Capita tunnel syndrome
For the last 10 years, government economic growth targets have missed the mark with the Kiwi public.
We’re more motivated by national wellbeing, our health, education levels and environment than by pure wealth which is how the last two governments have chosen to measure our place in the world.
Basically we’re much more interested in a better quality of life than a higher standard of living.
Our politicians’ tunnel vision means they keep banging away at sterile comparative income measures, such as top half of OECD in income or matching Australia’s wealth by 2025.
This fixation actually goes back to the 90s.
As a result, attempts to prod us into action over our falling relative incomes will ultimately fail because they won’t have long-term voter support. There are five elections between now and 2025.
In fact all past ones have failed and we’re not off to a great start in the current run chase against Australia.
The targets of course are not just politically difficult. In fact this is probably the easy bit compared to organising our economy to lift its performance.
The New Zealand Institute is about to plug the target gap with its nzahead campaign for a “big picture” growth goal that has 16 measures including a traditional gross domestic product (gdp) one along with ones for inequality, education, unemployment, productivity, innovation and the environment.
The Institute wants New Zealanders to start talking about what really matters and how we measure those things we identify as important.
As I think the Institute found out when nailing down its 16 measures, this is a difficult exercise.
Calculations for standard of living and quality of life overlap – both include information on wealth and income, but standard of living uses it as the main measure while quality of life focuses more on general wellbeing.
But it’ll be the ‘big picture’ measure of how we’re doing overall as a nation that’ll motivate Kiwis to change, not harping on about falling incomes, gdp per capita etc.
The fact is we perform a hell of a lot better internationally in the ‘soft’ standard of living measures, such as education, health and environment than we do in income.
Economists have figured out that gdp measures are flawed; Kiwis just know it is by looking around them.
For example, in Mecer’s Quality of Living Global City 2009 rankings, Auckland comes in at fourth equal. Sydney is the top ranked Australian city at 10th; Wellington is 12th.
This compares our country ranking of 22nd in the OECD in terms of per capita gdp.
The Mercer survey evaluates social environments, health, education, public services, recreation, shopping (!), housing, and the natural and economic environments.
In the Growth and Innovation Advisory Board’s 2004 survey of Kiwi attitudes towards growth (there’s been nothing similar since) quality of life was rated the most important with 93% of respondents rating it very important or important.
Next highest was education (83%).
Standard of living wasn’t among the measures included, but the money ones came in well down with employment prospects appearing in 6th place (at 76 percent) of the 12 measures and the potential to increase personal wealth 7th (68%).
So our standard of living is not, to use the GIAB’s phrase, a “burning platform” for change. Well actually, this is a burning platform – we just don’t see it or feel it.
Our quality of life isn’t a burning platform. The latest New Zealand General Social Survey found that our level of overall life satisfaction (at nearly 86%) is broadly comparable with other countries including Canada, the United Kingdom and Australia.
You’d think someone along the line would have realised this reality when they tried to set and sell an economic target.
The latest mistake is the current Government’s “close the income gap with Australia by 2025”.
At one level it’s clever – it’s catchy and something easy to get your head around – but it presupposes that Kiwis actually see the need to do this.
Yeah, I know the target is there as a way of measuring progress, but BigCake is convinced that the Australia 2025 target mainly exists to impress voters.
The GIAB survey, and from what BigCake can see around him, indicates we don’t consider matching Australia as a meaningful target.
Same for Labour’s top half of the OECD in gdp per capita and Morrison and Co’s Measurable Goal project’s aim of gdp per capita in the top 10 by 2025.
We need a measurable economic goal, but it’s got to be one that motivates your average Kiwi.
As Peter Biggs from the GIAB said at the time of the survey: “I suspect New Zealanders have reached a point of confidence in their values that they are now a bottom line.
“If we are to encourage economic growth and innovation we need to start with these core values, create a values-driven growth strategy, and move forward on that basis.”
BigCake hopes the New Zealand Institute project may have at last started a public discussion on a broader confident Kiwi-focused approach to creating a target.
But any new target should not downplay the importance of what’s in the wallet. Our future as a first world nation depends on that.
The public reaction to planned tax changes comes down to a matter of faith in two things we mostly ain’t got much faith in – economic theory and politicians.
But a faith divide appears to have developed - some of us have more faith than others.
The rich appear to have it; the poor not.
The young have it; not the old.
