Kiwiblog

The 2025 taskforce made a total of 48 recommendations for initiatives that will help close the income gap with Australia. The media will probably only highlight half a dozen, so I thought it would be useful to list them all here, and add my thoughts to them.

1. Government operating spending (as measured by core Crown operating expenses) as a share of GDP should be reduced by 2012/13 to 29 percent, the same share as in 2004 and 2005.

I think a target of 29% of GDP for operating spending is an excellent target, and will probably do more than anything else to help lift national incomes. There is an overwhelming amount of evidence that countries with the state at 25% to 30% of GDP grow much faster than those with larger burdens.

It is worth noting that 29% is what we had in 2005, so it is not a level unknown to us. The problem is that as surplus grew, Dr Cullen grew spending even faster in his desire to avoid tax cuts.

However it is not politically possible to achieve it by 2012/13. I would think by 2017 (end of three terms) might be possible, without causing major disruption.

2. Beyond 2012/13, government spending as a share of GDP should be reduced materially further. To achieve this, the level of core Crown operating expenses per person should be capped in real terms.

I generally support a cap in crown spending in per capita inflation adjusted terms. However this may restrict options too greatly as new technologies in medicine (that are expensive) might become unaffordable.

What I would suggest is for spending per capita to increase no more than CPI+1%.

3. The Public Finance Act should be amended to require the Minister of Finance to specify publicly a medium-term target for core Crown operating expenses, either in real per capita terms or as a share of GDP. In each Fiscal Strategy Report, the Minister of Finance should be required to report publicly on steps being taken to ensure that that goal is met.

This is very sensible, and even if 1 and 2 are not adopted, we should require Governments to be transparent about their spending plans.

4. The Government should undertake an in-depth examination of the scope for further institutional changes to strengthen long-term spending discipline. Examples of such institutions could include a Taxpayer Bill of Rights and/or an independent Fiscal Advisory Council.

Agree, so long as they are effective in standing up for taxpayers, and adding to fiscal discipline.

5. Expert taskforces should be established to scrutinise each major area of government spending, with a view to proposing more effective models for delivering those services that the public sector will continue to fund.

To some degree this has already been happening.

6. Processes for evaluating government spending should be materially strengthened, including greater use of rigorous and transparent cost-benefit analysis for both new spending proposals and periodic reviews of the value that is being obtained from existing spending programmes. Enhancing the quality and rigour of such analysis should be a key priority for the Treasury.

Agree.

Specific

7. Ambitious welfare reform measures should be undertaken as a matter of priority to reduce the very large number of people of working age currently receiving welfare benefits.

I agree. At a minimum we should do what Bill Clinton, a Democratic US President, did.

8. Early steps should be taken to lower the actual and prospective costs (as a share of GDP) of New Zealand Superannuation. The eligibility age should be increased progressively, with increases linked to ongoing improvements in life expectancy, and for some years payments should be indexed to the CPI rather than to after-tax wages.

Firstly the Government has said it will not do this, and I don’t want the Government to become one of broken promises. But I certainly expect a future Government to increase the age of eligibility in line with age expectancy. I’ve not yet received the data I need to make a call on whether part of superannuation (maybe from age 65 to 70) should be linked to CPI instead of average wage.

9. Remaining KiwiSaver subsidies should be abolished.

I do support retaining KiwiSaver with matching employer contributions. That provides enough incentive for people to take it up, so direct state subsidies are not needed. I think KiwiSaver has worked well for encouraging a savings culture amongst younger NZers especially.

However again the current Government got elected on a series of promises, and as much as ACT voters may not like it, it is not going to break its word on current commitments. But such changes do not have to happen before 2011. There may be room to seek a mandate for some of these changes at the next election. If one does not get a mandate for such changes, then you will get wiped out at the election, and have them reversed anyway – a lose/lose.

10. Health:
a. A funder-provider model should be reintroduced in the hospital sector, allowing much greater
private sector involvement in the provision of taxpayer-funded services.

