Category: Uncategorized

The Government’s Growth Strategy Seems to Have Little Analytic Content.

In 1990, the Prime Minister, Geoffrey Palmer, announced that he would halve unemployment – its rate was then more than 7 percent of the labour force. An OIA request turned up no technical papers. Apparently, the PM’s political advisers – jock wankers/politicos – thought the aspiration would go down well with the public.

More recently, the Minister of Workplace Relations, Brooke van Velden, presented a ‘Health and Safety Reform Construction announcement’ which proved to be, according to one exasperated journalist, ‘an announcement of an announcement you hope to make later in the year once you know what it is you’re announcing’. As the minister explained, her non-announcement (about the regulation of scaffolding) was ‘because people are really excited about this stuff. You should put it up on your website and see what response you get.’ Aspiration without content.

As Jonathan Milne in Newsroom newsletter commented:

Banning cellphones in schools when schools already had their own policies restricting cellphone use. Setting up a road cone tip line, inviting people to dob in excessive cone use. Banning gang patches. Banning voters from enrolling in the last 13 days before polling day. They’re striking initiatives, guaranteed headlines and social media clicks. But what they have in common is the dearth of actual evidence behind them. They’re dreamed up in party-political strategy brainstorming sessions. There’s little reference to the subject specialists in the public service; there’s no prior consultation with the wider public and those who are affected.

An earlier, and perhaps more portentous, initiative was Christopher Luxon’s announcement that he was leading an ‘economic growth’ government.

Presumably he and his political advisers saw that the public thought the Luxon-led Government was drifting. (This is January 2025.) How could they seize the initiative? Economic growth was their suggestion, which Luxon adopted. But how to add content to the narrative? Cough, cough. ‘We’ll make Nicola Willis the minister for economic growth.’ As far as the politicos were concerned, the problem was solved. What was the analytic content?

Appointing Willis as Minister of Economic Development placed her in charge of the large amorphous department, Ministry of Business, Innovation and Employment, which had been created by Stephen Joyce in what was seen as a power grab. (It appears to have been partly to demote the previous minister, Melissa Lee, out of cabinet; I leave the politics to others.)

MBIE is really a ministry of miscellaneous economic affairs, with (over half the cabinet ministers holding or sharing its portfolios). It is not thought to function well and needs to get its various divisions to work better together. Handing it over to the Minister of Finance, who usually has enough on their plate, is odd. (Willis is also Minister of Social Investment.) In principle she is more powerful than Joyce ever was. I am surprised that there was no one else in cabinet to take the job.

Willis has not made much of a mark. She is in the public eye for trying to increase competition in the supermarket sector and reduce the price of butter, hardly matters central to the finance or development portfolios. David Cunliffe, when a junior minister in the Clark-Cullen Labour Government, was charged with increasing competition in the telecommunications industry (and got it right). Minister of Finance Michael Cullen told me he was right behind him, but the leg work was by the more junior minister. Willis is out front.

It is hard to see that the announcement has had much effect other than the ministerial reshuffle. The key ministers driving the government’s economic growth agenda are Chris Bishop, Shane Jones and David Seymour. The first two ministers are doing much as you would expect – improving infrastructure and exploiting resources. (Perhaps add Todd McLay, minister of trade negotiations, since thrust from the external sector is vital.)

Seymour’s involvement reflects a changing perception, here and overseas, of the determinants of economic growth. Economic theory has tended to downplay transaction costs – they are so difficult analytically. There are some Nobel laureates for transaction costs – notably Ronald Coase and Oliver Williamson – but there is little connecting their work to economic growth.

There has been recently an increasing focus on how transaction costs from public sector procedures are limiting economic growth. (Not a lot of attention is given to private sector transaction costs, which might suggest there is a whiff of neoliberal economics in the thinking.) There are a number of other ministers and ministries – over half a dozen on my count – who are also addressing regulatory standards. The most prominent, which does not mean the most effective, is Seymour’s Ministry of Regulation. In principle, its concern is improving the quality of public regulation. Sometimes the impression is that it is adding to the regulatory burden, as in the case of the Regulatory Standards Bill.

