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Back to the future

April 24th, 2013

Back in the 1980s, there was a constant stream of international delegations to Wellington, seeking to learn from the “New Zealand miracle”, in which a group of radical free-market reformers turned around a sclerotic welfare state. While the results had yet to show themselves, everyone was confident that NZ would soon surpass Australia, where the political system threw up many more obstacles to reform. Everyone knows how that turned out. After 100 years of economic parity, NZ GDP per person has fallen to around 60 per cent of the Australian level. The gap closed a little when NZ abandoned radical reform (from the first MMP election to the end of the Clark Labor government) but is now widening again.

And, just in the last week, the intellectual foundations of austerity polices have been cut away with the discovery that the influential paper of Reinhart and Rogoff, predicting disaster when public debt levels exceed 90 per cent of GDP, was based on a coding error (not to mention some dubious statistical choices). That follows the demolition of the even more influential work of Alesina, Ardagna and other co-authors, some of which I criticised in Zombie Economics

Against this background, it’s truly bizarre to see the Australian right (IPA, CIS and Tony Abbott) presenting New Zealand as a model, on the basis that the budget has been returned to surplus. Apparently, it doesn’t matter that the economic outcomes have been consistently appalling, as long as the ideology is right.

I have a simple suggestion which I hope will appeal to everyone. Since the new NZ government came in, deluded Kiwis have been voting with their feet in large numbers. The resulting imbalance could be addressed if the CIS, IPA, Parliamentary Liberal Party and their keenest supporters moved across the Tasman to try out the marvels of free-market reform for themselves.

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  1. Lord Downer
    April 24th, 2013 at 21:10 | #1

    NZ central budget is not in surplus but in large deficit as far as I know.

  2. April 24th, 2013 at 21:36 | #2

    NZ has not experienced below trend nominal GDP growth either.

    On the other hand Canada is experiencing similar problems to Australia in getting the budget back to black.

    The IPA/Catallaxy et al mob simply have no idea about fiscal policy

  3. Fran Barlow
    April 24th, 2013 at 21:40 | #3

    And Abbott did it again tonight in his interview with Leigh Sales. He said that NZ’s wise policy had reduced debt to GDP to 30% — and didn’t bat an eyelid when Sales point out that Australia’s debt/GDP ratio was less than that of NZ …

    Ah but you see Leigh, NZ doesn’t have state governments …

    Yup … that would be why the ALP Federal government is profligate … You have to laugh …

  4. April 24th, 2013 at 21:43 | #4

    good grief,
    If we had revenue forecast the same as NZ we would be in the black as well.

    the ignorant leading the ignorant.

  5. Jim Rose
    April 24th, 2013 at 22:55 | #5

    John, the drop in NZ productivity was in the 1970s after the UK joined the EEC. A 30 percent drop in TFP between 1974 and 1981.

  6. TN
    April 24th, 2013 at 23:57 | #6

    Everyone knows how that turned out.

    Unfortunately though, not everyone knows why.

    As McCann has pointed out here, the economic reforms in NZ coincided with significant changes in the importance of geography considerations that significantly and adversely affected New Zealand’s economic performance relative to its bigger brother across the Tasman.

    From this perspective, the relevant question is whether New Zealand would have fared better or worse without the reforms; not the one John raises, and triumphantly answers, of how it performed relative to us.

  7. TerjeP
    April 25th, 2013 at 04:57 | #7

    A few points:-

    1. What TN said. Changing role of geography and cities.
    2. Compare with Tasmania. It is part of Australia but isn’t exactly booming. Like NZ it is isolated.
    3. Tax. Bright young things in NZ will generally pay less income tax if they move to Oz. Brain drain hurts. See chart:-

    http://blog.libertarian.org.au/2013/04/17/new-zealanders-should-migrate-to-australia/

  8. Jordan
    April 25th, 2013 at 06:40 | #8

    3. Tax. Bright young things in NZ will generally pay less income tax if they move to Oz. Brain drain hurts.

    So, those are two variables changed: less tax and barind drain.
    How did you decide that only one changed variable have an effect?

    Because you wanted to?
    Isn’t that how Reinhart and Roggof did their study?

  9. iain
    April 25th, 2013 at 08:02 | #9

    GDP per person is a very poor measure of much that may be useful. When you look at EIU or HDI lists there isn’t a lot of difference between Australia and New Zealand.

  10. John Quiggin
    April 25th, 2013 at 08:59 | #10

    GDP per person may not be the most important measure of welfare, but it is the primary target of macroeconomic policy. Fortunately, NZ abandoned its health “reforms” before they could do much damage to life expectancy, and largely copied Oz as regards education

  11. Jim Rose
    April 25th, 2013 at 09:35 | #11

    Economics got on just fine before the attack of the econometricians and their data mining and publication bias. they well may torture the data until it confesses, but not one really cares about the contents of the confessions:

    I invite the reader to try and identify a single instance in which a “deep structural parameter” has been estimated in a way that has affected the profession’s beliefs about the nature of preferences or production technologies or to identify a meaningful hypothesis about economic behavior that has fallen into disrepute because of a formal statistical test.

    From ‘The Scientific Illusion in Empirical Macroeconomics’, Lawrence H. Summers , The Scandinavian Journal of Economics, Vol. 93, No. 2, Proceedings of a Conference on New Approaches to Empirical Macroeconomics. (Jun., 1991), pp. 129-148.

  12. Moz
    April 25th, 2013 at 09:48 | #12

    I would love it if the RWDBs moved to NZ. As Muldoon famously said, that would increase the average worthiness of both populations.

    John, they have continued the education reforms, and at the moment are about to go further. More funding to “private” schools, less funding and more external control over state schools with bonus forced mergers to make sure. But then, the country is run by a merchant banker so you’d expect it to be profitable, at least in the short term. Pity about the small “shareholders” getting screwed though.

    One ray of hope is the green/labour alliance announcing that they will reduce the monopoly profits in the electricity sector, which has made privatising it harder (oddly taxpayers don’t seem to mind “profits” that go to the taxpayer anywhere near as much as profits that exit the country tax-free).

