Hickey on Economy

September 26th, 2010 at 10:08 am by David Farrar

Bernard Hickey writes:

BNZ Economist Stephen Toplis compiled some figures showing New Zealand’s GDP is still 1.5 per cent below its previous peak in late 2007 and is down 4.2 per cent on a per capita basis from the peak because of the migration and natural population growth we’ve had recently.

This is the truly shocking result from the recession and the debt-fuelled growth that preceded it. Per capita GDP in New Zealand is now back at the levels it was at in the June quarter of 2004.

Think about that for a moment. The “stronger for longer” economic growth bragged about by Helen Clark and Michael Cullen from 2000 to 2008 was a fraud.

It was growth built on debt and now New Zealanders are having to consolidate and repay that debt, and doing it on lower incomes.

After the housing boom and years of spending, New Zealanders have seen their per capita GDP fall, but total debt rise $97.5 billion to $246.5 billion in the last six years.

No wonder this recovery feels more like a hangover.

And this isn’t just because of inflation or because we’ve invested heavily overseas.

Our net international investment position, which includes debt and equity owned and owed by New Zealanders here and overseas, deteriorated by $55.4 billion to a deficit of $163.7 billion.

Household debt as a percentage of disposable income rose to 154 per cent from 127.5 per cent in that six-year period.

So what was the point? Now we produce less per person than we did in 2004. And now we have to repay a much bigger debt.

It wasn’t even a wasted six years. We went backwards.

The 2010 budget should help with the re-balancing economists talk about – greater incentives to invest and save, and less of an incentive to borrow and spend.

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30 Responses to “Hickey on Economy”

  1. bchapman (649 comments) says:

    The question is- why is our productivity so bad? I can think of at least half dozens reasons off hand. Not sure changing depreciation rates for rental properties is going to be enough to sort that one out though.

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  2. Owen McShane (1,226 comments) says:

    The Centre for Resource Management Studies was deregistered as a charitable trust by the Charities Commission for being too political.
    So it is about to be wound up.

    I have been advising a group of trustees who have set up a new Centre for Local Government Studies to carry on the work about local government in general and housing affordability in particular.
    However, yesterday I was adviced that the application had been declined by what is clearly our own Committee for Public Safety.
    Anyone can see that they simply do not approve of the research we do. Apparently trying to promote affordable housing does nothing to reduce poverty.

    The 17 page decision which reads like a heresy trial.
    Needless to say the EDS and Forest and Bird and Greenpeace are free of all political thought or advocacy.

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  3. Viking2 (11,471 comments) says:

    Not often that I agree with Hickey but this time he is bang on.
    When will Key and English actually take this on board and start taking the Axe and chopping hard at the Govt. expenditure and the totally useless pile of quangos and boards etc etc that it funds.
    Mortgagee sales are increasing again for good average Kiwi people, jobs are not being produced and very soon a shortage of housing is going to rear its head.
    Doc wastes money saving whales that are destined to die,lots of money, educationalists demand more money from the public for poor quality education services, the list goes on.
    Meanwhile Sir Roger is treated like a leper, the only politician to make a fiscal difference to NZ and Don Brash is trashed by the appeaser and his friends.

    The Nats. are going to lose Auckland, almost certainly and they need to stop being nice to everyone and do what needs to be done before they lose the next election.
    Won’t take many votes to change the Govt. so either they yp their performance or find a coalition partner that will.

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  4. flipper (4,065 comments) says:

    Owen..
    The answer is to abolish the “commission”.
    Treasury tried to attack charities when Lange was PM. Patrick Millen was Sec of Cabinet and very much ionvolved in charities. A study by NZIER (then headed by Bollard) and funded by charities, blew them out of the water. They tried again and again, but it took the new chair of NZ Post and Helengrad to say “yes”. Now we have a bunch of doctrinaire “policy analysts” deciding the nature of charitable work.

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  5. tom hunter (4,843 comments) says:

    As an adjunct to this debate have a look at this interview in Business Insider, with a Dr Marc Faber. He discusses the similar credit-driven, boom-and-bust situation in the US.

    However, it was the following comment that struck me in particular:

    HRN: Given the poor prospects for US economic growth, do you foresee a flight of capital from the United States?

    Dr. Marc Faber: You would be out of your mind, with health care reforms and with the government interventions and the uncertainty about future taxes in the US, to even consider expanding in the US and this is a problem. I mean people say that loan demand is down because banks are not lending, but maybe nobody wants to borrow any money in the US and nobody wants to expand in the US but they are expanding in China, India, Vietnam, Bangladesh, Africa and Brazil.

