Tuesday, February 20, 2024

Professor Robert MacCulloch: Getting NZ back to where it belongs can't be done by running a John Key-style National Party. Can Luxon do it?

This blog long predicted that when Chris Luxon gained power there was a high likelihood of him simply copying the approach that John Key and Bill English took to growing the economy, which was driven largely by immigration & tourism (with the Christchurch construction rebuild picking up the rest). It sure did wonders for Key. Our GDP began surging in the post-Global Financial Crisis (GFC) era to the extent we got called a "rock-star economy". Record breaking rates of immigration worked back then as there was far less pressure on public services and infrastructure 15 years ago.

Those days are long gone.

What seems to be fundamentally confusing both National & Labour, as well as Treasury & Reserve Bank (which lack high-level economic expertise these days) is the nature of the shock NZ has just suffered & how it differs from the GFC in 2008. As two authors in the American Economic Review write, "History shows financial crises are predominantly a negative shock to demand". Demand shocks are characterized by falling prices & rising unemployment. By contrast, the pandemic was predominantly a negative supply shock, characterized by both rising prices & rising unemployment. Labor supply was constrained as people couldn't physically go into work and supply-chain disruptions broke out.

Consequently, the aftermath of the pandemic requires a completely different approach to economic management to the one taken by the Key-English government starting in 2009. This time around, supply side reforms are required - slashing costs & regulatory burdens & smashing monopoly power, whether it be from government or private firms. The best parallel to our present times is the aftermath of the oil supply shocks in the mid-to-late 1970s, which put up costs & started a severe decline in NZ's world GDP per capita ranking. The response was the supply side reforms begun in 1984, as the previous National government's response failed to address the root causes of the crisis.

On election night last year Sir John triumphantly went to National Party headquarters as if he was the one who had just won the election. In an interview with Jack Tame, Chris Luxon admitted he spoke with Key on a weekly basis. Finance Minister Nicola Willis worked for John Key and Bill English as an adviser when they were in government. Meanwhile, Sir Bill English's Chief of Staff, Matt Burgess, is now Chris Luxon's economic adviser. Former National Deputy PM Paula Bennett has become an influential figure in the current National Party, having taken charge of meeting every Rich Lister she can find in Auckland, trying to wangle money out of them to help fund the Party. The list goes on and on.

One thing is certain - our present times & cost-of-living crisis bear no comparison to the period when John Key and Bill English led the country between 2009 & 2017. If Luxon & Willis think they're smart calling Key, English & Joyce, asking for advice, then they will fail NZ. We have no other way out than rapid & deep supply side reforms which must be signaled early on by the new government to get the necessary investments planned right now. There is no time for delay. But do Luxon & Willis know how to do them when there is no precedent of National ever doing such reforms?


Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.


Valid Point said...

Key, Joyce and English successfully managed us through GFC, Christchurch etc with the tools of the time that they deemed worked. Given that all three are intellectually rigorous, pragmatic and are able to deliver what they say, there is no reason they'd serve up the same formula for today's issues.
A long discussion over lunch with Luxon, Willis, the three mentioned above and Professor McCulloch sounds like a highly productive session.

Anonymous said...

Comments above as may be. However they avoid the fundamental issue of the deep rascism in NZ, which is now so mainstream it is a huge political and economic force. It must be addressed. Other things are important but as long as NZ is being bled dry and broken from within NZ will go nowhere.

Anonymous said...

Fully agree, start with the "Gentailers" they produce electricity at 2 cents per unit and somehow we pay close to 40 cents. Yes yes distribution and transmission but it should be 20 cents/unit.
The estimated monopoly rental is $2.7B but the impact on industry alone is to indicate that production of products in NZ is stupid we need to change this and the Govt. owns 50% of the entities so could push this through. there is much after that.

Anonymous said...

The less said about EX public servants the better.

EP said...

Thank God for ACT and NZF.

Kevn said...

Thank you for more forthright comment Robert. Cheers.