Of course, reducing the regulatory process may be a good thing if the resources it releases get usefully deployed elsewhere. But the gains are likely to be small in terms of GDP and not affect the growth rate. On the other hand, too little regulation can be a disaster. The reductions of building regulation led to the tragedy of leaky buildings, estimated to cost the housing sector alone between $11b and $33b plus a lot of heartache and some deaths.

I am not unsympathetic to the argument that some of our regulatory processes are unnecessarily burdensome and could be simplified. (I’ll address their impact on economic growth shortly.) But regulations serve other – often valid – purposes.

The most common justification is ‘market failure’ when unregulated market transactions damage GDP (as in the case of leaky buildings). Two others are often overlooked.

One is that where economic output is not the same as wellbeing, an intervention may shift economic activity towards higher wellbeing, albeit at the cost of depressing GDP. For instance, most healthcare interventions cannot be justified in terms of enhancing GDP but they add to longevity and the quality of life. Cut them back and since people will experience poorer health and die earlier, GDP per capita will go up.

Second, regulation usually has a distributional impact. In simple terms there are winners and losers. Changing regulation changes the balance between them. Abolishing them can abolish some people’s implicit property rights. For instance, some of the environmental regulations give the public, collectively, entitlements to environmental resources which they do not privately own. The effect of the Regulatory Standards Bill is to prioritise explicit private property rights over implicit ones. (The bill would be a better if it made this trade-off more explicit by requiring the reviewing process to identify them.)

I have long been looking at whether regulatory changes affect New Zealand’s economic growth rate. There have been constant promises to improve the growth rate, but there is not the slightest evidence that anyone has succeeded. (By ‘slightest’, I mean within the known margins of measurement error – say plus/minus 0.2 percent p.a.) I concluded that good economic policies keep the boat moving forward but no faster.

That was especially true with the major changes to regulation implemented by the Rogernomes. I had expected there would be gains and tried so hard to find them; I could find none. (I found some improvements in the ‘quality’ of output which are not incorporated in the measurement of GDP.)

Given the way the economy is tracking, I shan’t be surprised if per capita GDP is much the same at the time of the next election as it was when Luxon announced that economic growth was the government strategy (the level will be lower than it was in late 2022). Probably output will be moving up in late 2026 after stagnating this year. No doubt there will be confusion between a cyclical recovery and sustainable growth; a common mistake which politicians in charge like to encourage.

The Luxon-led Government’s political advisers may well be looking for a new slogan. At the National Party conference, he announced that the New Zealand economy was ‘turning the corner’. One is reminded of Muldoon’s announcement of there being a ‘light at the end of the tunnel’. It proved to be a train coming the other way. We don’t know what is around the corner. 

Angus Deaton’s ‘Economics in America’ challenges the direction that economics has taken.

In 2015 Angus Deaton was the sole awardee of the Bank of Sweden’s Prize in Honour of Alfred Nobel, for his contributions in the study of ‘consumption, poverty and welfare’. (It has been relatively rare for this Nobel to recognise poverty or welfare; nowadays the award covers a slightly wider remit than just economics.) The Royal Swedish Academy of Sciences, which makes the award, said that ‘more than anyone else, Angus Deaton has enhanced this [understanding of economic policy intended to reduce poverty]. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics’.

Deaton described himself as ‘someone who’s concerned with the poor of the world and how people behave, and what gives them a good life’. His Deaths of Disease and the Future of Capitalism, which he coauthored with his wife Anne Case, illustrates both his concerns and how innovative he (they) can be.

He grew up in Scotland, going to Cambridge University where he graduated with a doctorate. Forty years ago he took up a chair at Princeton University near New York. Thus he is both an immigrant and well embedded in American life, which is a good place from which to provide an insight into the state of economics and US, as his memoir Economics in America: An Immigrant Economist Explores the Land of Inequality well illustrates. (If you think ‘civilised economist’ is an oxymoron, you have not read this book.)

Of course, American economics is not the whole of economics, but some 71 of the 93 Nobel laureates were born in the US, and a goodly number of the remainder spent most of their working lives at American universities; American economics dominates the economics profession.

Deaton reports that when he shifted to the United States from England, he was struck by how little attention was paid by American economists to distributional economics, which perforce means by the economics profession as a whole. I won’t say he has trod a lonely path, but certainly it has been the path less trodden.

