. The standard measures of income inequality showed little change during the nine years it was in power.

The puzzle is increased by the fact that every informed observer knew that the neoliberal changes of the late 1980s and early 1990s markedly increased poverty and that we had good scientific measures of the increase in inequality by the mid-1990s, before the Labour government was elected. Why did it not do something about it?

One answer is that the poor and depressed do not vote (children, the main sufferers from poverty, cannot vote). It is an interesting argument because it suggests that Labour’s strategic thinking has been reduced to who will vote for it. But the approach also has a neoliberal dimension; look after ‘number one’ and to hell with what is happening in your community – in your nation-state.

Another view is that the Fifth Labour government ignored inequality because of the very poor quality of advice it received. Whatever the individual merits of its advisers, they had outdated views of the welfare state, reflecting a world which no longer existed – for instance, the traditional welfare state was built on the assumption that mothers did not do paid work and that there was negligible unemployment.

In a curious way, today’s current National Government could claim to be a moderniser of the welfare state in the way that the previous Labour government cannot. I am not happy with the way it is doing it, but at least they are trying to grapple with the social changes of the last forty years in a way the previous government did not.

You may say ‘what about the Working for Families package?’ There is a view that this was the best piece of social policy that Labour introduced. The alternative view is that it was badly designed, clumsy to implement and socially inequitable – a view which the courts have come close to supporting.

Let me offer a compromise. Working for Families was the best thing that Labour did in the social policy area and it was a totally botched job which needs to be replaced by one which is better designed, easier to administer and understand and which is more equitable. I look forward to the plans the next Labour Government has for doing this. I just hope they have better advisers than they had last time.

Regulating the Market

At the heart of the neoliberal agenda was a belief that the competitive market should rule as far as was possible. Now it is true that Muldoon had very little faith in market mechanisms and frequently overruled them. Commonsense concluded that there had to be shift to more-market. But commonsense does not support moving to the neoliberal’s extreme minimalist version.

The Clark-Cullen government gingerly rolled back market extremism in some areas. It took eight years to address the Telecom monopoly which enabled what is now Spark to use its control of what is now Chorus to extort favourable prices and profits. Recall how Telecom’s share price fell when the two activities were directed to operate independently of one another, an implicit admission that Telecom was the beneficiary of monopoly profits. The subsequent poor performance of Telecom, now Spark, confirms the advantage of the monopoly advantage that Telecom once had.

We are still dithering on the regulation of monopolies, dealing with each on an ad hoc basis. Rather we should recognise that monopolies are much more common in a small economy such as New Zealand than in a large economy like the US or the ideal economy beloved by neo-liberals. We need a competition framework which thinks monopolies and oligopolies are normal and in need of social regulation.

Our slackness with regard to monopolies is an example of ‘light-handed regulation’, the belief that firms can be left to themselves to act in the interest of their consumers. (The Telecom experience indicates why it is sometimes called ‘light-fingered regulation’.)

The Clark-Cullen Government was faced with a major example shortly after it took over. The leaky building crisis arose because of changes to the building regulations in the late 1980s which assumed that builders would maintain a high standard of craftsmanship because home owners would monitor them. Yeah, right.

It has not been the only major catastrophe. The billions-of-dollars collapse of the majority of finance companies about the time of the Global Financial Crisis reflected the poor regulation of the industry. There have been many smaller instances.

Again we have responded in an ad hoc way, rather than asking how to regulate a market effectively. Sometimes we seem to over-react with onerous requirements which are not obviously effective but a consequence of policy by panic.

It would be wrong to charge the Fifth Labour Government with a failure to adopt an emerging approach in economics popularly called ‘nudge’ theory. It recognises that individual behaviour and decision-making is far more complicated than the crudities of neoliberal economics. Both the US and British governments have set up nudge units to try to incorporate the thinking into decision-making. The Key-English Government has not and its main adviser in the area, the Productivity Commission, takes a far more neo-liberal approach to market behaviour than current economic thinking would justify.

A related issue to be discussed only briefly is that of the burden of risk. The neoliberal changes aimed to shift the costs of the unexpected from the government – from the taxpayer and the community – to the individual. It would be foolish to design a system in which all risk was borne by the government – albeit the Muldoon Government was inching that way. In my view – and I am sure that of most social democrats – certain parts of risk should be borne by the community. That is what is meant by social insurance. The current policy stance needs to clarify this rather than remorselessly shifting the burden onto the individual. Again this is a major topic for a session in its own right.

The fact is that competition in even many-supplier markets need not lead to quality outcomes. I remain unimpressed by trying to do this in the education sector. The market remains a powerful means of regulating an economy for the social good, but to do so it has to be socially regulated not left to run itself.

What A Social Democratic Government Is About

That market regulation is by the government. The neoliberal economic tradition is that government is a hindrance to individual welfare; the social democratic tradition is that government is a means of the community harnessing powerful economic forces such as industrialisation and globalisation for a common good and higher individual welfare. ‘Harness’ you will observe, not oppose.

That has not always been true. Some governments assist one part of the economy, often business, to pursue its objectives at the expense of the rest. The role of business is to enhance our social objectives. Business is not the social objective itself; sometimes some businesses have to be restrained for the social good.

We too often forget the harnessing role of government, implicitly adopting a neoliberal agenda by default. In particular we think of individuals alone rather than individuals in their communities, how that a well-functioning community enhances individual welfare. Individuals may compete against one another; competition may be relevant in a social democracy but so is co-operation and trust.

The neoliberal changes did much to destroy trust, replacing it with contractual relations between individuals. The not entirely unexpected outcome was the need to impose costly layers of bureaucratic and legal regulation to enforce contracts (they call it ‘accountability’). That is one of the reasons for the failure of the neoliberal changes to improve economic performance – the transaction costs of managing the trust-less economy has gone up markedly. We are not getting any more output than in the trust economy, but a lot more output is devoted to monitoring people we do not trust.

We may not be able to return to the levels of trust that were once central to the New Zealand community. But we do need to reaffirm social democrat values – something which the Fifth Labour Government may have done by example – by partial example – but it never articulated a rhetoric. When it left office the community had no language – and hardly any other means – to defend itself against a government which was less imbued with social democratic values.

In particular, the squeezing of the public sector in favour of tax cuts for individuals – particularly the better off – is a denial of community and its need for the social regulation of the economy for a more effective and humane society.

I do not think anything I am saying is that far from most New Zealanders’ thinking. Their difficulty is that they cannot easily articulate it, with a consequent inability to implement their reasonable, practical desires.

There are many good things the Fifth (Clark-Cullen) Government did; sure, it would have done more had it been re-elected for a fourth term. Its most lamentable failure was to fail to articulate a social democratic vision which took up the challenges which face us – leaving those who inherited its mantle struggling about where they are going.