I support greater private sector involvement, but I don’t think the sector could handle another major reform. And again, there were specific election commitments here.

b. Universal (unrelated to income or health status) subsidies for doctors’ visits should be abolished.

This I strongly agree with. Subsidies should be targeted to those who most need it. It is ridiculous that Eric Watson gets subsidized doctors visits. And it is very inefficient to tax people to then just give them that money back in subsidies.

c. Subsidies for prescription pharmaceuticals should be substantially reduced, with those in generally good health and not on low incomes paying the full price up to a cap.

Again, I generally agree, but with a note of caution that middle income families can’t afford a big increase in the costs of medicines. But a total cap may help with that.

11. Education:
a. The substantial increases in subsidies since 2005 for early childhood education and day-care should be reversed.

Again this was an election promise, so I don’t see change there. As a general rule I much prefer spending in the area of early childhood than tertiary but I don’t know enough about whether the increased subsidies have just rewarded families already using day-care facilities, or has allowed lower income families to access day-care.

b. A funder-provider model should be adopted for the school sector, allowing new providers to enter, with all-up per student funding equivalent to that for existing state schools.

Yes.

c. In the meantime, governance and accountability structures in the school sector need to be reformed to provide better incentives for stronger performance and greater accountability for teachers, principals and schools.

Too generic to say aye or nae too.

d. Government-imposed fee caps on university fees should be abolished.

I have long advocated these should go.

e. Market-based interest rates should be reintroduced for student loans.

This won’t happen as again it was an election promise, but for the future it would be sensible to have a policy of at least charging enough interest to cover inflation. Otherwise we are effectively paying people to borrow money they don’t need.

f. Governance of the public tertiary sector should be reformed, including exploring the rationalisation of the non-university sector and the establishment of universities as independent foundations.

Possibly. Need more details.

g. A full review should be undertaken to identify, and recommend reform of, those areas in which various government education agencies (Tertiary Education Commission, Education Review Office, Ministry of Education) have become overly prescriptive, and to explore other, less intrusive, monitoring and accountability options to achieve policy ends that pass a cost-benefit test.

Again, need more details.

Taxation
12. Average tax rates should be substantially reduced, as ambitious expenditure restraint permits. Cutting core Crown expenses to 29 percent of GDP would, for example, allow the maximum personal tax rate, and the company and trust tax rates, all to be reduced to 20 percent.

The Government’s goal is to get the top tax rates down to 30%. Let’s do that first and then look beyond.

13. Serious reforms should be undertaken to reduce the high effective marginal tax rates facing many middle income taxpayers with dependent children as a result of the abatement provisions of the Working for Families tax credit scheme.

Absolutely.

14. Reductions in average tax rates should be achieved by reducing income taxes, and doing so having regard both to the importance of administrative simplicity and minimisation of tax avoidance on the one hand, and to the evidence that taxes on capital income can be particularly detrimental to economic performance on the other.

Agree.

Government assets
15. All businesses owned by central government which are operating in markets where competition is actual or feasible should be sold.

I agree, but note again the Government has a clear election policy. I just hope that for 2011 they have a more flexible policy. At a minimum I would like to see some SOEs take in minority private sector shareholdings, so they gain the discipline of being a listed company,

16. Local governments should be strongly encouraged to sell their trading enterprises.

Agree, but not always one size fit all.

17. To strengthen governance while businesses remain in public ownership, an independent Crown Commercial Appointments Commission should be established, to be responsible for making recommendations to Ministers for Board positions on all Crown commercial enterprises and for vetting and publishing suitability assessments of all appointees to such boards.

This seems a good idea, and should be under the OIA, so if a Minister refuses a recommendation this will be transparent.

18. The New Zealand Superannuation Fund should be wound up and its assets used to reduce gross government debt.

I agree, but again note the clear Government policy means this won’t happen.

19. Congestion charging should be introduced in central Auckland and in any other cities where a cost/benefit analysis supports doing so. Full road-user charging, differentiated by place and time of road
use, should be introduced as it becomes economically efficient to do so.

Strongly agree. Here I am with the Greens. Road users should pay for the costs of roads.