For example, some years ago, I was looking at some New Zealand research which was trying to estimate the gains from reducing border protection. The assumptions in the model ensured there would be gains; at issue was how much? The research concluded that they would amount to an increase of about 0.3% of output. What the research did not notice was that the changing shape of the economy had real wages falling by about 5% amd profits correspondingly rising, which meant that the distributional impact of the proposed policy change was far greater than the gain in efficiency. The winners gains from the redistribution far exceeded the gains from greater allocative efficiency. 

I am not arguing these figures were correct. The point here is that the researcher did not notice the distributional implications of the research. Had I raised it with him, I would have been dismissed by the argument that workers could be compensated for their loss of income, but there would have been no consequent discussion of how the compensation would be implemented – that would involve raising taxes.

That is the story of much public discussion about the economy since. Lots of attention to efficiency gains – which are often quite small (and promised rather than measured) – and no attention to distributional impacts, which can be quite large. I often observe advocacy based upon efficiency gains – promised but not measured – without any attention to the effects on equity. Surprise, surprise; the advocate would be one of the beneficiaries from the gain. Even less surprising, the change is resisted – to the incomprehension of advocates – by those who will be made worse off; advocates attribute it to ‘politics’ (which they pretend to be above). Distributional economics is one of the most complex and difficult parts of economics, but that is no excuse for ignoring it, especially if the analysis is about policy.

Take, as but one example, the Regulatory Standards Bill and let us assume the charitable interpretation that its purpose is to provide a more systematic review of a regulation when it is being introduced. I would have thought that any systematic review would identify winners and losers but there is hardly any reference to that in the proposal. The exception is that a review is required to identify the losses (but not the gains) of those with property rights – commercial capital. One might have expected a similar provision for losses for those with human capital – their earnings. On that the bill is silent. (Even that addition would not cover wider distributional issues such as the degree of income and social inequality and poverty.)

Such criticisms are not peculiar to New Zealand; much of our economic debate echoes that in the US and elsewhere. That is what Deaton is challenging in public policy, area after public area, including health economics, which combines distributional issues with challenging technical ones. Deaton points out that while the healthcare sector consumes about 15 percent of US output (less in New Zealand), there are comparatively few health economists, and they generally have lower status (also true in New Zealand).

Deaton is not a minor economist. Among his recognitions are that he holds a prestigious economics chair at Princeton University, which is globally ranked among ten universities for economics and econometrics (most of them are American). He has been elected president of the American Economic Association. Deaton is an insider writing from the inside.

A great autobiographical memoir describes a journey through life, its vistas changing. Last year, Deaton wrote that he had changed his mind on large parts of the mainstream economics he had previously supported. While acknowledging that economics had achieved much, he concluded, that economists’ mistakes showed how ‘economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Adam Smith once did.’

The final chapter of his memoir, entitled ‘Is Economic Failure a Failure of Economics?’ is as an impassioned and informed essay on the state of economics as I have come across for some time – Keynes would have been proud to have written it. It is so dense, balanced and thoughtful that any paraphrase would be inadequate. I suggest you sneak into your local (good) bookshop and begin reading it. I bet you buy the book.

Winning office is not the same as achieving change.

A recent Economist columnist divided politicians and their political advisers into either ‘jock wankers’ or ‘nerd wankers’. It’s a distinction which I use here, but with the less pejorative ‘politicos’ and ‘policy wonks’.

In opposition, the politicos are primarily concerned with getting their party elected; in government their concern is maintaining party support to get the government reelected. The Economist recalls ‘a period of swaggering jocks, charming or bollocking journalists until they wrote something nice about Sir Tony Blair’.

The policy wonks are concerned about the development of effective policy. Of course there is overlap between the two but it is characteristic of the politicos to be concerned about articulating (often poorly defined) policy goals which sound plausible but are not implementable. Think of boot camps for which there is no evidence of their effectiveness – let alone cost effectiveness – but resonate with the public and so win votes. How many policy proposals of this government – indeed of every incoming government – are on the list of such examples?

Very often the politicos have studied politics at university and pop up in advisory positions to incumbent politicians. There are lots of good reasons for studying political processes but, alas, understanding how policy is made is not one of them in New Zealand. In principle, one can take policy studies courses, but my impression is they don’t contain enough gritty case studies – the devil is in the detail.

