Herald on Govt’s first year

October 31st, 2009 at 9:12 am by David Farrar

This weekend it is the Herald’s turn to do a big feature on the Government’s first year in office. Multiple article to quote.

John Armstrong starts with what I think is the most important aspect:

The first Herald-DigiPoll survey since last year’s election shows close to 80 per cent of respondents rated the Government’s performance in dealing with the effect of the global recession on New Zealand as good, very good or excellent.

Barely 20 per cent rated the Government’s response to the recession as not good or poor.

And this is the major issue voters have focused on. Not use of urgency, not the Super City, not RWC broadcasting, not any of the numerous beltway issues. Not to say handling of those issues is not worthy of focus, but they are not critical to the average voter.

In another article, Armstrong reviews Key himself:

Key’s sheer ordinariness has fooled opponents into making first impression assumptions that there is little substance behind the confident, smiley face he presents to the world.

Key would not claim to be an intellectual. But he is very bright. Those who have worked closely with him speak of a capacity to absorb mountains of information and a laser-like capacity to focus on what needs to be done.

I would almost call Key a data sponge. He loves soaking up information from numerous sources, and reflecting on it. He is constantly thinking, and analysing.

He is anything but ordinary. The chief executive of New Zealand Incorporated is nothing short of a political phenomenon.

As one Beehive operative of long experience puts it, Key is rewriting the rules of New Zealand politics. That is a sweeping statement. But it goes some way to explaining why public support for National – confirmed in today’s Herald-DigiPoll survey – has climbed to unprecedented highs for a ruling party in its first year of government and, just as crucially, continues to remain at that level.

The challenge for the Government is to build its own brand to complement Key’s strong brand.

Key cites his Government’s fulfillment of manifesto commitments and steering the country through and (he hopes) out of economic recession as crucial in consolidating support for his party. Cabinet ministers readily acknowledge, however, that National’s post-election dream run is overwhelmingly down to Key’s strong rapport with voters – especially females who shunned National in the past.

It is rare for a centre-right party to do well with female voters.

Labour Party insiders grudgingly agree, but with a subtle twist in the language: National’s popularity rests on Key’s popularity. When the latter starts to fade, the former will quickly evaporate.

As I said above, I agree with them that the popularity is largely Key. But that may change over time, as other Ministers become better known. Also the other Ministers have generally been doing quite well in their portfolios – what is lacking is more a coherent all of Government brand.

Or so Labour prays. Labour, however, has made a bad habit of underestimating Key.

And they still are.

One of the principal ways he is seen to be rewriting the rules is by applying a “will it work” test to policy proposals rather than first asking whether they sit comfortably with National Party ideology. Key’s willingness to search for ideas outside conventional boundaries is in tune with an electorate less hung-up about ideology than in the 1980s and 1990s.

Key has centre-right values and instincts, but he sees them as a guide not a straitjacket.

This may irk some colleagues who see the vast gap between National and Labour in the polls as a rare chance for National to adopt a more radical and right-leaning prescription. …

Key seems to have no difficulty with either proposition. However, he is extremely wary of breaching National’s 2008 manifesto. He believes it is vital that voters feel confident they can trust National in government.

I’m one of those who want to see the Government be more bold, and indeed use that vast poll gap while we have it. But it isn’t about being more “right”, it is about fighting battles that are important to our future such as tax reform, the union stranglehold in education, state sector reform etc. But I agree any reform has to be consistent with the election manifesto. But there are plenty of areas where initiatives were not ruled in or out.

Dunne also noted that “references to what happened in the 1990s, let alone what side one was on during the Springbok Tour or, heaven forbid, the Vietnam War are utterly irrelevant to the values of this new generation, as Helen Clark found out dramatically last year, and Phil Goff is continuing to find out”.

The battles of yesterday.

Though Goff is an effective communicator, Key operates on another level. Unlike some politicians, he never talks down to people. He instead likes to disarm his audiences – no matter how big or small – by kicking off proceedings with a witty anecdote. More often than not, the joke is at his own expense. And deliberately so. The self-deprecation helps to break the ice.

A typical example was a recent meeting with youngsters at a riding school. Praising their ambition to represent New Zealand in show-jumping at the 2016 Olympics. Key turned to their proud parents, telling them “and you’ll be able to watch it all on Maori television”.

Heh. More seriously I recommend anyone who has not seen Key do a Q&A, should attend one of his meetings. He really engages with the audience, and as John A says, never talking down.

Yet, a year on from the election, it is still difficult to discern the direction in which the Government is going. Presumably it knows, because it is a very busy Government. It would be useful if it told the rest of us.

If Key has a major flaw, it is in not drawing the big picture often enough.

I agree. I don’t think it has mattered much this year, for it has been a crisis year – fighting the recession. But as that fades as an issue, people are going to want to hear more about closing (or at least slowing) the gao with Australia.

Key’s power is at its zenith. But how does he intend to use it? What legacy does he want to leave? The next 12 months will be true measure of his prime ministership, judged on what is done to get his promised “step change”in New Zealand’s economic growth.

I think the 2010 budget is very important, even more so that the 2011 budget.

Claire Trevett reports 78% of NZers back the series of cycleways.

Patrick Gower talks to Rodney Hide about working with John Key.

John Armstrong also reviews Bill English.

Claire Trevett talks to Tariana Turia:

Do you still have that level of trust in National?