20. Rigorous and transparent cost-benefit analyses should restored to the prime place in guiding decisions on all public capital spending, including infrastructure spending. All such cost-benefit analyses for projects involving the outlay of more than $50 million should be formally reviewed by Treasury.

I would have thought this is already the case.

21. Mining:
a. A governance framework should be put in place to facilitate the best economic use of those mineral resources in which the Crown has a direct ownership interest (under both land and sea).

Not sure what is meant by such a governance framework but I support better economic use of our mineral base.

b. Mining developments on or under sensitive Crown land should generally be permitted provided that they pass a full cost-benefit analysis.

Agree, but recognizing that costs must include conservation, environmental and tourism costs. Applications should be decided on a case by case basis.

c. Development of mineral resources should be undertaken by private operators, with the Crown securing its financial interest through appropriate royalty-type arrangements.

Agree.

Regulation
General
22. A Regulatory Responsibility Bill should be enacted, based on the draft proposed in the recent report of the Regulatory Responsibility Taskforce.

Agree.

23. Property rights should be added to the list of rights specified in the Bill of Rights Act.

Also agree. It would be great to have Crown Law advising Parliament if proposed laws breach property rights of certain individuals or groups.

24. Substantially improving the quality of regulatory impact analysis being undertaken before legislation is introduced and/or government regulatory powers are extended should be treated as a matter of high priority by Ministers and central government agencies. Such analysis should be an integral part of all policy development and review processes, to ensure that the full costs and benefits, to all sectors, are appropriately and rigorously factored into government decision-making.

Agree, and I think Rodney has underway.

25. An independent Productivity Commission should be established as a centre of microeconomic and regulatory analytical expertise. The Commission should be authorised (and resourced) to undertake reviews of matters referred to it by Ministers, and of issues it identifies as requiring further in-depth analysis and research.

Have long advocated an independent Productivity Commission. The Australian one has performed well with bipartisan support.

Specific
26. A high quality independent taskforce should be constituted as a matter of urgency to review resource management law from first principles, including identifying the policy goals that should be served by such legislation and assessing the best ways of achieving those goals.

I am unsure how much this differs from the RMA reviews underway.

27. When determining the zoning of land for residential purposes, local authorities should be required by statute to take explicit account of any differences between the price of residential-zoned undeveloped land and the price of other undeveloped land in similar areas. These differences should be reported on by local authorities each year, with a strong presumption that scarcity of zoned land, as reflected primarily in price differences, should prompt action to increase the supply of residential land.

Sounds sensible. Land scarcity is what partly has led to a runway property market.

28. A system of tradable water rights should be established urgently.

Agree in principle.

29. Labour market:
a. Labour law should be amended to strengthen the freedom of negotiation between workers and their employers, including, for example, streamlining provisions governing dismissal of workers, and putting less emphasis on procedural matters.

Agree. The 90 day grievance free period for small businesses seems to be working very well with no horror stories about it.

b. Statutory provisions allowing enforceable mutually-agreed probationary periods for new employees should be extended, from the current maximum of 90 days for those working for small firms to a maximum of 12 months for employees of firms of any size.

That goes beyond my comfort level. Maybe 6 months for small firms, and 90 days for larger firms. Generally a dud employee can be detected fairly early on and 12 months seems too long to me.

c. For employees earning in excess of $100,000 per annum, employment relations should be governed by the standard provisions of contract law rather than by the Employment Relations Act.

That is what the situation was before the ECA for all non union employees. I would want to see data on how many employees over $100k are using the ERA provisions to see if there is a problem.

d. The youth minimum wage should be reinstated as a matter of urgency, and minimum wage rates should be reduced to the same ratio to average wages that prevailed in 1999.

I agree on reinstating the youth minimum wage. The abolition appears to have been a disaster with the blowout in youth unemployment through the recession. I do not support turning the clock back on the adult minimum wage but agree there should be a ratio of the minimum to the median wage.

30. Immediate notice should be given that from 1 January 2011 all remaining tariffs will be removed.

Agree, Disgraceful the Government has extended them to 2015.