A salient example of the approach of ‘politicos’ is Elon Musk who having helped Trump get elected, wanted to downsize the US government. Even if we ignore his exaggerated promises typical of the Trump administration, his attempts were a failure because he had no understanding of how the bureaucracy worked; the outcome has been damage followed by (often ineffective) damage control.

The distinction is useful to understand the ‘paradox of Jacinda’. Ardern with a degree in communications and politics and an adult life spent in politics, was a prime minister who was superb in her first term to the extent that her party won a majority of seats in the election at its end. But in the second term, it lost support to the point that she retired early and her party was electorally demolished.

A common trope is that her loss of popularity was because she was a woman, but that has not applied to the same degree to Jenny Shipley, Helen Clark or Judith Collins. The Economist dichotomy provides useful insights, although it is not a perfect fit.

As signalled by the title of her memoir, A Different Kind of Leadership, Ardern saw herself as a leader, skills greatly required in her first term during a number of crises, notably the Covid pandemic and the mosque massacres. (I just marvelled at her handling of the latter, although it is likely that Bill English, say, would have done as well leading during the brunt of the pandemic.)

Her Labour Government could excuse itself for not having much policy during its first term because it was generally quite unprepared for winning the 2017 election. A few – very few – ministers were prepared but their achievements did not amount to an overall direction. Ardern promised ‘transformation’ but that was aspiration without content.

Fortunately for her, and for her Labour Government, the first term was riddled with issues where leadership was vital; Ardern handled them well. Hence the election of a majority Labour Government in 2020. Now was the time for policy which would lead to the promised transformation.

It did not happen. It was not so much that the government was unprepared for policy changes but there was no coherence in the overall direction and some, especially the penchant for centralisation, were in the wrong direction. I have detailed this in my book In Open Seas.

Ultimate responsibility rests with Ardern and her Minister of Finance, Grant Robertson. They may be contrasted with their predecessors, Helen Clark and Michael Cullen, both of whom were policy wonks. (That I give them this attribute does not mean I support all their directions. I have various hesitations with Clark; Cullen I am more comfortable with. Bill English was a policy wonk too; Key was not, as his abortive attempt to change the flag demonstrates – his role was political leadership.)

It is instructive that Ardern’s policy achievement with the greatest transformational potential was the 2018 Child Poverty Reduction Act which gets little mention in her memoir (see my Chapter 22). Arden was not the policy wonk to implement its strategy; she largely employed advisers like her. They were rich with goodwill towards the ambition, but they did not understand the technical issues – the devil is in the detail. The act became aspirational and has achieved little.

I puzzle over Robertson. He too was a politics graduate but had more experience outside the political system. (I am not judging his macroeconomic management here.) In the end I conclude he was not a policy wonk like Cullen or English. He too proposed a transformational policy, probably driven by work which began in Treasury even before English. But the promise to pursue wellbeing rather than output was never bedded in, despite it being, in my view, the economic approach of the future. (See my Chapter 2.) Instructively, it was hardly mentioned in Labour’s 2023 campaign (poverty reduction couldn’t be because there was hardly any). There was not the sort of dual leadership which characterised the Key-English Government.

Instructively, the current Luxon-led Government has wound back most of the Ardern-Hipkins legacies. It was partly because some were misconceived, but also because the current government has a quite different account of the economy and its future. They have yet to convince us it is forward looking.

Neither Christopher Luxon nor Nicola Willis are policy wonks, although some ministers are dealing with their portfolios more than competently. Luxon’s ‘going for growth’ strategy seems to have come from the politicos among his advisers. They are all sausage and no sizzle. Thus the increasing dismay of the public towards the government. Same happened to the recent Labour Government in its second term.

If there are any policy wonks near the current government, they may be advising ACT although they show little of the political judgement of politicos. 

It is too early to judge the efforts of the Opposition – whether Labour has learned from its failure in government. (It should read my book; even if I have it wrong it may stimulate them to get it less so.) Aotearoa New Zealand is going through a rapid social and economic transition but most of the public discussion is backward looking.

The choice between politicos and wonks is that the politicos are better at attaining and maintaining office, but their policy achievements are aspirational and rarely effective; policy wonks find it harder to get elected but when they are, they have the power to change. The Economist article is about getting the balance right.

Winning office is not the same as achieving change.

