• Re-opening the Debate

    Something important has happened in New Zealand politics. After two and a half decades in which economic policy has been a no-go area for political discussion, we have at last seen the beginnings of a debate about what is potentially the central issue of our politics.
    “There is no alternative” was very much Mrs Thatcher’s mantra, but it held equal sway in New Zealand. Indeed, it has been even more significant here, because the aggressive free-market orthodoxy first introduced by a Labour government was then reinforced by their National successors. As a consequence, the major parties chose not to engage each other over the basic principles of economic policy, and the whole question of how our economy should be run was consigned to the sidelines.
    The reluctance to discuss economic policy was nevertheless surprising, given the constantly expressed concern and disappointment at our poor economic performance. As the gap between New Zealand and Australia widened, and our productivity figures remained stubbornly unimpressive, the finger was pointed at every conceivable explanation – bar the obvious one. It is only now that the realisation seems at last to have dawned that our comparative economic decline might – just might – have something to do with the economic policy settings we have faithfully followed for twenty five years.
    For most of that period, we have slavishly adhered to the view that government’s involvement in the economy should be limited to regulating monetary conditions and that even that limited function should be delegated to unelected bankers charged with the equally limited goal of controlling inflation. Beyond that, the rest of the economy could safely be left, it was thought, to look after itself.
    It turned out that things were not so simple. The apparently simple and technical question of controlling inflation through interest rates and exchange rates proved to have important and unfortunate consequences for the real economy. The productive sectors of our economy were constantly handicapped by high interest rates and an overvalued dollar, and by secondary consequences like the relative attractiveness of investing in property as opposed to productive capacity and of bingeing on cheap imports as opposed to saving. There was, in other words, a price to pay for using instruments like the exchange rate for purposes they were not meant for.
    Government over this period, of course, was let off the hook, disclaiming any responsibility for managing the economy as a whole. It was content to dabble in micro-economics, and in balancing its own books, but showed no interest in issues of competitiveness or demand management. Macro-economics simply did not exist.
    So, what has changed? The Labour opposition has been thinking. They seem to have grasped that there is no upside in either electoral or practical terms in simply agreeing with the government, and that the evidence before our eyes demands that New Zealand should strike out in a new direction.
    So, the two-party consensus on economic policy is at an end. It is proposed that the purpose and techniques of government’s involvement in economic policy should change. Macro-economic policy is back.
    What are the chances of the debate taking off? They are better than one might imagine. The current government continues to stick to orthodoxy, but they are led by a pragmatist. Sooner or later, and hopefully sooner, John Key is going to realise that he and his government will get nowhere near the goals they have set themselves if they continue to slog along the same road that has led nowhere for so long. That would mean just watching the Australian tail lights disappearing into the distance.
    There is also reason to hope that the official mind might be less rigid than it has seemed for so long. The regime at the Reserve Bank under Alan Bollard is clearly less doctrinaire than it was under Don Brash. Even the Treasury cannot be entirely immune from common sense.
    To get the debate under way is not of course to win the argument. But whatever the outcome, our public life will be stronger for re-opening a real discussion about the role of government in achieving economic success. And not for the first time, we might even lead a world-wide trend.
    The voters may or may not reward Labour for its courage in challenging an orthodoxy that has prevailed for so long. But we all owe Labour a debt of gratitude for starting a debate that is long overdue.
    Bryan Gould

    25 October 2010
    This article was published in the NZ Herald on 27 October.