LOOKING INTO THE ABYSS

Last week’s Consilium hosted by the Centre for Independent Studies took a look into the abyss of sovereign default in Back from the Brink: Fiscal Disasters and Recoveries. “Kicking the can down the road” was definitely the phrase du jour on the topic, and among numerous memorable remarks were these from Czech Republic President Vaclav Klaus on Europe: “Europe is too heterogeneous for anyone to speak on its behalf” (how true) and “Capitalism without bankruptcy is like heaven without hell”. And from Oliver Hartwich: “Europe will have the next financial crisis and it will make the GFC of 2008 look like the good old days.”  Argentinian former politician, presidential contender and would-be reformer Ricardo Lopez Murphy spoke passionately about the difficulty and pain of adjustment. He entered politics in 1999 and was made Minister of Economy in 2001, but was fired by the president eight days later over his proposed fiscal austerity project.

Depressing stuff, and not surprisingly the session rapidly descended into an Eeyore-type gloomy patch about the debt crises. I felt obliged to ask why no one had mentioned the underlying problem, namely the intolerable government expenditure problems facing all the big welfare states (including New Zealand). The burdens of their entitlement programmes can only get worse with demographic trends, yet there is little evidence anywhere that governments are seriously grappling with them. It was pleasing to see the direction of the session shift somewhat. Vaclav Klaus was in strong agreement. As former 2025 Taskforce member, Trotter lecturer and smart labour market economist Judith Sloan said, the issue is all about the role of government :  if governments hand out free beer to people they will want more and will resist being deprived of it. Which is why the fiscal consolidation required on economic grounds in all these struggling welfare states is so very challenging politically. 

Home thoughts from abroad

Melbourne University professor and member of the 2025 Taskforce Judith Sloan has an excellent article in The Australian today.

Entitled ‘New Zealand seems to have lost track of its reform agenda’, she writes:

New Zealanders are good at lots of things. Rugby, sailing, rowing, netball and film-making all spring to mind. But running a national economy does not appear to be one of their strengths.

On the income gap with Australia, she says:

Some commentators attribute New Zealand’s poor economic performance to its small size and distance from markets. The trouble with this explanation is [that] New Zealand has always been small and distant and so these characteristics cannot explain the growing gap.

She puts a finger on a key problem:

In Australia, there is broad-based acknowledgement of the benefits of the reforms undertaken by the Hawke-Keating and Howard governments. These involved removing import protection, financial sector deregulation, privatisation and other pro-competition measures.

By contrast,

New Zealand suffers from the consequences of an incomplete reform agenda. Public ownership remains prevalent, statutory marketing arrangements are still in place and the labour market has been re-regulated. There is even a single desk (monopoly) for the export of kiwi fruit.

Many New Zealanders think of Australia as a big government country, with governments at federal, state and local levels.

But as Judith points out:

The overall size of the public sector is considerably greater in New Zealand than in Australia. General government outlays as a percentage of GDP are around 45 per cent in New Zealand, some 10 percentage points higher than in Australia. Even if cyclical factors are taken into account, the relative size of the public sector in New Zealand is considerably larger than in Australia and has been growing particularly strongly since 2005, well before the GFC.

And the point here is that:

While there are exceptions, the higher the level of government activity in a country, the lower the rate of economic growth. And there is no example of a country with a public sector of equivalent size to NZ that has grown at the sustained rates needed to eliminate the per capita income gap between the two countries.

The article goes on to talk about New Zealand’s inferior policies such as interest-free student loans, ownership of KiwiRail, the Resource Management Act and the lack of public private partnerships: these “are almost unheard of in New Zealand.” Judith pinpoints the risks for New Zealand:

[T]he spanner in the works relates to the fact that New Zealand and Australia essentially have a common labour market. Trans-Tasman migration is completely unfettered. As a consequence of the income gap between the two countries, the flow of migrants is almost completely one-way, to the point that there are now about half a million New Zealanders living in Australia.

The consequences for New Zealand of this flow of people are both economic and social. Economic in the sense that there is little return to New Zealand for the investment in its citizens’ early years, and social in the sense that children (and grandchildren) live at a distance from their parents (grandparents) and possibly even barrack for the Wallabies!

She notes that the Key government has made modest moves in the right direction:

But if the aim is to close the gap with Australia by 2025 — and the taskforce of which I am a member will be recommending how to achieve this objective — modest policy is not nearly good enough.

Wise counsel from a good friend of this country.

  

O wad some Pow’r the giftie gie us

To see oursels as others see us!

 

The full article is here