A recent Economist columnist divided politicians and their political advisers into either ‘jock wankers’ or ‘nerd wankers’. It’s a distinction which I use here, but with the less pejorative ‘politicos’ and ‘policy wonks’.

In opposition, the politicos are primarily concerned with getting their party elected; in government their concern is maintaining party support to get the government reelected. The Economist recalls ‘a period of swaggering jocks, charming or bollocking journalists until they wrote something nice about Sir Tony Blair’.

The policy wonks are concerned about the development of effective policy. Of course there is overlap between the two but it is characteristic of the politicos to be concerned about articulating (often poorly defined) policy goals which sound plausible but are not implementable. Think of boot camps for which there is no evidence of their effectiveness – let alone cost effectiveness – but resonate with the public and so win votes. How many policy proposals of this government – indeed of every incoming government – are on the list of such examples?

Very often the politicos have studied politics at university and pop up in advisory positions to incumbent politicians. There are lots of good reasons for studying political processes but, alas, understanding how policy is made is not one of them in New Zealand. In principle, one can take policy studies courses, but my impression is they don’t contain enough gritty case studies – the devil is in the detail.

A salient example of the approach of ‘politicos’ is Elon Musk who having helped Trump get elected, wanted to downsize the US government. Even if we ignore his exaggerated promises typical of the Trump administration, his attempts were a failure because he had no understanding of how the bureaucracy worked; the outcome has been damage followed by (often ineffective) damage control.

The distinction is useful to understand the ‘paradox of Jacinda’. Ardern with a degree in communications and politics and an adult life spent in politics, was a prime minister who was superb in her first term to the extent that her party won a majority of seats in the election at its end. But in the second term, it lost support to the point that she retired early and her party was electorally demolished.

A common trope is that her loss of popularity was because she was a woman, but that has not applied to the same degree to Jenny Shipley, Helen Clark or Judith Collins. The Economist dichotomy provides useful insights, although it is not a perfect fit.

As signalled by the title of her memoir, A Different Kind of Leadership, Ardern saw herself as a leader, skills greatly required in her first term during a number of crises, notably the Covid pandemic and the mosque massacres. (I just marvelled at her handling of the latter, although it is likely that Bill English, say, would have done as well leading during the brunt of the pandemic.)

Her Labour Government could excuse itself for not having much policy during its first term because it was generally quite unprepared for winning the 2017 election. A few – very few – ministers were prepared but their achievements did not amount to an overall direction. Ardern promised ‘transformation’ but that was aspiration without content.

Fortunately for her, and for her Labour Government, the first term was riddled with issues where leadership was vital; Ardern handled them well. Hence the election of a majority Labour Government in 2020. Now was the time for policy which would lead to the promised transformation.

It did not happen. It was not so much that the government was unprepared for policy changes but there was no coherence in the overall direction and some, especially the penchant for centralisation, were in the wrong direction. I have detailed this in my book In Open Seas.

Ultimate responsibility rests with Ardern and her Minister of Finance, Grant Robertson. They may be contrasted with their predecessors, Helen Clark and Michael Cullen, both of whom were policy wonks. (That I give them this attribute does not mean I support all their directions. I have various hesitations with Clark; Cullen I am more comfortable with. Bill English was a policy wonk too; Key was not, as his abortive attempt to change the flag demonstrates – his role was political leadership.)

It is instructive that Ardern’s policy achievement with the greatest transformational potential was the 2018 Child Poverty Reduction Act which gets little mention in her memoir (see my Chapter 22). Arden was not the policy wonk to implement its strategy; she largely employed advisers like her. They were rich with goodwill towards the ambition, but they did not understand the technical issues – the devil is in the detail. The act became aspirational and has achieved little.

I puzzle over Robertson. He too was a politics graduate but had more experience outside the political system. (I am not judging his macroeconomic management here.) In the end I conclude he was not a policy wonk like Cullen or English. He too proposed a transformational policy, probably driven by work which began in Treasury even before English. But the promise to pursue wellbeing rather than output was never bedded in, despite it being, in my view, the economic approach of the future. (See my Chapter 2.) Instructively, it was hardly mentioned in Labour’s 2023 campaign (poverty reduction couldn’t be because there was hardly any). There was not the sort of dual leadership which characterised the Key-English Government.