BigCake would pick the poor and old as the bedrock of the growth skepticism movement – the belief that economic growth promises of the past have failed to deliver, so why trust current ones?
The public reaction to the Government’s planned tax and property rules changes, based on the latest Westpac McDermott Miller Consumer Confidence Index, is a variation on the old saying ‘what you believe depends on where you sit’.
The rich, and to a lesser extent the young, will be the winners from the increased GST/tax cuts tradeoff, so not surprisingly think it’s great.
Changes to property taxes will favour the young (houses will be cheaper to buy) and not be so good for the old (the houses they own will be worth less and if they have rental properties, they’re likely to lose the right to depreciate the building).
The poor (and maybe the old) probably won‘t be any poorer, but they won’t be a hell of a lot better off either, so predictably they are less enthused.
For this last group to see any upside in the changes, they need to have faith not only in politician promises to ensure no one (or at least very few people) will be worse off, but also faith in economic theory.
In short the theory is that, in the words of the Tax Working Group, “increasing the GST rate to 15% would …result in reducing the taxation bias against saving and investment”.
This is a good thing because without this bias there’ll be more savings and investment which will lead to more economic growth and more economic growth will be good for the poor.
Similarly, the theory is tax cuts are good for growth and the poor.
Join the dots and everyone will be happy…eventually.
Intriguingly there’s a suggestion that not all members of the Tax Working Group buy this wholesale. The report says “Most members of the Group consider that increasing the GST rate…”
Anyway, the poor and the old are not buying it.
BigCake suspects the public backlash over the increased GST/tax cuts package will quickly wash away after the changes are implemented.
But the Government’s tentative actions on the tax front highlight a mismatch between the Government’s economic growth aspirations, such as a “step change” and matching Australia’s wealth by 2025, and the reality of what it is doing.
Get the faith guys!
“Toughen up,” former Prime Minister Mike Moore’s reaction to New Zealanders supporting a merger with Australia. “We will not solve our economic problems by becoming a state or two states of Australia.”
An interesting thing about the Government’s 2025 catch Australia economic growth target is how rarely PM John Key and Finance Minister Bill English mention it.
They haven’t gone as far as former Labour PM Helen Clarke in denying that her Government even had a target to get New Zealand into the top half of the OECD’s wealth rankings by 2011, but there looks to be a real reluctance by National’s leaders to put the words 2025 and target in the same sentence.
In his 2010 Statement to Parliament, Key couldn’t bring himself to do it. In fact he only mentions 2025 once in the speech.
English, in a column in The New Zealand Herald setting the scene for 2010 and “significantly lifting our economic performance”, managed not to mention the 2025 target once.
Back in July last year Key, in a speech focusing on “longer-term economic objectives” achieved a similar feat.
Of course the “concrete” goal of closing the income gap with Australia by 2025 included in the National-ACT confidence and supply agreement has, in the Nats’ eyes, has become an aspiration.
Not alot of ownership going on here.
2025 is a political eternity (five elections) away, so its not surprising that there has not been a lot of political ownership (ACT perhaps excepted) over the target.
Will ACT leader Rodney Hide be in Parliament in five elections’ time? Same for Key and English?
Doubt it.
Having goal a long way out makes it safe (in politics and life). Clarke apparently spat the dummy over a commitment, made by a group of her over-excited ministers in 2001-2002, to get New Zealand in the top half of the OECD by 2011.
Labour’s goal eventually became the fairly meaningless “top half of OECD over time”.
Dropping the 2011 target was good political management, given Clarke knew her Government’s economic policies would never make this possible (her minister’s didn’t?), but bad for the country.
It was a lost opportunity.
Is history repeating?
Innovation maybe the single most important talent that will get us out of our economic growth quagmire, though we are not as crash hot at it now as we like to think we are.
But BigCake worries (based on the work of two Government taskforces) that we once again maybe taking a blinkered view of growth opportunities, this time in innovation.
As mentioned earlier (What the hell’s ‘good economic growth’?) any increase in the size of our economic cake has to be smart.
Applying innovation to New Zealand’s natural resources – frozen meat, aerial topdressing, the herring-bone milking sheds – helped make (and for a long while keep) New Zealand as one of the world’s wealthiest countries.
Disconcertingly we may not now be as good at innovation as we imagine we are.
An Innovation Index produced by IBM and the University of Auckland shows our overall innovation record has flatlined for the past decade, rising 13% between 1998 and 2000, then levelling off and dropping in 2008, no doubt recession induced.
