Reaping what they sowed

In all the debate about "keeping up with Australia" it's worth bearing in mind a simple fact which is deeply unhelpful to Brash and his right-wing acolytes. The massive right wing reforms of the 80s and 90s significantly depressed New Zealand's growth rate and economic progress. The more sensible policies since have led us to slightly catch up in terms of growth - particularly over the past five years.

In fact you could argue that this government's whole mission since 1999 has been to begin to repair the damage of the past 20 years. That takes time, and stepping back to the past won't make things better. It would make them worse.

Simply put, the kinds of policies Brash stands for don't work, and won't work if he gets the chance to try them again. The point is illustrated brilliantly by the following graph (p. 8 in the attached PDF):

Comments

[sweetdisorder]

pretty graph, where is the rest of it?, 1999-2005 figures?

[Jordan]

It's off an old paper, I haven't time to grab the others - but might do it on the weekend if nobody else does it.

[Idiot/Savant]

I'd certainly like to see them (and damn, I've just been working on a post pointing this out...)

[Neil Morrison]

The graph doesn't show much at all. If 1993 was taken as the base year instead of 1984 then the opposite conclusion could be drawn.

But it's irrelevant anyway since National is not advocating anything as sweeping as the reforms of the 1984 Labour Govt.

The article does not argue against the reforms, considering them necessary, but against the pace.

[tim barclay]

The reforms were necessary and NZ was lucky they were not imposed on NZ by the IMF. That is how close we were and if the IMF were dictating terms the Labour Party would be squealing then. It makes me purr just to think about it.

[gottalaugh]

Nice graph Jordan pitty the Prime Minister and cabinet don't agree with your sentiment as evidenced by the amount of 1980's and 1990's reforms they have kept in place. Even your graph shows how beneficial those reforms were once they kicked in. This is the same old rhetoric that gets trotted out when things aren't going so well for the government. 10 out 10 for consistency, 0 out of 10 for creativity.

[Aj]

Neil Tim and gottalaugh need to read the whole article.

From any objective reading it puts lie to the 'TINA' policies expoused by the Douglas/Richardson faction.
To his credit Bolger saw through this canard.

[Whaleoil]

Gee, I wonder if Paul Dalziel is related to a certain Labour Minister in any way?

[Winches]

What the graph shows, quite clearly, is that the Labour government of the eighties was incompetent. Given the history of Labour government failures, that is hardly an amazing discovery.

The period where New Zealand growth was in line with Australia was the periods of National government. That is, except for the usual expected macro-economic delay.

The conclusion to take from this is that Labour party is not competent to govern New Zealand, while the National party is probably competent. Since Brash is the leader of the National party, we have to assume that he is the best person to lead New Zealand, based on the evidence presented.

That is the clear implication.

[Aj]

I would argue that they were so efficient & competent at introducing the reforms expoused by Douglas and endorsed so strongly by Richardson and Brash, that they ground brought this country to its knees.
And given a second chance, Brash would, by his own admission, do the same again.

This was the choice facing & rejected by the electorate in '05, and will be the same in '08 under Brash

[gottalaugh]

'that they ground brought this country to its knees.'

What a load of partisan bullshit AJ. New Zealand's problems are its distance from major markets and our over dependence on agricultural exports to pay our way in the international marketplace - both evade easy partisan solutions. The reformers helped ease these problems by removing the artifical obstacles that in effect made New Zealand even further from international markets and in the process helped to create more internationally competitive companies. Now if New Zealand had not been in such a precarious fiscal position thanks largely to Robert Muldoon, important matters such as retraining and reskilling could have taken place as they should have done. Moreover, if the former import substitution policy had been eased earlier and faster, the reformers would not of had to fear interest group pressure as much as they did and therefore would not of had to move so fast. Of course mistakes were made but those mistakes do not outweigh the successes of which we, and the current Labour government, are still enjoying. Douglas is a national hero not a villan - give Helen and Jordan some truth serum and they will admit their deep dark secret.