Instructively, the current Luxon-led Government has wound back most of the Ardern-Hipkins legacies. It was partly because some were misconceived, but also because the current government has a quite different account of the economy and its future. They have yet to convince us it is forward looking.

Neither Christopher Luxon nor Nicola Willis are policy wonks, although some ministers are dealing with their portfolios more than competently. Luxon’s ‘going for growth’ strategy seems to have come from the politicos among his advisers. They are all sausage and no sizzle. Thus the increasing dismay of the public towards the government. Same happened to the recent Labour Government in its second term.

If there are any policy wonks near the current government, they may be advising ACT although they show little of the political judgement of politicos. 

It is too early to judge the efforts of the Opposition – whether Labour has learned from its failure in government. (It should read my book; even if I have it wrong it may stimulate them to get it less so.) Aotearoa New Zealand is going through a rapid social and economic transition but most of the public discussion is backward looking.

The choice between politicos and wonks is that the politicos are better at attaining and maintaining office, but their policy achievements are aspirational and rarely effective; policy wonks find it harder to get elected but when they are, they have the power to change. The Economist article is about getting the balance right.

Why is the British Labour Government penalising its poor?

We have the spectacle of the Starmer-led British Labour Government taking measures which are making some of the most struggling Brits worse off. It has got to the point where Labour’s parliamentary backbench is revolting and the government has had to make partial concessions – the latest is a backdown over cutting disability and sickness benefits. It’s hard not to see Keir Starmer and Chancellor of the Exchequer, Rachel Reeves, practising fiscal austerity.

The underlying reason is that the British economy is stagnating. Since the 2008 Global Financial Crisis there has been no real growth in British per capita GDP. The economy is producing a quarter less than it would have if the pre-GFC trend had continued. (There are other affluent economies which are similar, so it is not just Brexit.)

You may think that if per capita GDP is flat, then things are not getting any worse, and ask why some people have to be made worse off. Leave aside that when there is an average of zero economic growth there are many people whose income is decreasing (offset by those whose incomes are increasing); averages can be misleading.

As this column has had occasion to point out, when focusing on the average, output (income) is not the same as wellbeing, nor does an increase in output necessarily mean progress. Indeed some rise in output may be associated with making things worse.

The most recent example was how smartphones – which have added to GDP – seem to have made adolescents worse off. Once young adults reported themselves happier than mid-age adults and about the same as the elderly. It was described as the ‘U Curve’ of wellbeing by age but today’s generation say that on average they are more miserable than all those older – happiness increases with age. The youth’s state may not be economically induced – we do not have the research evidence although one can think of causal processes – but it illustrates how ‘progress’ may not be progress. This is but an example. Do be cautious about equating GDP growth with social progress.

Additionally in Britain, and for much of the West, there are plans to increase military spending – mainly as a result of Russian aggression but not helped by Trump or Netanyahu. The output may increase national security but I doubt that people think it adds to their personal wellbeing. However, it diverts public spending from activities that they think will do so.

A further ongoing issue is that during a period of fiscal austerity some measures are delayed – in New Zealand we have held back on building public infrastructure – and the consequences of the failure eventfully catch up, adding to the fiscal pressures.

The British fiscal position is gloomy. Currently the budget deficit is about 5 percent of GDP while the public debt-to-annual GDP ratio is near 100 percent. While these figures may be defined slightly differently from New Zealand’s, they are certainly higher than ours. So the economy has little room for a boost in private and public spending. What to do?

The easy option is to talk about boosting sustainable economic growth, but despite the clamour of (conflicting) policy proposals, few are based on evidence or even explain the current long-term stagnation (and, to be honest, I am puzzled too). Even those policies which might boost growth will do so sometime in the future (when the current proponents are no longer in power).

 

Why not borrow more? This would amount to future generations paying for current consumption (and might explain why young adults are so melancholy). But most countries are nearing their public borrowing limits, in that lenders are becoming increasingly reluctant to hold more government debt. In a curious way (and presumably unintentionally), lenders are guarding the interests of future generations (although not out of benevolence). *

Britain’s independent Office for Budget Responsibility has warned that British public finances are in a relatively vulnerable position, with pension costs, climate change and volatile bond markets all posing significant risks. It observed that the UK has ‘the sixth-highest debt, fifth-highest deficit and third-highest borrowing costs among 36 advanced economies’. There is not a lot of room for fiscal manoeuvre, so Reeves has had to restrain or cut national expenditure.

