Editorials 17 May 2010
May 17th, 2010 at 10:00 am by David FarrarThe Herald wants a decisive budget:
Seldom has a Budget been as crucial to the economy as the one that Finance Minister Bill English will deliver this week. It is immediately crucial to the housing market, where activity has been practically frozen while prospective buyers and sellers wait to see what tax will do to property investment.
And it is crucial to the country’s productivity that something is done to divert investment from housing and consumption to industry and exports.
After years and years of complaints about the property boom, and the impact that has had on inflation and interest rates let alone the banking crisis, finally a Government is taking some steps towards fixing this. They don’t go as far as Bernard Hickey would want, but they should be a good start.
The minister has made no secret of this objective. For many months he has been travelling and speaking with charts to illustrate his concern that New Zealand was in an export recession long before the domestic sector’s housing bubble burst in 2007 and it was struck by the recession of 2008.
While household and Government spending had been happily rising year by year, export activity had slumped in 2005 and has not recovered.
Quite incredible that the tradeables sector had in fact been in recession for Labour’s entire last term of office.
The Press looks at how the UK Government may learn from us:
The spectacle of the United Kingdom looking to New Zealand for constitutional guidance, during the formation of its coalition Government, is rare and perhaps unprecedented. …
The recent general election there may well have inaugurated a long-term weakening of the political parties. The increasing social mobility of the population and disenchantment with the behaviour of MPs is lessening the tribal affiliations to Labour and the Conservatives. The result is an increasing willingness among the electorate to switch from party to party according to the prevailing political climate.
This could well be the case. In the past conventional wisdom was National had core support of 35%, Labour had 35% and 30% were swinging.
But we have seen National’s support drop to 21% in an election and Labour drop to 14% in polls in 1996. There are very few core supporters left now.
Whatever the scenario, New Zealand has lessons for the British. We wrote the rule book for coalitions in a Westminster system of government, and it was that which helped the British through their recent experience of putting together a Government from competing parties. That the process was so smooth and rapid can be significantly attributed to the processes formulated in Wellington.
Of course with Winston we learnt the hard way!
The Dominion Post asks Phil Goff to explain:
Labour leader Phil Goff would like the Reserve Bank to aim at more targets. The almost certain result of this is that it will miss them all.
Absolutely. Goff is trying to retreat from every good policy that his party has previously supported.
New Zealand has, by and large, been well served by the Reserve Bank Act, with its single-minded focus on the inflation rate. The tools available to the governor to achieve that may be blunt, and his task made more difficult by New Zealanders’ determination to pump every spare dollar – and every dollar that can possibly be borrowed – into property, but at least he or she has only one goal to chase, and it has been relatively successful in keeping the lid on inflation.
You can achieve one target well, or you can not achieve multiple targets. Plus it is also an attempt for a future Labour Government to blame the Reserve Bank Governor when unemployment is high, rather than the elected Government.
There is also a need for caution on democratic grounds. Economic changes that can drastically affect people’s lives should be made by those whom the people can hold to account at the ballot box, not appointed officials. An expanded role for the bank makes it all too easy to muddy the lines of responsibility, and to use the bank as a scapegoat for economic failure – the same trick has been used to duck responsibility for health, where failures become the property of area health boards while successes are claimed by the minister.
The same point I made above before I carried on reading.
It is still a good while until the next election, but Mr Goff is still a good way away from delivering a coherent economic policy that offers alternatives rather than a parcel of vagaries.
So far the policies are not at all future looking, but attempts to revisit debates from 20 years ago.
May 17th, 2010 at 10:26 am
It isn’t just that “Goff is trying to retreat from every good policy that his party has previously supported”, but that so many of those were policies that he advocated.
Vote:May 17th, 2010 at 10:46 am
National has very little room to move with the budget, having agreed to all Labour’s socialist give-aways – Working for Families, Interest Free Loans and so on. Key has ruled out progressively raising the retirement age, an economicially illiterate bribe which on its own will almost bankrupt us in the long term.
All that they can do in the budget is make worthy sounding aspirational statements, with a bit of tinkering to keep the journalists happy.
Like much of the western world, where governments have played the rob Peter to pay Paul game for decades, it’s all coming home to roost. We have run out of Peters to rob and the bills are now out of control. The Pauls are in control of the ballot box.
