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Zombie economics

December 4th, 2009

That’s the title of my book-in-progress, which is about undead ideas that should have been buried for good after the global financial crisis. But, in most cases, the evidence against these ideas was substantial even before the crisis. Still they wouldn’t die.

This was brought to mind the other day when I got a call from Radio New Zealand asking me to discuss a new report on how NZ could close the (very large) gap in wages and productivity with Australia. That’s an important question, but I realised it was unlikely to get much of an answer when I was told the committee that produced the report was headed by Don Brash, former head of the Reserve Bank of NZ in the 1990s who resigned and immediately went into politics, becoming leader of the then National Party Opposition. Other members included David Caygill, one of Roger Douglas’ offsiders in the 1980s Labour government that implemented ‘Rogernomics’ and Australian free-market economist Judith Sloan.

From this team, about the best suggestion would be that crack NZ scientists should invent a time machine which would go back in time to ensure that the parents of Brash, Caygill and, even more importantly, Roger Douglas were prevented from ever meeting.

Update: For a more carefully stated presentation of my views on NZ, a few years old now, but not requiring any updating, you can read this paper.

Before the committee members and their allies gained political power in NZ in the 1980s, there was no significant gap between Australia and New Zealand. The two economies had grown in parallel ever since the arrival of Europeans, and both faced very similar challenges. The gap the report were supposed to close was the product of the radical free-market policies implemented by Douglas, Caygill and others in the 1980s and the mismanagement of monetary policy by Brash in the 1990s. Australia took a more measured approach to micro reform and chose more sensible central bankers, producing much better outcomes.

The absurdity of appointing such a committee is even greater now that the theoretical basis of their policies has been destroyed by the financial crisis. The centrepiece of the policy framework was comprehensive financial deregulation, along with policies like privatisation that depended on the assumption that private capital markets were the best possible guide to the allocation of scarce capital. All this depended on, and reflected, the effiicient markets hypothesis, a theory now abandoned by all but the most dogged and dogmatic of its proponents.

Unsurprisingly, the committee came up with no new ideas, suggesting massive cuts in public spending, more deregulation and so on. About their best idea was congestion pricing for road access to major cities, something Ken Livingstone beat them to some time ago.

Who would be silly enough to appoint such a committee. The National Party is happy enough to leave the Brash years behind, and Labour certainly has no interest in promoting Cargill. The answer, unsurprisingly, is the free market + statist law and order ACT party, which demanded this as part of its price for entering a coalition government. This political zombie is well matched by the zombie economics it has dished yp.

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  1. December 4th, 2009 at 21:05 | #1

    Snark deleted. Your contributions so far don’t justify your continued presence, but I’ll give you one warning before a permanent ban. Read the comments policy and adhere to it in future. – JQ

  2. SJ
    December 4th, 2009 at 21:48 | #2

    John, comment #1 is just manually applied spam from some libertarian idiot.

  3. stockingrate
    December 4th, 2009 at 22:08 | #3

    Here is an economic principle for NZ: in a world of 6.8b neither deregulation nor nuanced progressive regulation will allow a remote island economy to gain sustainable industry wide competitiveness in manufacturing or logistics or finance or insurance or real estate or anything really except tourism, farming, fishing and mining if available and depending on population.

  4. a student
    December 4th, 2009 at 23:17 | #4

    “Before the committee members and their allies gained political power in NZ in the 1980s, there was no significant gap between Australia and New Zealand. The two economies had grown in parallel ever since the arrival of Europeans, and both faced very similar challenges. The gap the report were supposed to close was the product of the radical free-market policies implemented by Douglas, Caygill and others in the 1980s and the mismanagement of monetary policy by Brash in the 1990s.”

    John, could you provide some numbers to back that up? I’ve quickly looked at some manufacturing wage numbers from the OECD that might back you up, but if you look at the productivity numbers from Dalziel and Peetz, Australian Economic Review vol 41 no 4, p 390, then the gap looks like it opened up from the 60s to the 80s and then remained constant.

  5. David C (aka Smiley)
    December 4th, 2009 at 23:33 | #5

    Flippant jokes about the arse end of the world and “crack NZ scientists”. That’s what I love about this blog. :-)

  6. paul walter
    December 5th, 2009 at 00:03 | #6

    Yes, grizzly for the enzedders- they seem to be caught at the opposite end of the electoral cycle to us.
    But boy, what a grim quartet to conjure with: the only thing I couldn’t understand was, where’s Des Moore?

  7. Freelander
    December 5th, 2009 at 03:45 | #7

    The committee sounds like a local chapter meeting of the Mont Pelerin Society. Only a bit more than a decade ago they were claiming, a la Iceland, responsibility for the “New Zealand Economic Miracle” as they used to be touting it. I am surprised that the committee isn’t ’rounded out’ with Ruth Richardson and Derek Quigley, a couple of other MPS members.

    Possibly the worst contribution to the gap was the Don Brash mismanagement of monetary policy where every time he imagined a shadow of inflation he choked the economy sending it into a recession. It is fitting, therefore, that he is chair.