Yes. What I’ve enjoyed the most is our ability to be upfront with one another and be straightforward on issues. I have never found that they’ve said one thing to me in a meeting and done another.

I recall what John Tamihere said about how Cullen used to treat coalition partners!

Have there been difficult choices?

When you can see value in what is being proposed but there’s always downsides to it. We’ve had to think really carefully about ACC, the Emissions Trading Scheme, and adult education courses.

For example with the ETS, it’s been difficult to try to balance the interests of iwi – whose major focus is forestry, fishing and farming – when on the other hand we’ve got really poor communities who are going to have to pay and they’re not the ones causing the problems.

There are very few policies that don’t involve balancing the trade-offs.

Jon Johannsson talks leadership:

I believe we are watching an unusual prime ministership take shape. Key’s skillset is vastly different from what we’ve seen before. We’d possibly have to go all the way back to the entrepreneurial Julius Vogel in the 1870s to find an apt comparison. Vogel put in vital and much-needed infrastructure to connect New Zealanders with each other and then with the rest of the world. Vogel’s legacy is a hugely significant one in our politics. If Key could affect a 21st century equivalent – meaning nothing short of major structural transformation to better position New Zealand during its transition to an information-age economy – his future legacy would be assured.

And Key has pushed hard on infrastructure. But the structural transformation is not there – however stuff like the fibre to the home initiative may be part of that.

Key has also grasped that our politics is going through a non-ideological phase, which explains why much of the criticism of his Government’s performance has come from ideologues on either side of the spectrum. His acceptance of much of Labour’s policy inheritance reinforces this judgment. Keeping its promises, which National has largely done, thereby establishing long-term trust with the electorate, has given Key the prerequisite platform needed for greater freedom of action in the future.

Absolutely. You have to earn trust, to then have greater freedom of action.

But to return to where I began, Key’s larger context; his political vision has been quite parsimonious in my view. There is no overarching narrative that tells us where Key intends taking us or what policy mix will best maximise our future progress and choices.

Transforming education (surely the best incubator for our future economic prosperity), leading our democracy (think: the electoral referendum, the Treaty, republicanism), and how to best protect water, our most valuable strategic resource, are being managed, not led, in an entirely ad-hoc fashion.

I think this is fair criticism.

Finally John Roughan:

The most impressive member of the Cabinet is a complete newcomer, Steven Joyce.

He is doing the infrastructure projects, notably the duplicate broadband network, as well as those in his primary portfolio, transport.

He’s done the little things, like the car cellphone ban on which the previous government dithered for years, and the big things like the Waterview connection, which I thought was wrong but he put me right.

I remarked to the Dominion Post for their review that I thought John Key’s best decision was probably appointing Steven Joyce to such critical portfolios. The fibre rollout was Key’s signature initiative, and speeding up infrastructure investment also a iconic issue for Key. And Steven indeed is no ditherer.

Of course I still think he is wrong on the cellphone ban!

Not the Great Depression

May 29th, 2009 at 9:04 am by David Farrar


This graph was e-mailed to me, originally shown on Andrew Sullivan’s blog. It does put things into perspective.  It is presumably about the US economy.

The Credit Contracts and Consumer Finance (Break Fee Disclosure) Amendment Bill

May 6th, 2009 at 7:00 pm by David Farrar

National List MP Aaron Gilmore has put together a useful private member’s bill. It will:

require banks and other credit providers to include the dollar amount of any break fee payable in the credit contract, as well as a plain English description of the calculation.

Transparency is a good thing. This is the first private members bill by a National MP since the election, so hopefully it will get picked from the ballot.

The full bill is after the break:


John Key in the Wall Street Journal

March 9th, 2009 at 1:00 pm by David Farrar

The Wall Street Journal has a story on Jon Key’s response to the credit crisis, with the headline You Can’t Spend Your Way Out of the Crisis.

“We don’t tell New Zealanders we can stop the global recession, because we can’t,” says Prime Minister John Key, leaning forward in his armchair at his office in the Beehive, the executive wing of New Zealand’s parliament. “What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with.”

Keeping the tax cuts will be a good start then.

That idea — growing a nation out of recession by improving productivity — puts Mr. Key and his conservative National Party at odds with Washington, Tokyo and Canberra. Those capitals are rolling out billions of dollars in stimulus packages — with taxpayers’ money — to try to prop up growth. That’s “risky,” Mr. Key says. “You’ve saddled future generations with an enormous amount of debt that then they have to repay,” he explains. “There is actually a limit to what governments can do.”

It isn’t quite an either or. NZ is spending a fair bit on a stimulus package – but it is mainly infrastructure spending being fast-tracked, than permanently increasing social spending beyond our ability to pay.

Mr. Key’s coalition government, which includes parties to the right and left of the Nationals, has moved fast to implement a program of tax cuts, regulatory reform and government retooling. He won’t label it supply-side economics and smiles when I ask if he’s a Milton Friedman or Friedrich Hayek acolyte. “I’m not deeply ideologically driven,” he says. “I believe in good center right politics.”

But wait – Labour kept telling us he is a dangerous ideologue?

“We have been on a slippery slope,” Mr. Key says, pointing to the country’s slide to the bottom half of the Organization for Economic Cooperation and Development’s per-capita GDP rankings. “So we need to lift those per-capita wages, and the only way to really do that is through productivity growth driving efficiency in the country.” He talks at length about how to attract and retain talented workers. What does he think about populist arguments about the end of capitalism? “Nonsense!”

