Illusions of History

That is the title of a new New Zealand Initiative report out yesterday, with the subtitle “How misunderstanding the past jeopardises our future”.

I’m no fan of this government, including its economic policies, and often lament how little New Zealand economic history is taught (none at all for example in our capital city university), so I should have been favourably predisposed towards such a report, which appears to have been prompted (specifically) by a couple of recent quotes from the Minister of Finance. This is how the report starts

And here is how it ends

You’ll get the drift.

I’m very sympathetic to the story that both Robertson and his boss are keen on a “bigger and more intrusive and directive government”, and it is clear that they have no serious ideas about (and demonstrate little interest in) reversing the decades of relative productivity decline. Most likely, their approach will see New Zealand outcomes worsen relative to those in the rest of the world. I’ve also been quite critical of this year’s Budget and the huge cyclically-adjusted deficits the government was choosing to run at a time when their forecasts suggested the economy was running at pretty much full capacity.

And yet, and yet.

There seem to be two themes or driving concerns to the report. The first is to re-present aspects of New Zealand’s economic (policy) history in ways less sympathetic to Grant Robertson’s rhetoric, and the second is alarm – I would probably call it alarmism – about the current and prospective global situation. On that latter, these paragraphs also come from the last couple of pages of the report.

I’m probably not much more keen on big debt and big deficits than the report’s author – Bryce Wilkinson – is, but this sort of broad-brush rhetoric seems set to discredit useful and important points that could be made, especially in the New Zealand context.

Are there “unresolved fiscal problems that followed the 2008 global financial crisis”? Most probably there are, in some countries anyway, although even in the United States – exemplar of chaotic fiscal policy surely – the problems were evident before 2008, were worsened again by the Trump tax package, and are now being worsened again by what the Democrats are now trying to push through. It is a sorry picture – and the US is still a consequential country – but it isn’t the New Zealand story. We ran into big deficits for a time after 2008 – some mix of a late spend-up by the previous government, poor macro forecasts, the recession itself, and the earthquakes – but we pulled ourselves out of that hole, with (in the main) bipartisan support for doing so. On the OECD’s net general government financial liabilities measure (the broadest and most internationally comparable) we were at zero net debt just prior to Covid (and almost a quarter of OECD countries had positive net general government financial assets).

As Bryce acknowledges, the New Zealand government’s own fiscal projections have debt stablising and then slowly falling as a per cent of GDP. And if the level the socialists are happy to see it stabilise at might be higher than either Bryce or I would prefer…it is hard to get very excited about that level. Whichever measure you prefer, on none of them is there any risk of New Zealand running into a public debt crisis. Of the government’s range of debt indicators, I like the net debt one that includes NZSF assets: Treasury see that being 25 per cent of GDP in 2025.

And what about “monetary excesses”? Well, I’m not fan of QE-type programmes, but mostly because they make little sustained macroeconomic difference, but provide central banks some feeling of “doing something”. And perhaps the world really is about to see a sustained break-out of inflation, but……nowhere in the advanced world, not even in the US, are financial markets (with money at stake) suggesting that is the most likely outcome. Our own central bank, having presided over 10 years of undershooting the inflation target, was actually on the brink of tightening just last month, and may yet do so next month. At the moment, markets think governments will allow central banks to (and central banks will act to) keep any sustained lift in core inflation pressures in check. Markets may be wrong – it has been known – but I’m not sure our Minister of Finance has a strong ground for thinking they are.

And what about the history, the central part of the report’s title?

There is a rather weird reverence in some circles for the first Labour government, at least the period under M J Savage in the late 1930s. Labour seem particularly prone to it, which I suppose is somewhat understandable, but it even infects the other side of politics at times (In this post I unpicked some Todd Muller rhetoric on similar lines, during his brief stint as Leader of the Opposition). It seems to be sentimental rather than rigorous, and the NZ Initiative report is a useful quick canter (albeit with a historical error or two) through material on the macroeconomic mess that Labour government ran us into by 1938/39. At a macro level, we were simply saved by the war, but then lived with the panoply of microeconomic restrictions and controls in one form or another for the next 45 years. But it is rather light on some significant differences from the present: not only was the New Zealand government very highly indebted in the late 1930s (well over 100 per cent of GDP, not primarily the fault of the Labour government), but we were also running a system of fixed exchange rates. And we did not have a monetary policy run consistent with the demands of the exchange rate system

There is more (also with some arguable interpretations/emphases) on the macroeconomic mess New Zealand was in by 1984. That mess can be overstated – partly because inflation itself overstated the severity of (notably) fiscal deficits – but the truth was messy enough. But it wasn’t primarily a fiscal crisis – there was no question of default, no question of lenders being unwilling to lend to us – but a productivity underperformance one and (in the immediate) a monetary policy crisis. We had a fixed exchange rate regime, and we did not have a monetary policy run consistent with the demands of the exchange rate system.