    When they’re finished, Abbott, no doubt, will commission them to find the real truth about global warming, although that should not be difficult as members of the Mont Pelerin Society have already devoted a lot of thought to that one (see, for example: http://www.klaus.cz/Klaus2/asp/clanek.asp?id=KaTffYUet0Rm ).

    Meanwhile, I await the creative piece of revisionist history their investigation of the ‘gap’ is sure to produce. Our has it produced already? George Orwell identified the variety of techniques available for the enterprise, so it is no surprise that they have moved from ‘our economic miracle’ to ‘nothing to do with us’, to now, New Zealand’s problems are all the fault of not following our advice. After all, they have already disowned the catastrophe in Iceland, though in that case, we may have to wait a few more years before they seek to identify the ‘real’ culprit. Great works of fiction are not produced overnight.

    Are they using Keith Windschuttle as their secretariat? Good man. He set everyone ‘right’ on the aboriginal mistreatment ‘myth’.

    On the topic of ‘not us’ and the search for the ‘real’ culprit, I really like this by a Peter Boettke, speaking before the Mont Pelerin Society in New York which was convened to tackle the crisis the GFC had created for true believers:

    “If you bound the arms and legs of gold-medal swimmer Michael Phelps, weighed him down with chains, threw him in a pool and he sank, you wouldn’t call it a ‘failure of swimming’. So, when markets have been weighted down by inept and excessive regulation, why call this a ‘failure of capitalism’?”

    Sure, the problem wasn’t deregulation it was not enough deregulation! When will we ever get the free market utopia? When will we reach the libertarian nirvana? Being a libertarian is never being willing to say you’re sorry. Or that you were wrong.

  8. Freelander
    December 5th, 2009 at 04:34 | #8

    Yes, they have produced their first report and we are promised two more, cunningly timed also as early Christmas presents. http://2025taskforce.govt.nz/ As expected, none of their report says “it was us, we mucked up” and all that is suggested is more of the same. The best chance for New Zealand to close the gap is to become a state, but would they be wise enough to see the benefits and would we want them, given their present condition?

  9. charles
    December 5th, 2009 at 06:18 | #9

    “The best chance for New Zealand to close the gap is to become a state.”

    I once read our constitution ( you do strange things when your a student). The way I read it, that is an option given to New Zealand in our constitution and should they decide to do so Australia would have to hold a referendum to stop them. And we know how many of those fail.

  10. Ernestine Gross
    December 5th, 2009 at 07:57 | #10

    It seems to me, JQ’s frustration with ‘zombie economics’ in power is such that he may be very sympathetic with Malcolm Turnbull who is known to suffer fools badly.

    Wage and productivity gap. It is not clear to me why this is a question of interest. Surely, it is relative purchasing power (wages relative to cost of living) that matters.

    Parallel economic development. I beg to differ from JQ on this point to some extent. When the UK joined the EU, both NZ and Australia experienced a significant loss of a traditional export market for meat and other agricultural products. In contrast to Australia, NZ does not have the mineral resources which helped Australia to a smoother transition. However, this does not imply that the radical change in the institutional arrangements in NZ , from a social democratic, mixed economy, to a ‘free market’ economy, didn’t make things worse.

    It is indeed amazing how some people, in various walks of life, seem to act as if they had 7 lifes – like cats.

  11. PeterM
    December 5th, 2009 at 09:08 | #11

    Response to EG #10:

    While Britain joining the EU was the start of NZs downward spiral wrt to economic performance it is not underlying cause. Can I suggest you have a read of John Kay’s excellent book, ‘The Truth about Markets’? He makes the following points:

    * There is group of economies which have almost average per capita incomes. (using the world bank’s “MacDonald’ index for exchange rats.)

    * Once an economy joins this group it stays there. (For example Germany’s economy was destroyed by WWII but 15 years later it had rejoined the group.

    * Only two countries have dropped out of this group. NZ and Argentina.

    Key then produces a very good analysis of NZs fall. Basically:

    * Lack of diversity in Markets. (In 1960 50%+of exports were to UK.)

    * Robert Muldoonomics. His think big economics with its focus on Aluminium Smelters, Hydro projects, petrochemical plant etc. that incurred huge debt that were eventually paid for by the country.

    . Rogernomics etc. as a reaction to the previous excesses, free market policies were invoked that essentially destroyed the infrastructure of the country. (The Auckland blackouts of 1988 were just the tip of the iceberg with respect to the damage that was done to the country).

    Prof Q’s solution of a time machine that would have prevented to procreation of perpetrators of the three phases in the destruction would have saved Kiwi’s a lot of heart break. However, I agree with John Kay. I think that if NZ can keep the zombie’s on a short lead so they can not do any further damage, NZs economy will gradually recover so they rejoin Kay’s rich club.

  12. Graeme Bird
    December 5th, 2009 at 09:32 | #12

    Although, as I’ve said, I would aspire to private infrastructure, by setting up non-freehold titles, and a clear rules-based approach, in reality I wouldn’t want the intellectual development of this approach to get in the way of “just say no” when it comes to more asset sales. For the interim the correct approach for infrastructural goods is MARKET SOCIALISM. There. I’ve said it.

    Market socialism is a ridiculous way to run an economy in its entirety. But for the next few decades at least I think it will be the right approach for infrastructure. Infrastructure is trans-spatial properties. The rules for building, owning and investing in them would as of necessity have to be much more complicated than for freehold.