The end of capitalism- film at 11.

For now, the prime minister is focusing on chipping away entrenched regulations that drive away foreign capital — a contrast to the U.S. and Australia, which are reregulating their markets in the wake of the financial crisis. “Good regulatory reform can be an important catalyst toward driving economic growth and coming out of the recession faster,” Mr. Key says. His government is revising legislation meant to protect New Zealand’s pristine environment from private-sector development but misused by greens to stymie all stripes of business plans.

Worth reading the full article

Hat Tip: Anti-Dismal

Keating attacks Obama’s Treasury Secretary

March 9th, 2009 at 10:00 am by David Farrar

The Sydney Morning Herald covers former PM Paul Keating on new US Treasury Secretary Tim Geithner:

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.


But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans – Thailand, South Korea and Indonesia – all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: “Soeharto’s government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power.”

So is he calling the US Treasury Secretary a gigantic fool?

Exactly who was the “gigantic fool”? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner’s misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: “The IMF is the gun that can’t shoot straight. They’ve been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose.”

Is there anything to back up this assertion?

China, in particular, drew hard conclusions from the IMF’s mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: “This has all been noted inside the State Council of China and by the Politburo. And it’s one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it’s why through a series of exchange-rate interventions each day that they’ve built these massive reserves.

“These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it’s 50 per cent of their annual income. It’s a huge thing for a developing country to not spend its wealth on its own development.”

And does anyone else agree with Keating?

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn’t think so: “After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money.”

Sounds convincing. And how does this all relate to our current problems:

Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.

And he is now in charge of devising the solution, appointed by President Obama. Excuse me, while I go hide my cash under my mattress.

Obama’s troubles

March 7th, 2009 at 4:49 pm by David Farrar

Barack Obama has more troubles.

First of all three more nominees withdrew on a single day. He now has the most shambolic appointments record of any President.

The problem is so bad, that the Treasury Secretary doesn’t have any of his 17 Deputy Secretaries confirmed.

That has led to the AP story:

For five weeks, Treasury Secretary Timothy Geithner has battled the worst economic crisis in generations with no key deputies in place. That’s made for a rocky debut for the man President Barack Obama put in charge of addressing the financial crisis.

With an awkward first television appearance, a bank rescue plan that lacked promised specifics and two restructured bailouts that raised taxpayer risk, Geithner has failed to calm financial markets desperate for answers.

Critics say part of the problem is that Geithner is flying solo: Not one of his top 17 deputies has been named, let alone confirmed. And without senior leadership, lower-level Treasury employees can’t make decisions or represent the government in crucial conversations with banks and others.

There is growing criticism that Obama’s massive budget (did you know Obama will borrow more money as President than the other 43 US Presidents combined!) was all about spending wishlists, but little on fixing the banking industry crisis, which is causing all the othe rproblems.

And people are also noticing that Obama is unable to give a speech without a teleprompter. Now I don’t mean major set piece speeches, where of course you use a teleprompter. But he is using it for everything – five minute speeches announcing an appointment, and a short tribute to Abraham Lincoln speech.

Now to be fair to Obama, the financial crisis would test any President. Bush did not inspire confidence, and while McCain would have been a good President in other areas – I doubt he would be doing much better with this crisis.

The one who might be handling the job the best is the Secretary of State Hillary Clinton. I always had far more confidence in her abilities than Obama’s.

The cost of the credit crisis

February 27th, 2009 at 12:34 pm by David Farrar


This comes from Reserve Bank Governor Alan Bollard’s presentation to the PM’s Jobs Summit.

US$39 trillion is a lot of money. It is 390 times the size of the NZ economy.

This is why things are going to get a lot worse, and why local measures (no matter how worthy) will have little effect.

We’re all doomed!

February 26th, 2009 at 8:11 am by David Farrar

Well according to Sue Bradford.

You should have seen the faces in the audience at Backbenches last night, when Wallace Chapman asked the panel how bad they thought the current recession would be.

Sue answered that she thought it would be worse than the Great Depression of the 1930s, and further that it would last for the rest of her lifetime!

I guess the bright side is that a never ending great depression would be excellent for reducing carbon emissions.

The fiscal stimulus

February 17th, 2009 at 2:00 pm by David Farrar

MacDoctor has an excellent response to the analysis done on Pundit over the $9 billion fiscal stimulus. Tim Watkin on Pundit says most of the stimulus is “old money” not new.

MacDoctor reponds:

Tim gets understandably offended by the fact that fully half of the fiscal stimulus is new spending already earmarked by Labour, including, amusingly enough, the purchase of Kiwirail.

I should point out that Tim’s problem is due to the fact that he is interpreting the words Fiscal Stimulus in the very socialist fashion used by Rudd, Brown and Obama – all died-in-the-wool Tax-and-Spend socialists. Fiscal Stimulus in this sense of the word means “Invent large sums of money from nowhere, then spend it like there’s no tomorrow”.

Bill’s answer is straight from Treasury – who are about as socialist as Roger Douglas. To them, Fiscal Stimulus means “amount of extra money being put into the economy” – nothing more, nothing less. Labour’s committed spending counts towards a fiscal stimulus just as much as National’s new spending. This is normal accounting practice and is not some strange plot by National to impress the media.

There is a big difference between “spending” and “stimulus”.

