When did NZ’s right become communist?

I am very confused at the moment. I keep hearing the NZ right talk about “catching up to Australia” and increasing New Zealand’s labour productivity (eg here and here).

But doesn’t this presume that the government has the ability to do these things? This confuses me as I thought that the basis of the NZ right was that the government doesn’t have the ability to significantly improve economic outcomes.

For example, Don Brash, the ACT party, and Roger Kerr, believe that the government can increase real GDP growth in New Zealand sufficiently for us to catch Aussie. According to them this involves growing adding 31% more output in this period (15 years) as well as any growth that Aussie achieves. Is it me or is this insane.

I also hear people say “China has been growing in excess of 10%pa” why can’t we. Well this is because they are starting at a low base, and are catching up in technology to developed economies – we don’t have this “low hanging fruit” to pick up on.

Long-term growth is based on technology, resource allocation, and to some degree the structure of institutions in the economy. I severely doubt that the government can turn around and improve any of these things to the degree required to “catch Australia”. Hell, Australia is closer to its markets, has a larger set of currently important natural resources, and gets “economies of scale” due to its higher population. No government policies can magically fill this gap.

Update:  Paul Walker shares similar sentiments, and a bit more discussion, here.

  • Perhaps government is suggesting they don’t trust in the private and tradable sector to get things done?

    Or else it’s just politicking (which is what I think). It’s a free-kick to constantly point to the last 9 years (whether they were bad or not doesn’t matter) and say “we’re in the shit. We, the new govt. is faced by an enormous challenge to get us out of it.”

    All the blame on why we are so much behind Aus has been landed on Labour’s policies (which is possibly right). However, the new govt. would in no way come out and say anything like “parts of the private sector have performed terribly over the last few years which is why we’re so far behind Australia.”

    Better to blame those now in opposition and advertise yourselves as the one’s who will make things better. If things do get better then you can take all the credit. If thing’s don’t get better, you say “well, we were in such a big hole to begin with, it’ll take time”…or “we’ve done our bit, now we need everyone else to come to the table.”

  • @Alex Tarrant

    I just struggle with the a couple of ideas here:

    1) The government actually has much of an impact on the economy in a mixed economy like NZ’s,
    2) That government can actually target variables for the aggregate economy, which is actually just the result of individual’s actions.

    The language of people on both the left and the right makes NZ sound like a centrally planned economy, but it is not. There may be imbalances, but they exist because of the incentives being provided to individuals – in that context it is hard to see a change in government policy giving us these sorts of wild income gains.

  • Miguel Sanchez

    I seem to recall a recent paper in the NZAE journal that found that the productivity gap is pretty much explained by Australia’s higher weighting towards mining, which has extremely high measured productivity. If true, it points to an easy way to close the gap: get on with drilling for oil in the Great South Basin.

  • Matt. I agree with you on this one. I tried to make the same basic point here. As you say the “low hanging fruit” has been picked. I think is a problem with most OECD type countries. It’s not clear to me what these governments can do to increase long-term growth.

  • @Miguel Sanchez

    That is interesting. I read something similar, but I don’t think it explained the entire gap. It would have been a couple of years ago though so I can’t remember where it is 🙂

  • @Paul Walker

    Completely agreed Paul. I think any economist who doesn’t harbour a “social planning” bent would agree 🙂

  • Miguel Sanchez

    @Matt Nolan

    The one I’m thinking of was in the last few months. Don’t remember who the authors were though.

  • Matt I agree, but I suspect if you asked them, they would say that the previous Government(s) had pursued policies that actively hindered productivity growth, and so their goal is to change those policies and allow the market to work.

    I guess that’s the most charitable way of looking at it.

  • Greg

    Surely the government SHOULD have no impact on long term productivity but actually does. Your telling me that if we cut and flattened taxes, lowered government expenditure and prvitised many state assets this would have no impact on long term productivity?

  • oh ffs – what tosh. you think the private sector in Zimbabwe and the Soviet Union failed and the Irish private sector was so much more efficient than the rest of Europe???
    Government influence investment and private enterprise through tax, regulation and stability.

    New Zealand’s government can identify and eliminate any govt hindrance on private investment in New Zealand. A good start would be to ensure that any company considering investment in NZ or Oz was attracted to NZ by better rather than substantially worse depn rates.

  • @phil sage (sagenz)

    “you think the private sector in Zimbabwe and the Soviet Union failed and the Irish private sector was so much more efficient than the rest of Europe???”

    Zimbabwe and the Soviet Union had a mixed of poor institutions and a PLANNED ECONOMY. New Zealand is not in this boat.

    The Irish economy was coming off a low base when it grew, and is currently collapsing, it is hardly indicative of excellent public policy 😛

    “New Zealand’s government can identify and eliminate any govt hindrance on private investment in New Zealand.”