    Now I think this market socialism ought to work on the basis of rabid peak-time profiteering. So that when the water levels are low, water charges might go up by a factor of twenty or even 100. When the rivers are at reasonable levels the charges ought to fall right back to variable and maintenance costs. With roads and rail at peak time we ought to charge like wounded bulls. But those who want to get rostered on earlier or later have a free ride on the road and a token rail payment.

    This approach lends itself to much better public goods usage. And also encourages private solutions. Peak time electricity ought to be at a massive premium. The rest of time just at cost. This will bring private investment on and reduce the running costs of the public gear.

    I don’t think there is any justification for a sovereign wealth fund. Rather I think the Feds ought to run surpluses and pay for the infrastructure (for the time being) out of those surpluses. I think if we can have even higher surpluses then we could have a tiny peoples bank operation that goes in the factoring business and monopolises on the new money creation for the time being. I’d approve of this but if only their charter was to reduce our debts to these finance sharks. Like if a local council is in grave debt, but locks in totally the idea that they will never use debt financing again, well then the peoples bank could get them to sign a binding agreement to that effect and reward them by paying out their debts and issuing an interest free loan. I think the loans could be prioritised on the basis of the speed which they were to be paid back.

    Once all the state and local governments were weaned off debt by this method it could be applied to people and then I think age would give some precedence. Speed of payback. Number of years they were willing to swear of debt. This sort of thing. Just a small low-cost operation. But with the monopoly on new money creation. Later hopefully to be palmed off to the miners of monetary commodities. But thats another story.

  13. December 5th, 2009 at 10:56 | #13

    Pr Q says:

    Before the committee members and their allies gained political power in NZ in the 1980s, there was no significant gap between Australia and New Zealand. The two economies had grown in parallel ever since the arrival of Europeans, and both faced very similar challenges.

    The gap the report were supposed to close was the product of the radical free-market policies implemented by Douglas, Caygill and others in the 1980s and the mismanagement of monetary policy by Brash in the 1990s. Australia took a more measured approach to micro reform and chose more sensible central bankers, producing much better outcomes.

    This is true as far as it goes, but it leaves out the critical factor, namely that in 1980 NZ’s economy was almost totally geared to agricultural exports to the EU, primarily the UK. My guess is that the CAP took an awful lot of the hard currency out of the Kiwi economy.

    They have never really managed to re-invent themselves as a “knowledge economy” due to regional isolation, lack of scale and relatively homogenous industrial base.

    Although this chart indicates that since 1981 NZ’s Terms of Trade have moved favourably thereby softening the blows of the free-market experiment. It shows that shifts in global prices have enriched each NZ person to the tune of US$1225 for every year from 1981-2001.

    So maybe the laissez-fairies cant blame it all on “the world economy”.

  14. Graeme Bird
    December 5th, 2009 at 11:17 | #14

    One advantage that Australia had in comparison, was that if you lost your job in Richmond, you might get another one in Port Melbourne. So the urbanisation of Australia probably made the adjustment a little easier. There were times when country Victoria for example had massive unemployment at times when Melbourne was high single digits. So the country Victorian experience was more akin to what the New Zealanders are going through.

    If the economics fraternity isn’t going to get abreast of George Reisman’s national accounting methods and theory then tight money will always mean the sort of clumsiness that we saw in New Zealand. The foolishness of trying to make consumer prices stable means that other things are whipsawed up and down and most particularly total sales revenues through-out the economy including all intermediate production. This is the most important thing to follow. If we were a nation of sole traders it would be the only thing to follow. I speak of the metric that Reisman calls Gross Domestic Revenue.

    Its true that in an economy where there are many employees, since GDP is also national income, we might have to moderate a monetary policy based on GDR-alone by not allowing GDP to fall too quickly. Since this might imply a need for a fall in nominal wages to maintain full employment that was unrealistic. But GDR ought to be the main focus. And not GDP. And not understanding this would have lead to Brash basically sending the NZ economy through a series of business crashes, not picked up by statistical norms.

    But we want to be tight if we know what we are doing. If we are no longer playing golf in the dark and we can get our debt levels down then our capital markets will function a whole lot better under tighter money. Just not the sado-monetarism we saw the last time around.

    Professor Quiggin, you ought not let the fact of Reisman being a radical minarchist put you off. If you get abreast of his innovations on national accounting the book you are writing now would be enhanced for sure. I want to defeat this ugly new orthodoxy that you call zombie-economics as much as you do.

    I still think defeating this orthodoxy is important and we have to hit it from both wings. Integrating Reisman’s astonishing insights into your new book with give you the street cred on both wings. I consider him to be our greatest living economist no contest.

  15. Alice
    December 5th, 2009 at 11:36 | #15

    @SJ
    SJ – could Sean Morris be Sean G by another name?