  13. April 25th, 2013 at 09:52 | #13

    Another major difference between NZ and here is that the public sector is ADDING to GDP whilst here it is DETRACTING from GDP.

  14. Ikonoclast
    April 25th, 2013 at 10:20 | #14

    Iko’s Propositions.

    1. It is impossible to change the views of the right wing regarding austerity policies, low taxes, surpluses and small government.

    2. Their views currently heavily dominate public perceptions, discourse and debate and will do so for a very considerable time to come. Witness the complete ascendancy of neocon prescriptions and persception re budget balances, less government, asset sales and privatisation.

    3. Their policy prescriptions will continue to be implemented for a long time to come. (Follows from number 2.)

    4. These policies must perforce play out in the system as they cannot be “argued out” of the system.

    5. We must await the full results of the neocon ascendancy.

    6. These full results will either be a new age of prosperityor current performance continuing idefinitely or a comprehensive economic collapse (meaning at least another Great Depression). (This is sans consideration of Limits to Growth which the right wing dismiss anyway.)

    Let’s wait and see. I predict a comprehensive economic collapse. When it occurs and I am proven right as I fully expect, my relentless “I told you so” tirades will make any other “I told you so” ranter look like a model of restraint. JQ will have to limit me to one a day. I will never let you necons forget you were wrong. Never, so long as there is breath in my body. And if you are right in the end you should do the same to me, but I very seriously doubt you will get to do so. :)

  15. TerjeP
    April 25th, 2013 at 11:27 | #15

    Ikon – where on earth is tax being reduced?

  16. TerjeP
    April 25th, 2013 at 11:35 | #16

    Jordan – there are a host of reasons that bright young things leave NZ. I’m asserting that losing brains is bad for your per capita GDP. I’m also asserting that the NZ tax structure does not help. As indicated by my chart at the site linked any Kiwi that earns under NZ$120k pa would be better off (in terms of after tax income) under Australia’s income tax regime.

    Of course there are other factors. But taxing workers at a higher rate than they are taxed in Australia (especially given the open border and mobile labour) is not a good idea. All else being equal you would expect labour to leave.

  17. John Quiggin
    April 25th, 2013 at 12:01 | #17

    The remoteness explanation doesn’t square well with the fact that Australia has improved its relative position in the OECD over the same period that NZ has declined.

  18. John Quiggin
    April 25th, 2013 at 12:03 | #18

    I looked at this a while back and concluded that you needed a combination of bad macro policy (this is easily verifiable), bad implementation of micro reform, bad terms of trade changes and bad luck (including possible effects of location) to go anywhere near explaining the gap.

  19. TerjeP
    April 25th, 2013 at 12:10 | #19

    @John Quiggin

    Hasn’t Tasmania gone backwards in relative terms also? And the presentation TN linked to was not simply about geographic isolation but something slightly more complex than that. That said I’m not convinced it fully explains things either.

  20. Ikonoclast
    April 25th, 2013 at 12:45 | #20

    @TerjeP

    “Where on earth is tax being reduced?”

    Well if you want to restrict it to present tense, the pedant in me will explain that the “present” is either an infinitesimally tiny moment or an extremely tiny finite moment if time is a quantum phenomenon.

    The very fact that you frame the question in the present tense, illustrates the desire to ignore or revise history. Since about the 1960s, taxes have been reduced markedly in the US, especially for the rich. Since about the 1980s, off-shoring income, tax avoidance, tax havens, corporate tax avoidance and so on have markedly protected some significant incomes and earnings from taxes. Ignoring times earlier than 1901, taxes rose from 1901 to about 1960 due to two world wars and the slow and then accelerating creation of the welfare state. From about 1960 or 1970 taxes have been generally falling in the Anglophone world.

    You are getting the world you want TerjeP. Soon you will get it in spades. I hope for your and your immediate family’s sakes your personal finances are depression proofed so far as that is possible.

  21. Ikonoclast
    April 25th, 2013 at 12:59 | #21

    @John Quiggin

    As per my theses stated further above, you cannot change the minds of the neocons who are in substantial control of public economic policy and public opinion and have been so since about the mid seventies. All that can happen now is for the process to play itself out fully. When it does so, it will crash our economy into another Great Depression. One can only hope then that a positive and progressive change in opinions and perceptions comes out of this next Great Depression.

    Why has neocon propaganda been so successful in entirely dominating the public debate? A thumbnail sketch would outline the plutocratic control of the main stream media. It would also note that neocon explanations of how things (like national budgets) work are both simplistic in the extreme and designed to appeal to the prejudices instilled by or encouraged by main stream media propaganda. A key example is the claim that national budgets are like household budgets. They are not of course as they differ in fundamental respects. However, to claim that national budgets are like household budgets and that surpluses (savings) are good in both cases is simplistic and appealing to people who want to, or can only, “understand” things by simplistic and inappropriate analogies. The population is deliberately kept ill-educated and propagandised in these matters so that it can be easily fooled.

  22. Greg vP
    April 25th, 2013 at 17:15 | #22

    John Quiggin :
    I looked at this a while back and concluded that you needed a combination of bad macro policy (this is easily verifiable), bad implementation of micro reform, bad terms of trade changes and bad luck (including possible effects of location) to go anywhere near explaining the gap.

    Another excellent summary, John. All of those, yes.

    (One quibble – the micro reform was not all badly done. The Employment Contracts Act 1991 was introduced for the purpose of reducing wages, and it did that very effectively. (P.M. Bolger effectively admitted that its purpose was to drive down wages in a radio interview.) That this would reduce both labour productivity and investment doesn’t seem to have occurred to anyone in NZ’s National Party, then or now.)

    All of those, but also bad tax policy, and most of all a ‘bad’ (non-capitalist) culture.

    More than most nationalities, Kiwis prefer owning their own micro-businesses to working in a large, productive enterprise. (Hofstede’s concept of ‘power distance’ might be part of the explanation — Kiwis strongly prefer to know and directly work with the decision-makers in their organisations–but we’re unlikely to find out. NZ is “too poor” to fund proper social science research, and its politicians too dull to realise that there is a problem.)