Maybe some smart political scientist types can tell us how this is all going to end. Riots like Greece? A grim never-ending recession?
The idea that Bill English is going to deliver us from this is a sad joke. Will any of the politicians tell the truth, that the game of over-taxing and bribing is reaching its end game?
Vote:May 17th, 2010 at 11:09 am
Goff seems to think becoming Trotsky and embracing ‘permanent revolution’ is a good idea
Vote:May 17th, 2010 at 11:22 am
@freedom101 – spot on. I can’t see any politician making the tough decisions. I wish MP’s superannuation packages vest based on NZs economic performance 10 years after they leave office. That might have them think about the big picture a bit.
BTW, Greek situation is just up-sized socialism, with the democratically elected Greek government ceding sovereignty to the bailout backers in the form of externally imposed controls.
Vote:May 17th, 2010 at 11:32 am
what % of the NZ electorate is now a beneficiary of other taxpayers – around 50%? Turkeys will not vote for an early christmas.
Vote:what amazes me is that no one is presenting a 10 year picture of what NZ will look like economically – I can understand the politicians not doing it, but would be good to the 4th estate being proactive.
I look forward to the day our economic issues are the lead item on the news every week – after all, they like leading with a disaster story! (I know…fat chance)
May 17th, 2010 at 11:35 am
Maxim have written about this, Kevin. Their reports make interesting reading: http://www.maxim.org.nz
Vote:May 17th, 2010 at 11:36 am
kevin-mcm …. actually, Roger Douglas has been on the case with 10 year plans etc. but there’s no traction from the media and essentially no one wants to know. Any 10 year plan has to look at reducing the entitlements of the “Pauls”, so, sorry, no go I’m afraid. We are heading down a tax/voting cul de sac.
Any circuit breaker will have to come from Key/English. Anyone quoting odds on this happening? …….. I didn’t think so.
Vote:May 17th, 2010 at 11:43 am
thanks – i’ll have a read. Looking forward to Rogers budget this week, but I am not expecting anything from english – cutting costs already in the too hard bucket. Will just have to keep enjoying the ads telling me the buy a new car with side-impact bars – tax money really well spent!
Vote:May 17th, 2010 at 11:46 am
I’m sure you can find them, but here’s their stuff on tax and the economy:
http://www.maxim.org.nz/index.cfm/Policy___Research/Category?name=Taxation%20and%20the%20Economy
Still no idea why they named themselves after a UK lads mag, though.
Vote:May 17th, 2010 at 11:48 am
I don’t know why anyone expects anything practical from Goff – he’s a university-educated theorist who’s never had any practical experience in, or at, running anything that wasn’t funded by public money. Even his degree is irrelevant to any understanding of the concept of practicality. It only enables him to address “legalities” – the perfections or imperfections, depending on where he chooses to stand, in others’ workable creations – not the elementals of what’s necessary in order to make something functional and profitable.
Given his 18-month-failure to impress, the pathos and mind-numbing waste of taxpayer monies in the “Axe the Tax” road-show, Labour’s active campaign holiday retreat in Nelson, and then his “Yes, Minister” performance on Q+A, Goff is living breathing proof of Margaret Thatcher’s dictum: The trouble with socialism is that eventually you run of other people’s money.”
The weirdest failing on his part is that he doesn’t seem to equate his financial squandering of the public’s purse with the lot of those he purports to uphold.
Meteria Turei is another university degree holder who makes the same ideological senseless noises. God help us.
Vote:May 17th, 2010 at 11:54 am
Poor Metiria. I fear she’s got herself caught in an Easter-Island-style cycle of ever increasing neck furniture size, and eventually she’ll don some enormous bone or stone edifice which will result in self-decapitation.
Vote:May 17th, 2010 at 12:04 pm
Even DPF is effectively muzzled as he’s on the National Party payroll as a pollster, so don’t expect any serious cage rattlling from here.
When everyone is on the public tit one way or the other, no one wants to consider the long term consequences of an out of control robbing Peter to pay Paul merry-go-round.
MP salaries should be tied to real per capita GDP. I don’t mind paying for results. On present form parliament would become progressively cheaper to run!
Vote:May 17th, 2010 at 12:13 pm
That would just encourage more meddling and waste on ‘silver bullets’ (e.g. the billions on fibre to home). The only hope is for a more economically literate electorate. Make economics compulsory at high school (like english). And scrap the minimum wage.
