LEGACY OF BABY BOOMER GENERATION
The starting point for my whole thesis has been that New Zealand can and should do much better. As a baby boomer, I feel as a generation we could have done much better for New Zealand. Life has surely been easier for us, than for every generation which preceded us. Over our lifetime there have been no world wars and limited recessions, with no major depression of the sort which gripped the world in the 1930’s. Apart from Covid, we have faced no society-threatening health issues. Major economic advance happening in the world around us, especially in recent years in Asia, has provided opportunities for us to leverage off.
And yet by and large we have only achieved an average report card. We took the great start our forebears had fought for on the battlefields and established by hard work on the land. We had free education. We did not save for our future superannuation needs. During our lifetimes, we have allowed the sale of much of NZ’s family silver and seen ownership of the country’s economic resources significantly pass into overseas hands. We have gained too much of our wealth from effortless capital gain (especially from houses), rather than concentrating on hard work to build up the country. We have presided over what has generally been a disappointing economic performance.
While economic growth has improved somewhat in the last 10 years, this has especially been off the back of trade with China (which looks more worrying, after the Security Law in Hong Kong), high immigration levels, which created an immediate economic boost, and high tourism numbers. These recent factors have masked longer term structural weaknesses in our underlying economy, which remain to be addressed. Now our generation is increasingly receiving expensive government funded healthcare and superannuation at the expense of the next generation of taxpayers.
INADEQUATE POLICY SETTINGS
Our performance as a generation is also reflected in what I have suggested has been an overly relaxed approach as a country. Not adequately valuing our economic progress, we have allowed the rest of the world to take too much advantage of us. We’ve had ultra-low tariffs and trade protections for our local economy; a country more open to foreign capital than pretty much any other in the world; and with insufficient limitations on immigration and visitors. We have been slow to correct inadequate tourism standards and deficiencies in some of the bodies offering foreign student education. We have assumed immigrants who come here from countries where corruption and/or tax evasion are endemic, will somehow miraculously start playing by our rules once they arrive here. We are continuing this same approach with our current climate change policies, which hurt us as a country, while making insignificant improvement to the world’s greenhouse gas position.
I have been a supporter of free trade and capitalism throughout my life but in the rest of the world these ideals are always tempered with a degree of realism and national self interest. There are always some tax concessions, hidden impediments to trade, and home town advantages, in the international trade policies of other countries: especially in the area of agricultural products. In New Zealand in my view, we have been too pure and too unworldly in our policies – and the rest of the world has taken advantage of us as a result.
CRISIS NEEDED TO SHAKE THE COUNTRY OUT OF ITS LETHARGY
I can imagine readers gagging over what I have just written. Some might be saying, ‘The guy has a few good ideas, but he is too hard on New Zealand. We may not be roaring ahead as a country but we are doing okay. Many other countries are envious of us. We have an open, fair and tolerant society. We don’t need to panic, or make significant change to our policy settings. Life is comfortable, and we only need to tweak a few policy settings around the edges. Why should the country confront the uncomfortable today when we can leave the hard issues until tomorrow?’
Yes, unfortunately that is the way we humans think. We need a crisis to shake us out of our lethargy. To create the circumstances when (in Milton Friedman’s wonderful description) the ‘politically impossible becomes the politically inevitable”.
Whether the economic aftermath of Covid creates those circumstances, is yet to be seen. If I had to make a prediction, I would say that such a crisis is a real possibility. Despite the early epidemiological success in containing the virus in New Zealand, and an accompanying post lockdown spending and stock market rally, it is increasingly clear the virus will take a long time to recede in the rest of the world. The world economy had not properly recovered from the 2008 GFC, and went into Covid with already ultra-low interest rates and major debt. The world is now trying to minimise the economic damage from Covid, with major new doses of debt, and widespread use of Quantitative Easing. Some damage is already inevitable. The risk that a significant shock or loss of confidence could occur somewhere and spread through the world economy, has to be real. If it does, let us hope New Zealand uses the resulting crisis wisely.
MOST IMPORTANT: CHANGE OUR ATTITUDES
First and foremost in that change, has to be a revision of our national psyche. We need to change our motivation as a country, resolve to start achieving in the economic arena in the same way we have so successfully achieved on the sports field. Bring in ‘NZ High Performance Economics’, to parallel ‘NZ High Performance Sport’, and lift our economic performance as a country. Resolve to play harder and with a greater determination to win in all our economic encounters going forward. Resolve not to allow inefficiencies and negative vested interests in any part of our society (and especially in the state sector) to continue to impede our progress. Resolve to get ahead in so many of our economic areas.