    BTW the NZ Productivity Commission is asking for submissions for its inquiry into productivity of the services sector, 70% of the economy. Interestingly, the commission doesn’t seem entirely a sinecure for the party faithful: it’s going through the motions fairly convincingly, despite bad terms of reference. Do you have time to upload a document with these thoughts of yours?

  23. Ikonoclast
    April 25th, 2013 at 17:40 | #23

    @Greg vP

    “More than most nationalities, Kiwis prefer owning their own micro-businesses to working in a large, productive enterprise.” This is a point in the Kiwis’ favour. More power, kudos and respect to them if they aren’t working for large so-called “productive” enterprises where all the profits go to capitalist parasites (usually overseas). Instead they are working in family co-operative micro-businesses and keeping the income and power to determine their own life and work patterns. They are to be highly commended if this is true.

  24. Greg vP
    April 25th, 2013 at 17:48 | #24

    @TerjeP
    Terje, it’s not entirely clear that NZ is suffering a net brain drain. It tends to acquire skilled immigrants from South and East Asia and from Southern Africa at about the rate NZers (born or naturalised) leave for Australia or elsewhere.

    Or it did, until this latest government, anyway….

    The economic geography argument (McCann, et al., based on Fujita-Krugman-Venables) has some merit. Since transport and communication costs have dropped so low and preferential tariff regimes have been dismantled, more subtle barriers such as time zones and business customs become more important. Market size becomes all-important. (John’s argument can be countered by observing that Australia’s population is five times that of NZ so geographic effects are attenuated; Australia has had very good policy and execution, much better than elsewhere in the OECD with the possible exception of the Scandis; and it has had a tail-wind with exports. Good policy and improving terms of trade can overwhelm geography for some decades.)

    But as I said above to John, I think underlying NZ’s performance is culture. A man, a ute, and a dog; or a woman, a salon, and a “handbag dog”: the ideal enterprises in many NZ minds. In reality, unproductive nanobusinesses.

  25. Ernestine Gross
    April 25th, 2013 at 18:56 | #25

    Flight distance:
    Sydney to Perth: 3301km
    Sydney to Auckland: 2160km

    (Just another example of the limitations of macroeconomic data and international comparisons.)

  26. rog
    April 25th, 2013 at 18:58 | #26

    Stats indicate large number +65 yr olds entering NZ in sufficient numbers to make a slim nett population growth. Great place to retire to providing you have sufficient cash resources.

  27. Ernestine Gross
    April 25th, 2013 at 19:49 | #27

    TerjeP : … where on earth is tax being reduced?

    In many places: Lichtenstein, Switzerland, British Virgin Island, Cyprus, ….. New Zealand.

    The most prominent firm of lawyers who arrange complex company structures and trusts for the purpose of transferring financial wealth of multinational corporations, ‘national’ corporations, and individuals (including the odd politician) to ‘tax havens’ is, according to recent reports, is located in Switzerland. According to the same series of recent reports, New Zealand is the home of an important facilitator for this form of tax reduction.

    The discovery of tax havens isn’t big news (except perhaps for the proponents of MMT verbal theories and much of macro-economic models which represent the financial sector by ‘the interest rate’).

    The news is that there is now a lot of data – a real lot of leaked data.

    The data was leaked to the International Consortium of Investigative Journalists (ICIJ), an organisation located in Washington. A prerequisite for data analysis by journalists (and I assume economists as time goes on) was the employment of forensic computing experts. Many journalists from the international newspapers, The Washington Post (USA) The Guardian (UK), Sueddeutsche (Germany), LeMonde (France) as well as from the BBC and the Canadian Broadcasting C. , Norddeutsche Rundfunk, in conjunction with individual journalists from many countries have started to report – every day a little bit more. The story runs internationally under the heading of ‘offshore leaks’. http://www.icij.org/

    To the best of my knowledge, the SMH had only one short article on this item http://www.smh.com.au/business/world-business/mass-leaks-reveal-secret-world-of-tax-havens-20130405-2hapw.html

    Here are a few links from the English language newspapers:
    http://www.smh.com.au/business/world-business/mass-leaks-reveal-secret-world-of-tax-havens-20130405-2hapw.html

    http://www.guardian.co.uk/uk/2013/apr/04/secrets-offshore-hideaways-laid-bare

    http://www.guardian.co.uk/uk/2013/apr/03/offshore-secrets-owners-unmasked

    http://www.guardian.co.uk/uk/2013/apr/04/uk-companies-offshore-directors-figures

    http://www.guardian.co.uk/commentisfree/2013/apr/05/offshore-industry-britain

    And one on the New Zealand link in the international web:
    http://dealbook.nytimes.com/2013/04/10/seeking-relief-banks-shift-risk-to-murkier-corners/?nl=todaysheadlines&emc=edit_th_20130411

    It seems to me there is a lot of room of austerity but not in the spirit of the authors of the two papers listed in JQ’s post.

  28. Ernestine Gross
    April 25th, 2013 at 19:53 | #28

    Further to my post at 27 (currently in moderation, perhaps because of the many links), I’d like to say that all newspapers I’ve mentioned are careful to point out that not all transactions on the leaked files are necessarily illegal. These newspapers proceed carefully.

  29. Ernestine Gross
    April 25th, 2013 at 20:01 | #29

    As is evident from JQ’s post @18 above and more than evident to anybody who is reading Prof Q’s blog and his books, he is not a narrow GDP focused macro-economist.

    The following link to GDP data per capita in USDollars by country is intended to provide a convenient reference for non-economists to check out the GDP per capita for some well known tax havens.

    GDP/pc, (PPP), USdollars
    https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html?countryName=New Zealand&countryCode=nz&regionCode=aus&rank=50#nz

  30. TerjeP
    April 25th, 2013 at 21:40 | #30

    EG – I’m not sure if your misunderstanding of my question is deliberate or otherwise. Let me restate the question. Which countries in the world have recently passed legislation designed to reduce their tax revenue? The context of the question being Ikons claim that proponents of “less government” are politically ascendent. I think this claim is a nonsense but if there are a multitude of countries passing legislation designed to reduce tax revenue then I’ll have to revise my opinion.