31. Foreign investment restrictions should be further reviewed, starting with a strong predisposition that a much more liberal regime should be introduced.

I think this is underway and has been mainly implemented.

32. Emissions trading legislation and any future emissions reduction targets the Government adopts should be independently monitored and periodically reviewed. Such reviews should focus on monitoring the economic impact of any carbon abatement goals, and the impact of chosen abatement regimes (here and abroad) on prospects for achieving the 2025 goal.

I think this is in the ETS legislation.

33. A review of the Commerce Act should be undertaken, with a focus on restoring the primacy of economic efficiency considerations and long-term consumer interests in the design and conduct of competition policy.

Seems sensible.

34. The Government should strongly encourage the transformation of Fonterra into a conventional company structure with fully-traded outside capital, using any appropriate instruments at its disposal.

Don’t know enough to comment.

35. Zespri’s monopoly on the export of kiwifruit to markets outside Australia should be removed.

In principle I agree.

Tags: Don Brash, Productivity Growth

Yet to read the full paper, but the Herald reports major recommendations are:

Dr Brash revealed 35 recommendations today but the centrepiece was to reduce government spending to 2005 levels of 29 per cent of gross domestic product by 2012-13.

This could be done by:

* Reducing benefit numbers through “ambitious” welfare reform;

* Ending Kiwisaver subsidies;

* Scrapping the New Zealand Superannuation Fund and using the money to pay off debt;

* Raising the age of superannuation eligibility; and

* Cutting universal subsidies for health and education.

Of these savings, $7 billion would be used to reduce all income and business taxes to a top rate of 20 per cent.

Dr Brash said unless tax and spending were slashed the Government’s “ambitious” goal could not be achieved.

“There may be some other cunning plan, but I am not aware of it,” Dr Brash said.

He said the proposed cuts were “not a massacre”, but a winding back of spending that had not been effective since 2005.

The taskforce’s other policy prescriptions included:

* Reducing the minimum wage and reintroducing a lower minimum youth wage;

* Changing employment laws to make it easier to sack workers;

* Extending probationary employment periods to a year for all workers;

As I type this I am literally on board NZ1 to Auckland sitting by the gate in Los Angeles. The wireless can still pick up the Koru Club signal – just. Will blog my thoughts on the different recommendations on Tuesday when back home.

Tags: Don Brash, Productivity Growth

Fran O’Sullivan looks at the recent National-ACT agreement. She covers some of the tensions around spending reviews, but notes that is not the big issue. The big issue is:

Where Act has scored is in getting an agreement out of National to make a concrete goal of closing the income gap with Australia by 2025. This will require a sustained lift in New Zealand’s productivity growth to 3 per cent a year – something that has so far eluded this country.

It is an ambitious target.

To get some focus on this ambition a “high-quality” advisory group will be formed to probe into the real reasons behind New Zealand’s decline in productivity performance, investigate the kind of institutions that Australia sports to drive its superior performance and report annually on progress made towards the 2025 goal.

Frankly, this is the real winner in the National-Act agreement.

The advisory group should move quickly to examine the runs on the board that the Australian Productivity Commission has notched up. The commission undertakes exhaustive investigations into various sectors, interviewing the key players before coming up with in-depth recommendations. It has been a powerful force in driving efficiency into Australia’s economy over the past 15 years.

If such a commission is set up here, it would be great to do it in such a way, the Goff led Labour Party would support it. That doesn’t mean that you agree to implement whatever they come up with, but that you don’t undermine and ridicule them if they ever propose something unpopular.

We saw this with the NZ Institute. They were a darling of Labour, and then they dared to suggest we should be a “fast follower” in terms of climate change responses and the wrath of Helengrad descended on them, and they were marginalised.

Both National and Labour need to realise that if they set up a NZ Productivity Commission, it will sometimes recommend stuff they don’t like. And the challenge for them will be to disagree with the message, but not shoot the messenger.