    It’s certainly what I’ve done with my US investments over the years. I dumped the bulk of them in 1999, but kept a few piddling little ones on the theory that I’d build up college funds for my kids. The 2008 meltdown put paid to that and I waited until mid-2009 for Bernanke’s credit flush to bring the market back up, at which point I sold the lot, losing only a little as it turned out.

    The real point is that there is no way in gods green earth that I will be putting any money back into the US economy until I see some serious legislation passed to deal with the government entitlement monsters of Social Security et al. The in-laws are not particularly happy about this (you mean you’re not buying a house in Oak Park after all?) but I see no reason to feed my wealth into that insanity.

    The question I really have to keep trying to answer is how similar (or not) we are to this situation in NZ?

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  6. backster (2,172 comments) says:

    Yet in the midst of the financial mess bequeathed by Labour, National implement a totally un-necessary Emission Trading Scheme which will kneecap any recovery endeavours they undertake, and promote the treacherous designer of the mess to chair the board of the largest state owned corporation in the nation.

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  7. kaya (1,360 comments) says:

    It was obvious 4 years ago that the growth boasted of by Clark and Cullen was an illusion created by a speculative housing market. This fuelled unrealistic optimism and in turn increased consumer debt. Consequentially Cullen had a higher tax take allowing wasteful Govt. spending and ridiculous expansion of bureaucracy. Very little that happened during that period was based on anything substantial or long lasting.

    In NZ there are too many parasites leeching off a diminishing productive sector.

    NZ needs to earn more than it spends. Current prospects for increasing our income aren’t promising which means reducing spending is all we can do in the short term. As Viking2 points out, wasteful Govt. spending needs slashed.

    We have a problem though. Precedents are being set all around the world that tell us not to worry, debt is not a concern and we can borrow and spend our way out of debt. We are heading for many years of Japanese style stagnation.

    Oh and to compound all of the above, watch the Govt. tax take plummet dramatically in 2011. Remember, many people pay provisional tax which means much of this years tax take (which was grim) was based on people’s earnings over a year ago. This year will be worse.

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  8. tom hunter (4,843 comments) says:

    Remember, many people pay provisional tax….

    But not enough for the whole shitty nature of the system to really hit home.

    I was reminded of this awareness gap recently when my sister told me about an associate of hers in Wellington. This guy recently took early retirement from long-time Government service, but wanted to continue working. He has plenty of consulting work lined up (classic in that town) but had to set up his own little company and (gasp!) register for GST and work with an accountant on his whole provisional tax plan. He told my sister all this in tones of amazement about what was involved and the penalties for getting it wrong. As a long-time farmer my sister was rather scathing to his face, effectively welcoming him to the real world.

    As such I thought this other article from the US was interesting – Thoughts From A Country Mouse:

    In New York City I was much more dependent on the services government provides the inhabitants of a densely packed metropolitan center — and yet I encountered fewer frustrating manifestations of government power in my day-to-day life. When something went wrong with the transit system, I tended to blame the selfish out-of-town taxpayers who wouldn’t fork over the cash the city needed to make my morning ride a little smoother. Now, paying gas taxes, a ghastly level of sales tax, and car registration and EZ Pass toll charges every time I turn around, it’s harder to convince me that what government needs is more of my money — or more regulations and bureaucratic labyrinths to eat up my time.

    I suppose what I’m doing is retracing on a personal level the Great Migration of Americans from the cities to the suburbs and exurbs after World War Two. A nation of subway and tram riders turned into a nation of motorists — and gradually lost its taste for Progressive era reforms. City dwellers know they need the state; there was no way I could commute by car to Manhattan and find parking at a reasonable time or cost. The government stepped in to help me with subsidized mass transit. Suburban and exurban people aren’t so sure about the government’s role. Out here, I want government to do its job and fix the roads, but otherwise stay out of my hair — and stop wasting my time and taking my money.

    The shift from the world of Norton, Ralph, Trixie and Alice to the world of Ferris Bueller or even Roseanne is changing the way the country thinks about government. My own little migration up the Hudson River is helping me understand why.

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  9. vibenna (305 comments) says:

    We simply cannot afford working for families and the generous student loan policy. Nor can we afford a public sector that has low productivity growth. These are the big millstones that will drag us down to the position of Greece over the longer term, unless they are addressed.