  16. jquiggin
    December 5th, 2009 at 11:47 | #16

    @a student
    Looking at the Penn World Tables, NZ did suffer a worse post-75 shock than Australia, and had a worse policy response, to the extent that NZ was about 15 per cent behind Australia. But looking at the historically close links, I would have expected convergence to operate. Instead, NZ fell much further behind in the reform period/

  17. TerjeP (say tay-a)
    December 5th, 2009 at 11:52 | #17

    If you want to blame the performance gap between New Zealand and Australia on free market reforms then you would have to limit the list to reforms that New Zealand undertook and Australia didn’t. To be fair you would also need to look at free market reforms that Australia undertook and New Zealand didn’t. Does anybody have a pair of such lists?

    Some quotes from the Economic Freedom Index on the size of government in the two countries:-

    New Zealand:-

    Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 41 percent of GDP. Higher-than-expected revenues have surprised authorities whose fiscal strategy is to lower the budget surplus through increased spending and further tax reductions. The state maintains significant stakes in transportation, electricity, and telecommunications industries.

    Australia:-

    Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 34.5 percent of GDP.

    An aside:-

    Roger Douglas will be the guest speaker at the Liberal Democrats (LDP) National Conference in Sydney on 24th January 2010. I’m quite looking forward to it.

    http://ldp.org.au/

  18. Freelander
    December 5th, 2009 at 12:10 | #18

    @TerjeP (say tay-a)

    New Zealand was the poster child for reform and was being referred to as an economic miracle by true believers in Australia well into the 1990s. Everything they did was ‘worlds best practice’. It was not until about 1997 that that description stopped and the revisionism and disowning began. I remember vividly having to listen to the nonsense about the ‘economic miracle’ and attempting to explain to true believers, that no, its a basket case, the ‘great leap forward’ has not worked. The experience was much like listening to communists explaining how behind the iron curtain it was a worker’s paradise.

    In 1996 there was a brief spurt of growth where NZ grew faster than Australia, which was hailed as ‘proof’ that New Zealand was the new ‘tiger economy’ of the South Pacific and would power away on a growth path faster than Australia. Instead, Don Brash quickly kicked the economy into another recession and true believers started to look elsewhere.

  19. TerjeP (say tay-a)
    December 5th, 2009 at 12:23 | #19

    Freelander – you heard some people express sentiments and that’s fine. But what free market reforms did New Zealand actually implement which Australia didn’t. Is it because they reformed their TAXI industry and we didn’t?

  20. Ernestine Gross
    December 5th, 2009 at 12:52 | #20

    PeterM @11. Thank you for your response. However I am a little surprised by it. Have you read John Kay’s book, ‘The truth about markets’?

    No, TerjeP @ 17, IMO Freelander provides a succinct summary of events rather than merely repeating sentiments expressed by some people. .

  21. melaleuca
    December 5th, 2009 at 13:19 | #21

    I’m kind of with TerjeP on this one, PrQ. You really do need to show us some evidence to back up your claim. I’ll hold off making any judgment until you back up your claim.

  22. PeterM
    December 5th, 2009 at 14:09 | #22

    EG #18

    Having read Kay’s book on Markets I can recommend it. It is not an academic text but meant for normal people with an interest in economics such as myself. It was written in response to all the nonsense that went on when communism collapsed in Eastern Europe and as a counter argument to what Kay term the ‘American Business Model’. (In a similar manner to Prof Q’s book being written in response to goings on the Finance a couple of years ago.)

    He uses New Zealand as an example of what can go wrong if a market get out of control in a mixed economy. (His basic message is that markets exist in a constraining framework of regulations, conventions and culture and are never free! If the framework is not appropriate then don’t expect markets to work.) I can recommend the book as a good cover to cover read.

    (PS: I am not on a sales commission from Kay but I can also recommend his general reading book, ‘Why Firms Succeed’ as good antidote to the nonsense on business strategy that come out of the American business schools from people like Michael Porter.)

  23. jquiggin
    December 5th, 2009 at 14:14 | #23

    As regards the greater radicalism of the NZ reforms, no-one denied this until after they had clearly failed. Here’s a summary from the Parliamentary Library research service
    http://www.aph.gov.au/library/pubs/cib/1995-96/96cib10.pdf

    Most commentators consider that New Zealand’s economic reforms have been more radical than those implemented in Australia. However, there is less agreement as to which country is adopting the better approach to economic reform. Some hail the New Zealand reforms as an economic ‘miracle’, while others suggest the gain from the changes in the New Zealand economy have not been, and will not be, worth the economic and social pain they have
    wrought.

    And Google reveals a piece I wrote in 1995, responding to the view of NZ as a miracle economy

    http://www.uq.edu.au/economics/johnquiggin/news95/Thatcher9506.html

  24. Ken Miles
    December 5th, 2009 at 14:24 | #24

    @TerjeP (say tay-a)

    Comparing the speed of privatisation of Telstra and Telecom (converted into a state owned company in 1987 and sold off entirely in 1990) respectively is a pretty good case study in the differences between the reforms in Australia and NZ.

    NZ also got a GST much earlier on.

    There are also examples of significant deregulation in building codes (which is still hurting NZ today) and the labor market. There was also large cuts to social welfare.

  25. Ken Miles
    December 5th, 2009 at 14:35 | #25

    Incidently, my examples above, are hardly meant to be a comprehensive list. Rather just what I can remember off the top of my head.