Tim’s objection to the inclusion of Labour’s extra spending appears to rest on the groounds that it occurred well before the economic crisis. This is meaningless in terms of the stimulatory effect it will have on the economy. Had it not been for the economic crisis and fact that New Zealand was moving in to a recession, Labour’s spending may well have kept inflation above the 5% mark, so stimulatory was it. The economy does not care where the spending was approved by Labour or National, it will still react to it in definable ways.

Tim also seems to object to the inclusion of spending on schools and roads on the understanding that these were already approved by Labour, but just moved forward. It seems to have escaped him that that is exactly what is required – an increase in current expenditure rather than later spending. Almost certainly, Labour would be doing the same thing, if it was still in power.

Those from the left want “extra” spending because that is what the left believe in – higher taxes and more government spending. But that is not the only way to increase the fiscal stimulus and bringing spending foward is, as MD says, an excelletn way to do that.

We are going to face a horrendous deficit and debt problem for at least a decade. If the Government is playing smart by having a large stimulus, without incurring ongoing expenditure that we have to borrow to pay for, good on it.

Having said all that, there is a fundamental mistaken assumption that Tim and the guys at Tumeke! and the Standard have made. It has also been made by the media and by Messrs. Rudd, Obama and Brown. It is the assumption that it is the amount of money being spent that is important. This is entirely false. It is actually how and where the money is spent that is vital.

Rudd has injected money directly into peoples pockets. This is a very popular move, but one that provides only a very short lived stimulus. Obama has huge swathes of useless “pork” in his package. Brown appears obsessed with owning banks.

Key, on the other hand, is spending frugally and carefully in the places he thinks he will do the most good for the economy in the long run. He has little money to play with (thanks, in large part, to Labour) and is making the best use of it he can. Arguing about the actual size of the stimulus is like arguing about the colour of the bus that is about to run you down.

I can only say I agree,

Fisher & Paykel

February 17th, 2009 at 7:06 am by David Farrar

The Herald reports:

Prime Minister John Key has not ruled out assisting New Zealand whiteware maker Fisher & Paykel Appliances, which has announced plans to find a cornerstone investor to help dig it out of a mountain of debt. …

Yesterday, Mr Key said he had phoned chief executive John Bongard to discuss the company’s situation and while Bongard had not asked for support, Key said he would keep in touch.

“They are an iconic New Zealand company, employing 1600 people. I’ve made it clear I’ll be staying in contact.”

Key said the Government did not want to become a primary banker, but it was not ruling out the option of helping Fisher & Paykel.

“Governments around the world have taken that course and we reserve the right to do so.”

Governments around the world have invaded Italy also, but that doesn’t mean we should.

No problems with the Govt making it easier for F&P to get an investor. I wish the Govt would make it easier for all companies to get investors.

But if the Government starts picking particular companies to “bail out” or leand money to, then they’ll find the queue for such assistance will get very long. Plus the moral hazard of having an implicit Government guarantee will make it more likely those companies will make bad decisions.

Kerr on Fiscal Stimulus

February 16th, 2009 at 5:59 am by David Farrar

Roger Kerr makes some excellent points in his NZ Herald op ed:

The Government is being urged to increase its spending to “stimulate” economic activity.

What seems to be overlooked is that the huge rises in core Crown spending in recent years – some $25 billion since 2000 – saw New Zealand “lead the world” into recession.

A very timely point. And that going into recession a year before most other countries has greatly affected our options.

Hundreds of economists in the United States are saying the Obama Administration’s so-called “stimulus” package is reckless.

The imperative now is to switch resources into the internationally trading sector so as to increase exports and cut imports. By marking down our exchange rate, the rest of the world is telling us that is what we have to do.

It looks likely to drive the US Budget deficit to about 12 per cent of gross domestic product, create huge public debt, and necessitate big tax increases or spending cuts down the track.

And NZ is already facing a decade of deficits. And if these deficits remain, tax increases are also inevitable in NZ.

For a small, open economy like New Zealand further increases in Government spending would worsen the balance of payments rather than do much to increase output, even in the short term. Longer term they would raise future tax and debt burdens and risk a resurgence of stagflation.

High levels of Government spending, already projected to be 45 per cent of GDP on the OECD’s measure (which includes local government), contributed to the balance of payments problem by driving up domestic costs, making exporting and competing with imports less profitable, and dragging resources (of capital and labour) away from those activities.

The imperative now is to switch resources into the internationally trading sector so as to increase exports and cut imports. By marking down our exchange rate, the rest of the world is telling us that is what we have to do.


Australia’s overall Government spending ratio is projected by the OECD to be 35 per cent in the coming year, compared with New Zealand’s 45 per cent ratio.

The Government needs to reduce the Government spending share of the economy over time to below Australia’s level – and more like the ratios in Hong Kong and Singapore which are below 20 per cent – to match Australia’s performance.

The Governments of those countries are able to ensure the provision of high-quality public goods and maintain strong social spending programmes with Government spending at far lower levels than NZ.

The benefits include lower taxes and levels of wages and other incomes that are now much higher than ours.

This is key. Reducing Government spending as a percentage of GDP does not mean you are spending less money. If you get higher GDP growth, then you can still maintain social spending. The trick is to have spending increase at a slower rate than GDP growth.

Beyond those exercises, the Business Roundtable strongly supports the proposed Taxpayer Rights Bill which would cap increases in spending at the rate of inflation plus population growth, unless taxpayers agree to higher increases in a referendum.