    We also need to stop oligopolies (like the banks) using market power to extract super-profits which are then taken offshore. That turns New Zealand into a slave economy.

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  10. Inky_the_Red (759 comments) says:

    I think the preoccupation we have by measuring our Nations Health by GDP growth is mislead.

    GDP is an important measure of economy however it has short coming. GDP will show some growth caused by rebuild after the Canterbury Earthquakes. However those rebuilds are just putting thing back to how they were (at best) the standard of living in Christchurch is lower now than on September 3. Not just did people lose building raw sewage is being pumped into at least 5 rivers. People can no longer take fish (especially whitebait). Businesses have lost plant so won’t have work for their staff. However in about 9-12 months GDP will show growth caused by new building. When the rugby world cup kicks off in 49 weeks Christchurch will not have been rebuilt.

    New Zealand economy will not grow to Australian levels until we raise incomes. The argument from the right is wages should not rise until there is higher productivity. However as we have low wages there is no incentives for businesses to invest in new plant, it is much cheaper in New Zealand to hire more cheap workers than build new factories or improve existing ones.

    Australia advantage has been resources and high investment. In part must of the investment is due to Australian Unions being stronger than their Kiwi counterparts. They have forced up wage of workers meaning the way to be more competitive is to buy more modern plant and use that to make money.

    The actual savings rate and house price is a red herring. If businesses were investing and planning in NZ as they are in Oz, NZ businesses would get funding some how. It is the fact that NZ is a low-waged with low level of union membership that limits the countries growth. If National and ACT put more pressure on low income earners the fact is the country will not grow as fast as countries where incomes are growing.

    I accept that China is growing faster than Australia and China does not have trade unions. The point is there wages are rising which is the source of their economic growth.

    No matter what the right thing GDP per capita is not a total measure of standard of living. Fresh air, democracy, free speech, low crime, clean rivers, etc are not measured in GDP.

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  11. Viking2 (11,471 comments) says:

    Have a listen to the video no 8.

    http://www.interest.co.nz/opinion/fridays-top-10-10-nz-mint-americas-generational-wealth-transfer-inside-inside-job-does-free-trade-ki

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  12. Viking2 (11,471 comments) says:

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10674239

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  13. tom hunter (4,843 comments) says:

    No matter what the right thing GDP per capita is not a total measure of standard of living. Fresh air, democracy, free speech, low crime, clean rivers, etc are not measured in GDP.

    The problems with GDP are hardly unknown, even outside the community of economists, especially the element alluded to above, in which damage to an economy magically turns into a GDP spurt as the damage is fixed – the whole “broken window fallacy”.

    But as with many other economic aspects the failure to measure has less to do with the choices made as to what to measure than the reality of what can be measured. How much are “fresh air” and “clean rivers” worth? Obviously they’re worth something, people do “value” them – but to what degree? The answer still comes back to money, which is simply the representation of human time and resources. The question is to what degree will people throw time and resources at enabling cleaner rivers and fresher air – knowing as they do so that such things are being diverted away from other efforts? What’s the cost/benefit? Specifically, where’s the break-even point driven by the law of diminishing returns?

    When it comes to left-wing governments I don’t think any of the above really applies. If something is “good” then it will be pursued at whatever the cost and the fact that what is being pursued has only a qualitative measure is a huge plus. It means that rivers can always be cleaner and air fresher – there is no limit aside from running out of money. Moreover, the qualitative measure means that endless amounts of emotive argument can be generated, you don’t care about clean rivers!!. For all their vaunted power, corporations like Fonterra will buckle to that in a heartbeat: they already are.

    That’s why I think the next Labour government in 2014 or 2017 will be with the Greens and that the focus will be on the environment. From a left perspective there’s nothing else to be done: can gays be more liberated, abortions made easier? For all the talk about raising workers wages and growing GDP there’s nothing a left-wing government can really do for those things in the modern world (as opposed to the 1930’s), so what will be left?

    The environment will be the answer. A perfect black hole of no dimension for consuming time and resources, a source of endless new rules and regulations as 0.01 ppm targets turn into 0.001ppm, more bureaucrats to work them. It’s an issue emotively hard-wired into NZ’rs long before the rise of the modern environmental movement. Frankly I’m so certain that this insanity will arrive later this decade – and you can see in Inky’s argument above the ground being prepared for it – that I’ve already begun preparing to escape once he and his associates regain power.