Tags: ACT, Fran O'Sullivan, government spending, National, Productivity Commission, Productivity Growth

The Visible Hand in Economics gives a neat lesson in economic literacy on the issue of productivity growth.

Paul Walker also joins in, dismissing the argument that merely increasing productivity doesn’t necessairly boost GDP or wages, and they quote Paul Krugman of all people:

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea’s wages have also risen dramatically over time. (“Does Third World growth hurt First World Prosperity?” Harvard Business Review 72 n4, July-August 1994: 113-21.)

Both major parties in Australia understand the importance of productivity growth. That is why they support the Australian Productivity Commission.

The challenge for John Key is to have policies that will help productivity growth.

Tags: Paul Walker, Productivity Growth, The Visible Hand in Economics

Very interesting session on the economy, with a focus on how to increase productivity. The guest speaker highlighted five issues:

1. Changing the balance of exposed and sheltered sectors, as exposed sectors tend to have higher productivity
2. The behaviour in the sheltered sector and how it imposes costs on the exposed sector
3. Market and Government failures
4. Capacity constraints
5. Random luck, culture

There was an in depth look at the health and electricity sectors. The health sector has had a huge decline in productivity. Now it was acknowledged that some of this is simply having to pay higher wages to retain staff.  But reference was made to an upcoming study which is looking at outputs per medical staff, and that the findings are quite depressing – something like a 15% decline. There are real structural problems in health.

Also of concern was the detail of how the Health Ministry has stopped publishing much of its data, and how they tried to charge $12,000 under the OIA for supplying some productivity data. The speaker advocated amending the OIA to force more info into the public domain, and also amending the Statistics Act to increase the power of the Government Statistician to force Govt Depts to supply info for statistics they feel are of public interest.

The role of the Electricity Commission was also focused on, and the mounting evidence that it has been removing transparency with caving into private pressure from Ministers and, in turn, applying pressure to generators to put prices up (so backup supply can be triggered) and then pressuring them to put prices down again. I am leaning towards the view the Commission can not be reformed, and should simply be abolished. For $90 million a year it is not adding value.

Tags: NZBR, Productivity Growth

An in depth interview with Sir Roger Douglas by Salient. Extracts:

Are you not concerned at all about any bad blood in the house?

(Laughs) What kind of bad blood is there?

Tensions between various other politicians…

Like who?

Well for starters Helen Clark and Michael Cullen…

Oh look, im not worried about Helen Clark or Michael Cullen, we are not going to agree anyway. How can I agree with them anyway! They are tearing the country apart! They have reduced our labour productivity to a third of what it was, multifaceted productivity is down to one seven of where it was. I’m not going to worry about what Michael Cullen or Clark think. They think as highly of me as I think of them.

And productivity growth is the long term key to closing the gap with Australia.

What is the single biggest issue facing New Zealand at the moment and how would you remedy it?

The level of government expenditure. This government has increased government expenditure over and above inflation. That’s about 17 billion a year. But in more practical terms, that’s $200 a week per family in New Zealand. The lives of families in new Zealand would be dramatically changed if the government had not taken that money from them and flushed it down the toilet because that’s essentially what they did. They wasted it.

There’s a whole lot of families out there that I used to represent, in Otara, who would feel a lot better about their lives today if they could keep that $200. This is supposed to be a government that cares about those kinds of people. They don’t care. They are chardonnay socialists. And in some ways I have nothing but contempt for them. Because they have usurped the people they claim to represent. They don’t even mix with those people. I’d mix with those people a lot more than they would.

That’s fighting words!

Why has John Ansell left the ACT team?

Well, I still talk to John. I think John probably from his point of view found there were frustrations, he wanted to control from woe to go. The problem in politics is you’ve always got that fine balance about aiming for perfection and when possibly 95% will do, and sometimes 95% is enough, you have a trade off there between speed to market and perfection. …

Id see something and say its great, but in John’s eyes it could be perfected by doing this or that. I’m sorry to lose him, hes a genius. And im hoping – I spoke to him yesterday – that he can do things for us. But, the other factor, and I don’t know if John really recognised, is the issue of the best use of his time. When you have a creative genius – which he is, you want him to work on projects that matter. Little projects aren’t as critical. Your better to keep him away from them really.

