Since the end of the Second World War, the New Zealand economy has not faced a more serious crisis than the Covid-19 induced recession. This recession is by far not over and the recovery will take years.
At this point in time New Zealand requires strong economic policies based on rigorous theoretical and empirical research. I worry that the shift in thinking under the Ardern governments will lead to bad policy decisions for Kiwis.
The focus on wellbeing and, most importantly, the associated ideological shift in thinking and culture has undermined the ability of economic research to inform policy making. This is visible, for example, by looking into who is responsible for economic policies: of the 54 senior management employees at Treasury, RBNZ, MBIE, and MFAT only two hold a PhD (of which one is in geography).
I have not come across this pattern in other countries. For example, at the Federal Reserve Bank in the US, senior management employees all hold PhDs, and many have extensive research experience. This is essential in order to be able to use research insights to design policies.
The Prime Minister herself has shown some rather questionable economic perspectives. At the 2019 World Economic Forum in Davos, for example, she said: “If you are a person sitting at home and post the GFC hear a politician stand up and say: ‘Well, according to what’s happening to GDP we are now in recovery phase […] and yet you’re there sitting there saying: I don’t feel that. My situation is not improving’.”
I have several problems with this example. First, it appears that there is a perception that GDP is a perfect measure and that economist and policy makers only care about this one variable. This is not true. Second, the problem here is not GDP it is inequality: you cannot blame a measure for being misused or misinterpreted. To me, this is equivalent to saying temperature is a useless measure, because it does a bad job of telling me how fast my car is going.
So far, the Ardern governments have promised many things but have achieved very little, and there are many examples of policies not guided by insights from economic research. The prime examples are KiwiBuild, the Wellbeing Budget, and the Living Standards Framework. The first Ardern government painted the picture that New Zealand was the first country in the world to focus on wellbeing.
This is wrong. In the first edition of The Economic Journal (a leading journal in the field of economics, published in the UK) in 1891, an article was published about living capital, so this is nothing new. It is also not true that this government was the first to focus on wellbeing in New Zealand. All previous governments, led by National or Labour, did spend money on health care, education, and so on.
Politicians, the people in the driving seat, can be as kind and compassionate as they like, but making economic decisions without evidence and research has the very real possibility of inflicting lasting harm.
All these examples and my reading of government reports and speeches related to, for example, fiscal policy (e.g. fiscal spending and debt financing) or monetary policy (e.g. negative interest rates or monetary policy to be used to steer the housing market) by senior officials document a missing appreciation of economic research. This is a worrying and dangerous development.
The term “economic growth” was mentioned 15 times on 147 pages of the Wellbeing Budget. “Wellbeing” is mentioned more than 300 times. Obviously, the Covid-19 recession and the economic losses due to aggressive lockdown decisions has changed this, as it is clear to everyone that it is time to foster growth and create jobs. However, the Wellbeing Budget sends a true signal about the intentions of the Government and what is yet to come.
In contrast to the current economic policy agenda, the Government needs to immediately develop and implement a growth strategy. Not doing so will endanger our future prosperity. The Government has already missed an opportunity after the first lockdown in 2020 to foster sustainable growth and productivity in the long run.
To achieve sustainable growth and productivity, it needs to appreciate and incorporate rigorous economic research in its policy decisions. This involves changing hiring practices in the middle and upper echelons of the agencies that steer our economic policy. By stocking these crucial positions in our economic engine with economic and financial PhD level-trained researchers, politicians will be guided by evidence.
I strongly recommend the implementation of a “Council of Economic Advisers” as used in the United States, tasked with independently advising the Prime Minister on economic policy, generating forecasts, and making policy recommendations. Doing so will help make the road ahead a lot easier to navigate. Politicians, the people in the driving seat, can be as kind and compassionate as they like, but making economic decisions without evidence and research has the very real possibility of inflicting lasting harm.
If our politicians look into New Zealand’s economic rearview mirror, they’ll see a number of discarded shells of ill-thought policies scattering the road. Will they continue driving blindly into the future, hoping they don’t hit a wall – or will they get some teammates to turn the lights on for them?