  31. Jordan
    April 26th, 2013 at 01:30 | #31

    @TerjeP
    Where is tax being reduced, and where is tax revenue reduced are two different questions and answers are different.
    Total tax revenue is not being reduced anywhere, but taxes are being reduced on the rich since 1961 while rising on the lower classes.
    Tax revenue is dependent on economy growth and the burden of it can be redistributed between different sectors.

  32. Ikonoclast
    April 26th, 2013 at 09:22 | #32

    Reply to TerjeP at number 30 above.

    http://en.wikipedia.org/wiki/Bush_tax_cuts

    Is this “recent” enough for you? I mean the tax cuts by Bush and the several extensions of them by Obama. Obama’s most recent act:

    “On January 1, 2013, the Bush Tax Cuts expired. However, on January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012, which reinstated many of the tax cuts, effective retroactively to January 1st. The 2012 Act did not repeal the increase in the highest marginal income tax rate (from 35% to 39.6%) which had been imposed on January 1st as a result of the expiration of the Bush Tax Cuts.”

    So all Bush tax cuts except the increase in the highest marginal income tax rate were reinstated yet again. All of Bush’s and Obama’s tax legisltation is implicitly “designed to reduce tax revenue” compared to what it would have been if the Bush tax cuts had (a) not been enacted and then (b) allowed to fully expire under the “Byrd Rule.”

    We might note that it was essentially only under the heavy post-2008 pressure on the budget (large deficits) that Obama and Congress squeaked one little tax rise in; the increase in the highest marginal income tax rate.

    At a time when the US budget is under severe deficit pressure there is still enormous reluctance to increase taxes or to reduce outrageously high military expenditures on disastrous overseas imperial adventures or to confront the realities of Limits to Growth and Climate Change. This is clear evidence to me of an effective neoconservative ascendancy.

    Of course, I am wasting my breath or rather my typing fingers. Neocons and libertarians take not the slightest notice of real world evidence nor of logic. As I said previously, their near-total ascendancy must now play itself out. When they have wrecked the economies of the West and plunged us into another Great Depression, there will then be an opportunity to change politics for the better though there is no certainty even then that politics will change for the better. Whilst the current unsustainable “pyrrhic victory” prosperity lasts and people are lured by advertising, placated by consumerism and propagandised by the main stream media a sea-change of consciousness cannot occur in the population.

    It won’t be long now ( as the monkey said when he got his tail caught in the chaff cutter). I would put our chances of avoiding the onset of a great depression by 2020 as very low indeed.

  33. TN
    April 26th, 2013 at 09:47 | #33

    I looked at this a while back and concluded that you needed a combination of bad macro policy (this is easily verifiable), bad implementation of micro reform, bad terms of trade changes and bad luck (including possible effects of location) to go anywhere near explaining the gap.

    Hi John – Did you put anything down at the time in print or electronically that backs up this conclusion, and more particularly that demonstrates what level of blame, if any in net terms, should be ascribed to NZ’s micro reforms?

  34. wilful
    April 26th, 2013 at 09:59 | #34

    Which countries in the world have recently passed legislation designed to reduce their tax revenue?

    Erm, why dont you try Australia? We had income tax cuts kick in only last 1 July!

  35. April 26th, 2013 at 11:02 | #35

    you have made it, in a number of areas this week.

    Can I say in an immodest way it provides the BEST reading from the blogosphere

  36. April 26th, 2013 at 11:03 | #36

    drat that should be it.

    It is stil lgreat reading. Morre on R&R as well.

  37. Jim Groves
    April 26th, 2013 at 11:24 | #37

    In fact, most of the GDP per capita gap opened up in the two decades before NZ’s economic reforms because the cosseted little NZ economy failed to participate in the two resources booms Australia had in that time.

  38. John Quiggin
    April 26th, 2013 at 11:46 | #38

    @Jim Groves

    Not true: Gap widened substantially post-1983, even though Aust resource boom of early 1980s fell in heap just around then.

    https://twitter.com/MattCowgill/status/326885099348058112/photo/1

  39. John Quiggin
    April 26th, 2013 at 11:48 | #39

    @TN

    No more free beer tomorrow? [electronic resource] : economic policy and outcomes in Australia and New Zealand 1984-2003 / Tim Hazledine and John Quiggin

    http://www.uq.edu.au/rsmg/WP/WPP05_4.pdf

  40. may
    April 26th, 2013 at 12:43 | #40

    but the fin said the other day that house prices in NZ were going through the roof.
    (although house prices in NZ have always been expensive.)

    todays had a letter in the opinion section from a man who was quite annoyed about being misrepresented in an article regarding the selling off of a publically owned service.

    i suppose it’s all of a piece with inability to have a proof reader—the mistakes in spelling and suchlike just keep coming.
    one expects this sort of thing from a roneoed newsletter, not the one and only fin.

    todays insert mag had quite a good piece on a fund manager and the interesting thing was at the end when he said he does not take any notice of analysts when gathering info

    and the poor old fin is mostly analysis.

  41. TN
    April 26th, 2013 at 12:54 | #41

    Thanks John: an interesting paper that I shall forward on to my NZ colleagues.
    However, on the issue of economic geography it seems to me that the paper, quite understandably given when it was written, does not properly consider the sorts of effects cavassed by McCann. Indeed, your paper states that:

    Indeed, the economic cost of distance has fallen quite sharply, in particular with the innovation of containerisation, the introduction of jet air travel, and the IT communications revolution. Distance should have been a factor operating in NZ’s favour over the past twenty or so years, not necessarily relative to Australia, but certainly relative to the other OECD countries whose growth rates exceeded New Zealand’s

    McCann’s paper, however, shows how those developments may in fact have harmed ‘periphery’ countries like New Zealand.
    Does this let the implementation of NZ’s micro-economic reforms you criticised off the hook? Not necessarily, and indeed not probably IMO. But it does, I suggest, mean that you should adopt more cautious and qualified language when discussing the possible effects of those reforms.

  42. wilful
    April 26th, 2013 at 14:50 | #42

    @John Quiggin

    ‘selfish sh*ts’ (rational opportunistic individualists)

    I like it!