[Aj]

gottalaugh,

In your first post you argue that Labour's incompetentence is responsible for the almost total lack of growth during and after the reform process.
Partisan bullshit indeed.

Thank you for rebutting that in your last post, " New Zealand's problems are its distance from major markets and our over dependence on agricultural exports to pay our way in the international marketplace"

Labour have never totally rejected the value of some of the reforms undertaken. But thats yet another myth propogated by the right.

[gottalaugh]

'In your first post you argue that Labour's incompetentence is responsible for the almost total lack of growth during and after the reform process.'

Ummm no I didn't. Me thinks you need some comprehension revision. It would seem it is only you, Tim, and Jordan that are advancing partisan arguments e.g.

Jordan: 'The massive right wing reforms of the 80s and 90s significantly depressed New Zealand's growth rate and economic progress...'

AJ: 'I would argue that they were so efficient & competent at introducing the reforms expoused by Douglas and endorsed so strongly by Richardson and Brash, that they ground brought this country to its knees.'

It is this partisan bullshit and the like on right wing sites that is bringing this country to its knees. I personally think as soon as you put your name beside a political party and its 'bumper sticker' slogans you forfeit 10 IQ points. In view of this AJ, I'm surprised you still have the cognitive capacity to breathe.

By the way don't you find it amusing that Jordan is being so goddamn unpatriotic. I mean to say only a traitor would ever think to compare New Zealand's economic performance to that of Australia. You know Jordan if you think its so great over there in AUSLAND why don't **** off there quick smart.

[SPC]

First consider the Muldoon growth funded by debt. Then the decline resulting from meeting the cost of that debt.

Second the cost of transferring at low price state assets to private ownership (a wrong response to debt).

Third the economic loss resulting from rising unemployment as state sector layoffs coincided with floating the dollar. An initial devaluation was to compensate for the free trade market direction, but was reversed. Thus the private sector also retrenched.

The private sector that did survive was faced with low profits with the high dollar. High currency volatility made investment planning difficult and thus little occured.

4. Fourth our inflation management is not pro growth.

5. Low savings (from low incomes as much as anything) and loss of asset ownership (loss of profit diividend flow out of the country).

The only good thing is the Super Fund and infrastructure investment
and debt repayment. While it has slowed growth for now - it's existence allows sustainable growth in the longer term.

But we still lack a currency and related RB regime which allows higher wages and greater investment.

[Peter Wilson]

I'm in no doubt that we are addressing the failures of the past twenty years (there were one or two good points though, largely around constitutional reform). Labour has managed to increase its share of the vote at every election so far, it has a solid support base, plus several viable coalition partners. It also understands MMP, and as September 17 2005 proved, it has the ability to win elections long after everybody else has written it off.

So I don't buy into any doom mongering and National party gloating around the 2008 election. Honestly, I read media reports of (albeit new) National MPs speaking as if they've already won 2008 and are now in government.

Well, here's the news for them. National's vote increase in 2005 was rather historic. It was able to marry two rather distinct constituencies together - urban liberals, and rural conservatives. That was an achievement perhaps only Brash was able to pull off. However, it cannot do that again in 2008. There simply aren't enough votes on the right, but if the tories head into the centre, they will lose the right. And I doubt they've got the time to consolidate enough new support in the centre to make up the shortfall.

In the meantime, New Zealand will be steaming ahead after a short slowdown, with full coffers and public services intact.

[SPC]

Gottalaugh

Are you serious?

"Now if New Zealand had not been in such a precarious fiscal position thanks largely to Robert Muldoon, important matters such as retraining and reskilling could have taken place as they should have done."

National chose to offer tax cuts in the 1990's rather than invest in infrastructure or retraining. They also launched student choice education (rather than economic direction) funding.

On Douglas.

Floating the dollar was wrong in policy and timing. Easton notes the consequences of this policy as adverse and the recent Canterbury study shows one reason why.

