Friday, June 17, 2011

Roger Kerr: If We Know What To Do Why Don't We Do It?

Last week journalist Deborah Hill Cone posed an interesting question. If we know what it takes to be a prosperous country, why don’t we do it?, she asked.

It’s certainly the case that we know what makes for prosperity.  For over two hundred years the essential nature of the ‘wealth of nations’ has been understood. Adam Smith didn’t get everything right, and economics has been refined since his time, but his basic insights into the virtues of free markets and limited government have stood the test of time.

Modern economics confirms that the key to prosperity is the institutions (broadly the rules that govern economic and social interactions) and policies that nations adopt. Institutions and policies in democracies are decided through the political process.  Thus it is how people vote that matters, and whether we choose prosperity or not depends ultimately on public understanding.Views about how the economic world works are not mainly a matter of political persuasion.

For 50 years from the 1930s, all New Zealand governments followed inward-looking, Fortress New Zealand policies.  They reflected public opinion, shaped by arguments for protection of domestic industries from import competition.

By the 1960s it was clear that the country’s formerly high relative living standards were in serious decline.  But a do-nothing Holyoake government resisted change at a time when it wouldn’t have been unduly disruptive.  Holyoake was elected four times – his government reflected public opinion.

From the mid-1970s the Muldoon government basically intensified interventionist policies, despite spasmodic efforts at liberalisation.  Muldoon presented himself as an economic wizard.  He was contemptuous of the average person as someone who “wouldn’t recognise a deficit if they fell over it.”

It took nine years of Muldoonism and a gathering economic crisis before voters realised they had been conned.

The subsequent Lange-Douglas government overturned Fortress New Zealand policies and brought New Zealand into the economic mainstream.  The changes were regarded by many as radical but only because New Zealand had been such an outlier in policy terms.

The Lange-Douglas government made great efforts to communicate the need and rationale for changes.  Voters understood and the government was re-elected with an increased majority before it fell apart.

Fast forward to the last decade when another Labour government held office for nine years.  Despite talking about ‘failed reforms’ it did not fundamentally change their essential features.  Why?  Because general public opinion understood their merits and would not have tolerated major reversals.

However, it also took New Zealanders nine years to realise that the Clark-Cullen government’s goal of returning New Zealand to the top half of the OECD was also a con.  They then elected the present government which is focused more on wealth creation than redistribution.

This potted history suggests that New Zealand voters are not dumb.  But they can be misled and slow to wake up, sometimes only reacting in the face of imminent economic crisis.

In part this probably reflects the tyranny of distance.  For half a century the relative success of western nations was not well understood in this distant country.  Today there is too little appreciation of the extraordinary rise of emerging nations in Asia and elsewhere, and the reasons for their success.  One such reason is the absence of cradle-to-grave welfare which has blunted incentives for work and pressures for change in New Zealand.

Another point is that sound economics is often not intuitive.  Economic myths about issues such as privatisation and industrial development abound. Anti-business, anti-market and anti-foreigner sentiments are always present.

Democratic governments may also not do the right thing because the influence of special interests often prevails over the public interest.  This used to take forms such as businesses lobbying for protection and farmers for subsidies, and is still seen today in unions lobbying for a regulated labour market.

It’s not as though New Zealanders don’t want to be more prosperous.  Surveys suggest that they share the values of citizens of other countries about things such as environmental quality; what stands out is their desire to be materially better off.

For the reasons outlined, however, such desires are not easily translated into policy.  Sometimes electoral systems don’t help: MMP involves a more representative process but arguably less representative outcomes (for example, decisive action when voters understand the need for it).

In the final analysis there is no substitute for political leadership.  Who can doubt the role of Lee Kuan Yew in Singapore’s prosperity or Margaret Thatcher in Britain’s turnaround?  Politicians are society’s main opinion leaders.  Think tanks, media, academics and others can help (or hinder), but can only do so much.

New Zealand is again in serious economic difficulties.  Will it take another crisis to force necessary changes?  Or will there be sufficient political leadership and public understanding to get on and do what needs to be done?

Roger Kerr is the executive director of the New Zealand Business Roundtable.


Anonymous said...

Despite talking about ‘failed reforms’ it did not fundamentally change their essential features.

Roger: this is simply a lie, and you know it's a lie. Every single one of Ruth's reforms, and most of Roger's, were undone by Labour.

Here are just ten points: there are many more!

* Reserve bank act changed to include focus on growth
* KiwiReal re-nationalised
* Air NZ re-nationalised
* Employment Contract Act repeated, replaced with direct state funding of unions
* Benefit levels increased to be most generous in the world
* Super surtax repealed; super most generous in the world
* Education system privatisions reversed
* Student loans nullified ("interest free")
* Health market reforms cancelled
* ACC re-nationalised

Is there anything important that remains of the reforms?
Even the currency is really managed by the reserve bank and Fonterra.