That’s a great idea. The same should apply to local Government!

Stimulus Packages

February 11th, 2009 at 3:00 pm by David Farrar

There are some interesting debates happening on various stimulus packages around the world. Take this AAP article on Kevin Rudd’s:

ECONOMISTS have raised concerns the Federal Government’s cash handouts to millions of people will be blown on pokies and plasma televisions.

The Government wants to give payments of up to $950 to individuals as part of its $42 billion economic rescue package….

Reserve Bank board member Warwick McKibbin called for the payments to be scrapped.

“A cash payment … only has the potential to temporarily stimulate demand and has no long-run benefits to the economy,” Professor McKibbin told the inquiry last night.

He said it would be better to bring forward tax cuts or temporarily cut the GST.

So what will the money go on. remember this is a one off payment, not a permament change in income:

Sinclair Davidson, professor of economics at RMIT, slammed the handouts.

“Do we believe that Australians have not been borrowing and spending enough on alcohol, pokies and tobacco, and that there aren’t enough plasma televisions around?” he asked the inquiry.

Then we look at the polls in the US on the Obama package:

In a CNN/Opinion Research poll, 54% of respondents said they favor the stimulus plan that the Senate is expected to pass on Tuesday. And 64% said they felt the bill would help the economy recover. …

But 55% of respondents said that even the less expensive Senate plan would cost too much in spending and tax cuts, according to the survey. In addition, 30% think it’s just the right amount of money and 13% said the government needs to spend even more.

The amount of pork in the Obama package is huge, and it is interesting that already most Americans say the package is too large.

Then back home Rob Hosking at NBR argues not to go too large:

Today’s infrastructure announcements from the government should provide a welcome boost for the economy, even though the $500 million spend is hardly earth shattering.

But too much stimulus – and it is not difficult to have too much – and ministers risk an inflationary surge and large interest rate hikes just as they head into the next election. …

Hosking continues:

There is already a fair surge of stimulation working its way through the New Zealand economy.

On the monetary side, the Reserve Bank has more than halved interest rates over the past six months and will continue cutting for until April or maybe even June.

The official cash rate was 8.25% just over six months ago: it is now 3.5% and likely to go to 2%.

It is very important to remember interest rate changes have a lag effect of 12 to 18 months before they fully work their way through the economic system.

That is a key point. Many of the effects are delayed and you risk having all this stuff kick in as the recession is ending, resulting in inflation.

$500 million of infrastructure projects to be fast tracked

February 11th, 2009 at 11:37 am by David Farrar

John Key has given details of $500 million of infrastructure projects that will be fast tracked:

  • $69 million on five new schools
  • $30 million on school refurbishments and maintenance at 64 schools
  • $9 million for special schools facilities
  • $34 million to upgrade ICT infrastucture so schools are broadband capable.
  • $41 million on improvements in 11 schools
  • $6 million to establish a trades academy on Southern Cross Campus in Mangere
  • $28 million to help schools accelerate existing building projects that have stalled.
  • $43 million on acclerating five large state highway projects (Kopu Bridge Replacement, Matahorua Gorge Realignment, Hawkes Bay Expressway Southern Extension, Muldoon’s Rimutaka Corner Easing and Christchurch Southern Motorway
  • $100 million for smaller regional roading projects, with one third to be spent before 30 June.
  • $105 million on upgrades and renovations to 10,000 state houses – 18 a day for 18 months
  • $20 million on construction of 69 new state houses

Targeted infrastructure spending is a far better response than some of the massive pork laden stimulus packages we have seen overseas.

Armstrong on Key

February 7th, 2009 at 8:57 am by David Farrar

John Armstrong warns National must brace for an end to the honeymoon:

The Prime Minister will win plaudits for his composure after being manhandled by a couple of lone protesters and for his determination that the incident not deter him from returning to Te Tii Marae in future.

Once again, Key has displayed the kind of leadership that makes a nonsense of Labour’s pre-election spin that he was too shallow and too inexperienced to hold the country’s most challenging job.

Labour should worry that it misjudged Key so badly in the run up to last year’s election, and that he is coping so comfortably with the demands of prime ministership, while building mana, prestige and authority in the process.

Yes, it was almost amusing as they kept sneering how weak and incompetent he would be, and how he could never match Helen. That ended with the first Leader’s debate.

The wake-up call, however, was the latest household labour force survey showing unemployment rising by 10,000 in the final quarter of last year.

It is the jobless and economic growth statistics on which Key’s Government will ultimately be judged. Everything else will be peripheral.

I tend to agree. In fact I think the economic crisis really means there is no honeymoon. What will be important though is to compare what actually happens over the next three years with the forecasts of growth and unemployment (and debts and deficit) that Labour left National.

It is basically impossible that there won’t be more people unemeployed in 2011 than 2008.

Labour would have spent more infrastructure-wise had it remained in Government, partly because the second phase of its tax cuts would have kicked in a year later than National’s and partly because the Opposition thinks more should be spent.

I disagree with this assertion. Labour could only match 20% of National’s broadband infrastructre plans. Labour couldn’t match National’s planned spending on roads. In fact up until a few weeks before the election, Labour was criticsing the level of National’s infrastucture spending as reckless and dangerous. The tax cuts are also a red herring, as they are funded from cutting KiwiSaver subsidies.