  43. Jim Rose
    April 26th, 2013 at 17:34 | #43

    @Ernestine Gross I am disappointed that you oppose the right of countries to decide their own tax laws.

    If Sweden has the right to set high taxes, others have the equally sovereign right to set low taxes.

    International law is not a cafeteria where you can pick what suits. Just as there is international humanitarian law, there is international economic law. One in, all in.

    International economic law makes a far greater contribution to peace. Free trade creates mutual dependencies among nations. Tariff walls do not promote peace.

  44. John Quiggin
    April 26th, 2013 at 18:02 | #44

    @TN

    I’m underwhelmed by the “global cities” story. In the Oz/NZ context, it seemed appealing when Sydney seemed to be breaking away from the rest of the cities in the region. But that fell in a heap, and there’s no obvious reason why Auckland should do worse than, say, Adelaide, a smaller city further from anywhere, and in a state with lots of historic problems.

    The story only really worked for the financial sector, and the associated wealth has proved entirely illusory.

  45. Ernestine Gross
    April 26th, 2013 at 21:42 | #45

    @Jim Rose

    Your disappointment is entirely of your own making; it is your emotional response (“disappointment”) to the strawman you created (unrelated to the content of my post).

    The following link contains an example of a tax haven case:

    http://www.smh.com.au/nsw/sydney-couple-jailed-for-12-million-tax-fraud-20130426-2iix0.html

    .

  46. paul walter
    April 27th, 2013 at 02:01 | #46

    As usual, thanks to our host, Fran Barlow and Ernestine Gross.
    I’d head for Auckland too, except for the earthquakes.

  47. paul walter
    April 27th, 2013 at 02:56 | #47

    Am curious to know how the Australian economy is run. I suppose this would be to understand how the Reserve Bank and Treasury operate, how transparent their activities are and what sort of people running these are (eg, do they operate for the “best interests” of “Australia” or the “Australian People” and how would such people define these terms and thus their own roles).
    Just reading an article at “Independent Australia”, by one Murray Hunter, it seems there are close links between the people at the Reserve, the big four banks (who actually owns these?) and patterns of investment as to resource development etc, much publicised by Fairfax and Murdoch as panaceas for our nations current problems and ultimate future
    Is there a clash between keeping the dollar and interest rates high and also looking after other parts of the Australian economy, as well as the well-being of ordinary Australians?
    Were the conflicting aims of competing interests the real reason the government seemed to get in trouble over the Mining supertax and Carbon amelioration?

  48. Ikonoclast
    April 27th, 2013 at 08:37 | #48

    @paul walter

    An interesting set of questions. The links you mention, if correct, would seem to constitute circumstantial evidence for the thesis of certain class and monied interests controlling Australia’s financial system. It would scarcely be surprising. Combined with other evidence, for example Julia Gillard’s obvious conspiracy with the mining bosses to overthrow a PM who enjoyed popular support, the picture gets clearer.

    The Liberals openly support the monied end of town. Labor have to pretend to support the working class while actually supporting the monied end of town as well. So in this sense Labor have a trickier job keeping everyone happy. Why Labor (or rather the Labor hierarchy and parliamentary party) have decided to support the rich bosses is another question but with a rather simple answer. They sold out for a mess of donations and post-term sinecures. The capitalist bosses must laugh at how cheaply and easily they were bought.

  49. Jim Rose
    April 27th, 2013 at 09:07 | #49

    John , your timing is off. the economic reforms were in response to a decade of decline.

    New Zealand’s total factor productivity growth rate fell a cumulative 30 per cent below its trend rate between 1974 and 1980.

    There was no significant growth in real GDP per working age New Zealander from 1974 to 1992. New Zealand lost almost two decades of productivity growth.

    Real GDP per New Zealander aged 15-64 on a purchasing power parity basis dropped from equality with Australia up until 1974 to a 30 per cent gap by 1992.

    Economic reforms returned real GDP growth per New Zealander aged 15-64 from no growth from 1974 to 1992 to the previous two per cent trend rate from 1993.

  50. John Quiggin
    April 27th, 2013 at 09:36 | #50

    @JR Since the reforms started in 1984, it’s your timing that’s off, not mine.

  51. Jim Rose
    April 27th, 2013 at 09:58 | #51

    @John Quiggin thanks john, what returned NZ to trend growth in 1992?

  52. Ikonoclast
    April 27th, 2013 at 11:57 | #52

    Maybe the neocons and market libertarians could explain to us why the most controlled and commanded large country economy in the world (China) is performing better than any other economy in the world currently . This question is raised not to defend or advocate the Chinese system in toto but simply to point out that dirigisme can be effective and can outperform a more laissez-faire system in at least some situations.

  53. paul walter
    April 27th, 2013 at 12:14 | #53

    Jim Rose, what was the cost in human terms of the “reforms”?

  54. Alan
    April 27th, 2013 at 13:02 | #54

    China’s not the only example of successful dirigisme. A number of countries are doing extremely well with sovereign wealth funds. Singapore’s acquisition of Optus is a case in point. Apparently it’s so important for Optus to be in private hands that it doesn’t matter if those hands belong to a foreign government. The French electricity parastal, EDF, acquired most of the British electricity industry in the same manner.

    At the same time I suspect China’s success is somewhat overstated by inflated statistics. That was the case in the old Soviet bloc and recent events like their effort to stop the US embassy in Beijing posting the real air pollution figures for the city as opposed to the state’s cooked figures suggests the Chinese have not learnt a lot about transparency.

  55. Jordan
    April 27th, 2013 at 14:18 | #55

    @Alan
    There is no inflated statistics in China, only hiding some damaging statistics. China is printing currency at stagering proportions. That, on its own produces large growth and inflation which statistics show.
    M=P+O+V By raising money supply, you can offset prices, output or velocity.
    Depending on economic flexibility and dirigist intentions, it all depends which of the variables will change the most. By neoliberal ideology, money supply raises only inflation while leaving other two variables intact. Any mathematician would tell them that is just crazy.