    Indeed, it can marginally improve policy. And there are areas where there can be significant improvement. But government policy can’t make us produce the same amount per person as Australia – anyone who thinks that seriously over-rates the abilities of government.

  • @Miguel Sanchez

    Interesting, if you remember definitely give me a bell.

    @Tom Mathews

    Agreed, that is the logic they will use. “Less government is the policy that will help”.

    However, my complaint is about the language. These guys think that a change in government policy can have that large an impact – and that is just plain nuts. The marginal factors that can be improved in New Zealand will improve growth, welfare, and make us more resilient to shocks sure. But they won’t see us “catch up to Aussie”.

  • @Greg

    No I am not telling you that. I said:

    “I severely doubt that the government can turn around and improve any of these things to the degree required to “catch Australia”.”

    I never said – better government policy has zero impact at any point.

    My criticism, again, was that all these people on the NZ right suddenly seem to believe that government policy has a BIG impact on long-term activity. There is no evidence for this among mixed economies (as Paul Walker pointed out) and so I noted down my irritation about the claim.

  • @ All

    I would also note that I used the communist title for another reason. The focus on GDP (which isn’t even a direct measure of income, let alone wealth, and is pretty out of whack for small open economies) misses the point regarding social happiness.

    The Soviet Union and China were also determined to push GDP during the Cold War (even if it involved making lots of things that no-one really wanted, or were unnecessary) when the USA was willing to allow society to make consumption goods – thereby illustrating how much happier people in a society that allowed freedom really were.

    We could increase productivity statistics by just making things that can be made the most cheaply (as the change in prices isn’t included in the stats) – but this type of command and control isn’t in anyones interests. Trying to make it sound like government should push productivity is a command and control way of talking about things – and I don’t like it.

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  • Ireland has lost dell which was 5% of GDP along wiht 3000 jobs. Think about that. It was high volume, low value add froth. ireland is in a hell of a lot better shape than the current media reporting would indicate.

    In no sense was Zim farming a “planned economy”. Farmers competed on international skewed markets and succeeded in making zim reasonably prosperous until govt policy completely screwed the country. you are hiding behind semantics. Good and bad govt policy does have an impact.

    “Long-term growth is based on technology, resource allocation, and to some degree the structure of institutions in the economy. I severely doubt that the government can turn around and improve any of these things to the degree required to “catch Australia”. ”

    curent gov is investing public money in broadband infrastructure. It can impact resource allocation through tax policy. All we need is to set those incentives in a way that the investment choice favours nz more often than australia. govt can invest in long term education to ensure a better skilled workforce rather than paying people to sit at home witgh their thumb up their arse. a private potential employer who can get $10 of value out of an hour of work when the minimum wage is $12 is not going to create jobs.

    need i go on….

  • @phil sage (sagenz)

    “Good and bad govt policy does have an impact.”

    I agree that there is an impact, in fact I have never said there was zero impact that would be too extreme. My point is about the size.

    The actual magnitude of governments impact on the economy is a lot smaller than is being sold here. Fixing up tax policy would help improve the allocation of resources, would improve growth, and would increase welfare for society. But it would not be nearly enough to help us catch Australia.

    “curent gov is investing public money in broadband infrastructure. It can impact resource allocation through tax policy. All we need is to set those incentives in a way that the investment choice favours nz more often than australia. govt can invest in long term education to ensure a better skilled workforce rather than paying people to sit at home witgh their thumb up their arse. a private potential employer who can get $10 of value out of an hour of work when the minimum wage is $12 is not going to create jobs.”

    Policies do make some difference. But this stuff about “creating jobs” it sounds like a planned economy. The goal of government should not be “maximising GDP”, it should be helping to help improve the allocation of resources that occurs though the market process by cleaning up market failures, improving the robustness of institutions, and providing public goods where there is a public mandate.

    This is how I would expect the NZ right to talk – not to say “lets increase productivity and catch Aussie”. This sort of talk really, really, really, sounds too much like Stalin circa 1930s to me.

    Truly, in a mixed economy the government is equivalent to a large firm – it is too big to fail, but it is not the driving force of the economy (contrary to politicians belief of their massive importance).

    I am all for a commission that will clean up government policy, improve the tax structure, and make the trade-offs associated with govt policy transparent. But all this stuff about catching Australia and targeting productivity is just a straw man to sell policies that a given group wants.

    As Chris Dillow says (vis Paul Walker):

    “The opposing poles of mixed capitalism – social democratic Sweden and freer market US – are consistent with similar, maybe indistinguishable, growth rates.”

    This implies that any belief that government can substantially influence the long-run growth in a country isn’t really consistent with evidence.

