Chapter 1. COVID’S SILVER LINING

Perhaps for many New Zealanders, the period of the March-April 2020 Covid-19 lockdown will not be remembered fondly. Shops all shuttered. Streets empty of cars. Just a few walkers getting their exercise (and keeping their distancing). Modern society as we know it, almost totally closed down. Much of New Zealand tuned into to TV1 at 1pm every day, watching the Prime Minister and the Director General of Health jointly report progress in the Covid fight.

Unusual times, generate unusual responses. A new video conferencing platform, “Zoom”, had just replaced Skype, and we all started Zooming each other – or ringing people we hadn’t spoken to in ages. Others circulated reading material via email- often articles on Covid, but also jokes, political commentary, and similar.

For some, I am sure, lockdown gave rise to genuine medical fears. Would the virus be contained? Were they seriously at risk? For them, I imagine, the daily 1pm briefings must have felt a little like World War 2 when the populace hung on advice from the Government. Are we winning? What progress in the battle overnight?

Others (me included) looked at the unprecedented sight of a modern day economy stopped in its tracks and wondered: how is this whole machine going to get up and running again? How severe will the economic shock be, in the recession which is going to follow the lockdown? How will that recession impact New Zealand as a country and its individual citizens? What will be the knock-on effects to New Zealand from the more severe impacts Covid clearly delivered to a number of major overseas countries? To what extent might future adverse conditions in these countries have an impact on New Zealand? Will life ever be the same again, when the world finally and fully reopens?

I was one of the lucky ones. For me, the lockdown was a time when the frenetic pace of modern life (yes, even for retirees!) mercifully receded, providing room for reflection and writing. The unique period was not to be wasted. The accoutrements of modern life stood still and were under the spotlight, inviting a more searching analysis than usual. No longer could we simply take the fundamental underpinnings of modern life for granted.

A more fundamental rethink of where we are in life, as a country, as an economy, indeed as a world, seemed to be called for. And there was unallocated time for that fundamental rethink to take place. A group of social scientists could not have scripted a more expedient set of circumstances. Could I make use of them, and turn them into some worthwhile ideas?

MY BACKGROUND

I have always been a thwarted economist (which probably makes me suspect from the start). I grew up in Orakei, Auckland, with a youthful interest in politics and economics. I listened to Parliament on the radio occasionally as a teenager. More usefully, I made friends with a neighbour who was an exceptionally successful businessman, investor and (in later life) benefactor. To his credit, a man who was probably 35 years older than me was very happy to talk to the kid next door about investing and economics.

During my secondary school years and thereafter, we spent many hours discussing stocks, business, economies and politics. I have said ever since, I learnt more about economics over the back fence talking to our neighbour than I did during a three-year economics degree.

At university I first studied law. My father was a lawyer. Law provided income and a job, and an entry to politics, which interested me. Commercial law overlapped with economics, so I could mix in some economics along the way. I completed my law degree and went on to pursue a conjoint degree with commerce which allowed me to concentrate on economics for the first time. I have to say my economic studies were an anti-climax. Unfortunately mathematics dominated the subject in the first two years. Attempts to build complex models to predict future economic outcomes, always bored me. The performance of economies reflects the actions of humans, who simply do not behave in logical ways that can be replicated in a mathematical formula. But in my third year, Professor Conrad Blyth came to head the department at Auckland University and the macroeconomics he taught struck a chord for me.

STAGFLATION

I emerged from university in the early 1970’s, when economies were entering a period of ‘stagflation’ – slow or no growth, and high inflation. At Chicago University a professor of economics, Milton Friedman, headed a scholarly group whose theory finally provided the answer to the problem. Their Monetarist School said stagflation was caused by too much money being put into economies by governments or central banks. What was needed was to limit the quantity of new money.

The theory proved correct, and New Zealand led the world, when it gave its central bank statutory independence in 1989, tasking it with keeping inflation in a target band of , initially, 0-2%. Inflation came down and growth generally lifted thereafter. Similar outcomes were seen around the world.

It is ironic for someone who studied macro economics at a time when decisionmakers around the world were concerned to limit the money supply and bring inflation down, to see the position central banks are in today. Now we have massive money creation by central banks (euphemistically called ‘quantitative easing’) resulting in major injections of liquidity into economies right around the world, unsuccessfully trying to drive inflation up from near zero. It is surely a salutary example of the difficulty of trying to build econometric models to predict what is going to happen in the real world, when very similar circumstances (allegedly excess money), can produce totally opposite outcomes 40 years apart.

