Noted for July 29, 2013
Joan Robinson: Open letter from a Keynesian to a Marxist: Tuesday Sixty Years Ago on the Non-Internet Weblogging

The New Zealand Macro Austerity Cheerleaders: Noted for July 30, 2013

John Quiggin: Oz & NZ:

For a variety of reasons, I’ve been looking at the relative economic performance of Australia and New Zealand over the postwar period. For most of the 20th century, income per person in New Zealand grew in parallel with Australia. According to the Penn World Tables, income per person in New Zealand was within 10 per cent of the Australian level for most of the period from 1950 to 1970. Since the 1970s, NZ has declined greatly relative to Australia… [to about] 70 per cent…. Over most of this period, NZ has been governed by radical advocates of the free market. As part of my research, I’m collecting some of their claims about NZ economic performance, relative to Australia and the OECD. I’ve listed some over the fold (links a bit scrappy, as some predate the rise of the interwebs). Further contributions welcome, as would any interesting examples of more accurate assessments (I have some already).

After decades of policy errors and investment blunders, New Zealand appears to have finally diagnosed its predicament appropriately and is on a trajectory to maintain its economy as a consistent high performer among the OECD’ (Evans et al., 1996, p. 1895).

By managing its economy more effectively than [Australia has] since 1988, by undertaking courageous steps towards reform and opening up its economy to the world, and by dealing roughly, though at some considerable cost, with the cosy institutions of the past, it shows every sign of being on the brink of overtaking Australia perhaps before the centenary of Federation in terms of living standards and economic performance. PP McGuinness (quoted in Rankin 1995)

Those who argued for the reforms have been proved right and their critics have been proved wrong. (R Kerr, ‘No time to stop and smell the roses’, New Zealand Herald, 21/05/2005)

A decade [after 1984], New Zealand had one of the most competitive economies in the developed world. The government’s share of GDP had fallen to 27 percent, unemployment was a healthy 3 percent, and the top tax rate was 30 percent. The government went from 23 years of deficits to 17 years of surpluses and repaid most of the nation’s debt.Maurice McTigue, former Cabinet minister, writing in Reason (libertarian magazine, 2010)

a look across the Tasman shows Swan and Labor are victims only of their own appalling policy choices… The Key government cut its cloth to fit circumstances and chose prudence, tax cuts and growth. In contrast, Swan’s economic management looks dismal. Luke Malpass, New Zealand Initiative (formerly NZ Business Roundtable), in AFR 24/4/13

see Tim Kehoe “Recent Great Depressions: Aggregate Growth in New Zealand and Switzerland 1973–2000,” New Zealand Economic Papers (2003) 5–40, with Kim J. Ruhl. 'Throughout the 1950s and 60s real GDP per working-age person in New Zealand and Switzerland grew at rates at or above the 2 percent trend growth rate of the United States. Between 1973 and 2000, however, real GDP per working-age person in both countries has fallen a cumulative 30 percent below the trend growth path. Our growth accounting attributes almost all of the changes in output growth to changes in the growth of total factor productivity (TFP), and not to changes in labor or capital accumulation. A calibrated dynamic general equilibrium model that takes TFP as exogenous can explain almost the entire decline in relative output in both New Zealand and Switzerland. To understand the recent growth experiences in New Zealand and Switzerland, it is necessary to understand why TFP growth rates have fallen so much.' NZ’s total factor productivity growth rate fell a cumulative 30 per cent below its trend rate of 2% between 1974 and 1980. Why such in collapse in such a short period? Muldoonism?

Greg vP: While NZ has had a lot of bad policy imposed on it (for example, I think it’s one of only two advanced countries whose central bank is solely focussed on inflation, and the other isn’t doing so well either) I think three policy events stand out from the crowd of mistakes:- 1) The dismantling of the Kirk-Rowling contributory superannuation scheme by Muldoon. 2) The overnight deregulation imposed by Douglas and Co. NZ’s larger productive firms were exposed to international competition and mostly driven out of business; small firms are not as productive as large ones. They’re also not as able to innovate in processes. (Syverson, I think, suggests that this innovation is the locus of much TFP growth.) By altering the structure of the economy it has had second-order effects on TFP growth too. Having said that, I don’t think that the situation is as clear-cut as Kehoe and Ruhl 2003 makes out: it’s not all TFP. 3) The Employment Contracts Act 1991. This was designed to drive down wages, and it did; in the long run that drives down labour productivity. Here we are: in the long run. And of course there are the second-order effects that JQ notes in #12: young entrepreneurs and skilled professionals are in effect driven away to larger, richer markets, so there’s an ongoing absence of skill transference. (One of the senses in which I mean this: highly productive people lift the productivity of those they work with.)…

Tony Abbott (2010): there are other countries which have chosen a different path and there’s no evidence that their response has been any less effective than ours. For instance, in New Zealand they have tried to reform their way through the global financial crisis under the new government’s leadership and they seem to be doing pretty well