High praise for John.

So the consequence of that, apart from the years of 1992 – 2000 our productivity has been relative to other countries abysmal. We had higher productivity than Australia in 1992 – 2000 largely due to the changes Ruth and I made. During those years we were catching up. But apart from that we are going backwards. One of the other significant reasons is that you’ve had a public who have rewarded politicians who have lied to them. And the students are a typical group. They might be bribed again. I dunno. I hope not. I hope they’ve learnt their lesson. And the public have responded to politicians who’ve scratched every itch. So Winston Peters goes up in the polls when he becomes a racist. And I hate that.

Not the only one!

Tags: ACT, John Ansell, Productivity Growth, Roger Douglas, Salient

It is good to see the SST editorial on the issue of productivity growth. You see this very obscure statistic is in fact the key to closing or slowing the gap with Australia. You can’t do it by just increasing wages, unless there is also an increase in productivity. Some useful extracts from the SST:

So this might be a time to ask whether all that sunshine has blinded us to certain fundamental problems in our economy. The major one being productivity, an ugly word but a concept of crucial importance. Only by increasing our productivity will we become wealthier. Only by increasing it dramatically will we rise from the bottom half of the OECD to the top half. …

It is, in a way, an index of smartness: it reflects innovation in technology and work practices and better ways of doing things. The fact that the growth rate in this area has fallen under Labour is a serious worry.

Is it fair to argue, then, as Roger Kerr does, that it shows Labour’s aspiration for a knowledge economy has been all talk?

Not necessarily, but it certainly shows that the knowledge economy has been much slower to arrive than hoped and it is noticeable that Labour’s promise to push us up the OECD stakes is less often heard nowadays. …

What we need is a serious national debate about our fundamental economic strategy, a campaign to find the Kiwi way to greater productivity. The good times perhaps allowed us to ignore this vital issue. The coming bad times will force us to face it.

So what are the facts behind productivity growth. Stats NZ has been measuring it since 1978. So let us have a look at it over the March years 78 – 84, 84 – 91, 91 – 00, 00 – 07.

Labour Productivity Growth

• All – 2.0%
• Muldoon – 1.6%
• Douglas/Caygill – 2.7%
• Richardson/Birch/English – 2.6%
• Cullen – 1.1%

Labour productivity is simply measuring the ratio of output to labour input. In the last March year output growth was 1.4% and labour input growth 0.9% so the difference is the productivity growth of 0.5%.

As one can see the record under Dr Cullen for the last seven years is a miniscule 1.1%. Half the average since 1978, and even less than the final years of Muldoon. Only around 40% of the previous 15 years.

The really scary thing is Cullen’s record is getting worse. His first three years averaged 1.5%. For three of the last four years labour productivity growth has been just 0.5%, averaging 0.9%.

Capital Productivity Growth

• 78 – 07: -0.7%
• 78 – 84: -1.0%
• 84 – 91: -3.5%
• 91 – 00: 1.5%
• 00 – 07: -0.5%

Capital productivity is similar but measuring output to capital input. Muldoon had negative growth due to Think Big. The worse period was Mar 84 – Mar 01, when capital inputs grew massively, but little growth in outputs.

The 1990s managed the only growth period – 1.5%, and since 2000 that has reversed back to negative capital productivity growth.

Multifactor Productivity Growth

• 78 – 07: 0.9%
• 78 – 84: 0.6%
• 84 – 91: 0.3%
• 91 – 00: 2.1%
• 00 – 07: 0.4%

Multifactor productivity is basically total productivity growth, excluding labour and capital productivity. It tends to reflect changes in technology, processes, knowledge.

Again a very good growth period in the 1990s, and since 2000 it has fallen to just one quarter of what it was. This suggests the knowledge economy rhetoric

This graph shows labour productivity growth since 1978. You will note nothing over 25% since 2000. I’ve also added a trend line on a three year rolling average in black – again the decline is significant.

