Zombie economics

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.

77 thoughts on “Zombie economics

  1. @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:
    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).

  2. 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.

  3. 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.

  4. @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.

  5. 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.

  6. “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.

  7. @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.

  8. 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).

  9. @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..

  10. @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.

  11. @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.

  12. @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).

  13. 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.

  14. 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.

  15. @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..!!!”

  16. @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.


    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?

  17. @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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