By contrast, at present we have a long-running woeful productivity performance – basically the enduring theme of New Zealand economic history at least since World War Two – but we know (including because we experienced it for the last 25 years) that that isn’t inconsistent with macroeconomic stability.

We have large fiscal deficits for this year and next (on the Treasury’s best interpretation of government policy as communicated to them) but public debt ratios that are low by any standards (cross country or historical) at a time when servicing costs, while not as low as in some countries, are very low by historical standards. The effective duration of the government’s debt portfolio is shorter than desirable – and the LSAP programme is responsible for that – but crisis material it isn’t (and it wouldn’t be even if we had another bad earthquake in the next few years).

And, we do have a central bank that – for all its many weaknesses (mostly the key people) – still operates, by law (and it seems in practice) at arms-length from the government, and (for all its florid rhetoric about other stuff) shows every sign of easing policy when core inflation falls away and tightening policy when core inflation looks like rising. And which has a target, set by the government, that is totally conventional internationally. And if nothing else, having a monetary policy that runs that way – consistent with our exchange rate regime and with the inflation target – makes things utterly different, in macroeconomic stability terms, than in 1938/39 or in 1984.

Having said that, I suspect the real thing that drove the report was the opportunity to litigate Grant Robertson’s take on the 4th Labour government. Personally I tend to take that sort of Robertson rhetoric with a considerable pinch of salt, since a great deal of his style seems to involve the appearance of product differentation from the 4th Labour government even when the substance barely changes (the Reserve Bank Act amendments are a classic examples). Feelings around the late 1980s are clearly still raw, especially in the Labour Party, and it seems to be good politics to pander to that.

But Bryce Wilkinson frames six “myths” about the 1984-93 reforms. He summarises them thus

Personally, I think the truth is probably somewhere in the middle. Take for example, the first one. The Robertson quote emphasises the damage to communities, and even Wilkinson in the report acknowledges the pain of the reforms for many. He might argue it was unavoidable by then, and Robertson would have been better not to have talked about “economic carnage” (especially when the basic economic model now isn’t that different).

Were the reforms “extreme”? I don’t think so, but they were unusually far-reaching, and in places went where few other countries had yet gone. For better or worse (I think mostly better) they positioned us very well in many international policy/institutional comparisons by the 1990s having started well behind. And I recall the time we spent in one OECD review of New Zealand urging them to take out language (which they intended as a compliment) suggesting that our reforms were unusually ambitious.

Were the reforms “undemocratic”? At one level, clearly note. They were undertaken by democratically-elected governments. But Wilkinson’s specific rebuttals risk inviting derision. He suggests that the snap election “gave no time” to Labour to articulate its ideas…..which more or less concedes the platform was never campaigned on. I have a bit more sympathy for the 1987 re-election argument, except…..that Labour’s manifesto that election, with talk of further significant reforms, was published after the election. And the 1990-93 Bolger government story was also a mixed bag – labour market reform was a significant part of their campaign but (for example) benefit cuts were not, let alone the amped-up superannuation surcharge. Call it democratic or undemocratic as you like, perhaps even call it unavoidable, but it wasn’t very transparent ex ante.

Call my overly literal, but “decimated” probably roughly accurately describes the welfare system effect – it was still there and, rightly or wrongly, just quite a bit less generous than it had been before.

And then there is myth 2. Bryce and I have debated this point on many occasions over the years, and I’ve written about it here before. I can’t prove that he, or Roger Kerr, have not been surprised at how poorly the New Zealand economy has performed over the last 30 years, or by the failure to even begin to close the gaps with the OECD leaders, or by the widening productivity gaps to, notably, Australia. But I’m pretty sure most people who supported the reforms don’t think outcomes have lived up to their expectations and hopes. I recall the very first time I ever appeared before a select committee it was with the Bank’s then chief economist to tell MPs our story about how as we emerged from the reforms we would expect multiple years of above-average growth, consistent with closing the gaps to the rest of the world.

But to me the single best illustration of the point was this photo, from 1989 but rerun in the Herald a decade ago

For the younger among you, that is David Caygill, then Minister of Finance and one of the foremost reformers. It is pretty clear he expected the reform programme – which was extended after his time – to pay off in closed productivity/GDP gaps. It is also clear that it didn’t.