That need not be public expenditure. Private expenditure could bear the burden by raising tax levels. Thus far, Reeves has been unwilling to do so in a major way, although she introduces increases where she thinks she can get away with it. (Jacinda Ardern ruled out her government raising tax rates, thereby drastically limiting Labour’s ability to implement the policies its supporters wanted including reducing inequality and child poverty. Nevertheless, desperate for revenue, her Minister of Finance, Grant Robertson, inched in new taxes whenever he could get away with it.)

I am not sure why Reeves and Starmer are so loath to raise tax levels other than the usual one that taxpayers don’t like them (but they don’t like the alternative policies of inadequate public services either). In New Zealand there are also vociferous neo-liberal lobbies which are opposed to any increases in taxation and therefore, being good fiscal conservatives, support cutting government spending. (Some of their work identifying shoddy government spending is to be applauded. They should be on select committees.)

So a Cabinet has to make choices. Think of it having a list ranging from the unavoidable (say, in the British case, increased military spending) to the nice-to-have, each accurately costed. (Actually they don’t; this is a simplification.) The list will include possible public spending cuts with financial gains. Tot up how much money there is to spend, go down the list until it is all spent, and cut off all those below it. It is not as simple as that but it illustrates the spirit of the exercise.

There will be divisions within cabinet. The amount of consultation outside will vary both directly with caucus and indirectly by budget leaks. The 1958 Black Budget was notorious for there being little consultation; the following Holyoake Government had very full consultation with its caucus. That would be difficult given the British Labour caucus totals more than 400 MPs.

Whatever the extent of the consultation, over 100 members of the caucus threatened to vote against some of the recent measures. The Starmer-Reeves Government made concessions. (There had been earlier upwellings but the Labour Government did not pay them enough attention.)

I’ve laboured through this process – even then it has been simplified – because the nature of the resistance is similar to what commonly happens here. The criticism was about a particular policy but there was no attention given to the underlying cause of fiscal restraint and no mention of how any alternative policy was to be funded. It was likely that the Labour cabinet was not enthusiastic about the cuts. They just had higher priorities on their list – healthcare would have been one (and the dissenters would have been just as unhappy had some healthcare programs been cut).

The economist who sees tradeoffs – there is no such thing as a free lunch – finds such public debates uncomfortable. There are almost overwhelming demands for the government to spend more (or to cut taxes so the private sector can spend more) but the constraints it faces are typically ignored or vague. Curiously, the ‘left’ tends to be more precise, with more specific proposals to raise taxes to fund their spending demands; the right tends to be vaguer about what public spending should be reduced to pay for their demanded tax cuts. Both drift towards taxing future generations – that is, borrowing.

The Starmer-Reeves Government plans to fund the concessions they made to their revolting caucus have been deferred to the end of the year. The hints are that there may be a tax increase. It is not easy governing in times of stagnation – being in Opposition is almost better and certainly easier.

* There is a crude Keynesianism that governments are borrowing from their public and have almost unlimited borrowing power. It would be tiresome to detail all it faults – Keynes would have been appalled; he spent a lot of effort negotiating US loans for Britain – but a key one is that countries are open to the world and are borrowing directly or indirectly offshore.

We should not assume that all adopted innovations are progressive. Jonathon Haidt’s ‘The Anxious Generation’ illustrates that sometimes they require social measures to enhance well being.

The Anxious Generation is a book which probably everyone engaging with adolescents should read. Haidt’s thesis is that smartphones replacing flip phones led to a marked deterioration in the wellbeing of American adolescents, causing an epidemic of mental illness. He is a social psychologist so I am not qualified to judge how right Haidt is but he certainly appears convincing. (I also greatly admired his The Righteous Mind, where he is acting as a public intellectual.)

The thesis reminded me of the wider problem of how to deal with technological innovation. Smart phones are an impressive technology, but do they improve wellbeing? Are they progress?

Progress is a relatively recent notion in the history of humankind. Plato described how once there had been a golden age, and how things have gone downhill since. When Copernicus proposed that the earth went around the sun, the conventional wisdom comforted itself that Pythagoras had already thought of that; it couldn’t be new knowledge, could it?

