Joyce on economic regulation

A very astute piece by Steven Joyce:

Low in New Zealand is definitely a thing. Lots of people are debating how real it is, but surely the important question is what is causing it.

The argument of those seeking to play down business confidence surveys goes something like, “the world is growing strongly, the fiscal parameters are good, monetary policy is good, so businesses need to get over themselves.”

The first point is correct. While there is lots of foreboding going on about bad things that could happen in the world, almost none of it has happened to date, and the world is growing faster than it was predicted to back when New Zealand was expected to be now growing at 3-4%. 

Given we were growing at that rate from late 2014 to mid 2017 when the world was growing much more slowly, all things being equal we should if anything be growing faster now, not more slowly.

The second and third points about fiscal and monetary policy are also mostly correct, but it is the constant focus on them as if they were the whole economic story and sufficient on their own that reveals the true elephant in the room.

Economic policy is in fact a three-legged stool, fiscal policy, monetary policy, and microeconomic policy. You can’t successfully operate an economy, especially a small one like New Zealand, without all three working together.

So what is microeconomic policy?

Microeconomics is everything that operates at the firm level in the economy – all the regulations and policy settings that impact directly on businesses. These are things like employment law, immigration settings, competition law, resource allocation, innovation settings, tax policy and the government’s investment in infrastructure.

It is microeconomics that drives much of firms’ actual operating conditions. Along with interest rates and exchanges rates, it is access to capital, skilled people, resources, markets, the necessary infrastructure and importantly the consistency of those settings, that tell the owners of businesses that it is a good time to invest and grow their business.

If you start playing with those settings in an arbitrary way while ignoring the economic consequences of those changes, then firms will simply stop investing. They’ll either wait until there is more certainty, or not invest at all.

And for the first time in a long time, most firms have negative investment plans.

Politicians as a species are often quite poor at handling microeconomic policy. It’s complicated, and it is prone to populist soundbite decisions that don’t achieve their objectives and have bad economic consequences (think of the oil and gas ban). There are also plenty of strong single interest lobby groups in favour of changes that ignore or play down any negative consequences.

Yet microeconomic policy arguably has a bigger effect in New Zealand than in larger countries. We are a small country far away from the rest of the world. Our businesses are smaller and margins here are much tighter than in the US or Europe, so policy changes that get shrugged off in bigger countries really hurt our nation of small businesses.

Our government is currently rearranging, often negatively, not one or two but nearly every aspect of microeconomic policy. Employment law, resource law, company taxes, innovation settings, immigration settings, the infrastructure plan, it’s all being thrown up in the air at once, and not surprisingly kiwi firms are taking fright.

And the only certainty is that every change is likely to mean increased costs for employers.

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