Bryce Wilkinson thinks more should have been done, and could have been done. He was a member of the 2025 Taskforce a decade ago on closing the gaps to Australia. But even if he is right on that – and on some specifics I agree with him – I’m not sure what is gained by continuing to run the line that the economic outcomes really weren’t disappointing or unexpected at all.

To close, the New Zealand Initiative’s report ends up being a funny beast. For better or worse, most people probably won’t care about the pre-84 history, and it isn’t clear how much relevance the specifics have to today anyway. And if there is a lot wrong with this government’s economic policy (and there is) this report is too once-over-lightly (and a little florid in places, given our relative macro stability) to add much value or get much traction. Perhaps there is still a place for debates about the 1984-93 period – in fact there definitely is, even granting that to many younger people it is (my daughter’s phrase) “ancient history” – but to do so usefully probably needs more space, more nuance, and more data than is in the relevant section of this report.

14 thoughts on “Illusions of History

  1. The obvious point to make around myth #2 would be that if the results today look underwhelming, imagine how things would look if the reforms had not been made, and if the country had continued on under a Muldoonist programme. A useful comparison might be Poland vs Belarus. That said, in the counterfactual scenario we don’t know if NZ would have embarked on the kind of migration programme that kicked off towards the end of the 80s and which is an important part (IMO at least) of the reformist agenda. If one accepts your argument that large scale migration has harmed productivity growth (which I do find compelling), it seems that either option (reform/don’t reform) might have delivered the same outcome but for different reasons.

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  2. It’s funny, I’ve been thinking a lot lately about that 1984-93 period and it’s not only people in the Labour Party who find the memories raw – despite your daughter’s verdict that it is “ancient history”!
    I agree with you, that the truth about that period is “probably somewhere in the middle” – ie between Bryce Wilkinson’s & Grant Robertson’s views, but a complete history can’t be written without considering the lives of New Zealanders, the impact on them of various reforms and the decisions they made to navigate their way through a very turbulent time.
    I remember all too vividly the excitement about the possibility of change, without anyone except Roger Douglas & his mates knowing what that change would involve. And I can’t remember a single thing Labour campaigned on in 1984; but I do remember Bob Jones’ clever New Zealand Party campaign, which succeeded in splitting the right-of-centre vote and so helped Labour win the Election.
    There was a powerful evangelical spirit about that Government, especially 1984-87 and for a while it did seem to drag the country along with it. “There Is No Alternative” and all that – what nonsense!
    I remember especially Douglas’ relentless promotion of GST – which was introduced relatively smoothly – and the general story that short-term pain was necessary for long-term gain. Well, there was plenty of very unevenly distributed pain, and the constantly promised long-term gains remain largely unachieved 30+ years later.
    I remember the money madness that glossed over the profound distress of rural and small-town New Zealand, which was thrown under the bus in favour of the idea that somehow we’d become the financial powerhouse of the Pacific.
    And I remember the 22% interest rate on our mortgage which finally triggered our decision to sell our small rural property, move to Auckland and then in 1991 to Australia – so we missed most of the Bolger/Richardson years, thank goodness. Five years working in Australia and a later stint working with an Australian company allowed us to establish a secure family base and a degree of financial independence that just didn’t seem possible in New Zealand 30 years ago – and tragically, it’s no easier for many Kiwis now.
    It really is too sad: New Zealanders are amazing, they work really hard, they’re adaptable, clever & innovative but we’ve been massively failed in so many ways by so many politicians of all stripes.
    Signing off now before I get too depressed!

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  3. How can productivity improve when we have armies of bureaucrats and half the population devoted to ensuring nothing changes?

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  4. On debt, I see the following:

    1. Treasury forecasts net government debt being 46% of GDP by 2023.
    2. NZ Households Debt to GDP is 98%.

    In my view, NZ cannot run the government debt levels that say the USA can comfortably carry, because:

    (a) We have a relatively risky, small open economy.
    (b) We have a very high private sector debt load.

    I don’t share your lack of concern about NZ debt levels at all. Things can change very quickly – as the 2008 financial crisis and the Rona crisis now show. This burst of spending takes net debt to nearly 50% of GDP – low by international standards, but the acceleration is concerning. We have lift-off.

    I went to the UK in 1996, and spent over 20 years there and in Switzerland, working for banks.

    I remember the fx rate was near 4 against the GBPeso when I arrived in London. After Gordo et all finished printing and spending, the fx rate is now less than 2…

    In other words, the UK fx rate has halved versus New Zealand in a generation. Let’s hope that the shoe is not now on the other foot. I personally do not believe it is impossible to slip out from the second tier to the Third World. Parts of Greece (similar to Turkey) and the South of Italy have already done this.