COVID’S FULL ECONOMIC IMPACT YET TO APPEAR

New Zealand has been successful in bringing the virus under control. Unfortunately the full economic impact of the lockdown is yet to appear as I write. Economists have wasted no time in looking into their crystal balls. Although there are no precedents for what has happened over the first half of 2020, many economic projections of what will happen to world economies over the remainder of the year have appeared. Most expect a significant contraction to have occurred in the first half . Beyond that, their predictions are much more uncertain.

All one can say at the time of writing, is that once the lockdown ended, there was an initial ‘sheep let out of the pen’ reaction from the public. The pent up energy built over the lockdown, broke out in every area of life. The stock market put on a real surge, and retail experienced almost a purple period. I went to buy a bike for my grandson in Rotorua during Queens Birthday weekend (the first weekend after the lockdown) to be told by both bike shops we went into, they had had exceptional sales that weekend.

Will this initial semi-euphoria last? As layoffs mount, especially after the wage subsidy ends, how long will the economy apparently remain positive? Even if NZ remains stable, will adverse economic developments in overseas nations struck harder by Covid, make their way to NZ? While predicting the future is always fraught with risk, one would have to say there is a real chance Covid will leave the world with a major adverse economic legacy, potentially even on a par with the seriousness of the medical concerns it generated. We can only wait and see.

Circumstances have not yet reached the point in New Zealand where major change of the type discussed in the chapters that follow could be contemplated. Perhaps a sufficiently adverse and worrying post-Covid economic predicament (which assuredly would not be pleasant for the nation) will not arise. But if no one starts analysing what could be done before such a possible crisis, any change which we implement in the white heat of a societal meltdown is likely to be sub-optimal. They say governments should always have some ‘shovel ready’ infrastructure projects planned in case there is a need quickly to increase public spending to offset an economic slowdown. Well, for the same reason, shouldn’t we have some ‘shovel ready policy’- good policy ideas for change already well considered and ready to implement?

What follows is my analysis (as free of party political considerations as I can make it) of the current weaknesses of New Zealand society and the New Zealand economy. I have endeavoured to think outside the square. Little of what follows will be found in any political party manifesto. It is an attempt to set out what should be done, not what politicians assess to be politically advantageous. New Zealand COULD do so much better.

Many readers will disagree with much of what I have written. That is good. My major objective is to make people in New Zealand think on these policy issues. If what I have written achieves that (even in some small way) it will make my lockdown labours feel worthwhile.

THE STARTING POINT: A FORTUITOUS NATION

New Zealand is a fortuitous nation. We can count many natural blessings:

Isolation. For the first 150 years of European settlement, our isolation was a serious detriment. However in recent years a rapidly rising world population has put much of the rest of the world under pressures of overcrowding, pollution, migration, pandemics, and other developments. Small, remote New Zealand avoids, or faces lesser versions of, these problems. Our ability to close our borders, and successfully shut down Covid19, was a good example of the benefits isolation delivers. Air travel and modern communications minimise the drawbacks of isolation. Today if anything, our isolation has now become a positive for the country.

Low population. A blessing frequently overlooked. We have a country the size of Italy, larger than England and Wales combined, only 28% smaller than Japan. But our population is less than 10% of theirs. Double the population and you treble a country’s problems. Small numbers and a low population density keep things simpler in so many ways – less infrastructure needed, less impact on the environment, an easier country to manage and govern.

Climate. Surrounded by ocean, we get rainfall throughout the year and limited temperature extremes. Ideal for farming. Plenty of water- for hydro-electricity generation and irrigation.

Excellent natural resources. We don’t have the mineral wealth of Australia but our scenery is outstanding and a major natural resource.

International relations. We are too small and remote to threaten any other nations, which means other nations can afford to relax in their dealings with us.

Decency. For reasons perhaps historical and perhaps also owing to a first world living standard, New Zealanders are basically decent people. We have a current Prime Minister who contrasts with other world leaders and presents as genuine and caring, which enhances our reputation as a decent nation. New Zealand and perhaps Canada are two of the best liked nations in the world. That is a valuable asset to have.

