Monday, July 9, 2018

Turning a Rock Star Economy into a Basketcase

In 1984, the newly-elected Labour Party Government saved New Zealand from becoming a third world economy. Prime Minister Robert Muldoon's Stalinist economic policies had resulted in high inflation, increasing unemployment, a run on the dollar. and the imminent failure of the country's largest bank. The new finance minister, Roger Douglas, devalued the dollar, deregulated the economy, sold off inefficient state assets, and the economy recovered to experience a period of sustained growth for the next three decades that was interrupted only by global economic downturns. Roger Douglas's liberal economic policies continued with remarkable consensus under successive governments but now the Labour-New Zealand First coalition government seems determined to undo all of its predecessors' good work.

New Zealand was acclaimed as a 'rock star economy' after the 2007 Global Financial Crisis because of its resilience in the face of rising debt and sluggish growth in the rest of the world, but as economist Michael Reddell points out (here and here), our economy hasn't really been performing that well since the mid-2000s.

So what is the new government doing that risks our economic performance? The answer is almost everything. It has banned oil and gas exploration at a time when other countries such as the United States and Britain are freeing up regulations and encouraging investment in new fossil fuel extraction technologies like fracking. It has introduced new petrol taxes, which will raise the price of everything that has a transport cost, and it is about to introduce its Zero Carbon Act, which (as Michael Reddell points out here) will reduce our GDP by between 10% and 22% by 2050.

The government is choosing to pick winners with its cronyism Provincial Growth Fund, which is based on the mistaken belief that taxing people and businesses so that the government can dole out money to other businesses is good economics. It is increasing welfare payments across the board and eliminating incentives for beneficiaries to get back into work. It is raising the minimum wage to one of the highest in the Western world and it is pushing 'fair pay' - forcing employers to pay workers more than their market value - which of course will reduce demand for labour, thereby increasing unemployment (because, in reality, the minimum wage is always zero). The government is also reviewing tax, through its Tax Working Group, and if New Zealanders don't believe the result will be to increase taxation across the board they are deluding themselves.

All of these policies will be a dead weight on our economy, dragging down its already non-rockstar performance while other countries continue to soar past us. The net effect will be to make New Zealand, and New Zealanders individually, poorer compared to the rest of the world. I have travelled all around the world and have seen the stark contrast between countries that have high GDP per capita and those at the other end of the scale. New Zealanders take their relatively high standard of living for granted and do not realise that prosperity is fragile. I don't want to live in a poor country but it seems that is where we are headed.

The truth of the rock star analogy has always been more Ozzy Osbourne than Taylor Swift, but if we continue down the path the new government is laying out, even the aging Black Sabbath rocker will look more lively than New Zealand's economic performance.

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