In the long run, growth matters

In an article (pdf) in the Otago Daily Times, 23 May 2008, Roger Kerr writes,

“In the long run”, economist John Maynard Keynes said, “we are all dead.”

To which the best reply is, “Yes, but some of us have children.”

A better response would be to point out that "Keynes is now dead and we're stuck with the long run."

The more important point in the article is that it is the long run consequences of economic policy that matter for people,

... it is the long term that matters for increases in material standards of living for most people.

As Paul Krugman has noted

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)

Productivity underlies economic growth and it is the increases in economic growth that drives increases in the standard of living. It takes time, but growth is the only way we have to improve the standard of living for people. The recent report, The Growth Report: Strategies for Sustained Growth and Inclusive Development, by The Commission on Growth and Development, notes that growth is the way to reduce poverty and increase a country's standard of living. Michael Spence, the Commission Chair and Nobel Laureate in Economics, puts it this way,

The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth.

The basic idea is as true for New Zealand as it is for India, China or Africa. To improve New Zealand's standard of living we need policies that improve productivity and growth. But as Kerr points out in his ODT piece, policies over the term of the Clark government have done little to help improve productivity and growth. Kerr writes,

Inevitably, it has taken a long time for bad policies to take their toll – economic performance does not change quickly, and many of the former policies have been maintained. But eight years down the track we can see that the economy has reverted to a mediocre level of performance.

The clearest indicator of the damage is the slump in productivity growth, which has more than halved from the trend rates of the 1990s. So much for the government's goal of returning living standards to the top half of the OECD.

He goes on to say

As well, households are under pressure from price increases, employment growth is tailing off and outward migration is rising, central and local government spending and regulation is stifling the productive sector, and the current account deficit is large.

The size of the current account deficit is in all probability not that much of a problem. It just tells us that investment in New Zealand is greater than savings in New Zealand.

The major issue that flows from this is, What will we see after the election? The current situation tells us we need a change in policy direction. But as Kerr notes

... it will take time again to change speed and direction. We must hope that whatever government is in office after the election recognises the need to vigorously pursue much higher quality policies.

Indeed. But what we have heard so far from the major parties doesn't leave me with much hope.