  26. jquiggin
    December 5th, 2009 at 14:36 | #26

    @Ken Miles I hadn’t heard of the leaky homes crisis, but it’s obviously a big issue (the cost would have been large enough to affect the NZ government credit rating) as well as being a striking metaphor for the reform program as a whole.

  27. Alice
    December 5th, 2009 at 14:51 | #27

    @jquiggin
    JQ – amazing foresight and the sad part is, Australia, being ten years behind the rest of the world’s policy mistakes is making the very same policy mistakes continuing the unquestioning devotion to the privatisation model right now…

    Are we slow as a nation, or what? Sometimes I really worry. Beautiful place but full of dummies who import everything, even policy, from everywhere else just a tad late and out of date?.

  28. TerjeP (say tay-a)
    December 5th, 2009 at 15:04 | #28

    Ken – I don’t think implementing a GST counts as a free market reform. Free market advocates generally argue we should have less taxes and lower taxes not new taxes.

    In terms of the difference between privatising Telecom and privatising Telstra I think that is a bit of a stretch. Australia introduced competition in the way of Optus around 1992. But anyway lets say we leave speed of privatising dominate telephone carrier on the list. That means that so far we have three free market reforms on the list:-

    1. Faster privatisation of dominant telephone carrier.
    2. Removal of some building standards.
    3. Deregulation of taxi industry.

    Before we begin to analyse if these factors help to explain the income gap we should ponder for a moment whether there is anything elst that belongs on the list. Or is that it?

  29. Ken Miles
    December 5th, 2009 at 15:05 | #29

    @jquiggin
    The relaxing of the building codes is one of those gifts that keeps on giving.

    What amazes me most about NZ isn’t the reforms, but rather why the effects of the reforms aren’t studied more. I would have thought that NZ in the 80′s and 90′s was a great natural experiment. A comprehensive study into the policies and subsequent outcomes of the Muldoon era, free market reforms and subsequent Clark government should be both fascinating and informative.

  30. Freelander
    December 5th, 2009 at 15:19 | #30

    @Ken Miles

    I’m another who hadn’t heard about the leaky homes. I’m not surprised that they did away with building regulation. After all Milton Friedman believed that you didn’t need that sort of thing because ‘the market’ would automatically look after that sort of thing. Shock, horror, Milton got that one wrong as well.

    One silly thing that they did was, to reduce government expenditure, they only did road work where the cost benefit ratio was five or above. Given that transport by road is an essential part of an economy this was not exactly wise. It would be interesting if someone were to estimate the damage this alone did to GDP.

  31. Ken Miles
    December 5th, 2009 at 15:21 | #31

    @TerjeP (say tay-a)

    I should strongly emphasis that I’m not an economic historian (or anything even remotely close to it). My sole qualification is that I grew up in NZ during this period (that being said, I was a child when Douglas took control of NZ’s economic policies).

    However, for your list I would include:

    * Large cuts to income taxes (in particular the upper tax bracket) – financed by GST
    * Big cuts to company tax rates
    * The Employment Contracts Act
    * Market rents for state housing
    * Significant cuts to unemployment benefits
    * Hospitals were made to compete with each other
    * Government departments reordered to work more like businesses
    * Crown Research Institutes to obtain more of their funding from the private sector
    * Universities allowed to charge fees (which they set)
    * Sale of railways
    * Sale of Ministry of Works
    * Removal of farming subsidies
    * Reserve Bank follows stricter inflation target

  32. Freelander
    December 5th, 2009 at 15:24 | #32

    @TerjeP (say tay-a)

    Sorry that you seem to be being left out of the discussion but I am not sure that there is anything that could be said that would change your mind. Or that anyone would care whether you changed your mind.

  33. Ken Miles
    December 5th, 2009 at 15:24 | #33

    I would also suspect that NZ’s competition watchdog has significantly less teeth than its Australian counterpart.

  34. TerjeP (say tay-a)
    December 5th, 2009 at 15:27 | #34

    One silly thing that they did was, to reduce government expenditure, they only did road work where the cost benefit ratio was five or above.

    As per comment #17 expenditure as a proportion of GDP is quite a bit lower in Australia.

  35. TerjeP (say tay-a)
    December 5th, 2009 at 15:31 | #35

    How does Tasmania perform relative to New Zealand?

  36. Freelander
    December 5th, 2009 at 15:34 | #36

    @TerjeP (say tay-a)

    Interesting, so you are suggesting that if they had spent more on road work government expenditure would have gone down as a proportion of GDP? It is possible, if the result was that GDP increased sufficiently as a result. Interesting idea and from a surprising source.

  37. Ken Miles
    December 5th, 2009 at 15:35 | #37

    TerjeP (say tay-a) :
    As per comment #17 expenditure as a proportion of GDP is quite a bit lower in Australia.

    Was this true during and just after the reform period? Or have you thrown Helen Clark’s government into the mix?

  38. TerjeP (say tay-a)
    December 5th, 2009 at 15:42 | #38

    Ken – I don’t know the answer but it is a good question. However given that Helen Clark’s government stradles the period during which the income gap increased surely her policies are of some relevance also.