Post-colonial relations. We are making good progress in enabling Maori to improve their social and economic position. There is much still to do but positive momentum is definitely occurring.

Branding. A label on a product, saying it has been produced in New Zealand, is likely to be trusted overseas (even if fake Manuka honey and some doctored wine sold overseas, show we need to be very careful to keep up our reputation).

Being a small nation that is liked and threatens no-one opens doors for us. Take China and its aspiration to join world trading arrangements. A pragmatic Chinese leadership wanted to set up its first Free Trade Agreement with a country as a trial run. We were the perfect choice. New Zealand could be expected to be one of the easier nations to deal with. If things went wrong, this was only a toe in the water for the Chinese and little long term harm would be done. Our small size on that occasion created a major opportunity for us.

Similar considerations can apply in the economic sphere. We are a perfect testing ground for new products. Unlike the US and the UK, we have limited legal grounds for claims that impede experimentation and risk taking (within limits).

Big changes are also much easier to make in a small new country. Finance Minister Roger Douglas was able to make sweeping changes to our economic structures in the 1980’s, which would have been much harder to push through in a larger country. The NZ Reserve Bank has been innovative to a degree out of proportion to its size and influence in the world of central banking.

BUT THERE IS MUCH THAT NEW ZEALAND CAN IMPROVE.

Despite these natural advantages, New Zealand’s economic performance over the past 70 years has been at best moderate. Having had one of the highest per capita GDP figures in the world after WW2, we now rank around 30^th. New Zealand declined to join the Australian federation when it was formed in 1900 because NZ’s economy then was stronger than Australia’s and it was worthwhile to remain independent. Now, Australia ranks 19^th in the world in GDP per head. Their per capital GDP is now more than 20% higher than ours.

New Zealand‘‘s growth rate over the years has been disappointing. Between 1987 and 2019 (i.e, the last 30 years) our average annual growth rate was 0.64%. That is substantially less than 1% , when Asian countries were growing annually at 6%, 7% and even higher over the period. Yes, our nominal growth rates have been higher over the last 10 years or so, but largely because we have had high immigration, burgeoning international tourism, and off the back of our free trade agreement with China; rather than because we made successful structural changes to our existing underlying economy. Average out the higher GDP with the increased population from 6+ years of high immigration, and the recent increase in the real per capita wealth of New Zealanders has still been disappointing. Major imbalances in our economy remain, with little sign of improvement.

Our economic school report is still ‘Could do better’.

There are other areas of our society and our lives we can improve. Our education system overall remains disappointing. Our education standards are still above average in the world but other countries are steadily overtaking us. Our Health and Welfare systems both absorb large amounts of additional money, with limited improvement apparent. Politics and entrenched interests perpetually to get in the way of significant improvement.

New Zealand needs to put more emphasis on enhancing policy in both the economic and social areas- especially with more skilled experts.

New Zealanders don’t apply enough mental horsepower to the country’s issues. Perhaps it is because our early culture grew from hardy pioneers who had travelled across the world to build new lives for themselves. They got on with courage and hard physical labour to hack out farms, build new roads and railways and create a new country and new lives. There was no time to sit around and philosophize, there was too much hard work to be done.

Maybe now, in 2020, we need to separate ourselves from that early culture and take stock. In the modern world, intellectual input, technical expertise, skill and brainpower are more important than ever. In the knowledge economy, as it is frequently described, we need to concentrate more on skill, brainpower and analysis in all aspects of our lives. Work out more clearly as a country, where we want our economy and our social services to change; and what improvements we want from them. Ideally have a consensus and a plan where we want our country to go. If the ideas set out in the chapters to follow, help us even in some small way to move in that direction, my efforts will certainly not have been wasted.

USE OF THE MATERIAL IN THIS WORK

Anyone, including newspapers and other media, are free to use any of the material which follows, without charge, and without needing to seek any approval from me. I only ask one thing – that you acknowledge your source and refer to my new website with a link.

My website makes provision for comment, which I will read with interest and to which I may respond. If I do not respond it will not signal disinterest, disagreement or any other reaction. Rather I feel I have had my say. I have thrown out my ideas. I hope they generate some thinking among readers and even have some influence for the better in our country of immense possibilities.

David Schnauer.

Chapter 2 >>