    Soviet Union had deflated statistics, not inflated as was official propaganda.
    In communised society, many of spending is not counted with profit added prices. With that you automatically get deflated output in nominal terms. And output is calculated in nominal terms, in ammount of money.
    If a company provides free meal that was internaly produced, that would count only sallaries of cooks and supplys. There is no profit included as is in capitalist economy is, where outside vendors provide meals that workers pay. Companies would provide babysitting services and kindergartens without profit included. This would give benefits to employees that are not calculated as it was in capitalist society.

    Nonwage benefits in Soviet system was about on the level of nominal wage which is counted in GDP. Nonwage benefits are not caunted in GDP. This way Soviet wages were much lower then in the west, but if you would include benefits with it i would say it was at par with the west.
    Nonwage benefits in communist block were; free healthy meals, babysitting services, free transportation to and from work, housing credits for employees not depending on ability to pay but on need and some other smaller benefits.
    Imagine that half of consumer spending was barter economy and then claim that GDP was inflated. That is just funny knowing how GDP is calculated.
    .
    I recently wrote why privatisation of state assets is a major push in the west today.
    By including profit ammount in state provided services without profit which is effect of privatisation, you get inflated GDP which is then served for few purposes;
    -Politicians can claim that they grew economy so you should vote them in again,
    -Inflated GDP can reduce borrowing costs by reducing debt/GDP ratio
    -interstate competition for funds is a wash but internationaly, it can be of use(not for currency issuer)
    -Prestige in international political circles

    There are some negative effects but dependent on way privatisation is done.
    -

  56. Jordan
    April 27th, 2013 at 15:38 | #56

    paul walter

    Am curious to know how the Australian economy is run. I suppose this would be to understand how the Reserve Bank and Treasury operate

    It seems that Australians can not sit on their civic butt anymore, you all will have to become politicaly active in order to keep the democracy and prosperity. You all will have to work on building cooperation and knowledge between people in order to know how to proceed further.

    If people are not politicaly active to show politicians the way they need to govern, then there is someone who is paid to keep everyday preasure on politicians: lobbyists for corporations.

    That article in IA is a nice presentation on how far corporations have gone in search for higher profits. 90% top tax is a bulletproof way to keep them from doing that, they would not have incentives for such profits with such confiscatory tax.

    Percentage of FIRE economy in GDP is a simple way to know how far they have gone in accuiring the economy. FIRE is not a productive economy, it should be a service for the economy to keep it smothly humming, if it have over 20% of the total GDP it becomes a burden on the economy and prices productive investments out of the system. It also prices out citizens out of acquiring the housing and small enterprenuership out of the credit market and capital investments. Land price becomes too inflated trough credit creation while other needs are downgraded.

    To find out how Reserve bank and Treasury operate you can turn to MMT only because they are the only economists/bankers who try to give the attention to it. Other economists do not even dare to approach to what really matters: money and money creation.
    All other economists calculate only goods and service flow which is taken in nominal terms/money value while abandoning the question: who benefits from money creation and how that affects the real economy.
    MMT is also called Functional Finance, Chartalist, Circuitist, Sectoral ballance aproach, Monetary realist, …..They only differ in prescribed policy solutions not in describing how state financing really works. Try Warren Mosler first who started it all, a banker who figured it out and MMT was called Mosler Economics in the begining. MMT is Keynesianism trough money circuit view.

    If you do venture into MMT knowledge, you need to forget about morality and opposition to giving something yours for the benefit of all in order to comprehend it. See a big picture, Enter the Rabbit hole, Choose the blue or the red pill. Prof. JQ is opposed to it, still, but slowly comming around to it, just as Paul Krugman.

  57. ralph
    April 27th, 2013 at 16:23 | #57

    A good article by Martin Wolf in the Financial Times – Fiscal austerity loses an article of faith. Re Reinhart and Rogoff he argues “Nevertheless, their work and that of others supports the proposition that slower growth is associated with higher debt. But an association is definitely not a cause”

  58. Ernestine Gross
    April 28th, 2013 at 10:16 | #58

    @Jordan
    “All other economists (than MMT) calculate only goods and service flow which is taken in nominal terms/money value while abandoning the question: who benefits from money creation and how that affects the real economy.” [Term in round brackets added to convey the context.)

    Aren’t you exaggerating (misleading) a bit?

  59. John Quiggin
    April 28th, 2013 at 11:03 | #59

    @Jim Rose

    So, the great achievement of the reformers was that, after a decade of destruction, growth resumed at the pre-reform rate, but without any catchup of the losses caused by reform?

    And, of course, there’s been more decline relative to Oz, under Key.

  60. Jim Rose
    April 28th, 2013 at 11:17 | #60

    John Quiggin :
    So, the great achievement of the reformers was that, after a decade of destruction, growth resumed at the pre-reform rate, but without any catchup of the losses caused by reform?
    And, of course, there’s been more decline relative to Oz, under Key.

    Real GDP growth resumed at the pre-1974 trend rate of 2%. The same rate as Australia.

    There were many reforms in the 1980s and also in the 1990s.

    The 1990s reforms did not lower growth under the Nats, including the employment contracts act. The 1990s reforms should have also lowered growth if you a right about them been the cause of the lower growth from after 1984.

    This situation in 1984 after the Muldoon years was described thus:
    We ended up being run very similarly to a Polish shipyard

    David Lange

  61. Jim Rose
    April 28th, 2013 at 11:18 | #61

    the second last sentance after the colon should be in quotes

  62. Ikonoclast
    April 28th, 2013 at 11:27 | #62

    @Alan

    I would not equate sovereign wealth funds with dirgisme. Where a country issues its own fiat currency, sovereign wealth funds are in many ways both illogical and counter-productive. Dirigisme is not mere fiscal manipulation.

    In what way does it make sense for a sovereign nation to save in its own fiat currency? It can inject or withdraw high powered money by running deficits or surpluses respectively. Where there is a surplus this implies (a) deliberate withdrawal of money to cool an over-heated economy or (b) austerity policies when austerity is inappropriate (ie. a pro-cyclical stance).