We need to do better, if we want to keep people in New Zealand.

Tags: Productivity Growth

A leading economist did a presentation to the Business Roundtable Retreat on Friday. It was Chatham House Rules so I can report some of the detail – but not who said what. It was an analysis of the trends and issues in the economy, and then some possible solutions.

• The 90 day bill rate predicted to drop in 2009 to 6% but then to increase and stabilise at 7%
• A small increase in the unemployment rate reaching 4% in 2010
• The equilibrium level of inflation may have increased from 2% to 2 1/4 to 2 1/2 per cent.
• Migration to Australia would continue and this would be of the relatively “more productive” New Zealanders. This isn’t a judgement on education levels or intelligence as much as recognising they are people with “skills established in this economy” so generally more productive here than any replacements.
• Mining in Australia is only 7% of GDP and 2% of their workforce so incorrect to credit the minerals boom for their economic growth.
• The big challenge for NZ is to increase our productivity, and it is hard to do this with a declining talent pool. Hence we have a vicious circle – the more people who leave, the harder it is to increase productivity so incomes can increase to keep people here.
• Agricultural Protectionism is a real issue and hurting the agricultural sector
• Multilateral trade deals and plurilateral trade deals are better than bilateral deals
• NZ needs to shift focus in trade deals from purely agricultural access to also have investment rights in agricultural processes and storage facilities.

He also did a very nice summary of one of the problems with the current macroeconomic model. Basically, if I recorded it correctly, it is:

1. Increasing Inflation –> Increasing Cash Rate
2. Increasing Cash Rate –> Increasing Interest Rates
3. Increasing Interest Rates –> Increased NZ$
4. Increased NZ$ –> Decreasing Exports
5. Decreasing Exports –> Decreasing Economic Growth
6. Decreasing Economic Growth –> Decreasing Investment
7. Decreasing Investment –> Decreasing Productivity Growth
8. Decreasing Productivity Growth –> Decreasing Aggregate Supply
9. Decreasing Aggregate Supply –> Increasing Inflation

In one sense it is an argument why it is important to keep inflation under control from the beginning, but it does highlight a weakness in the current monetary policy cycle. Whether there is a better solution though is the real question.

It was suggested that the RBNZ targets should have the emphasis on targeting inflation over the medium term removed, as it has led to timidity with the RBNZ late to act, with the consequence being inflation and interest rates stay higher for longer than they otherwise would have been.

He also highlighted some ways to increase productivity:

1. Encourage people to stay in NZ
2. Increase the returns for effort
3. Reform and reduce tax levels
4. Get rid of redistribution policies which just redistribute money back to those who pay it, and adds a deadweight cost to the economy
5. Reduce the rate of growth in the public sector relative to the private sector
6. Make it easier for employers to release lower productivity staff

Now people can make arguments against each and every one of these on grounds of social justice or fairness etc. I mean for example I wouldn’t advocate being able to get rid of staff at whim. But the point the economist was making is that if you don’t do these things, you will find it harder to increase productivity growth. So it is all a trade off – if you do not do any of the above you’ll watch the gap with Aussie grow even faster.

There is also a list of what not to do:

1. Don’t discourage the able from staying
2. Don’t discourage more effort
3. Don’t discourage investment
   1. Don’t ignore property rights
   2. Don’t have costly planning requirements
   3. Don’t increase the regulatory burden
   4. Don’t impose climate change policies which have large risks for investors

It was clarified this wasn’t an argument for having no policies to mitigate climate change. It was for uncertainty and risks to be minimised.

And again people can argue for or against each of the above – it was just a reminder that there is a cost to productivity growth if you do discourage effort and investment etc.

To some degree it was a bit gloomy.  The vicious cycle with migration and the impact of monetary policy on productivity growth make it very clear that closing the gap with Australia will not at all be easy.  It won’t just happen by chance without a change in policies.  And there will be no one or two simple things to do – it will only happen as a result of taking action in a dozen different ways, each incrementally helping increase productivity growth.

Tags: Economy, Monetary Policy, NZBR, Productivity Growth