Vote:May 17th, 2010 at 12:20 pm
Export Recession.
An effect of all those people leaving. They also take the businesses with them.
But do not worry, the money we are pouring into treaty settlements will be invested into the local communities, create new businesses, create employment opportunities and generate export dollars for the country. We are saved.
Vote:May 17th, 2010 at 1:22 pm
MP salaries should be tied to real per capita GDP.
MPs should all be economic recovery experts paid on performance.
Vote:May 17th, 2010 at 1:24 pm
I sit here hoping for the best, and expecting the worst.
This country is occupied by nothing more than ostriches… that all think money grows on trees, and that the way to get ahead is that we all sell each other properties, using money we’ve borrowed from overseas.
Morons… the lot of them.
Vote:May 17th, 2010 at 1:29 pm
The Canadians have had minority Government for the last 5 years so before we get too far ahead of ourselves I think lessons were learnt from there too. But I think the Brown gerrymander on inner city seats needs to be addressed and a full parliament is needed for that. At the moment there is a considerable bias in favour of the Labour Party and the Tories and the Lib-Dems have common cause there. It is clear the Tories were far advanced in their thinking on coalition Government, whereas Labour was divided.
Vote:May 17th, 2010 at 1:53 pm
If National were really pro-business they would scrap the taxes that hobble small businesses and reinstate the enterprise allowance that they have hamstrung at an institutional, if not statutory level. Both of these things would encourage the new niche businesses that New Zealand really needs to grow its export sector (we have a massive ballance of payments deficit).
Sadly however National is the party of the wealthy, not the eneterprising. How sad that we have a government so bereft of economic vision.
Vote:May 17th, 2010 at 2:02 pm
“scrap the minimum wage”
lol – that would have zero economic benefit for the country according to the economic literature. Perhaps it’s you that needs to be studying economics?
Vote:May 17th, 2010 at 2:02 pm
@RKBee – Now that’s spooky. I’m just back from a 40k bike ride. While enjoying the fresh air I was speculating about this very idea… and arrived back to start calculating it. My thinking was that the GPD should exclude state spending and have a multiplier of some sort for taxable export earnings. I’m playing with an idea for a new electoral system. Bit of a hobby. Will be called “Open Electorate” or some such. The number, quality and remuneration of MPs is a important component.
Vote:May 17th, 2010 at 2:08 pm
Got a link? What are the credentials and political affiliations of the authors?
Vote:May 17th, 2010 at 2:09 pm
@curia pigeon
Of course it would. There is economic activity which isn’t taking place because two parties are unable to trade labour for money at a rate less than the minimum wage. If you don’t believe me, try a little thought experiment. If the minimum wage has no effect, then why not double it? Or quadruple it? Make it $100/hour.
If you accept that increasing it would have a detrimental effect, then you would have to explain why decreasing it would have no beneficial effect.
Vote:May 17th, 2010 at 2:15 pm
That’s two gems from Malcolm in one thread. The first was about Metiria’s neck-furniture (it’s probably for stashing her weed) but the other one has some real merit: Make economics compulsory at high school. I think it should begin in intermediate school, and continue at least until 4th form (or whatever they call it now). 3-4 years of economics should give everyone at least a basic understanding of why bludging shouldn’t be a career choice.
Vote:The Richest Man in Babylon should become a text-book for high school students also. This might actually help NZ achieve long term prosperity, if everyone understood sound fiscal management.
May 17th, 2010 at 2:15 pm
“MP salaries should be tied to real per capita GDP”
a very good idea. However – ministers of the right, despite their ideological proclomations to the contrary, are just as into milking the public teat as ministers of the left. Look at Rodney Hyde and Blinglish. So it will never happen.
Vote:May 17th, 2010 at 2:31 pm
Thanks, RightNow. It’s a shame that Public Eye* isn’t still being made – they’d have a lot of fun with Metiria and her necklaces
*NZ version of Spitting Image.
Vote:May 17th, 2010 at 2:37 pm
Malcolm:
Theory is one thing, but reality is different. I conceed that economic activity that could be taking place is not due to the minimum wage being in place. The problem is that the labour involved is low-skill, and the combination of capital and labour is heavily skewed to labour. So it would encourage a low-producivity economy, which is bad for economic growth.
have a look at this paper.
http://www.rbnz.govt.nz/research/bulletin/2007…/2007mar70_1drew.pdf
Also – the drop in income for low-income families would mean worse educational outcomes for children in the long term – which would only damage our social cohesion and economy further.