    In case (a) the logical thing to do is to destroy the fiat monies. Taxes higher than expenditures withdraw and essentially destroy fiat monies. It runs counter to case (a) to place the monies in a sovereign wealth fund and then invest in say shares thus contributing to assets inflation. In case (b) you would be further depressing demand and then artificially holding up assets prices. Such a practice would depress and distort the economy as Sovereign wealth funds are typically used to purchase assets and/or shares.

    Dirigisme is a policy of directed development facilitated by government. The track record of dirigisme in mixed economy is very good as distinct from the track record of 100% command economies.

    The capacity to accumulate a sovereign wealth fund when the economy is otherwise running well and the budget inflows and outlays are healthy would simply imply taxes are too high and could be reduced. Accumulating a a sovereign wealth fund under other conditions would imply fiscal settings inappropriate for that point in the business cycle.

    Using sovereign wealth funds to accumulate overseas assets always runs the risk of eventual confiscation by nationalisation or other means in the other jusidiction. It is better to let private enterprise enjoy the rewards and bear the risks of foreign investment. Rather than using a sovereign wealth fund or government borrowing, deficits can be used to create needed national infrastructure at home. A dirigist policy would directly invest in and/or encourage investment in and/or assist with planning and R&D for needed national projects and needed national industries.

    A dirigist policy would participate in predicting what is needed. Private enterprise is no better at predicting long term needs than an effective public administration. Private enterprise is less effective at providing long terms needs in many cases. Private enterprise is probably better at predicting and meeting near term (proximal) needs. Thus private enterprise is good at keeping up food and fuel supplies for the next 6 months or two years. It is poor at planning the 20 or 30 years transition needed to go from fossil fuels to another energy system. Short term proximal steps don’t get you that place. Dirigist (state) planning is required.

    Short term proximal steps only get you to a long term goal if fundmental requirements don’t change. When fundamental requirements for progress change you are stalled at that point until you re-engineer aspects of the system. This is unless you have done long-term preparation and engineering. Then you are proplerly placed to rapidly surmount the point of fundamental requirement change. There is nothing in the market system that sees profit in preparing for a fundamental requirements change in twenty years time. Indeed it will vigorously fight such preparation when such preparation mandates the need to strand assets. The climate change problem, for example, mandates the need to strand fossil fuel assets.

  63. Ikonoclast
    April 28th, 2013 at 11:46 | #63

    I might now make a somewhat stretched analogy if I may. Imagine you are driving a four wheel drive in rough, trackless country as dusk approaches. For some reason you do not have the luxury of stopping after dusk but must press on.

    The four wheel drive is the economy. You are the government. The engineering of the four-wheel drive, especially its self-correcting, adjustment systems and in-built capacities, like suspension and ground clearance, is the market economy and extras like headlights are innovation. The self-correcting systems will get you over middling ruts and bumps. All you have to do is steer to avoid major obstacles and make for your desired destination (the town of Full Employment for example). If you drive over a cliff (e.g. a fiscal cliff) then no amount of good suspension (market economy) mechanisms will save you.

    Thus the government must steer the essential direction to distant goals while avoiding disastrous imminent obstacles. The markets provide the proximal self-adjusting mechnisms which mean you don’t have to micro manage everything. The market system also provides innovation which allows you to see further ahead i.e. to turn on the headlights. But all these benefits of the “automatic” market system (efficiency at achieving proximal adjustments and developing innovations) are useless without an intelligent driver (the government) with a sensible long term goal and a map, compass and navigation methods to get there.

  64. Jordan
    April 28th, 2013 at 15:09 | #64

    @Ernestine Gross
    Yes, i did exagarate a bit, but not really misleading.
    Ortodox economists do look at money flow when talking about inflation, deflation but not seeing the causes and effects of it. They are misleading us on it.
    They look at sectoral ballances but seing it as a separate, individual sector issue.
    They look at deficit but do not see how it affects redistribution.
    They look at superannuation scheme but not seing negative effect of it, how it redistribute pension based on luck/ success of a particular investment.

    This is not true for economists that are working for Central banks (in general) but this research is not available to the public or presented to the public.
    There are Economics Department separated from MBA Departments at universities and the economic proffesors are teaching different economics, not only macro and micro different but also different in logic. This is according to Randall L. Wray, Michael Hudson, Steve Keen, Richard Wolf and other hetedox economics.

    Is there an economist that talks about issue that Ikonoclast wrote at #12 and me at #5?
    I have not read about it nowhere. Sure that there is, but it is not readily available. Even tough it has huge importance, it is a side issue for ortodox economists.

  65. Jordan
    April 28th, 2013 at 17:42 | #65

    And here is Steve Keen talking about economists not including money and banks in resarch in a video, the best yet, by him about his project “Minsky” and importance of it at the Australian Treasury stuff presentation. Here he repeats how ortodox economists treat the issues and how he modeled and incorporated money flow and goods and service flow.

  66. Jim Groves
    April 29th, 2013 at 09:37 | #66

    @John Quiggin
    The graph shows that, at best, we both have a point; the gap in per capita GDPs opened in the late 1960s and was fairly wide by the time of NZ reforms started in mid-1980s. It has widened since as Australia’s reforms 1983-2000 seem to have been much more successful than NZ’s; as has Australia’s performance post-2008. This is consistent with the view that NZ just consistently fails to join in Australian successes, despite CER; perhaps only a single currency (properly administered, unlike Europe’s) could fully integrate the two economies.

  67. Troy Prideaux
    April 29th, 2013 at 10:10 | #67

    Jim Stanford also follows John’s argument in regards to productivity growth in Canada.

    http://canada2020.ca/increasing-innovation-and-productivity/summary-increasing-innovation-and-productivity/

  68. Jordan
    April 29th, 2013 at 16:20 | #68

    It looks like Brad DeLong is going full bore MMT. This inclusion of Abba Lerener’s “Functional Finance” and from New Preface to Charles Kindleberger “The world in Depression 1929-1939″ posts points to that.
    Krugman still thinks that this means that budget deficit never matter even tough it is clear from Abba Lerner that is not what MMT claims. “Monetarism falls short (Somewhat wonkish)” post is giving his toughts on it. at his blog in NYT.