[tim barclay]

I think all you ladies had better look at David Farrar's blog on this issue and it shows that we have continued to slip since 2000, indeed lately it has got worse. If we compared aftertax incomes the situation would be even worse.

[Peter Wilson]

Sorry, that last post sounded like a paid party broadcast - I apologise.

Here's something a bit more thoughtful, based around those points SPC raised above.

1) I would argue we've just shifted the debt from the public sector to the private sector, plus a lot more. We're more indebted now than before the reform period started. In many ways that's worse, because the government as a single entity can take a more consistent approach towards paying it off.
I once asked Richard Prebble that, and he couldn't answer it.

2)Agreed. Our assets were undervalued massively, plus there was never a convincing reason to sell most of them. I cannot understand the logic of why one would want to sell a profit making business enterprise. Service from the privatised companies certainly hasn't improved, and neither has price. Then there's the not so small matter of profit-exporting contributing to a rather large and growing current account deficit.

3)That's an example of the reforms being carried out in the wrong order. We were running procyclical policy at a time when we should have been doing the opposite.

4) What would you do differently here? What further tools would you provide the reserve bank with, or would you redesign all monetary policy? There are worse things than inflation.

5) Yep, agree totally. Asset sales were the biggie, that was a loss of billions of savings, as well as the ability to earn high incomes.

The question is: how do we recover, is it possible to regain what we've lost? I for one would be a proud New Zealander if we were able to think of a way to recover from a structural adjustment (which our reforms essentially were) - and the implications of such a policy shift would have international effect, especially in the poor world.

I wouldn't suggest it if I didn't have the nucleus of a plan :) But more on that later.

[SPC]

1. The transfer of debt was in accord with "SOE" policy, to attach debt to revenue earning sectors of the economy (phase two, after costing and pricing government services, this actually began under Muldoon).

4. I can live with high interest rates (with higher wages would come savings and more local ownership).
We cannot live with an over-valued dollar (unless a low wage, foreign owned society is our goal). The thing is disconnecting the two, by ending the float.

I would dirty float (75 to 85 cents Oz range). This gives some security for long term investers (especially in the Oz market) and secures a lower level value.

More profitability for local production. Higher wages for workers. More tax - better paid state sector workers.

[tim barclay]

A dirty float would provide a one way bet for exchange rate speculators. The New Zealand tax payer does not have the financial resourses to bet the financial muscle power of the international speculators. The Bank of England could not do it, Muldoon could not do it and neither could Cullen and he knows it.

[Neil Morrison]

Aj, to quote from the article's conclusion "...the alternative in 1984 was not “no reform” but rather reform at a pace and to a degree more comparable with the rest of the OECD."

The author recognises that reforms were necessary but takes issue with the method of implementation.

That doesn't help Jordan's argument in that National is not proposing anything like what happened in the 80s and those reforms were indeed necessary.

[haha]

SPC

At worst your "dirty float" would provide a quick fix at worst it would totally screw the economy.

The floating NZ $ suits our economy pretty well. It is more reactive to the needs of our economy than the Aussie is to it and actually provides us with more stability as a result. If you don't believe me just look at the steady nearly 100% positive GDP growth over the last 15 years.

Oh, and Jordan picked the wrong source to make his point. Whip over to the reseve bank's site to find accurate and meaningful data (which still supports his case).

[haha]

Should have started..."At best".

[SPC]

Tim

Really?

Can you cite ANY EXAMPLE of a currency that was "under-valued" and sustained by capital inflows attracted by the highest interest rates in the developed world being attacked by speculators?

PS There is no known precedent.

Can you say how speculators would make money doing so? There is no motive AND if profit was not a motive, why would they get involved?

Speculators attack "over-valued" currencies. England's.

In Muldoon's case, it was not speculators as much as a run down of foreign exchange etc (total economic meltdown). Our accounts are quite sound and our high interest rates attract good capital inflows (a dirty float increases the attractiveness to foreign investors - who get the high returns with less currency decline risk).

haha

The profit margin for NZ based producers would increase for all time, even with higher wages to staff (also higher tax income flows to government). These would be permanent, not temporary.

