Monday, 3 November 2008

Key's economic understanding

Over at Kiwiblog David Farrar writes
John Key, if he wins the election, may be the most economically literate Prime Minister New Zealand has had in recent decades. I think he will have a far greater understanding of business and the economy, than most people realise. Why do I say this?
A good question. I have to say given what I have heard of Nationals economic polices I could not vote for them. Why?

To take a couple of examples. First, Nationals redundancy package. I have to ask why do we have such a scheme? Why do we want to treat unemployment during a recession and unemployment outside of a recession differently? (Vote buying aside, of course). Secondly, National's plan for more of the Cullen fund to flow into domestic investment projects. Not good. Such an idea has to reduce the return to the fund. If investment in New Zealand made the highest return, then we wouldn't need to legislate a 40% local investment rule, as the Cullen Fund managers would already have invested that amount here anyway. As a result, by "forcing" the fund to keep 40% here, we are reducing the return on our investment. Also what will the extra Cullen Fund investment do to the local market? Will this extra government investment just crowd out private investment, both from within New Zealand and from overseas. So the total amount of investment in New Zealand may not change much at all. And then there is the issue of what happens if politicians start to take an even more hands on approach to the fund. The last thing we need is for investment decisions to be made, not for good economic reasons, but purely for party political reasons. In addition as Matt Nolan has noted
Someone might say that “we are making job, and we’re making money” but they would be practically illiterate - just like the buy NZ made campaign. “Employment” and “domestic production” are not a positive externality. If we are investing money overseas and getting more goods back in return, then we are effectively getting “something” for “nothing” - what is wrong with that.
My colleague Eric worries that 40% Superfund investment in New Zealand seriously exposes the fund to the risk of correlated shocks. To wit: the government must use tax funds to pay superannuitants when the returns from the Superfund aren’t enough to cover obligations. If the Superfund is invested broadly, shocks to New Zealand’s tax revenues should be relatively uncorrelated with shocks to the Superfund’s returns, barring global shocks about which not much at all can be done. But if the Superfund has supernormal investments in New Zealand securities, shocks to Superfund returns are likely to hit precisely when tax revenues are at a low ebb, exposing the fisc to serious downside risk.

Thirdly there is National's approach to infrastructure investment. I have argued here that infrastructure is a loose term covering a collection of very different industries and assets and, importantly, that the government does not have a major role to play in many of them. There is also Matt Burgess's guest post as to why National's plan to spend $1.5 billion building fibre to the homes of 75% New Zealanders is not a good idea. I agree with Matt on this issue. Lastly there is National Party's decision not to move any state-owned enterprises to the private sector in, at least, its first term. I again I think is a mistake. The evidence we have on state ownership of business shows that in most cases private ownership is more efficient. Nellis (2006) for example, summaries this experience as
The vast majority of economic studies praise privatization's positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Moreover, contrary to popular conception, privatization has not contributed to maldistribution of income or increased poverty - at least in the best-studied Latin American cases. In sum, the technical picture is generally positive.
These are just four issues, but they are important ones where I think National has got it wrong. My view would be that good economics is not driving National's economic policy, vote buying is. And that is the worst possible basis for government policy of any kind.

So a dilemma, who to vote for? Perhaps the only thing worse that National's stated policies are Labour (and their coalition partners) policies over the last nine years. So voting Labour is out. What of Act? Their policies are the most sound, but a candidate vote is wasted vote anywhere outside Epsom. A party vote could help.

This does raise a question for me. Are bad economic policies necessary to be elected? Is Key right to put forward bad economic policies since he has come to the realisation that voters, unfortunately, like bad policies? If we take Caplan's "Myth of the Rational Voter" seriously then this could be the optimal approach to an election. Then we have to hope Key is lying as to his true intentions. If not, then neither of the major parties are worth voting for. Perhaps then the issue should be decided upon who the major parties are most likely to go into coalition with in the hope a coalition partner can mitigate the worst excesses of its major partner.
  • John Nellis (2006) "Privatization—A Summary Assessment", Center for Global Development Working Paper Number 87 March.


jeremy said...

Yes, I agree with all that. Indeed, it's not so long ago that the EQC realised that their innvestments in Muldoon directed NZGS would not be much use in paying for our earthquake damage. The 40% in NZ is daft - if the projects are worth investing then the money will come but before any money comes someone will have to work out how the return is packaged? Without packaging the road into some sort of joint stock venture how does the investor get paid?

Sean said...

Most economic literate PM...

The bar isn't exactly high...

Paul Walker said...

Sean. Unfortunately you are right, there have not been too many economically literate PMs in our history. In fact off the top of my head I can't think of any.

Anonymous said...

Oh come on guys, John Key in all probability is the most economically literate MP we have had in a generation.

However, NZers are economically illiterate, having been steeped in socialism for a very long time, and frightened by the brief exposure to a poorly handled transition to a better alternative in the late 80s-early 90s.

When I studied economics in the late 60s early 70s even the lecturers were raving socialists and Keynsians, with no idea who Hayek, Mises and Friedman were. Very frustrating.

You don't really think you are voting for John Key just for a 3 year term do you? Give him a break. He is looking to me more like a very able change manager with a lot more sensitivity and ability to make change stick than Roger or Ruth ever showed. He has learned from Roger, Ruth and Don that cold turkey is a hopeless change strategy in a democracy like ours.

Through years 6-9 I bet you will begin to warm to what he achieves to turn around the economic literacy and attitudes of this country and move it onto a fast growth path by consensus not by imposition from on high.

Sean said...


How much are you willing to bet?

phil sage (sagenz) said...

oh ffs. what a pile of academic bullshit. just as bad as clark and Cullen, albeit from the other side of the ideological tree. No basis in observable reality

The strategy is called backing yourself. Its what entrepreneurs do every time they start a business. You invest in your own business first. That has been missing since the sharks spun the average NZSX investor in the late eighties.

You also take no account of the GDP multiplier effect of investment in NZ on jobs and tax income and wealth vs an investment overseas.

Take a trip out of the ivory tower and observe how business really starts.

sorry to sound grumpy but I get sick of the same bs being spouted.

Paul Walker said...

Phil. What exactly is wrong with the comments I made about National's policies? Remember a country is not a company, being a good entrepreneur does not automatically mean you will be great at economic policy. Comparative advantage holds in these areas just as in any other.