  39. Ken Miles
    December 5th, 2009 at 16:19 | #39

    TerjeP (say tay-a) :Ken – I don’t know the answer but it is a good question. However given that Helen Clark’s government stradles the period during which the income gap increased surely her policies are of some relevance also.

    I certainly agree that studying the Clark period would be informative. As I said above, I would also throw the preceding Muldoon period into the mix.

    That being said, I was under the impression, that during the Clark period, the NZ per capita income:Australia per capita ratio remained constant. While not optimal, it is certainly an improvement over the preceding free market period where NZ consistently fell further and further behind.

  40. TerjeP (say tay-a)
    December 5th, 2009 at 17:44 | #40

    Ken – catallaxy has a chart up that would suggest otherwise. However it is missing the last few years.

    http://www.catallaxyfiles.com/blog/?p=7190

  41. Freelander
    December 5th, 2009 at 17:57 | #41

    @TerjeP (say tay-a)

    Looks to me that there was no obvious trend until the post ’84 reforms started to bite. The momentum immediately before that was in the direction of closing the gap. The data isn’t properly referenced which doesn’t make it easy to check. Rather than simply noting that the data is from the OECD with a link that isn’t helpful it should name the exact series and if it has been constructed using more than one series exactly how it was done. That said, it doesn’t support your claim anyway.

  42. Graeme Bird
    December 5th, 2009 at 18:26 | #42

    Getting rid of the reserve asset ratio has got to be a killer. It just hollows us out. A starting position of the New Zealanders being the biggest debtors per capita in the history of the world could not have been helpful. Their performance must also be checked against how their debt has improved or further degraded, when making the comparison with Australia.

    There is not enough emphasis on getting rid of company tax on retained earnings and there was too much emphasis on pulling the top rate of taxes down for the bigshots. Business development comes out of spending that is from an accounting point of view retained in the business. To me a 15% tax on retained earnings for some subcontractor trying to build up his capital base is far more offensive then a 30% tax on an executives second million on any given year. I think its only when you take money from your business into your personal accounts, only then you ought to be liable. Because we want to build up small businesses capital goods base, and to remove as many people from the proletariat as we can. It sounds like a pro-corporate measure on the surface of things, but delving a little deeper its the opposite.

    Consider the unsoundness of the bankers in the New Zealand situation. There we were the most indebted per capita country in the history of the world. And we have this income tax rate cut. Does it lead to an investment boom in capital goods in small business? No. Most of the small businesses in the small towns were squeezed to breaking point. But then you get house price inflation in Remuera road. There was no hope for free market reform if the bankers were fundamentally useless. And if they saw their role as merely investing in land asset inflation, consumer debt and so forth. And not creating wealth. They are the custodians of loanable funds. They blew it both here and in New Zealand. Its they that need reforming. When the alleged financial market deregulation came they got their way and we wound up with a reptilian bankers version of capitalism that could have been a great deal different.

    Can I request that you limit yourself to one comment per day. I don’t want the threads overwhelmed, and the burden of moderation would be reduced thereby – JQ

  43. melaleuca
    December 5th, 2009 at 20:01 | #43

    TerjeP says:

    “Ken – catallaxy has a chart up that would suggest otherwise.”

    The chart suggests nothing. Such raw figures are useless.

  44. Ken Miles
    December 5th, 2009 at 20:11 | #44

    @TerjeP (say tay-a)

    Bear in mind that the chart misses out most of the Clark period (1999-2008).

  45. Ken Miles
    December 5th, 2009 at 20:24 | #45

    Apparently, in 2004, NZ government spending was at 29% of GDP.

  46. TerjeP (say tay-a)
    December 5th, 2009 at 21:56 | #46

    Ken – be careful. Freelander will be after you for not properly referencing that data.

    Freelander – you said:-

    That said, it doesn’t support your claim anyway.

    What claim?

  47. Ken Miles
    December 5th, 2009 at 22:38 | #47

    @TerjeP (say tay-a)

    Source. Sure the authors are hardly unbiased, but the figures are presumably ok.

  48. Freelander
    December 6th, 2009 at 02:14 | #48

    TerjeP (say tay-a) :
    Ken – catallaxy has a chart up that would suggest otherwise.

    That claim.

  49. a student
    December 6th, 2009 at 13:23 | #49

    @jquiggin
    Whether you expect convergence depends upon the reason for the divergence. If the divergence resulted from adverse trade patterns, for example, then you would not expect convergence (not saying that this was the case, but using it as an example).

    I find the comparison with Tasmania mentioned above interesting, although I would like to see more data on the structural similarity of the two economies. Looking at this:
    http://www.abs.gov.au/AUSSTATS/abs@.nsf/7d12b0f6763c78caca257061001cc588/6d78e92a3f2bc51aca25727200796236!OpenDocument
    it appears that Tasmania did not grow any faster than the rest of Australia, on a per capita basis, from mid 90′s to 05/06, even though Gross State Product was 25 per cent lower (NZ, as of 2007, according to the Penn World Tables had GDP that was 30 per cent lower). It looks, to me, that New Zealand lost a bit of ground over this period, but not much (again from the Penn World Tables).