  69. Jordan
    April 29th, 2013 at 18:56 | #69

    Steve Randy Waldman explains systemic mechanisms for lag in developements, the one like NZ lag to Australia. He calls it “resource course”. It points to many other complex effects on an economy. And i think that easiest statistic to find which resource is causing the curse is to look for inflation between sectors of an economy, which sector inflated the most?.
    The financial sector inflated the most, so, it got the benefits trough bargaining power over other sectors.

  70. Ernestine Gross
    April 30th, 2013 at 06:46 | #70

    @Jordan

    Re your 18 above.

    What you are proposing under the label “MMT” is but another example of ‘back to the future’; back to the time when Keynesian ‘functional finance’ (to use Lerner’s term) was promoted (in the positive sense of the word).

    May I point out that this example of ‘back to the future’ is untenable because the initial conditions in or around 1945 are different from those in the early parts of the 21st century.

    While it is the case that the Great Depression (early 1929 to depending on where you lived) as well as the 2007-2008 ‘Deep Depression’ were preceded by ‘financial innovations’, it does not follow that therefore the remedy of the post WWII period applies today.

    I shall focus only on one major difference, which may be seen as general, and one difference, which is specific to New Zealand.

    The 1929- Great Depression was marked by wide-spread bank failures (causing an end to the ‘financial innovations’). By contrast the most ‘innovative’ of the banks (proverbial Wall Street bankers) were bailed out in 2008 (and ongoing) by means of replacing their privately generated currency units with government generated currency units. The effect on the income and wealth distribution is very different under the 2 scenarios.

    As for New Zealand, in 1945 there was great demand for its agricultural produce in Europe and there were trade agreements between the UK and New Zealand. This changed radically when the UK joined the EU in the early 1970s. (In contrast to Australia, New Zealand does not have mineral resources with different export markets.)

    My point about New Zealand does not negate the point of the thread regarding the policies of the 1980s entailing an example of ‘back to the future’. My point is that the consequences of 1980s example of ‘back to the future’ are not negated by yet another example of ‘back to the future’.

  71. Ikonoclast
    April 30th, 2013 at 07:42 | #71

    @Ernestine Gross

    Why use flaws in the 1929 process and in the 2009 process (in the US) to implicitly argue that the Functional Finance / Keynesian / MMT approach is flawed? This seems to be what you are doing. Yes, it is a flaw to allow unregulated financial innovations (in the lead up to 1929 and 2009). Yes, it is a flaw to allow mass bank failures to occur before doing anything (1929). And yes it is a flaw to bail out the speculators and ponzi-scheme merchants (US 2009).

    These flaws result from ignoring the full Functional Finance / Keynesian / MMT approaches and not from implementing them properly. How are such flaws an argument against proper FF / Keynes / MMT measures?

    Clearly, the answers are (a) tighter financial regulation and strict control of speculative instruments (b) proactive action to stem bank failures (c) economic stimulus delivered (when needed) to consumers and workers and not to rich speculators.

    There is no reason why failed banks could not be nationalised and wound up where necessary. There is no reason why losses cannot be restricted to millionaire shareholders and depositors, with small depositors being protected by a government guarantee. There is no reason not to have one state owned national bank (like the old Commonwealth) which pays lower interest but fully guarantees deposits.

  72. robert monks
    April 30th, 2013 at 11:05 | #72

    good sense in this article.

  73. Ernestine Gross
    April 30th, 2013 at 11:24 | #73

    @Ikonoclast

    Inconvenient as it may be, Ikon, we have to deal with the world as we find it and try to solve the problems which exist at the time.

  74. Jim Rose
    April 30th, 2013 at 17:08 | #74

    @Ernestine Gross there were no bank failures in canada. Ditto in australia and new zealand, as i recall. No bank failures in uk?

    Most of the bank failures were in 1933 and thereabouts in the USA? The grea contraction started in late 1929 with massive layoffs im manufacturing

  75. Ernestine Gross
    April 30th, 2013 at 22:07 | #75

    @Jim Rose
    There were no banks in the 1920s in relatively large areas in the Amazon and in October 1987 a stockbroker in Cairo was reportedly not aware of stock exchange crashes in many places a few days earlier. Here you are, Jim, there is always a little bit of detail – irrelevant to my original point about initial conditions – that can be mentioned. It is extraordinarily easy (no ‘barriers to entry’).

    Do you agree that the initial empirical conditions at a particular time and place are relevant for the application of any theoretical framework? Yes or No?

  76. Ikonoclast
    May 1st, 2013 at 08:10 | #76

    @Ernestine Gross

    As always, you dance around an issue theoretically and never wish to come to terms with it by grappling with any practicalities. Every moment in time is a new situation. Every moment in time presents “initial empirical conditions at a particular time and place” which as a complex have never existed before. Every theoretical framework (as a set of simplifying formulas and algorithms) grapples with a unique and new complex which is perforce imperfectly understood.

    If one studies in course detail, one will over-simplify one’s model (theoretical framework). If one studies in over-fine detail, one will never finish the model before reality evolves, moves on and invalidates the model. Where is your research project on this continuum?

    It is patently clear that good macroeconomic settings are a necessary but not sufficient condition for a healthy mixed economy like Australia’s. For example, a bad macroeconomic setting would be to levy all current taxes and make absolutely no outlays thus returning the budget to a massive surplus. How long do you think the country could run on those settings?

    Thus I refute the attempt to reject macroeconomics.

  77. Jim Rose
    May 1st, 2013 at 17:05 | #77

    @Ernestine Gross no. popper wrote a book on historicism.

  78. Ernestine Gross
    May 1st, 2013 at 21:27 | #78

    Ikonoclast and Jim Rose,

    There is a new sandpit open.

  79. kevin1
    May 1st, 2013 at 21:33 | #79

    @Alan
    “A number of countries are doing extremely well with sovereign wealth funds. Singapore’s acquisition of Optus is a case in point. Apparently it’s so important for Optus to be in private hands that it doesn’t matter if those hands belong to a foreign government. ”

    My recollection is that in 2011 or thereabouts, the Aust PMC Dept rejected (unofficially) the Optus bid for ICT services because Sing govt was likely to get access to communications info.

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