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  14. wreck1080 (3,917 comments) says:

    “The 2010 budget should help with the re-balancing economists talk about – greater incentives to invest and save, and less of an incentive to borrow and spend.”

    You are crazy. The 2010 budget tinkered with the same framework that has seen the NZ economy deteriorate over the last 40 years or so.The big change, moving the top rate from 39% to 33% simply reverses a change made by Helen clark a few years ago and on top of that they have the cheek to raise GST.

    Do you seriously think NZ will regain it’s position as one of the highest per capita income nations in the world, because John Key reversed helens 39% envy tax , and increased gst for fun while he was at it?

    It’s a bad joke.

    Housing will bubble again, maybe not now, but maybe in 10 years, as most of the drivers causing the last bubble are still there.

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  15. jackp (668 comments) says:

    Tom Hunter, with the baby boomers taking early retirement , this doesn’t help things. For the last 30 years, the US has become a nation of manufacturing to a nation of services. General Electric found they make more money quicker lending it then making whiteware. In the fifties, the number one employer was General Motors now it is Wall Mart. They buy items made in those countries mentioned that are growing. Our best and brightest didn’t cross the tasman like in NZ, but went into law or wallstreet instead of engineering and science. The US has been running a deficit in the billions for decades and now things are falling apart The baby boomers are now beginning to collect retirement, which they should. Social Security might be a problem, but it isn’t the only problem. When I moved here 10 years ago, the biggest mistake I did was to keep my money in US currency. What I should have done was to buy Euros when they were equal in value. I agree with you, don’t invest in the US because that economy is headed for a collapse.

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  16. labrator (1,850 comments) says:

    inky_the_red wrote:

    In part must of the investment is due to Australian Unions being stronger than their Kiwi counterparts. They have forced up wage of workers meaning the way to be more competitive is to buy more modern plant and use that to make money.

    and

    However as we have low wages there is no incentives for businesses to invest in new plant, it is much cheaper in New Zealand to hire more cheap workers than build new factories or improve existing ones.

    So what you’re saying, inky_the_red, is that unions force up wages which has the net effect of businesses buying more modern plant to replace those workers with? Doesn’t this mean less jobs? How does a company, which has to pay more of its income in wages afford all of this extra plant? Isn’t that counter-intuitive? You seem to be saying that expensive labour makes companies more productive because they use less labour.

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  17. Jimbob (641 comments) says:

    We are not only going backwards, we are accelerating. What is the name of the ninth state of Australia? The banana republic of New Zealand.

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  18. Inky_the_Red (759 comments) says:

    Labrator

    Not completely, if workers get paid more they can afford to work fewer hours or their spouse won’t need to work as well. It’s about increased standard of living not the poor working for minimum wage for 60 hours a week.

    If the plant allows more to be produced by less import of labour (in terms of hour) then the business grow quicker than relying on employing workers alone.

    Jimbob

    Australia has only six states.
    We are not a banana reublic we are a milk-powder dominion

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  19. labrator (1,850 comments) says:

    … if workers get paid more they can afford to work fewer hours …

    I think you’re misunderstanding wage inflation. If everyone gets paid more, nothing changes as everything gets more expensive. It may seem in the short term that this works but in the long term it doesn’t. This is one of the fundamental flaws in the oft touted silver bullet the “minimum wage”.

    I agree that when plant produces more than a labourer the labourer will lose their job though. If this is what unions are trying to achieve then I’ve underestimated unions.

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  20. krazykiwi (9,186 comments) says:

    The 2010 budget should help with the re-balancing economists talk about – greater incentives to invest and save, and less of an incentive to borrow and spend.

    Deck chairs. Titanic.

    NZ’s 2010, National-led brand of socialism has us seeking icebergs with as much conviction as ever.

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  21. side show bob (3,660 comments) says:

    The answer is simple, socialism sucks, it doesn’t work never has never will.

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  22. hj (7,021 comments) says:

    Both Labour and National have been pro immigration claiming “needed skills” and economies of scale but the primary beneficiaries would have been the property sector. When I see all the new subdivisions I wonder what new industries have been created. When migration slows the emperor has no clothes on?

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  23. kaya (1,360 comments) says:

    jackp @ 1:16pm

    The “best and brightest……. went into law or wallstreet instead of engineering and science”.