  • Matt – Excuse some of my more robust language, I do enjoy engaging in this forum on occasion.
    “The opposing poles of mixed capitalism – social democratic Sweden and freer market US – are consistent with similar, maybe indistinguishable, growth rates.” – This implies that any belief that government can substantially influence the long-run growth in a country isn’t really consistent with evidence.

    Utterly utterly utterly confusing cause and effect. Sweden prospers by committing to a homogenous highly educated workforce with tight social constraints that ensure the working age population has worked productively over a long period. America has pursued a more laissez faire approach with respect to health care and education, although it is difficult to argue it is more laissez faire with regard to industrial policy. Two examples of good government policy approaches producing similar positive outcomes over a long period. But they certainly do not prove the opposite as you and Chris Dillow assert

    Zimbabwe is all the evidence you should need as evidence that government policy can influence long run growth.

  • Hi Phil,

    “Excuse some of my more robust language, I do enjoy engaging in this forum on occasion.”

    You have been perfectly reasonable this whole time, so don’t worry about it.

    “Two examples of good government policy approaches producing similar positive outcomes over a long period. But they certainly do not prove the opposite as you and Chris Dillow assert”

    They are examples of two very different “mixed economies” – which is a group NZ fits into. Now, they are not polar opposites in the widest sense, but in terms of good and labour market policy we do fit inbetween them.

    “Zimbabwe is all the evidence you should need as evidence that government policy can influence long run growth.”

    Zimbabwe is not an example of a mixed economy like NZ – it is a basket case.

    Extremely bad government policy, when the government is effectively thugs, or are heavily mixing up the allocation of resources, is an example of where government policy influences long-run growth.

    My point is that, given our current structure I do not think there is scope for any change in government policy to get us anywhere close to Aussie – even in this case I did not say the influence was zero, just small.

    The policy discourse from both the left and the right of the spectrum suggests that the government can “organise” the economy and “increase output”. Even if this was desirable (which is not clear given the issues with statistical measures) it is effectively the same assumption that drove communist countries such as the USSR – hence why I compared these guys to communists.

  • I think one of the factors that is against NZ is that geographically we are in the wrong place, thus we cannot take advantage of positioning in the way that Ireland and Singapore for example were able to do.

    Singapore for example has over time moved into and out of various types of activity, for example some decades ago it was in textiles, but got out of those, it went into electronics, but has consistently upgraded it’s participation. At the same time it went for financial services and latterly for Regional HQs.

    It has been aided by a government focused on making it easy to do business and long term investment in the education system and core infrastructure to enable businesses to prosper. Further, the Central Provident Fund mechanism has provided a large pool of savings which the Government has been able to tap.

    NZ has relied on primary produce and for a long time did not really attempt to provide any added value to that product.

    In addition, far too many NZ businesses look to government for direction. Many successful business reach a certain size and then the owners sell out.Business is regarded with suspicion in NZ you only have to look at the way so many revile the private sector. Success is only lauded in this country if you are an All Black.

    Too many people assume the world owes us a living and suffer under the delusion that because we make some good wine an d we have lovely scenery that we do not need to bother.Yet we have a poorly educated workforce, which is I suspect one of the reasons we have relatively low productivity. We need to graduate better qualified people from our schools and colleges.

    We need to work smarter and seek to understand what we can supply into world markets. In addition I would suggest, we look at applying some of the approaches Singapore used in the 1970s and 1980s to encourage companies to set up shop there. In our case we should focus on service and technology industries. In addition growing our population by say another million would not hurt either.

  • on THIS occasion 😉

    ah so now you are saying something completely different. Not that government does not have the capacity to influence growth but that New Zealands current approach and the public understanding is basically incompetent and will not lead to catching up with Australia. I agree with that which is why I live in the UK at present. Not because their govt is competent but because I can mitigate that incompetence more easily.

    Should the NZ public understand that voting for middle class welfare and punitive tax and treatment of entrepreneurs then New Zealand has a chance.

    FWIW I agree the past and current government focus on “productivity” and “growth” is meaningless. It is changing depreciation rules, committing cullen fund to investment in nz infrastructure and other concrete actions that will make a government difference. teh nz public can help by voting out middle class welfare

  • phil sage (sagenz) :
    Zimbabwe is all the evidence you should need as evidence that government policy can influence long run growth.

    Phil. I think there is an asymmetry in the effects governments can have. In most cases governments can do bad things more than they can do good things. This is what Zimbabwe shows. It was 20 years ago a healthy economy – at least for Africa – today it is not – even by the standards of Africa. Getting an OECD type country to growth is harder because all the things that a government can do to help growth – rule of law, protection of property rights, good institutions etc – have, by and large, been done but it can do bad things by backtracking on the good things.

  • “I severely doubt that the government can turn around and improve any of these things to the degree required to “catch Australia”.”