What downside from this?

In what way, is an over-valued currency reacting to our needs? Crushing profitability from production to counter inflation (should this not focus on consumer demand, not reduce costs for those buying goods made overseas) means we can never improve our economic position relative to others.

A floating currency means punishing our manufacturers, every time terms of trade improve for farmers. A RB which responds to farmer spending by raising interest rates exacerbates this.

Currency studies show our cuurency is too volatile to encourage investment. Whereas the Oz currency is quite stable and has tracked up and down as ours has.

The EEC had dirty floats - fixed relativity and we and Oz should have the same. We do not need their permission to do it. When they declined an ANZAC dollar they and said we could adopt their's. We should in a sense do so, but via a dirty float.

There is no link between growth of the last 15 years and a floating currency (LAST 20 YEARS).

The evidence is of a sharp contraction as soon as we introudced the floating currency.
Experts are near unanimous, this was because we introduced it at the wrong time.

Of course there was growth after we reached 10% unemployment, there was no where else to go.

[SPC]

The current floating dollar is attacked by speculators all the time.

It's just that the risk is transferred onto those involved in trading and producing.

The amount of speculation would diminsh, if the float was restricted.

[PabloR]

"I think all you ladies had better look at David Farrar's blog on this issue and it shows that we have continued to slip since 2000, indeed lately it has got worse. If we compared aftertax incomes the situation would be even worse."

David has used nominal GDP for Aussie and real GDP for NZ, therefore he is comparing the wrong data. Knowing how hard it is getting these numbers together I put it down to cock-up, rather than deliberately misleading. The OECD uses the same codes for data comparable across countries, making it easier to compare.

Comparing real GDP between NZ & Australia NZ's CAGR is 3.45% since 2000, Australia's is 3.09% so Jordan is right in saying we have marginally closed the gap.

[tim baclay]

SPC you cannot buck the market. I accept in the short term you may have some influence. But once the speculators get wind that the currency is out of line with fundamentals it will be all on. It was with Muldoon and they made a fortune as the tax payers' expense, George Soros did when "shadowing the DEM" fell apart and I am sure there are other examples as well. But I concede in the short term you can fool the market and manipulate things but not over the longer term. The bluff is eventually called.

[PabloR]

Shame to agree with Tim :) but messing with the exchange rate would be a bad thing.

I am more in favour of currency amalgamation with Oz, if handled right.

[Winches]

This stuff about currency rates is extremely tiresome. I thought we got over that notice decades ago.

There's probably a good arguments about the relevance of having our own independent currency, in the light of our small size and distance from our markets. Myself, I think there's definitely a problem with the risk costs that are imposed on exporters because of the currency.

But, it's extremely frustrating to find people seriously discussing management of the currency as a solution to our economic problems.

[haha]

Sorry SPC, I have seen to many countries dick around with currency controls and fail miserably. I accept that you are essentially talking about a devaluation but so what? That can be achived with a lowering of interest rates.

You say it will not hurt manufacturing, well that would be true only if all their raw materials were sourced in NZ and our markets were either mainly domestic or much much closer. Some fast continental drift required for the latter I am afraid.

So, I will go out on a limb and agree with Tim and Winches on this one. If you want an example of how relatively small and free trading can help compare the UK economy since 1996 against the single European one. Compare growth and unemployment. NZ matches UK more than it does Europe, thank goodness.

[SPC]

The fact remains, our floating currency is the biggest disadvantage our economy has being competitive in the world.

It's routinely over-valued and the volatility results in low rates of investment.

This means downward pressure on wages. So those not prepared to do anything about it, are accepting our low wage structure.

Unless this problem is overcome, we will continue with low savings (low incomes do not allow savings) and tread water at the lower rungs of the OECD.