Minimum wage cuts simply don’t work.
Vote:May 17th, 2010 at 2:41 pm
She was on 7 days a while ago playing the game where you can’t say yes or no. If it’s still in the archives it’s good fun watching her try and pretend she wasn’t stoned.
Vote:May 17th, 2010 at 2:41 pm
Here’s a paper re ineqality and educational outcomes:
http://ideas.repec.org/p/oec/ecoaaa/708-en.html
Vote:May 17th, 2010 at 2:43 pm
it would appear half of that paper is in french ^.^
Vote:May 17th, 2010 at 2:48 pm
The link for the productivity paper above doesn’t seem to work, so i’ll try posting it again:
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2007mar70_1drew.pdf
Vote:May 17th, 2010 at 3:04 pm
@Malcolm: You’d have to change the welfare system for it to have an impact, I’d be guessing, and along with positive flow-on effects, there’d likely be negative ones as well.
I think accounting would be more useful to make compulsory in education than economics to be honest. Economics can be too theoretical for many people and a good understanding doesn’t come for a long while for most, whereas accounting allows one to see much more clearly the impact on the individual in easily comprehensible terms and units (dollars rather than utility, for example). What does this taxation do to my budget? How does it affect my cashflow? Etc.
Vote:May 17th, 2010 at 3:10 pm
Actually, it would be more useful for young people to get summer jobs etc. Sorry, they can’t as they have been priced out of the Labour market!
Vote:May 17th, 2010 at 4:01 pm
I run a small business. Real life is better than the literature.
If the minimum wage was cut it would result in an immediate pay rise for my productive staff. This is where my business gets the money to cover minimum wage increases from, the potential wages of my productive staff. If I have two people working together, more often than not one of the two will be twice or three times as productive as the other, but the minimum wage restricts my business to offering very flat wages and there is very little differentiation between staff.
Removing minimum wage also does not necessarily mean wages have to drop. In my case, I would offer staff bugger all until they are productive, therefore the staff would do something about being productive and probably end up on a better wage then with the minimum wage because we would be a better business.
Also I don’t believe increasing minimum wage leads to low-productivity. If there are improvements in in process or automation we can make, they will be made regardless of the minimum wage. Increasing minimum wage forces business to waste money on an unproductive area, it is sucking money from spending on equipment, training, and productive staff.
Vote:May 17th, 2010 at 4:04 pm
“finally a Government is taking some steps towards fixing this. ”
And the evidence to support this is?
Vote:May 17th, 2010 at 4:10 pm
“I run a small business. Real life is better than the literature.”
So do i. You can’t look at society as being like a small business. it isn’t. You’ve got an extremely narrow perspective. You’re talking micro-economics on a an issue that is macro-economic. You need macro-economic theory backed up by data to make any solid conclusions regarding macro-economic policy, otherwise you’re just pissing in the wind.
Vote:May 17th, 2010 at 4:10 pm
@Curia pigeon:
OK. And economic activity has a multiplier effect; more activity at the low-skill end of the economy creates demand for the products and services at the high-skill end.
That’s wrong. By your reasoning we could improve prosperity simply by forcing some people to stay at home and slapping a surcharge on wages to artificially inflate the cost of labour. To get a sustainable high-productivity and capital-intensive economy you need an unconstrained economy in which people are willing to invest (i.e they want a good return), businesses are not forced to overpay for labour and where people up-skill themselves because they get the full rewards for doing so (i.e. low taxes and low pay if you don’t up-skill).
A high minimum wage excludes the young and inexperience from the workforce and insulates people from the reality that they must up-skill themselves to increase their income. The minimum wage is a good example of only considering the intended consequences and ignoring the unintended and second-order consequences.
I had a quick look, but it’s too much to read to be honest. If you want to bring it into the discussion it would help if you could pull out some pertinent quotes or give a synopsis. Otherwise discussions just descend into link wars.