    Therin lies an unsurmountable problem for the US. Not the fact that they have stopped manufacturing (to the degree they used to) – but that the lawmakers and financiers now running the country won’t be concerned about bankrupting the most powerful nation on the planet. They will all have well feathered havens to fly to when the defecation hits the oscillation.

    What happens after that remains to be seen but it could be one of the major events of this century – potentially the millenium.

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  24. Stuart Mackey (337 comments) says:

    labrator (670) Says:

    I think you’re misunderstanding wage inflation. If everyone gets paid more, nothing changes as everything gets more expensive. It may seem in the short term that this works but in the long term it doesn’t. This is one of the fundamental flaws in the oft touted silver bullet the “minimum wage”.
    ********************************

    No one on the left thinks that minimum wage is a silver bullet, at least not the sane ones. But it is true that Australian unions are strong, they have better productivity and I will be earning twice as much, to start, for doing the same job here. And with better qualifications the higher the pay, which is not always a given in NZ.

    ******************************************
    I agree that when plant produces more than a labourer the labourer will lose their job though. If this is what unions are trying to achieve then I’ve underestimated unions.
    ******************************************

    The unions are there to get the best deal they can for their membership, if one becomes redundant so the rest can be paid more, then thats for the better, especially if done economy wide, and the company can grow and eventually employ more people. Remember the same thing happened in the 19th century.
    But business in NZ need to start investing in plant an training and not relying on cheap labour, we are not China, we cannot compete on that basis.

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  25. Falafulu Fisi (2,179 comments) says:

    Government Debt is wealth destruction.

    All the so called fucktard Keynesian economists out there , should follow complex system researcher/economist Prof. Steve Keen, because he has had amazing research publications on the topic. His blog site is shown below:

    DebtWatch

    Go on Bill English & David Cunliffe, read Professor Steve Keen’s blog sites or his (peer review) publications from various economic literatures. Even if you can’t read them, then get your research staffs to summarize them for you. Read economic facts and stop pretending that you understand. Your understanding is basically kindergarten. Yes, Keynesian economics (that’s what you’re doing – both labour & national) is kindergarten.

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  26. Falafulu Fisi (2,179 comments) says:

    DPF said…
    The 2010 budget should help with the re-balancing economists talk about …

    Err, you mean cartoonists (and not economists) Mr Farrar? That’s not my words DPF, it is the label that econophysicist Prof. Jo McCauley stated on his paper : Response to worrying trends in econophysics (originally appeared in the statistical mechanics journal of Physica A 2 371 , 2006: pp. 601-609) , which is freely downloadable.

    Those cartoonist economists are the ones responsible for fucking up capitalism with their ill-advise to illiterate lawmakers in the world with their (now debunked) keynesian ideologies. It is a pity that politicians/lawmakers endorse those cartoonist advises unquestionably.

    The University of Auckland Econ group runs a regular meeting/discussion/lecture on economic topics and lawmakers should attend them to learn about real economics. Bill English & David Cunliffe should attend themselves or send their representatives on their behalf. Lawmakers must be learn real economics and stop hanging on to bullsh*t keynesians. Attendance is free for everyone which they welcome. I have just attended one seminar about 2 weeks ago which I learnt a lot, but I will definitely attend their upcoming seminars on a regular basis. Interested participants should check out Not PC blog, because upcoming seminars are being announced there by Peter Creswell.

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  27. ben (2,380 comments) says:

    But this is the problem David. Looking forward to a budget whereby a Minister in Wellington tweaks a few of the dials in favour of one objective really isn’t anything to write home about. The essence of why economies grow is not because governments have planned the economy in just the right way. Governments simply cannot do that. Looking forward to a budget in which English manipulates incentives, even in favour of a goal we think accords with the overall goal of raising prosperity (itself questionable when government directed), is hoping for too much.

    Far better that government a) stops tilting the playing field in any direction, and b) finds a way to stop future governments tilting the playing field. Then c) watch savings and investment takeoff as investors can finally anticipate not being arbitrarily expropriated.

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  28. KevinH (1,227 comments) says:

    Bernard Hickeys reports on the state of the nation are in general pretty much spot on but on this occassion his reportage is coloured by more than financial statistics.
    No one would disagree that under the previous administration the economy went backwards, but New Zealand is not alone in this observation.
    Globally the melt down has had far more serious consequences, the USA printing money flat out to get out of the hole, and Europe tettering on the verge of the Debt abyss.
    The only economy that has come out of the crash has been China.

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  29. sam f (2 comments) says:

    I’ll just leave this here:

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10676862

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