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. 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

  2. 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 …

  3. 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.

  4. 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.

  5. 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?

  6. 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.

  7. 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

  8. 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.

  9. 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).

  10. 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. 🙂

  11. 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.

  12. 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.

  13. 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.

  14. @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.

  15. @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.

  16. @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.

  17. 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?

  18. @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.

  19. @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.

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

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

  21. 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.

  22. 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’.

    To the best of my knowledge, the SMH had only one short article on this item

    Here are a few links from the English language newspapers:

    And one on the New Zealand link in the international web:

    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.

  23. 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.

  24. 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 Zealand&countryCode=nz&regionCode=aus&rank=50#nz

  25. 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.

  26. @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.

  27. Reply to TerjeP at number 30 above.

    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.

  28. 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?

  29. 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!

  30. 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.

  31. 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.

  32. 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.

  33. @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.

  34. @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.

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

  36. 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?

  37. @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.

  38. 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.

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

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