Ummm, that’s what happen when you, in the words of think tank the New Zealand Institute, don’t make “as much effort as other small countries that are seeking advantage from innovation”.
BTW – the usual advice for companies in recessions is to increase their innovation spend. It may hurt, but will pay off latter.
Anyway, the Government has recognised the importance of innovation to economic growth, and that dread word productivity, by indicating it will make science and innovation a “priority” for new spending in this year’s Budget. Remember most of the public sector will be (in fact are) on starvation rations.
But there appears to have been a couple of gaps in thinking about the innovation issue when ministers commissioned taskforce reports into lifting our economic performance.
First up, Brash’s 2025 taskforce report only makes passing mention of innovation, mostly along the lines of: “What markets do best is to encourage innovation…”
Surprisingly the report does give a plug for Government intervention in the venture capital market – one of the big drivers of business innovation – through taxpayer investment in the NZ Venture Investment Fund.
The other oversight is raised by commercial lawyer Andrew Simmonds in an innovation perspective on the Capital Market Development Taskforce’s report.
He says the taskforce’s focus was “unduly narrow in two important areas”:
1) the report concentrates on the publicly funded elements of the innovation sector (universities and crown research institutes) and overlooks the large and vibrant private innovation sector and
2) the taskforce put “too much emphasis on growing innovation companies with NZ capital… In many situations, NZ innovation companies will be better served by offshore capital…”
This is a touchy area, but Simmonds is right and New Zealanders need to get over their reflexive attitude that overseas investment in our companies is bad.
It maybe so, but most of the time not, particularly for our exporters.
It’ll often come down to a choice between having a small New Zealand company that exclusively finances itself locally, or the opportunity for the Kiwi company to grow into a business of truly international scale.
This is not just about money. What international investors bring to the party include access to offshore markets, management experience and local knowledge in offshore markets.
Do we want 100 percent of a biscuit or half of a cake?
Don Brash’s speech to ACT’s annual conference at the weekend is a classic example of why some people should never be involved in the push for a greater level of economic growth.
As reported in today’s NZ Herald, Brash says any economic changes to do this will have to be done in the context of many voters being venal and ignorant.
Yeah, that’ll get people on side.
According to Brash the venality and ignorance was the result of the “failure of teachers to teach and politicians to explain some of the basic facts of life”.
“Note the near total failure of the public to see any connection between the sudden requirement by the Labour Government in 2008 that employers would have to pay the same amount to someone coming out of high school at 16 as they paid to an adult, and, the resulting very sharp increase in youth unemployment.
“Most of the public simply don’t get it. And this ignorance often appears to be actively fostered by the grossly superficial and sometimes totally misleading so-called news on state television.”
Okay, so teachers and the media are at fault. In Brash’s world of certainty it’s all very simple.
My problems with this is two-fold:
- Firstly, it completely lacks respect for the many New Zealanders who are growth skeptics and are so for good reason.
Between 1988 and 2004 the rich got richer and the poor got poorer. For a large part of that time Brash-style policies held sway.
The people are not ignorant. Why should they believe in something that has not delivered what was promised.
- Secondly, it’s dumb marketing. Calling fellow New Zealanders names is not going to help the cause that Brash has been given a prominent role in through heading the 2025 taskforce.
As I’ve pointed out previously (see Economic growth is good for me – yeah right) it’s easy for business people, academics and commentators to get mad about Kiwis not getting ‘it’ but a better idea would be to understand where the growth sceptics are coming from and where they want to go.
The latest issue of Idealog magazine has a story “Smile, you’re in New Zealistan” which as the mag points out is not an alternative universe, but where we’re heading.
I did a bit of research for this piece, so here’s some additional thoughts from BigCake.
In Borat’s Kazakhstan’s national anthem, the former Soviet republic is the “number one exporter of potassium” and has “industry best in world”.
And it’s supposedly not a bad place to live. As Borat’s creator Ali G said in response to legal threats from unimpressed Kazakh authorities, “Kazakhstan is as civilised as any other country in the world…Women can now travel on inside of bus”.
But wealthier than New Zealand?
This is not satire. Being poorer than the Kazakhs is the real world flip side of the Government’s dream of matching Australian incomes by 2025.
Hitting the Australian target will be hard. It would represent a monumental turn around in New Zealand’s ability to plan for, then generate, economic growth capable of matching that of countries we like to consider our equals.
