Oz, NZ and the election

John Quiggin46 Comments

Following my earlier discussion of relative economic performance in Australia and NZ, I’ve been chatting with people in the NZ Treasury, and also with some of the macroeconomists in my own department. Its given me a number of research ideas I hope to pursue in the future, both with respect to possible ways the NZ-Oz gap might be bridged and more general implications about macroeconomic theory.

In the circumstances of the election what matters is the suggestion by Tony Abbott and others on the political right that New Zealand is a model for Australia to follow as regards macroeconomic policy. The key point is that NZ had a smaller stimulus than we did, and looks set to return to surplus a little earlier, though of course we know how unreliable such projections can be.

If, like Abbott, Hockey and (on even-numbered days) Robb[1], you regard budget surpluses as the paramount measure of good economic performance, there’s a case to be made here. But if you think that employment and economic growth are more important, Australia looks a whole lot better, as you can see from the graphs below.

Standard economic theory suggests that, when two countries have access to the same technology, comparable education systems, free labour and capital movements and so on, any initial differences in income levels should gradually be evened out. Instead, the Oz-NZ gap has widened since the GFC. Anyone who could seriously suggest NZ as an economic model should not be entrusted with the management of our economy.

OzNZ002
NZandothers

fn1. Not to mention Peter Costello and Wayne Swan, who seemed to view the stimulus that saved us from recession as an embarrassing departure from normality.

Election on 7 September

John Quiggin87 Comments

At least that’s what I’m reading. As I’ve argued before, I think this is a mistake for a number of reasons. In fact, I spent a fair bit of yesterday working up a piece arguing the case for allowing Parliament to sit again, and holding an election in October. [Irony on] If only I had run it on Friday, the course of history would doubtless have been changed [Irony off]. It’s now only of academic interest, in the pejorative sense of the term, so I’ll turn my attention to issues that actually matter.

My views on the election are simple. Whatever the weaknesses of the Rudd government, it’s far preferable to the disaster that Abbott would give us. So, I’ll certainly be putting Labor ahead of the Coalition in the House of Representatives. I’ll probably give my first preference to the Greens, though if my vote matters in Ryan, Labor will have swept Queensland. Both Labor and Greens have good local candidates, so I’d happily support either, and I’ll equally happily give my last preference to the LNP incumbent, unless someone truly awful runs.

The big issue is the Senate. Regardless of the Lower House outcome, it’s critical that a Labor-Green majority should be returned, and therefore that Labor and the Greens work together. This was one of Rudd’s big weaknesses last time round, and hasn’t been helped by some statements from his frontbench, or from perceptions on both sides of the way the last Labor-Green deal worked out.

Doublethink on triple-A

John Quiggin27 Comments

Which politician, holding a senior frontbench economic position, made the following sensible observation

I remind you that Lehman Brothers, the collapse of Lehman Brothers, which started this global financial crisis, on that very day, they still had a AAA credit rating. What does a AAA credit rating really amount to? What I’m saying is you can’t place enormous store in the rating agencies. They do get things very badly wrong, and they totally missed those major firms and economies that were driving and the reason for the GFC.

Unfortunately, the same one who said only a few months ago that our

commitment to returning the Budget to a real surplus in a timely fashion and retaining Australia’s AAA rating is paramount.

Answer over the fold

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NZ & Oz: why it matters

John Quiggin46 Comments

My previous posts put up various bits and pieces about the sharp economic divergence between NZ and Australia, but I didn’t say much about why this topic is of interest right now. The issue has come up in several different contexts, where the contrast between the two countries, starting from fairly similar positions, seems to me to provide some pretty strong evidence. The questions include

* Do recessions have sustained effects on income levels, or does the economy rapidly return to its previous growth path? The evidence from NZ (six recessions since 1975) and Australia (two) suggests that effects are sustained
* Is market-oriented microeconomic reform a major determinant of economic growth? NZ reformed more, and more vigorously than did Australia and did drastically worse in economic terms.
* Do more flexible labour markets yield better macroeconomic performance? Again, the evidence from NZ and Australia suggests the answer is No.

Obviously, given the points above, I take the view that bad macroeconomic policy in NZ, particularly during the reform era of the 1980s and 1990s, is an important reason for poor economic performance. Important examples include the adoption of a contract-based 0-2 per cent inflation target in the early 1990s, and the misconceived idea of the Monetary Conditions Index at the time of the Asian crisis. I don’t think bad macro policy is a sufficient explanation, but the gap is so large and persistent, it’s hard to explain in terms of standard microeconomic analysis.

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Ignorant, out of touch, crazy

John Quiggin99 Comments

Those are the terms chosen by young American voters to describe climate change deniers in a poll conducted for the League of Conservation Voters. LCV is obviously pro-environment, but historically nonpartisan, and they used both a Democratic and a Republican pollster.

The fact that, to be accepted in Republican circles, its necessary to be ignorant, out of touch or crazy or, at the very least, deferential to the crazies who dominate that side of politics, is being recognised as a problem for the Republicans and an opportunity for the Democrats, going well beyond the specific issue of climate change.

The climate denial issue came up again in Andrew Bolt’s interview with Kevin Rudd, and I’ve been reminded of his repeated claim that I got estimates of the climate impact of the government’s emission target wrong. In fact, it was Bolt who was wrong, as on almost every topic he touches, in this case, out by a factor of 100.

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NZ & Oz – a bit more

John Quiggin19 Comments

Readers have sent in a couple more instances of claims that the NZ economy has done, or was about to do, better than competitors, most notably Australia. Here’s Tony Abbott on the alleged success of NZ macro policy

there are other countries which have chosen a different path and there’s no evidence that their response has been any less effective than ours. For instance, in New Zealand they have tried to reform their way through the global financial crisis under the new government’s leadership and they seem to be doing pretty well

and here’s a picture from 1989 of then Finance Minister, David Caygill, showing what he thought the reforms could achieve.

Caygill1989

Oz & NZ

John Quiggin35 Comments

For a variety of reasons, I’ve been looking at the relative economic performance of Australia and New Zealand over the postwar period. For most of the 20th century, income per person in New Zealand grew in parallel with Australia. According to the Penn World Tables, income per person in New Zealand was within 10 per cent of the Australian level for most of the period from 1950 to 1970. Since the 1970s, NZ has declined greatly relative to Australia. On the latest Penn World Table figures, income per person is about 70 per cent of the Australian level. Over most of this period, NZ has been governed by radical advocates of the free market[1]. As part of my research, I’m collecting some of their claims about NZ economic performance, relative to Australia and the OECD. I’ve listed some over the fold (links a bit scrappy, as some predate the rise of the interwebs). Further contributions welcome, as would any interesting examples of more accurate assessments (I have some already).

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