Because unless and until we really acknowledge as a country that we could do much better economically, and that we owe it to our children and grandchildren to do much better, then changing policy by itself (even if this was attempted) will be of limited success. As I have said in relation to both health and education, buy-in to change from the vested interests already in the system, is vital. Likewise, buy-in to a whole economic restructuring of the economy will succeed, only in proportion to the degree to which the population realises such change is essential and supports the changes. If the changes are strongly opposed in society then at best they will be a limited success and at worst they will fail.
So New Zealand needs a whole new resolution to do better. We need to set a vision for the country – to make ourselves over the next 50 years, a savings based commercial centre of excellence: the Switzerland of the Pacific in our approach to our commercial sector. And over the same period we need to create a whole new social philosophy in our society, copying the Singapore model whereby society tells people social policy is a combined effort. However much money society throws at the disadvantaged sections of society, this will not reverse social ills without beneficiaries also taking a significant measure of responsibility to look after themselves. People need to save for their own future social needs and build up a nest egg for rainy days where possible, with social supports there as a backstop. As a country, we need a new social consensus to go with a new economic consensus.
Until we make fundamental changes as a country in our attitudes to both economics and to welfare, only limited improvement will be achieved. With a new economic and social consensus going forward, we could transform the country.
THE CHANGES ARE ACTUALLY QUITE SIMPLE AND OBVIOUS
If we could get a nationwide consensus that our economic and social performance both need to go up several gears, the changes are actually not difficult to spell out. Key among them in the economic sphere is a major boost in institutional savings and a shift away from housing as our main form of wealth, into productive economic assets and businesses.
Once that fundamental direction change is settled, many subsidiary changes are reasonably obvious. Change the structure of banking to stop favouring house lending. Amend local government law to facilitate more housing land, and create new funding avenues for local bodies. Bring in tax changes to wind back the favourable tax treatment of housing, and make Kiwisaver and the NZ Super Fund contributions and annual earnings both tax free. Tighten the Overseas Investment rules. Drive productivity and value added products. There is no need to go over these issues again.
Create an environment and policy settings which encourage and favour business. Ideally work to lower company tax. Modestly raise the levels of tariffs and local protections to stimulate development of local industry. Provide better tax incentives to encourage investment and research and development. No, we don’t want to go back to high protection with inefficient local industry turning out poor quality goods. But we also need to realize that in the post-Covid world, the greater your dependence on stretched supply lines around the world, and on the supply of finished goods from overseas, the more you have vulnerabilities as a country and as an economy.
Like so many things in life, when we (correctly) threw out the fortress economy of the 1950’s, with its import licencing, high protections and artificial local industry, and opened our economy to world competition, we actually went too far. We went from one side of the road, right across to the other side, and created a theoretically pure but slightly impractical policy setting. We unnecessarily destroyed some local industry, which was not that far behind the rest of the world, and forgot that destruction is interlinked- Industry A often needs Industries B and C, all working in conjunction with each other. Astute and practical policy makers in the future needs to shift our policy settings back a few degrees, without going too far and artificially protecting hopelessly inefficient local industry again. We need pragmatic support to favour local industry and commerce and agriculture, without going too far.
There are also specific measures needed to improve the economy. Clean up tourism, and the contradiction that we can market ourselves as ‘Clean and Green’, while pumping up tourist numbers and accepting high prices and disappointing standards in parts of the tourism sector. Tighten up immigration considerably. Bring in part charges and economic implications to the provision of healthcare. Get teachers talking with parents, and trying to deliver more of what parents want rather than what teachers think they should have. Make government more efficient rather than continuing to throw more money at already inefficient government activities.
GOVERNMENT FINANCES
The New Zealand government finances are in a mess and need change. That is not widely acknowledged because attention to date has just focused on the budget deficit and the amount of government debt, which at around 20% of GDP prior to Covid, has been low by world standards. But this initially satisfactory position masks the coming enormous expenditure increases in healthcare and especially superannuation which are not yet in the figures. Then, to compound these forthcoming serious deteriorations in the public finances, the 2020/21 Budget has committed to extensive deficit spending after June 2021. The scale of those future deficits have been hidden by optimistic projections that the economy will bounce back quickly after Covid in just 18 months and drive the deficit down again. A new consensus to revitalise the New Zealand economy would necessitate major changes to Government finances. Key among these would be significant restrictions on people receiving NZ Superannuation for the future, and part charges for health and hospital care.
WHERE TO FOR CENTRAL BANKS?
This is the really hard question at the moment. As I have made clear, I think central banks have gone too far in their policies. Yes, monetary intervention, to reduce the economic downturn resulting from Covid was of course appropriate. But monetary intervention on the scale we have seen, to try and ELIMINATE the downturn, was excessive. It is attempting to protect the present generation of workers to keep their jobs, at the potential cost of leaving a major debt legacy and other serious economic issues for the generation of workers who follow them. In my view in 5+ years, the scale of these monetary interventions will be seen as having been a serious mistake by central banks.