[SPC]

Tim

"SPC you cannot buck the market."

It's not a sacred religion Tim. Speculators are not gods.

"But once the speculators get wind that the currency is out of line with fundamentals it will be all on. It was with Muldoon and they made a fortune as the tax payers' expense,George Soros did when "shadowing the DEM" fell apart and I am sure there are other examples as well."

You are merely repeating what you said before

I responded last time with

Can you cite ANY EXAMPLE of a currency that was "under-valued" and sustained by capital inflows attracted by the highest interest rates in the developed world being attacked by speculators?

PS There is NO known precedent.

CAN YOU SAY how speculators would make money doing so? There is no motive AND if profit was not a motive, why would they get involved?

Speculators attack "over-valued" currencies. England's.

In Muldoon's case, it was not speculators as much as a run down of foreign exchange etc (total economic meltdown). Our accounts are quite sound and our high interest rates attract good capital inflows (a dirty float increases the attractiveness to foreign investors - who get the high returns with less currency decline risk).

"you can fool the market and manipulate things but not over the longer term. The bluff is eventually called."

You are saying having a currency at a reasonably stable level,
true to it's value,
is manipulating things. But a currency going from 45 to 75 cents USA, is NOT being manipulted.

[SPC]

Pablo R

"messing with the exchange rate would be a bad thing."

Why? We have the worst performing currency in the OECD. It is our number one economic problem.

The EEC had currency relationships pre Euro.

CER should have the same.

"I am more in favour of currency amalgamation with Oz, if handled right."

They do not support an ANZAC dollar, only us adopting their's. There is however nothing stopping us retaining an independent currency and linking ours to their's via a dirty float - say 75 to 85 cents Oz.

The local disadvantage, we have is high interest rates, could be turned into a strength - as it secures a lower value currency from challenge. No one would bet against the uradashis (savings investors). Thus we could maintain incentives to save and not spend and have higher investment in and profit returns from local production. This would increase national wealth.

[SPC]

Winches

"This stuff about currency rates is extremely tiresome."

Oh the resort to put down. Thanks for the attitude, can you back it up wih arguement in debate?

"There's probably a good arguments about the relevance of having our own independent currency, in the light of our small size and distance from our markets."

FFS, distance has nothing to do with currency markets.

The greater arguement is against continuing with the float, when it is so disadvantageous to our national economic well being. We have the worst performing one in the OECD - over-valuation and volatility.

AND the reason to have one's own currency, is to have independent monetary policy.

At present, Oz has a bit of a boom to suppress, but NSW is sluggish. We would be a bit like a state of Oz out of cycle to other states, if under their currency/monetary policy regime.

"Myself, I think there's definitely a problem with the risk costs that are imposed on exporters because of the currency."

Thats from the volatility alone, but the constant is lower returns because of over-valuation. This means a reluctance to invest to add value and the problem of financing R and D new plant etc, if profit margins are low.

"But, it's extremely frustrating to find people seriously discussing management of the currency as a solution to our economic problems."

Terribly snooty of you, perhaps you could back it up with some rationale - next try.

[SPC]

haha

"I accept that you are essentially talking about a devaluation but so what? That can be achived with a lowering of interest rates."

The connection between our vigourous anti-inflation regime and generally over-valued currency value is well known. Though terms of trade play a part too (also a problem as manufacturing struggles when farmers do well)

BUT lowering rates to manage currency value downward on a long term basis would compromise use of domestic monetary policy to restrain inflation.

The goal of a 75-85 cents Oz dirty float band limits the effect of domestic monetary policy on currency value. When high rates a maximum of 85 cents and when stimulating demand a low of 75 cents.

"You say it will not hurt manufacturing, well that would be true only if all their raw materials were sourced in NZ and our markets were either mainly domestic or much much closer."

Don't agree - if they sell locally, they benefit from the high cost of import cometititon, if they sell overseas they get greater returns. These gains are on the total content, not just materials and are therefore greater.