Back to the future

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.

79 thoughts on “Back to the future

  1. 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.

  2. 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.

  3. @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.

  4. 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.

  5. 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”

  6. @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?

  7. @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.

  8. 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

  9. @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.

  10. 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.

  11. @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.

  12. 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.

  13. @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.

  14. 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.

  15. 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.

  16. @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’.

  17. @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.

  18. @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

  19. @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?

  20. @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.

  21. @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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