The Unravelling of Labour's Economic Strategy
Below is my column in the NBR today - it's a critique of the government's economic strategy - though in the interests of non-partisanship it should first be pointed out that it's not as if the National Party are offering anything better - in fact, the Nats still haven't thought up an economic strategy, other than "steady as she goes". You can read the column at this link, https://www.nbr.co.nz/node/232187 or here:
Earlier this year Finance Minister, Grant Robertson, was full of hubris. Buoyed by the temporary “elimination” of the virus, he painted himself as saviour, describing NZ as the “envy of many countries in the world”. His 2021 Budget Speech, whose theme was “Accelerating our Recovery”, was detached from reality. It implied his government had successfully put the worst behind us. It was reminiscent of US President George W. Bush’s “Mission Accomplished” fiasco, when he prematurely declared the Iraq War over. “Wage growth, at nearly 3% a year will outpace inflation”, Robertson boasted. How embarrassing. The inflation rate has hit nearly 5% this year, far outstripping wages, and consumers expect it to go higher. Now, just a few months later, he does not talk so loud, nor does he seem so proud.
How did the great unravelling occur? The essence of the collapse stems from the Finance Minister’s slogan, “a strong public health response [to the virus] proved to be the best economic response”. Once Robertson went and nailed the colours of the nation’s economic strategy to the mast of its elimination policy, when the latter sank, the former went down with ship. The no-trade-off, we-can-have-ourcake-and-eat-it-too sound-bite evaporated just before Auckland ended its Level 4 lockdown. Mayor Phil Goff summed up its demise when he said, "the psychological pressures of the long level 4 lockdown are growing and the financial pressures on businesses and jobs … I always listen to the epidemiologists ... but they're looking at it through one lens ... there are other implications of staying at level 4”.
On a deeper level, Labour’s economic strategy this past year confused the drivers of short-run growth with those of long-run prosperity. The GDP growth numbers which the Finance Minister bragged about in his Budget Speech were due to a spending splurge that occurred after last year’s lock-down ended. But the drivers of long-run prosperity are different. They depend on supply-side factors, like the skill base of the workforce. As such, Robertson’s job was not to gloat about how Kiwis were packing back into the Warehouse. Instead, it was to help firms overcome skill shortages and supply-chain disruptions, not to mention travel restrictions, brought on by an avalanche of virus rules & regulations.
The Productivity Commission should have been set to work on this urgent task. After all, advising on how to ensure the efficient functioning of business is what it was set up to do. Instead, the Finance Minister asked the Commission to “bolster” its focus on well-being, which is the subject of a debate not far removed from the meaning of life, and little to do with the constraints that businesses presently face.
What’s more, in the teeth of one of NZ’s biggest ever adverse shocks, Robertson never prioritized resources, thereby embodying the Stanford economist, Thomas Sowell’s, line that, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” In our Finance Minister’s case, he kept paying $10 billion per annum in unnecessary transfers to the wealthiest families for their children to attend university, to movie studios in Hollywood, to the racing industry, to the highest earners in the nation for their winter energy bills & as subsidies to their Kiwi Saver accounts, to name but a few.
Due to a failure to prioritize, the huge bills stemming from schemes like the wage subsidy created a funding crisis. As a result, the government had no option but to massively borrow. Robertson’s justification was that since Sir Michael Cullen and Sir Bill English had been competent economic custodians, paying down public debt, this gave him a license to ratchet it back up, without cuts to non-urgent programs.
Further, it was Labour’s number one chief duty to increase health-care funding on a scale way greater than has been done this past year. Instead, the government became preoccupied with the scrapping of District Health Boards, irrelevant to the emergency at hand. Meanwhile, the slow vaccine roll-out, whereby 85% of Pfizer supplies weren’t ordered until March 2021, became the single most costly mistake ever made by a Kiwi government. It is the primary factor behind our current lockdown and has caused incalculable adverse economic and psychological effects.
As for the Reserve Bank of NZ’s failed $100 billion Quantitative Easing program, it symbolized the Finance Minister’s mismanagement of this institution. That program’s covert aim was to help Labour win the last election by creating “cheap” money. Yet it whipped up house price inflation. Wealth inequality went sky-high. Consumer price inflation is now sharply rising as well, a predictable outcome which was not forecast by the RBNZ’s 250 staffers. Unsurprising, though, given that the majority of its Directors and Senior Leadership Team are untrained in economics.
Yes, Robertson’s 2021 Budget has not stood the test of time. Its assumption of a strong economy confused the drivers of short-run growth with those of long-run prosperity. It did not prioritize resources and thereby exploded borrowing. It continued to subsidize high earners at a time when resources were scarce. It underfunded health-care in the midst of a health crisis. The slow vaccine roll-out led to the paralysis of a nation. And the Reserve Bank’s politically motivated money-printing program caused skyrocketing inequality.
The greatest irony of all is that a staunchly leftist Finance Minister has jeopardized the lives and livelihoods of low income Kiwis, who are the ones most affected by this storm, in a way that would make even the most extreme right-winger blush. Never fear, though. The government’s Ministry of Truth will shortly correct the errors and falsifications in this article should they start to gain traction.