It's not just that we know what needs to be done: we did it all once before, and then under Labour, undid everything. As a result, NZ needs the combination of Ruthanasia and Rogernomics to be reapplied from scratch, and carried out to their full conclusion, with no "cups of tea" or any prevarication or "compensation" for the reforms.

It must be done and it must be done quickly!

Will it take another crisis to force necessary changes?

Of course it will. And - based on Europe - it will take rioting in the streets. Because every single cent of welfare payments (and state health and education) in NZ today is "payed" for with borrowed money.

And if you recompute NZ's debt and deficit levels and the long-run mean exchange rate, rather than the highest the dollar has ever been - NZ"s position is worse than Greece, worse than Ireland, worse than Iceland

But then seeing this requires basic numeracy that state educations clearly do not provide.

Anonymous said...


"Roger: this is simply a lie, and you know it's a lie. Every single one of Ruth's reforms, and most of Roger's, were undone by Labour."

If that is the case you just did a good job of highlighting why NZ has failed then didnt you?

Anonymous said...

I don't know who this Guy is that wrote this but he should be appointed Prime Minister immediately.With total power,it is the only light coming out of a very dark tunnel

R Cressy Own_Up_Dude said...

The failure is in the quality of the people and ideas that are put forward. It is also in the small problem that the supposed correct solution can result in pain for a large majority of people and a gain for a smaller group. That New Zealand has a greater gap between rich and poor after the reforms is an example.

"The right thing" such as removing the minimum wage would not be acceptable for those on a minimum wage and creating employment laws that give the power to the employer and none to the worker over time lead to a will amongst the workers to seek a better deal.

It is easy to push for change when you are a direct beneficiary but for those who pay the price for profits it is hard to explain that at some point in the future they may at some point benefit when say their wages are low enough that corporations may invest and create jobs.

It could be said that our low productivity rates are because we rely on wages to be competitive and so don't upgrade technology to improve productivity.

If you want change you need to put forward ideas that will benefit the majority at least and these need to be more than theory. The right often seem like Buddhist monks with their appeal that a hard floor and a bowl of rice once a day followed by a beating is the way to happiness.

It is also interesting that Singapore is used as an example of growth. This country wouldn't know what a free-market was. It has been built and survives on market manipulation. It's policies control wages to prevent poverty and they pick winners it really represents everything ACT et al would oppose yet is used as an example. I think the only thing that is appealing about Singapore is that it is a dictatorship cloaked as a democracy. This I think appeals to many.

Of interest though is that people look to National to change the economic system but if you look at history no national government has actually done anything to change the status quo, only Labour governments have totally changed the tax or economic system.

If you want change Mr Kerr perhaps you should join Labour

Rod Young said...

The solution for the Euro and some lessons New Zealand can learn. Greece has been good for German exports. But longer term the world is looking to gold and silver. To understand why is simple when one looks a hyperinflation that has hit many nations in the past. Selling up and cashing up into gold and silver before the decline saves the heart ache of wheelbarrows full of notes to purchase daily bread down the track with 100 trillion dollar notes. in the euro zone some nations like germany can run a gold standard relative to nations like Greece that can run a silver standard. In each nation the cities run a gold standard and rural run a silver standard. This removes the tention we see in the above statements and the above rejections in reply (Roger vs Anon.) NEW Zealand can leave the gold standard out for the nation and adopt silver. Plenty silver in Corromandel. Auckland and Wellington would be the only two cities that have a gold standard with the rest of New Zealand on the silver standard. The other cities in New Zealand would labor under the fait money with fractional reserve currency. Thorium as a new energy source would complete the tri-metalic standard. Imagine gold and silver coils with a heart of thorium inside them to sheild the slight radioactivity. With out talking about the tri-metalic standard this debate just becomes a polemic argument with malthusian catastrophe around the corner.

Rod Young said...

Gold, silver, coal, oil, thorium and uranium are crown minerals worth part of the five to twenty trillion New Zealand dollars the UN recognizes we own. Crown Minerals Act 2001 is due to be upgraded with a new mandate post 26 November General Election. Alliance-Labour Government from 1999 effectively nationalized these minerals off multinational ownership with the use of the Resourse Management Act. Gold had increase in value ten times in ten years so it was a good move. But now competitive tender is proposed after 150 years to displace time priority and privatize this resourse. MED Minister Gerry Brownly overseas this wealth transfer. An Acting Minister, while he is in earthquake watch, just announced the intended change two Mondays ago. Giving away five million dollars for every man, women and child in New Zealand for a less than one percent royalty. This is the biggest news since the treaty was signed. Has New Zealand become a republic by stealth from executive order. Where is our upper house of Parliament to address this?