  50. Fran Barlow
    December 6th, 2009 at 13:37 | #50

    50th comment

  51. Fran Barlow
    December 6th, 2009 at 13:39 | #51

    51st Comment

  52. Michael Harris
    December 6th, 2009 at 15:22 | #52

    Not about NZ, John, but in the broader context of the book, and in case you hadn’t seen it (and no-one’s brought it up anywhere else around here where I might have missed it).

    http://business.timesonline.co.uk/tol/business/economics/article6908915.ece

  53. melaleuca
    December 6th, 2009 at 23:52 | #53

    Thanks for the update PrQ, you’ve won me over.

  54. TerjeP (say tay-a)
    December 7th, 2009 at 04:48 | #54

    Freelander :

    TerjeP (say tay-a) :Ken – catallaxy has a chart up that would suggest otherwise.

    That claim.

    Which was in response to Ken where he said “I was under the impression, that during the Clark period, the NZ per capita income:Australia per capita ratio remained constant.”

    On re-inspection the chart at Catallaxy doesn’t cover much of the Clarke years. So I concede that the chart says little about the wage gap during the Clarke years.

  55. Sea-bass
    December 7th, 2009 at 21:59 | #55

    One thing that happens often on this blog is a revision of history whereby the 10-20 years before the 1980s are painted as some Big Government Utopia. It’s good to see that such revisionism doesn’t just focus on Australia, since new evidence has apparently been unearthed by Prof JQ indicating that New Zealand was once the South Pacific Scandinavian-style Promised Land, before the evil neo-liberals took it over and converted it into the Dark Free Market Land of Mordor.

    And yet New Zealand’s government is still even larger than Australia’s.

    There’s your problem.

  56. Ken Miles
    December 7th, 2009 at 22:25 | #56

    @Sea-bass

    You do realise that except for very recently, NZ government spending has been considerably less than Australia. This was particularly the case as NZ fell further and further behind Australia.

  57. Peter Whiteford
    December 8th, 2009 at 09:42 | #57

    There’s a degree of artificiality in NZ’s public spending figures. This is due to the fact that most social security benefits are taxable, and except for very low income earners there is no tax threshold. So for example national superannuation spending and spending on unemployment benefits are grossed up and then tax is withheld from payments so the net payment to retired or unemployed people is about 30% less than the gross entitlement. So both public spending and tax revenues appear higher than they would be if they had the sort of low income and pensioner tax offsets we have in Australia.

  58. Freelander
    December 8th, 2009 at 10:22 | #58

    New Zealand is the Iceland of the South Pacific.

  59. jmh
    December 9th, 2009 at 21:16 | #59

    This would seem to be a fairly clear and damning indictment on NZ’s neo-liberal project:

    “According to the OECD, New Zealand had the biggest rise in inequality among member nations in the two decades starting in the mid-1980s” http://finance.yahoo.com/banking-budgeting/article/107980/countries-wi

    Neo-liberalism/laissez-faire: Epic fail.

  60. jmh
    December 9th, 2009 at 21:36 | #60


    “I was under the impression, that during the Clark period, the NZ per capita income:Australia per capita ratio remained constant…”

    It looks as though the wage gap increased by around 50% in the 90s while the Nationals were in power and following their introduction of the Employment Contracts Act (1991) and either remained constant or narrowed marginally during the Clarke period http://www.radionz.co.nz/news/stories/2008/10/03/1243790e0f34.

    There seems to be some quibbling from the Nationals as to whether the Treasury’s figure of a 2.6% narrowing of the gap during the Clarke period is statistically significant but no disputing the 50% wage gap increase in the 1990s/Nationals/Employment Contracts Act period.

  61. Alice
    December 9th, 2009 at 21:53 | #61

    @jmh
    Epic -fail – agreed JMH. Some (Abbott) are still slavishly following employment contracts – Workchoices V2 – here… yes, it must be nice for some to have a cowed disposable beaten down thinner workforce. Too bad about inequality. Abbott is probably writing ‘Whip and Chains V1′ legislation as we speak.

  62. Peter T
    December 9th, 2009 at 22:28 | #62

    After reading the paper, one comment I would offer is that in my experience, the imposition of strict accountability on the NZ public service has not led to more responsiveness but to more managers and less creative flexibility – with every dollar scrutinised in terms of a narrow bottom line, there’s no room to experiment or test, and the emphasis on managerialism actively discourages technical innovation (the managers don’t understand the technology, and don’t see it as necessary to).

    We have taken the same path, but more moderately (although under Rudd the stressson central accountability has strengthened).

  63. Alice
    December 10th, 2009 at 11:59 | #63

    @Sea-bass
    Sea Bass you do get some things right even if you use colourful expression…reminiscent of MacBeth ? “double double toil and trouble…fire burn and cauldren bubble… fillet of a fenny snake in the cauldren boil and bake

    - “the evil neo-liberals took it over (NZ) and converted it into the Dark Free Market Land of Mordor.”

    Well they certainly boiled up a mess theyve had to undo. There will be more windbacks to come of free market Mordor (or is that torpor) I would suggest..

  64. paul walter
    December 10th, 2009 at 13:54 | #64

    Re#13, Jimmy Page, where are you?