    On the 1984 Labour government, I would say they were comfortably our best ever government. Cindy’s government has probably already overtaken Muldoon’s place as being our worst ever.

    Under the 1984 Labour government, anything was possible. Now, everything is being vandalised and lost. I respectfully believe that you are complacent, but I hope that you turn out correct!

    Woe is us…

    Liked by 2 people

    • Yes Cakeface, slipping into the third world is not out of the question. Things like the steep slide in our kids academic achievement will have serious consequences over time.
      Totally agree on the “Worst Government Ever” accolade.

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    • Not sure if you have been a regular reader, but I’ve spent years on this blog bemoaning our decades-long drift from rich country to something not much better than upper middle income now. Our productivity performance is dreadful and this govt’s policies are only likely to worsen that performance.

      But on debt, I will still stand my ground. the 46% net debt measure is an idiosyncratic one made up by the govt to play down the big financial assets they have in NZSF. Internationally comparable metrics give us net public debt more like 25%, and while household debt is quite high (a) it has been at similarly high levels for 15 years now, and (b) is largely a consequence of the land-use distortions. A better metric for overall economic vulnerability is our net international investment position relative to the rest of the world, which is less bad now (% of GDP) than it has been for quite a few decades.

      My story has long been that one can be poorer and unproductive but still have moderate macroeconomic stability. Broadly speaking that has been the story of the last 25 years. I discuss some of that in a NZ context in this piece (version of a recent book chapter).

      Click to access an-underperforming-economy-the-insufficiently-recognised-implications-of-distance-longer-version-of-book-chapter.pdf

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      • I enjoyed the chapter.

        You point out that NZ has performed relatively poorly in terms of productivity, despite the reforms of the 1980s and 1990s.

        I would accept that NZ productivity has been very poor. My view is that without these reforms, the alternative would have been catastrophic. The counter factual is clearly impossible to prove.

        As you say, remoteness and a fixed supply of land are two factors reducing productivity substantially in New Zealand, but there is little we can do about them. The government could, however, compulsorily address the issue of the low national savings rates. I would support this.

        My solution to address the issues you raise would be to massively increase the NZ tourism industry.

        Of course, currently we have Covid childishness, and later, there will invariably be EcoNazi complaints. Many New Zealanders oppose mass tourism, but will they do so at the expense of poverty? We will see. I certainly believe there is potential here for huge productivity growth. Remoteness could be a selling point!

        There is one other area I think NZ governance could massively improve. I lived in Switzerland for over a decade. The tax I paid was mostly to my village (kreisburo). Next came the Canton (province). The Federal government only received 10% or so of the tax I paid. Nearly all government spending was highly decentralised, with direct democracy contributing priorities. NZ is going the other way, creating an ugly behemoth NHS style health service. It will be a disaster. NZ should force tax and spending decisions down to local Councils.

        You say:

        “But on current (OECD) estimates, Slovakia and Slovenia already have real GDP per hour worked a bit ahead of New Zealand with Lithuania and Poland only a little way behind.”

        Wow, I hope this is bad data. I’ve spent quite a lot of time in these countries, and they’re pretty poor. Ouch.

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      • The “what would the counterfactual have been” is certainly a common counter. It is really hard to know since (among other things) the terms of trade started reversing from the end of the 80s, and neither the fall nor the reversal had much to do with policy.

        On the central and eastern European countries, the data are pretty solid (OECD, Eurostat etc) but it is worth remembering they are current income/productivity measures. You don’t overcome 200 years of lagging behijnd, and 40 years of Communism, with a couple of good years of income. Similarly, NZ has poor productivity and lagging incomes now but still benefits to some extent from the decades of being one of the richest and most productive countries on earth.

        Re tourism, I’m more sceptical than you of what it might offer NZ. I have nothing against it at all, but just struggle to find places where tourism has been the difference between a lagging economy and a really high-performing high productivity one.

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  5. “A better metric for overall economic vulnerability is our net international investment position relative to the rest of the world, which is less bad now (% of GDP) than it has been for quite a few decades.”

    Agreed. Current account deficits go back and forwards as far as the eyes can see, and this has become problematic. This is especially the case when you have a socialist government that has already vandalised your second biggest export earner (tourism), and now has their sights set on annihilating the country’s biggest export earner (farming). The practical effect of running a capital account surplus is that NZ is owned by foreign institutions.

    The NZ government encourages this. For example, the FIF tax laws relating to owning overseas shares (ex Oz) are idiotic on many levels. No wonder NZ investors prefer property.

    I am new to your site – it is excellent. I will read your chapter, thank you for that.

    Like

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