Quantitative Easing by the central banks of many countries around the world has gone beyond the point of no return. It is not credible to suggest countries will ever be able to reduce their money supplies sufficiently and central banks to shrink their balance sheets again to levels they had before Quantitative Easing. Even if (as I have advocated) NZ moved quickly to increase funded superannuation, and a large part of that new saving was used to buy government stock back off the Reserve Bank, it would take years (probably decades) to save enough to buy back the NZRB’s $100 billion government stock accumulation. Resale of securities back into the market, repayment, reduction – call it what you will – is realistically no longer an option. The degree of the intervention has been too large for economies around the world (including belatedly New Zealand) to be able to work through any feasible unwinds. So what is going to be the ultimate outcome from these experimental new central bank policies? I certainly do not know. I suspect central bankers do not know either – which is the scary part.
The range of outcomes is extensive. Does the world end up losing confidence in money controlled by governments and move to cryptocurrencies? Do we face widespread inflation around the world? Does the world carry on as normal, and as if nothing has changed, and ignore Quantitative Easing? Do the relative values of world currencies adjust over the next 10 years, so the effects of such credit creations by central banks are finally represented for those economies as relative currency devaluations? If the RBNZ ends up owning 60% of the NZ Government Stock which has been issued, do the bank and the government consolidate and net these two off, so the amount of that stock which the RBNZ owns is cancelled and not repaid by the Government, and the RBNZ writes down its balance sheet again by the amount of the cancelled government stock? But a netting off of the two government agency positions (the money owing by the government on its stock, and the holdings of that stock by the Reserve bank) does not remove the money introduced into the economy by the combination of such quantitative easing and stock purchasing , out of the economy again.
If there is a particular vulnerability of economies in the post-Covid world, it is how the final chapters of central bank activism since 2008 are ultimately written. The world is not only in the middle of a pandemic with an uncertain outcome. It is also in the middle of what is surely the largest social banking experiment it has ever seen. Let us hope for all world economies, that I am wrong in my concerns, and it is a central banking experiment with a happy ending.
BEYOND CONVENTIONAL POLITICS
I freely acknowledge that what I have written is well outside conventional politics in New Zealand at the moment. But it is helpful to compare what I am advocating with some conventional political positions. First, I take a much longer term economic view than current political wisdom. We need to attach a much greater importance to New Zealand’s long term economic success than we do at the moment – using more institutional saving, more brains, more government money via tax breaks for saving, for R & D, etc., more local ownership, a real productivity drive, especially in the state sectors and in local government, and generally more commitment than politicians presently advocate, towards our long term economic success and growing our real economy.
Then I advocate a tax burden which is in the low 30%s of GDP as it has been for a number of years – no significant change here (despite the 20/21 Budget, which is likely to disrupt our government finances for a number of years). But I do advocate a different spread of taxes, making up the same total – with the main change being a capital gains or wealth tax which must NOT exclude the family home. A capital tax on owner occupied houses is vital to try and rebalance our economy away from its present over-emphasis on housing. That is a big point of difference from conventional politics. This tax rebalancing will ultimately put a greater tax burden on the better off and lighten the tax burden on wage and salary earners, so will help reduce social disparity. But I am not advocating more tax in total. Governments are inefficient now, so don’t give them more funds they can spend unwisely.
In social policy areas I believe we will only ever be able to make progress with a combined effort between government and people. Unless and until people take some responsibility for their own retirement, health, well being and success in life, government on its own cannot alleviate social distresses no matter how much money it throws at them. That is a major difference from conventional New Zealand political thinking at the moment.
WHAT IS THE POLITICIANS’ ROLE IN ALL THIS?
Yes, it is easy to put ideas down on paper and much, much harder to make policy and implement them. Even if we experience a sufficiently serious economic crisis caused by Covid19, and even if the populace as a whole is sufficiently shaken out of their comfort zones, such that major change becomes possible, what is going to make our politicians change their spots? These include short termism, sweeping problems under the mat and deferring them if possible, a reluctance to challenge vested interests, a focus on the next election but no further, partisan politics with entrenched opposition to everything the ‘other side’ proposes, and a shunning of politics by many skilled people because of the drawbacks the democratic process throws up. Even if a crisis arrives, and people are receptive to significant change, how will our political system ever throw off its deficiencies and drive some of these important long term changes?
These political questions are sufficiently concerning and important, that they deserve a final chapter. There are some changes which could be made to our democratic system to enable major change to be implemented. Once again, an essential ingredient in doing that would be a widespread acceptance among politicians that change to our presently unsatisfactory political system has to occur. If our politicians could make that change of mindset the improvements needed are not all that difficult to spell out. It all depends on finding the political will. If that arises, the changes in the next and final chapter 16 could follow readily. Appropriately, politicians can have the last word.
| << Chapter 14 | Chapter 16 >> |
Covid – Catalyst for Change 