Where the parties differ is in David Cunliffe, Labour’s finance spokesman, urging National to think again and cancel April’s tax cuts because they favour the better-off and the extra cash will be saved rather than spent on consuming goods and services.

The tax cuts were financed from cutting KiwiSaver subsidies. Under Labour’s policy 100.00% of the cash would have been saved and 0.0% spent. By converting Kiwisaver subsidies to tax cuts, a far larger proportion will be spent.

Brash vs Gould

February 3rd, 2009 at 1:00 pm by David Farrar

Don Brash does an excellent rebuttal in the NZ Herald to a call by Bryan Gould for more regulation. Some extracts:

But Gould implies that the crisis was caused by “free” and unregulated markets, especially in the financial sector. This is quite simply nonsense. Banks may be relatively lightly regulated in New Zealand (where there is no banking crisis), but they have been highly regulated in the United States and Europe for many years.

Worth thinking about. And then talking about the US regulations:

In many ways, this intensive supervision by official agencies made matters worse by leading bank customers to assume that banks were effectively “guaranteed” by Government, thereby enabling banks to operate with levels of capital well below those regarded as prudent in earlier decades. Perhaps even more serious, intensive supervision led some bank directors to suspend their own judgment, and believe that they were behaving prudently provided they were observing all the rules.

Often a problem – a minimum standard becomes a target.

Gould seems not to have noticed that the crisis emerged not in the essentially unregulated hedge fund industry, or even among private equity funds, but in the most highly regulated part of the financial sector, namely banking.


Gould argues that “Government involvement in the management of the economy is essential”, implying that that has not been the case in recent decades. Again, that could hardly be further from the truth.

Government taxation and spending make up some 40 per cent of total economic activity in most developed countries, and in all developed countries regulations of one kind or another tightly control what businesses can do.

It’s not exactly libertarian heaven with the status quo.

Gould in any case asserts that fiscal policy is more important than monetary policy. I would not want to get into a debate about which is more important – both are important. At its most basic, monetary policy is essentially about preserving the purchasing power of money.

Unless that is achieved within some tolerable limits, money can’t fulfil its important roles as a unit of account, a basis for transactions, and a store of value – just ask the Zimbabweans!

When people argue for a bit more inflation they are arguing for a bit less purchasing power.

With the benefit of hindsight, monetary policy was probably too loose in recent years, in some countries at least.

This is the irony – interest rates were probably too low, causing too many people to borrow.

We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.

It is often the best intended policies that have the worst results.

Economy worse than expected

January 15th, 2009 at 4:57 pm by David Farrar

The economy that National has inherited is even worse than thought at the end of last year.

NZPA reports that Treasury has told the Government it now expects unemployment to hit 7.5%.

PM Key has said that a number of initiatives have been considered and will be announced on 4 February.

To get some idea of how bad it is, look at these trade figures from the US, a reader sent to me:

THE NUMBERS: American imports:

July 2008: $230 billion
October 2008: $208 billion
November 2008: $183 billion

This is the biggest drop in imports since 1942. And it is near impossible for us to maintain exports and economic growth with that sort of contraction in the US.

I’m not sure the recession may not turn into a depression.

NZ Herald editorials

December 30th, 2008 at 10:00 am by David Farrar

The NZ Herald counts up the editorials this year.

There were nine editorials backing decisions of the Labour Government, and 18 criticising it. National fared little better with 19 editorials criticising it, and 11 supporting it (five since the election).

14 editorials were on the credit crisis, 10 on the Electoral Finance Act and 10 on Winston Peters. The problems around the last two have been solved anyway 🙂

The transitional relief package

December 16th, 2008 at 10:42 am by David Farrar

National announced yesterday the relief package for those who lose their jobs during this period of global recession. It is up to $160 a week for 16 weeks for those with high accommodation costs.

Strangely one of the criticisms from Labour has been people who get a redundancy payout of over $25,000 will not be eligible.

Labour really don’t get this concept of limited funds, so you target to the most needy. But hey it is good to see Labour concerned about those who get redundancy payouts equal to one year on the minimum wage or seven months on the average wage.

ANZ National moves to 20% deposits

November 27th, 2008 at 7:49 am by David Farrar

It’s just got a lot harder to buy your own home. ANZ National are now requriring 20% deposits on home mortgages. Not that long ago 5% was all you needed.

This means that the median deposit needed will be $86,600 in Auckland, $73,800 in Wellington and $62,000 in Christchurch. And that has to be saved from after tax income.

The policy change is a logical consequence of the credit crisis, and of falling house prices. I suspect other banks may follow suit.

Key’s APEC speech

November 22nd, 2008 at 9:35 am by David Farrar

John Key gave his first speech as Prime Minister to the APEC CEOs Summit. While the invitation was not for him personally (it was for the PM), it proved very fortunate, as it allowed Key to demonstate that he understands the causes of the credit crisis better than most. Some extracts:

To understand the potential scope of the changes that may be required is to understand the changes in the global economy over the past 10 to 15 years.

Over the past decade or so the global economy was fuelled by a private sector credit boom made possible by a combination of large macroeconomic imbalances with and between economies, relatively low global inflation, new waves of financial innovation, and huge amounts of leveraging by hedge-funds and other financial institutions.

These forces were, in turn, fuelled by excessive optimism in asset markets, and a more relaxed, and in many cases, recklessly complacent attitude to risk.

The result was a global credit boom like none other.