  65. Ken Miles
    December 11th, 2009 at 18:44 | #65

    A power point presentation on NZ, its economy, the failure of the free market reforms to improve the economy and some potential solutions by Prof. Phillip McCann can be found here:

    http://www.motu.org.nz/files/docs/McCann_seminar_slides.pdf

  66. Alice
    December 11th, 2009 at 19:28 | #66

    @paul walter
    Ramble on – in our hearts and and memories Paul…

    “Mine’s a tale that can’t be told,
    My freedom I hold dear;
    How years ago in days of old
    When magic filled the air,
    T’was in the darkest depths of Mordor
    I met a girl so fair.
    But Gollum, and the evil one crept up
    And slipped away with her.

  67. Alice
    December 11th, 2009 at 19:49 | #67

    @Ken Miles
    Ken – same old neo liberal clap trap.

    You havent got the solution in those slides. Youve got the whip and a future promise unfulfilled – you are a modern day Frederick Winslow Taylor – thats all youve got and all you are plus its old fashioned. Your slides are more of the same that got NZ into the hole its in. A one eyed focus on beating more productivity (and more and more and more) out of the worker (and not less greed out of the entrepreneur) and not more investment out of the government. The worker alone will not give you what you want. It takes two or three to tango to get this game right. You can overload a horse until it wont carry.

  68. Alice
    December 11th, 2009 at 20:00 | #68

    @Ken Miles
    Let me give you a classic example Ken. I apply for bridging finance. They send a bank man here to my house. He is here for 10 mins. Very efficient. Explains everything so fast and has to run to another appointment but tells me he has the highest productivity score of the lenders at the bank. Do I care a bit? No. The bank phones me ONE DAY afterwards and wants a survey – asks was he efficient (out of ten) – answer 9. Did he explain everything – 9. Did he resolve your problems 9. Did he relate to you – 0.
    I said – the reason he doesnt relate to me ], nor me to him, is – and write this down “the poor bastard is so scared of your surveys he acts like a robot on speed. The last lender we had for years always had time for a cuppa and a laugh. Do I think its his fault? No – write this down “it is excessive bank monitoring. It is excessive managerial surveying. It is excessive interference in your employees daily efforts. It is excessive micro management”

    I suppose you would call that productivity but I feel like getting another lender (even though its not the poor bastards fault – its micro management in the bank).

  69. SJ
    December 11th, 2009 at 22:03 | #69

    The “leaky homes” story was very interesting. Thanks ken miles.

    The NSW ICAC made some findings this week also related to industry self-regulation. For the security industry, it doesn’t work, and the ICAC has recommended that the government (via the NSW Police) resume its proper role as regulator.

    The ICAC summary report and full report can both be found here.

  70. SJ
    December 11th, 2009 at 22:07 | #70

    Alice, you might have misinterpreted what ken was saying with the McCann slides.

  71. SJ
    December 11th, 2009 at 22:16 | #71

    BTW, I can’t say that I agree with everything that McCann says, but he does make some very good points about where things went wrong in NZ. I can easily imagine someone writing something almost exactly the same in about ten years time about what went wrong with the US economy.

  72. Alice
    December 12th, 2009 at 06:37 | #72

    @SJ

    SJ – you know something? I dont think I have misinterpreted Ken’s slides that much. I dont see much in these slides to help NZ except to essentially blame its geography as a reason for why it isnt doing so great…..just like this little ditty..

    “because of iits location its missin out on globalisation..!!!”

  73. SJ
    December 12th, 2009 at 09:16 | #73

    I read them as saying that the Chicago School/Washington Consensus doesn’t work.

  74. Alice
    December 12th, 2009 at 10:24 | #74

    @SJ
    SJ – policy issues last page – Im not still not reading it that way – the monopoly of Air New Zealand is seen as a problem? Well – have a read of this.

    http://www.act.org.nz/news/why-act-opposes-the-qantasair-new-zealand-takeover

    If they thought late planes were a problem with a monopoly – apparently a Quantas merger is even less desirable to NZ liberals. The “liberals” on this weblink have only one view they want less government and more privatisations because the private sector always does it better (same old same old) even if it makes a bigger mess than they had before.” I cant see five airlines rushing in to NZ to give it the private competition these nutty liberals think will instantly appear and keeping on that road will guarantee NZ stays in the doldrums. Its a damn little place with not much flying distance from one tip to the other – and not much coming in or out relative to countries where they do have volume in air traffic. They whinge about the unions taking all the profits ya da ya da. These liberals whinge about unions “taking control of Air NZ’s profits” but forget union workers spend money their money in New Zealand and dont generally repatriate most of offshore like the company would.

    Still not seeing as anti Washington Consensus SJ….we may have to agree to disagree on this one?

  75. Alice
    December 12th, 2009 at 10:37 | #75

    @SJ
    And dare I think the unthinkable and speak the unspeakable SJ?

    If NZ wacked a tarriff on clothing and textiles, gave unions greater rights, stopped pursuing “the private sector always does it better” religion, they could probably revive sheep farming as an industry, put more money in New Zealanders pockets instead of multinationals pockets and resuscitate their stricken economy in a fraction of the time it will take to fix the mess they are in as a result of neo liberal policies.

    I am under my desk waiting for the rocks to start ricocheting LOL….

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