Ending up behind Kazakhstan by 2025 will be easy. This path simply represents business as usual for New Zealand’s economic fortunes for the last 50 odd years.
Analysis by Morrison and Co put New Zealand at number 6 in world rankings for gross domestic product per capita in 1950; by 2007 we were at number 32.
The firm’s “Measurable goal for New Zealand” project reckons that by 2025 we’ll be ranked 47th – five places below Kazakhstan if New Zealand’s politicians, business people and citizens don’t change their ways.
BTW 47th is also 14 places below Botswana.
Morrison and Co admit their numbers have been thrown out by the global financial crisis, but stand by their drift.
This turn of events is not just going to put a dent in our fragile self image. In the real world it’ll mean we’ve slipped even further behind in our ability to pay for improved health care and education that an increasing number of countries will be taking for granted.
That new car or iPad (or whatever you have to have in 2025) will also be increasingly out of reach.
There are those among us who do not seem to be concerned by this turn of events. Others just don’t believe it.
At a basic level this is easily understood. New Zealand is still a great place to live. Statistics New Zealand’s General Social Survey revealed that 86 percent of New Zealanders were basically happy with their lives (and that’s in the middle of a recession).
As they say, money isn’t everything.
But BigCake believes we’re living in a dream world a great place to be while you’re still a sleep, but shitty when we eventually wake up.
Most Kiwis are uneasy with the idea of more economic growth and greater wealth. Historically we’ve always been very careful about how we share our riches.
But in the last 20 years or so there has been a new phenomenon – the rise of the growth sceptic.
The Kiwi growth sceptic is not only wary of what we do with the benefits of growth, but also not convinced that there is actually a lot of benefits in the first place.
And not without good reason.
Between 1988 and 2004 the rich got richer and the poor got poorer.
The Ministry of Social Development’s 2009 Social Report shows that in 2008 the disposable income of a household in the top 20% of income earners was 2.6 times that of the lowest 20%.
Twenty years earlier the ratio was 2.2 percent. Apart from 1991-1994 when income inequality “plateaued” and 2004-2007 when it fell, there has been a steady increase in inequality.
Most of the difference was due to a “larger overall rise in incomes” for the top 20 percent while there was also a small decrease in incomes for the bottom 20%.
According to the United Nations Development Programme, New Zealand ranks sixth worst in the world’s income inequality stakes.
Not surprisingly our faith and trust in economic change has been chewed up.
But old failings should not paralyse us now. We’ve had strong economic growth in the past, and ensured ‘fair shares’, and we can do it again.
Creating a bigger cake is the only way we are going to meet our expectations for healthcare, education, the environment and standard of living.
Unless we lift our level of economic growth above that of the recent past, we are going to be divvying up ever smaller slices of cake to an increasingly grumpy populace continually looking over its shoulder to see if anyone is getting more.
The fall out from our low-growth economy is already apparent in health.
The argument should not be about whether we should grow the cake, but on how. The how must include ‘fair shares’.
And change is happening whether we like it or not.
We have two choices:
• Do nothing and putter along in the economic slow lane and let the rest of the world pass us by on the way to better healthcare and education, higher standards of living, the new ipod or whatever or
• Take control of economic change and shape it to our needs and draw ahead.
BigCake supports change, but he’s not a cheer leader for the current Government’s economic agenda. Its fairness is yet to be proven, it takes a narrow view of the problems we face and probably won’t do much to help us catch up to the countries we (used to) like to think of as being our wealth equals.
It’s also not clear that what’s on offer is good growth growth that builds on our strengths and the values we want to keep.
There are five elections between now and 2025. Unless new Governments are confident that the majority of New Zealanders back policies that grow the economic cake, we ain’t going nowhere.
This is not an argument for any growth-inducing policies. We need to define “good growth” that reflects New Zealand’s history (including our ranking among the rich nations), culture, lifestyle and expectations.
By we I mean all New Zealanders (not just businesses, academics, commentators etc) telling politicians what future we want.
BigCake is about helping those New Zealanders who are not convinced by all this that good economic growth is possible, that not having it does matter and that it matters in deep and personal ways.
I don’t claim to have a ready set of answers to New Zealand’s economic problems, but will seek out the interesting, provocative and sometimes quirky ideas that are all around us.
And I encourages down-to-earth Kiwi scepticism. Some of what you read here you might not agree with, but hopefully will get you thinking.