And one desired response:

New Zealand knows very well that one of the critical factors for getting out of this current downturn will be our ability to trade our way out of it. We’re a small cog in the global economy and we know that the only way we can lift our living standards is by growing our role in global markets.

This I believe is true for all of the economies represented in this room, particularly the small and developing economies. Indeed, APEC was founded on the collective goal of pursuing an open trade agenda. There is no doubt in my mind that the APEC region still stands to be the growth engine of the world.

The G20 has pushed the idea that Doha should be resolved – and I can’t speak loudly enough to that. The G20 leaders have put their reputations on the line, calling for an agreement by the end of this year on the crucial decisions needed to take this Round to a successful conclusion. Our Trade Ministers at this meeting have issued a similar strong call for action. I am certain APEC leaders will follow suit.

Let me put it bluntly. Against the backdrop of those political statements and against the background of the international economic turmoil, a failure to follow through in Geneva and deliver the results we need would represent nothing short of a political failure.

Now is most definitely not the time for any individual country to allow their worsening domestic economy to lead to a retreat from global trade and engagement.


In particular, central bankers across the world are grappling with the issue of asset price cycles and their consequences for price stability. Housing market booms occurred this decade not only in New Zealand, but throughout this region and the world. The aftermath of these booms is at the heart of current financial market dysfunction.

The question is: faced with this situation again would we do something different to address it? To my mind, this question should lead economies to consider whether monetary policy, fiscal policy, and prudential policy should be more counter-cyclical, and lean against credit growth in an upswing.

This will keep the economist blogs busy arguing pros and cons!

What is now apparent is that as the pressure to boost profits grew, Wall Street assumed more and more risk. The quantity, and also the complexity, of this risk saw investment banks evolve into pseudo hedge funds with balance-sheets and risk exposures well beyond what anyone would have previously deemed acceptable.

But leverage wasn’t, and hasn’t been, the sole preserve of the banks.

The hedge-fund community has mushroomed in size and significance. Gone for the most part is the traditional macro hedge fund, where risk was based on the views of an individual trader who undertook conviction trades that bore some sense of balance when compared to the overall size and structure of the market.

Today, hedge-fund leverage is for the most part unregulated, opaque and, arguably, globally unmanageable. The regulation that does occur is for the most part focused on the fitness of the manager to report to their investor.

All of these factors have helped contribute to the explosion in credit, completely out of proportion to the real economy, with cheap equity leveraged to the hilt.

So now the party is over and the taxpayers of the world are left to underwrite – in one form or another – the liabilities and obligations of banks and, by extension, their hedge-fund clientele.

We can no longer afford to ignore the fact that the amount of risk that hedge funds are able to take through the leverage of their funds is arguably completely disproportionate to the real economy.

These realities and the associated bailout of financial institutions are expected to prompt a widespread review of financial regulation. This is entirely appropriate.

A review is appropriate, but Key also reminds us of the positives from easy credit:

Reforming the global financial system will require a balancing act between, on the one hand, moving away from the largely unregulated environment of today and, on the other, ensuring we do not completely undermine financial markets.

Let us not forget that global growth over the past couple of decades has bought hundreds of millions of people out of poverty.

For global growth to continue, the world needs financial markets to function and it needs liquidity. Furthermore, the world needs to trade and to interact.


Kerre’s conversion is complete

November 2nd, 2008 at 1:00 pm by David Farrar

I think we can declare Kerre Woodham’s conversion to the dark side complete. She has shown primising signs before of having abandoned latte liberal or Chardonnay socialist leanings, but her latest column qualifies her for full entry. I will arrange the initiation ceremony the next time the High Council meets.

Kerre writes:

Can anybody explain why we need these redundancy packages? Will we always have them? Or do we only get redundancy packages when recessions fall in election years?

Kerre has it in one.

One man told me it was all the banks’ fault for luring people into mortgages, so the Government should pay if people couldn’t afford to pay the bills when times got tough.

For a start, no bank staff pointed guns at homeowners and insisted they take out mortgages. People did that of their own volition.

And if you’d listened to your grandparents, they would have told you not to borrow more than you could afford to pay back.

All good points.

And for another, it’s not “the Government” that will be giving you money. It’s me. And your friends and neighbours.

The Government is not a money machine. It’s an institution that is funded by taxes taken from all of us.

And the final proof of the conversion to the dark side – the realisation that the money the Governments gives out is not their money, but your money.

Where does personal responsibility come into it? I’ve earned low wages and I’ve earned high, and I’ve learned you cut your cloth according to your income.

Heresy, heresy to the left.

One of the reasons for this worldwide recession is that people have taken on more debt than they could afford to give themselves a better lifestyle.

What the recession is doing is shaking everything and everyone up, and restoring a natural order and balance. But that won’t happen if political parties set about subverting the sequence.

This column really gets a 10/10. Not only emphasises taxpayers, and individual responsibility but also talks about long-term effects of short-term interventions. Has Kerre been doing an economics degree on the sly?

Labour’s package is particularly loopy. If a person is made redundant, they will get the equivalent of the unemployment benefit for up to 13 weeks even if their spouse or spouse equivalent is on $200,000 a year.

How does that make sense?

It is about as sensible as giving welfare through Working for Families to couples earning $120,000.

National’s is targeted at lower income earners and builds on the Working for Families scheme and is marginally more practical _ if you agree that these redundancy packages are necessary. And I don’t.