We would all be better off if we had more economic growth (an extra 1-2% of GDP growth over the last 30 years would have seen us with same average wages as Australia). Which is not to say that some people at the bottom would not be worse off without the minimum wage. That’s true. But it would be better to help those few directly, rather than distorting the whole economy and hence reducing the prosperity of everyone.
Vote:May 17th, 2010 at 4:17 pm
“To get a sustainable high-productivity and capital-intensive economy you need an unconstrained economy”
That’s overly simplistic and narrow-minded. You need training for a more effective combination of captal and labour, and a free-market makes training a competitive disadvantage. Your ideological purity is cute though.
Also – employers would rather ditch labour than capital in a recession because it costs them nothing to do so. So if labour is too cheap you destroy the incentive to invest in capital. You get capital shallowing, and low productivity growth. It’s great for profit margins, but not so great for economic growth.
your later agument is invalidated by this.
Vote:May 17th, 2010 at 4:39 pm
Do you emply mainly people on or near the minimum wage curia pigeon?
Vote:May 17th, 2010 at 4:52 pm
Explain why training is a competitive disadvantage.
The most productive and prosperous countries are those which have the most highly skilled workforces. How did that come about? And you’re assuming that only an employer can provide training and somehow the employee has no ability to up-skill themselves. Both wrong. Also if capital is more cost effective than training, then that is where the investment should go, because it will improve prosperity. If that wasn’t true, we’d still be ploughing fields by hand with wooden ploughs and dying at 40.
The minimum wage discourages people to up-skill because it over-pays unskilled people and excludes the young and inexperienced from the first rung of the ladder. And as Sonny Blount explained, it reduces the ability to reward his best workers, because he’s forced to over-pay less capable people.
Firstly there’s no such thing as labour being too cheap. As soon as you try to set a minimum, you stop people from working and kill off economic activity. What’s more likely to cause companies to shed people during a recession: flexible labour costs and the ability to reward productive workers over unproductive, or artificially high labour costs? And what is more more likely to get people back into work and companies into profit after a recession: artificiality high labour prices and restrictions on hiring/firing, or a free market where rates of pay can find their own level and the employer is not penalised for giving someone a job which they can’t guarantee in perpetuity?
I’ll take your word for that
Vote:May 17th, 2010 at 5:06 pm
The Dominion Post attempts to support its argument that:
by noting that:
Putting aside for the moment the curious fact that we have an appointed (not elected) office holder in charge of the NZ economy and answerable to no one, other countries (including Australia, whom we supposedly yearn to emulate) instructs its Reserve to consider a broader range of objectives when setting interest rates. And none of their economies are as buggered as is NZ’s.
So taking a broader range of objectives into account does not cause the sky to fall, regardless of what various right wing economic think tanks might have to say.
But the DomPost has the targeted the right cause – property “investment” at the expense of investment in the productive sector. The poor old ASX has even taken to running ads explaining that, the GFC aside, investment in shares over the long term would have made you money.
But that can be easily fixed by taxing property income at a different rate to make it less attractive and / or eliminating or reducing the attractiveness of using it for negative gearing. Trying to control it via the base rate is like trying to steer a car using only the brake and accelerator.
What we want to do about the amount of money flooding the property market needn’t rely solely on the RBNZ, so why use it as a justification for not reviewing what we want out of the PTA?
Vote:May 17th, 2010 at 5:08 pm
A $1 increase in the minimum wage removes $15,000 from my income and $50000 from my net value. Does my situation not matter in this debate?
Much of the field of macro-economics is quite probably rubbish.
This economist explains some of the reasons why (Thomas Sowell was actually a leftist as a young man until minimum wage issues caused him to reexamine his viewpoint)
http://www.youtube.com/watch?v=ERj3QeGw9Ok
The effect minimum wage policy has had on American Samoa
http://www.realclearmarkets.com/articles/2009/05/the_minimum_wage_and_its_emplo.html
Vote:May 17th, 2010 at 7:59 pm
@JiveKitty
But economics helps you understand how the world works, whereas accounting is just dull. Imagine if every teenager left high school with a keen eye for unintended consequences, the broken window fallacy etc, and an understanding that wealth isn’t a fixed pie and that rich people aren’t depriving poor people of a slice. Plus a good understanding of what makes economies prosper and why socialism failed. That would be a great start.
Economic ideas can be explained without any math and can be very intuitive. And they could read Freakonomics; they can’t read Freakocounting
Vote: