2025 and All That: the 2009 Brash Report

Tuesday, 1 December 2009, 3:59 pm
Column: Keith Rankin

The task set for 2025 taskforce (chaired by Don Brash) - to identify ways in which New Zealand's annual economic growth might average at least 4.5% per capita for 15 years - must be understood for what it is: an exercise in politics, not economics.

Note that the "Brash Report" calculates that an average growth rate per capita of 3.3% is required; this means 4.5% average growth of real GDP if population grows at its usual average rate of about 1.2% per year [2025taskforce.govt.nz/xls/2025taskforce-readyreckoner.xls].

In essence, we are asking that total measured production - the annual 'economic cake' - be twice as big in 2025 as in 2009, given that annual exponential growth of 4.5% for 16 years equates to 100% growth over the whole period. (Bryan Gould [nzherald.co.nz/section/story.cfm?&objectid=10611929] correctly notes that if our average incomes are to match Australia's in 2025, then significantly more growth will be required, given that a high and growing percentage of our GDP is claimed by foreigners in the form of interest, profits and rents.) We might also note that if such a sublime growth performance could be extended to the year 2050 (and I hope to still be alive then), then our 2050 economic cake would be six times (500%) bigger than our 2009 cake!

Such growth rates are not attainable in these times in which the global economy is coming up against both environmental and social limits to growth. Further, it's not clear that the achievement of such a goal would be beneficial - on balance - to most New Zealanders.

The whole exercise is a political distraction. By pretending to be highly focused on a goal that almost everyone realises is impossible and many do not even regard as being desirable, the government is relieved of the obligation of trying to achieve anything, such as sustainability or a just distribution of income. Inflation-targeting that came into vogue in 1990 had a similar impact; it relieved the government of any obligation to achieve low levels of unemployment as a policy target, And in 1985, floating the exchange rate relieved the government from having to have a balance of payments' policy.

The recommendations of the taskforce [2025taskforce.govt.nz/fromthetaskforce.htm] are an unsurprising wishlist from a group of pure market true believer idealists (classical liberals) whose ideology - which is not a growth ideology - was influential in the 1980s. That time frame is important, because it was the years 1984-1993 in which the gap with Australia formed, and that was the period when these true believers had uninhibited control of policymaking in New Zealand, but not in Australia. The Australian growth in those years gave us scientific proof that the New Zealand policies were growth-inhibiting rather than growth-promoting.

These "true believers" (to use a phrase recently used in a US Frontline documentary "The Warning", recently screened on TVNZ [tvnz.co.nz/spotlight-on-the-economy/warning-3125474]) are people who are not especially interested in how real world economies work. (The US true believers in question - Alan Greenspan, Robert Rubin, Larry Summers - have recanted over the last two years, unlike their New Zealand counterparts.) To fully appreciate the true believer mindset, one needs to read Ayn Rand's turgid novels, such as Atlas Shrugged and The Fountainhead. They are Platonists, who have an ideal vision - in this case an internally inconsistent vision - that they believe can be made real if what they see as institutional impediments to market nirvana are removed.

These classical liberals, like other sects of idealists before them, they have a mission to construct heaven on earth. Idealism, as Platonist philosophy, is by definition about perfecting the imperfect. The macroeconomic part of the vision - which seeks to maximise production for its own sake because the amount an individual or country earns (ie sells) is seen as a measure of his/its success - is however incompatible with the microeconomic part of the vision that seeks to maximise efficiency through the principle of consumer sovereignty. The vision is an incompatible mixture of a sporting contest, in which most participants are losers, and an auction in which everyone is a winner.

The taskforce's proposals can be summarised as: "sell more, buy less". The emphasis is entirely on suppressing cost, with the two sources of cost that matter to the taskforce being labour and government. Financial costs and environmental costs - both of which represent significant constraints on growth - are conspicuously de-emphasised. (The expression "interest rate", while present at large in the full report, appears only once in the executive summary, and that's in the context of wishing to raise the financial cost of student loans.)

For an indebted country like New Zealand, this principle of "sell more buy less" may have some validity, but only in a context where we clearly expect creditor nations to pursue the opposite maxim "buy more sell less". If some countries such as ourselves must run surpluses, then other countries must run deficits. China maybe? Yeah right! Australia ? Somehow I don't see Australians dramatically increasing their imports from New Zealand as a way of helping us to catch up with them in the race to see whose country can increase their sales the most.

"Sell more, buy less" is a principle that, if it must be applied, should be applied to people rather than governments or nations. If indebted people are urged to sell more than they buy (ie to service their debts) then other non-indebted people are required to buy more than they sell. Yet the whole point of the policies suggested is to reduce business costs so that those who already sell more than they buy (mostly rich people) can sell even more, while those who currently buy more than they sell (mostly indebted non-rich people) will be subject to moral suasion to buy less while being fed loans (the savings of the rich) that actually require the indebted non-rich to spend more than they earn.

Just who is going to buy the 100% extra output that we are told we must have in 2025? Not the rich New Zealanders who are selling much more than they are buying, and who already have nice houses, nice cars and most other good things that money can buy. Not the highly-taxed low-wage-earners who will be forced to buy much less if they are reliant on reduced disposable incomes. Not the Australians, nor the Chinese, who will most likely also be advocating that their people sell more than they buy.

Finally, a note about "productivity". This mantra is a part of the true believers' nirvana, which defies credibility. Historically, productivity - getting more outputs per unit of labour, capital or raw material input - has increased through technological change, the emergence of institutions that are lenient on unsuccessful risk-takers, and government funded goods such as publicly-funded education. A critically important aspect of productivity growth in the years from 1850-1930 was the dramatic increase in the number of hours lived relative to the number of hours worked. Higher living standards principally meant more leisure, not more gadgets.

Rarely has higher productivity actually resulted from a government policy whose stated purpose was to raise productivity. Productivity gains are typically a by-product of an environment that represents a favourable mix market, social and political (democratic) forces. Central to that mix was a decrease in both absolute and relative poverty. Indeed higher productivity through technological improvement is most likely to take place in a high-wage environment, where the adoption of labour-saving technology rather than inflation is seen as the normal outcome of rising wages.

The policies advocated by the 2025 task-force are not policies that are ever likely to raise productivity. Their palpably visible goal is increased inequality.

Economists, as a profession, are notorious at coming up with answers that serve their most important patrons - the predominant purchasers of their services - rather than coming up with scientifically verifiable truths. (After all, we produce and sell the services that the market wishes to buy; that's the consumer sovereignty aspect of market utopianism. Why should economists be ethically any different from lawyers in the ways they adapt their professional careers to the marketplace for their specific services? Mammon has a chequebook.)

The 2025 taskforce derives its answers from a belief-system, and not from a scientific analysis of economic history. It's recycled conclusions are normative economics, at its finest, rather than positive economics. The result is that the government now has many excuses to not implement alternative policies, derived from fresh thinking, that actually address the 21st-century problems that really matter: the global problems of inequality and unsustainability.

keith [at] pol-econ.com or krankin [at] unitec.ac.nz

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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