I have no problem with taxes going to people who need a bit of extra help. Who are working low-wage jobs and looking after their families and who don’t have a lot to come and go on.

But we have programmes targeting those people already. I see absolutely no point in flinging money at people who have made poor economic choices or who don’t really need it. But then I’m not a politician looking to get elected.

Kerre’s membership will be approved by acclamation I predict. You have done well young Padawan.

Policy on the hoof

November 1st, 2008 at 6:00 am by David Farrar

The Herald editorial sounds useful warnings:

Policy made on the hoof is rarely good policy. Never is this more evident than in the final days of election campaigns, when parties are wrestling for votes.

Winston wants to ban polls in election campaigns. Maybe we should ban policy instead 🙂

National was first out of the blocks with a vague proposal to help highly mortgaged people keep their homes while temporarily unemployed. Labour responded with a plan to help working couples with a job search allowance if one of them was made redundant.

Haste came at a cost, however. The Prime Minister, whose command of policy is normally impeccable, yesterday accused the Herald of misreporting one of the details.

In fact, she was wrong. Obviously Labour’s scheme had been thrown together too quickly for her to fully acquaint herself with its abatement regime. Such are the perils of policy made on the hoof.

There is another explanation. That she did know the details and was just trying to ignore the weaknesses!

The boost to the supplement [by National] may be viewed by some as a humanitarian gesture. Others will see it as a means of underpinning house prices. But it also has the hallmarks of policy rushed out in haste and without due consideration. Most damagingly, it ignores the moral hazard of shielding people from reckless risk-taking.

Many of those who will find it hard to pay their mortgage if they are made redundant are the same people who disregarded the Reserve Bank Governor, Alan Bollard, when he repeatedly warned debt-laden households of the dangers of an ongoing spending spree. They abandoned common sense, convinced themselves house prices would always rise, and kept on buying.

I suspect Mr Fallow wrote this editorial, as it sounds very much like his questions at Mood of the Boardroom! And the moral hazard issue is very real. National have done a 16 week package which will last two years. Labour a 13 week package which is permament. I can see a future where the parties out-bid each other until we have a 52 weeks package for people made redundant.

The scant information National released yesterday did not disclose whether the accommodation supplement would be available only for family homes, and not for rental properties. Hopefully, this will be the case.

I am surprised the Herald even raises this point, as the existing rules of the Accommodation Supplement are very clear that of course it only applies for homes you live in.

National’s Transitional Relief Package

October 31st, 2008 at 3:14 pm by David Farrar

National has released its transitional relief package, to be funded out of the deposit guarantee to banks. Details:

  • Assistance will be available until they get another job and their circumstances improve, or for up to 16 weeks (Labour is 12 weeks)
  • National’s relief package will initially be available for two years (Labour’s is permanent)
  • Targeted at people who lose their jobs, and as a result either go on to a benefit or rely on the income of a relatively low-paid spouse or partner, in contrast to Labour’s relief package, which includes payments to people who are made redundant yet have a well-paid spouse and limited outgoings.
  • If a family loses eligibility for the Working for Families in-work tax credit ($60 a week for most families) due to redundancy, then they will be able to keep it for 16 weeks. This means that you don’t ave both your wages disappear and your WFF reduce at the same time.
  • Also the maximum Accommodation Supplement will be increased for eligible families by $100 a week for 16 weeks.

National has given three examples of how different families would do under National and Labour’s packages:

Low paid sole parent of $35K with one child

Current Weekly Net Income $712 a week
Redundant under National $541 a week
Redundant under Labour $425 a week

One income family of $70K with two children

Current Weekly Net Income $1,077 a week
Redundant under National $778 a week
Redundant under Labour $618 a week

Two income family of $200K with no children

Current Weekly Net Income $2,684 a week
Redundant under National $1,342 a week
Redundant (one not both) under Labour $1,649 a week

So National’s package will help the sole parent family on low income and the mid income family with two children, while Labour’s will not help them at all. And in contrast National won’t help the couple with no kids who are still on $100K, while Labour will give them over $300 a week.

If the calculations are correct (and they are taken from National’s policy paper) then I would say National has targeted it a lot better.

$100 m to aid credit crunch jobless

October 27th, 2008 at 8:30 am by David Farrar

The Herald speculates that John Key will use some of the $100 million in fees from the bank deposit guarantee scheme as an assistance package to those who lose their jobs during the recession:

Leader John Key hinted at the weekend he would this week unveil a scheme offering support payments and loans to people who lose their jobs during the turmoil.

The payments would be part of a wider move by National to help people get back into the workforce.

Any payment or support would be targeted and carry a time limit.

It would also probably be aimed at middle-income earners who have commitments such as mortgages but no savings to carry them through a period without work.

Smart thinking, if correct.

The hydra

October 25th, 2008 at 4:10 pm by David Farrar

A hydra normally has seven heads, not five. Whale Oil has kindly provided this illustration.

There is a serious point to the talk about the five or seven headed Hydra.

We are in the midst of the most serious global financial crisis for 70 years. Getting through it with minimal harm will not be easy.

A Government of Labour, Winston, Anderton, the Greens and maybe Maori Party is not one likely to cope well. Half of them want to abolish the Reserve Bank Act. Half of them don’t care about government debt. All of them want huge amounts more spending. Do you think they could credibly exercise fiscal and monetary discipline? Do you think they could make hard, even unpopular calls, if deemed necessary for the NZ economy?