Alternative narratives

From time to time people who are persuaded by my story about New Zealand’s economic underperformance ask why it hasn’t been more widely accepted, and the policy implications adopted.

And, of course, there is a variety of good reasons.  They include:

  • my own story/analysis is quite recent and is continuing to evolve.  I’ve spent over 30 years as an economist, but central bankers mostly focus on the short-term.  It was really only two years spent at Treasury from 2008, and my involvement there in helping the 2025 Taskforce, that energized me to start thinking hard, and reading widely, on the issues around New Zealand’s long-term economic underperformance.   The first time I wrote anything down on any of this was 2010, and it hasn’t exactly been a fulltime occupation since then.   The presentation I gave last Friday has quite different emphases in some important aspects than the first public presentation  of related ideas that I gave in 2011.
  • it is a competitive market in ideas, and there is a variety of competing narratives around to help explain our underperformance, and what (if anything) might be done to remedy it.   Some have had considerable resources put into them, and others are less formal.  Some are produced under important and influential ‘brands”.
  • it is not as if the problems are new.  It is now more than 50 years since the first major reports were published on New Zealand’s relative economic deterioration (eg the Monetary and Economic Council in 1962).   Many stories have been told, and explanations attempted, in the subsequent decades.  Various strategies have been tried since then –  some well-founded, and others daft –  and the decline has not been fully arrested, let alone reversed. In some ways, I think that experience leaves people a little jaded, disillusioned, and perhaps rather wary.

What are some of the alternative narratives?

Treasury is probably the organization that has put the most resources into exercises of this sort (and, of course, it is the New Zealand organization with the most resources).  Prior to the last election they put a lot of effort into a disciplined process reviewing the arguments and evidence in a range of areas, including getting contributions from people elsewhere in the public sector in particular.  The public face of what they produced was Holding On and Letting Go, part of their post-election advice to the Minister of Finance.  There was also a substantial (60 pages) and more specific paper for the Minister of Finance done in late 2013, (which has been released to me under the OIA but does not appear to have been put on the Treasury website with their other OIA releases), which grouped policy recommendations under nine headings.   Treasury has come and gone a bit on what it emphasizes but savings, public pensions, and problems with macro policy loomed large back then.

One could also think of the 2025 Taskforce’s reports in a similar vein.  With a lot fewer resources, those reports represent a story about what could, and should, be done to reverse New Zealand’s economic decline.  The Taskforce itself summed up the essence of its approach

 The key elements of the Taskforce’s approach are:

  • Significantly cutting government spending and tax rates.
  • Finding better, more effective, ways of ensuring the delivery of services the government does fund. „
  • Substantially improving the rigour with which government spending proposals are evaluated.
  • Substantially improving, across the board, the quality of economic regulation. „
  • Getting government out of the ownership of business assets

It was a “smaller and better government” prescription.  When I read through the specifics again this morning, I don’t find many I disagree with, and there is much I would strongly endorse.  But when the work of the Taskforce was over, I was left with a sense of “important as some of these issues may be, it doesn’t seem quite enough”.  Whatever one’s judgement on the appropriate size of the state, for example, that in New Zealand doesn’t seem unusual.

The Productivity Commission, mostly focused on specific inquiries assigned to them by Ministers, has also been turning its attention to trying to answer the question of how to lift New Zealand’s productivity growth.  Paul Conway, the Commission’s director of research, gave an oral presentation to last year’s NZAE conference, and it will be interesting, in time, to see where the Commission as a whole lands, in both diagnosis and prescription.

And no doubt there are others.  Roger Procter, the thoughtful  former (recently-retired) Chief Economist at MBIE had some interesting analysis and views on appropriate policy to reverse New Zealand’s underperformance.  Philip McCann’s analysis created significant interest a few years ago (and my own views are probably less far from his than I realized at the time), and the New Zealand Initiative –  while not, that I’m aware, having a fully worked-out framework for thinking about our underperformance –  would also probably emphasise smaller government and more open markets (people and capital).

And there are also the overseas prescriptions, notably the biennial advice of the OECD.  The OECD has long been somewhat puzzled by the underperformance of New Zealand –  we were somewhat embarrassing because in some respects by the early 1990s we were almost their best pupil.  Their analysis and prescription tends to be a modern social democratic one (open markets and lots of smart active government), and in my judgement hasn’t really got beyond treating New Zealand as if it were another small northern European country.

I’m not going to go through each of these diagnoses or prescriptions here  today (let alone ones from decades past, like the major World Bank report on New Zealand in 1968), Having said that, I always used to stress to staff that it was no use beating a caricatured straw man version of an opponent’s argument –  one had to engage with the strongest and best arguments that people could mount on the other side.  So perhaps I will spend some time as the year goes on working through some of these other documents and explaining why I haven’t yet been persuaded by their (often quite different from each other) stories.  I might also highlight the aspects of my own story that I’m relatively less comfortable with.

All of which is a long-winded way of saying that it is not as if my ideas, or those of any new contributor, are coming into a vacuum.  Able people have been trying for a long time to develop stories, and prescriptions, that best fit the collection of New Zealand economic stylized facts.  Different people emphasise different subsets of those stylized facts, which can often mean that it feels like quite different, unrelated, conversations are going on.  Each perspective probably has some useful policy presciptions to offer, but most probably won’t make a difference on the scale that is required.  Will mine?  I think so, but advocates of some of the other approaches no doubt think that is true of their models as well.

And it is also worth recognizing that any set of existing policies in place gathers vested interests in support.  That will be quite a mix: in some cases it might just be people who benefit financially (as those with import licenses in earlier decades were reluctant to see that policy changed), but more often it will probably be about the emotional and intellectual investment in a way of seeing the problems, and remedies.  We are all prone to those sorts of biases, and they are hard to overcome –  I wrote, with some conviction, the section of the first 2025 Report on why size and distance were cop-out explanations and I wince a little now when rereading that.  In respect of my own analysis, a “bigger New Zealand” mentality has pervaded political and economic life in New Zealand for a very long time. If it is misguided, as I think, it is not likely to be a sentiment that is abandoned readily, at least absent some sort of crisis.

On a slightly different note, I’d recommend people read (economist and economic historian) Deirdre McCloskey’s piece from the Wall Street Journal the weekend, ‘How the West (and the Rest) Gor Rich’, drawn from her new book Bourgeois Equality, the final in her massive trilogy of works in this area.  I rather liked the last few paragraphs, which remind us that politicians –  and policy analysts –  don’t generate our prosperity.  But they can –  and too often have –  got in the way of such prosperity.

What public policy to further this revolution? As little as is prudent. As Adam Smith said, “it is the highest impertinence…in kings and ministers to pretend to watch over the economy of private people.” We certainly can tax ourselves to give a hand up to the poor. Smith himself gave to the poor with a liberal hand. The liberalism of a Christian, or for that matter of a Jew, Muslim or Hindu, recommends it. But note, too, that 95% of the enrichment of the poor since 1800 has come not from charity but from a more productive economy.

Rep. Thomas Massie, a Republican from Kentucky, had the right idea in what he said to Reason magazine last year: “When people ask, ‘Will our children be better off than we are?’ I reply, ‘Yes, but it’s not going to be due to the politicians, but the engineers.’ ”

I would supplement his remark. It will also come from the businessperson who buys low to sell high, the hairdresser who spots an opportunity for a new shop, the oil roughneck who moves to and from North Dakota with alacrity and all the other commoners who agree to the basic bourgeois deal: Let me seize an opportunity for economic betterment, tested in trade, and I’ll make us all rich.