About five hundred years ago, the view developed that not all valid knowledge was imbedded in the past – in books – but that it would evolve out of empirical investigation. An early proponent was Francis Bacon in his Novum Organum (written a decade after the King James Bible, but in Latin). That approach has since driven science. In a meaningful sense science is progressive because it builds on past results modifying and discarding old theories.

This is nicely illustrated by the suggestion that were Plato to be reincarnated there would be a bidding war for him – no doubt won by Harvard, the world’s richest university. (This is not to say that there have been no great philosophers since but I would go to a lecture by Plato – providing it was in English and not Greek.) However a reincarnated Archimedes, the greatest Greek scientist, would be relegated to a 14-year-old’s maths class. Science progresses.

Science creates technologies – ‘blueprints’ for doing things which get applied to human endeavour, most notable with the economy. Before science, per capita economic output had been constant for millennia. Had economies stagnated at that level, today’s per capita output would be a fifteenth of its current level. (That does not mean we are fifteen times happier, or even any happier. But we have undreamed of choice and opportunity and live longer and healthier lives.)

Thus we think of technology as progressive too. But is it? The answer has to be cautious. Just because someone is promoting the new, it is not necessarily beneficial. Very often the real benefit comes after we have provided a social framework for its use.

That’s what Haidt is saying about smartphones. He is not against them but thinks that there should be rules for their use:

•             1. No smartphones before high schools;

•             2. No social media before 16;

•             3. Phone-free schools;

•             4. Far more unsupervised play and childhood independence.

I am not in a position to assess these policies, but an economist notes that the first two cannot be implemented by the state and yet are not simply a matter for individual parents since they won’t want their child to be left out if everyone else has them. The third could be state-imposed, but in my view it’s a direction to be implemented by individual schools to allow for local particularities (and to work with parents to effect the first two recommendations). The fourth is very much parental – read the book about how it fits in.

Sometimes greater state intervention is necessary. Laissez faire does not always work especially when a new technology arises. But a caution: we don’t usually know when a significant new technology appears how to regulate it. Smoking is a good instance.

Legislation was passed in 1907 to ban tobacco sales to persons under the age of 16, as it was feared that tobacco would ‘stunt’ a minor’s growth. It was a response to the introduction of cheap cigarettes. A feature of the parliamentary debate was that MPs said that smoking was appropriate for adults (i.e. themselves) but they were concerned for adolescents. They had no evidence.

It took half a century for scientists to be sure that smoking was harmful to the smokers. By then, there were powerful tobacco companies which not only opposed control but deliberately suppressed their evidence that smoking was damaging to health. Given that tobacco is also addictive, it has taken till now to reduce tobacco usage substantially.

The new development is vaping. We don’t know how damaging it is – it will take a generation of vapers to assess its impact on their health with confidence; the 1907 debate indicates that initial assessments can be very wrong. The current advice is that it is better to vape than smoke but who knows? Best give up both.

Vaping is but one recent innovation with puzzling impacts. Make your own list of concerns: AI, social media, microplastics, smartphones … it goes on.

This column appears to make conflicting recommendations. One is that almost every significant technological change will need a public policy response which the longer we leave, the harder it will be to overcome entrenched interests. But second, identifying appropriate policy responses early is difficult and we may get them very wrong.

It must be a concern that we do not have much capacity to introduce early responses. The changes that this government has made to science funding have virtually closed down serious social science research except what can be funded under the medical science remit. (Much of what was previously funded was so woke it hardly counted as serious research, but that should have been addressed by tightening up criteria and appointing more credible selection panels.) We are left very exposed to failing to use many new technologies in a socially effectively way.

Importing findings from other countries is hardly the whole answer. We need local research capacity to channel overseas research into New Zealand for responses to the innovations may be affected by cultural circumstances. This is nicely illustrated when Haidt describes quite different responses by boys and girls to smartphones (although both end up with higher rates of mental illness). Readers will not be surprised by the differences; Haidt does not tease out why. If there is this difference within America – Haidt mainly focuses on American Whites implying that things may be further different for Blacks and Latinos – then how much of his analysis is relevant here in Aotearoa New Zealand? (The answer must be some – but which?)

The government’s focus on economic growth means it is concerned with technological innovation. Given there is no certainty that the innovation will enhance wellbeing and that some will be detrimental, it is unwise not to strengthen relevant social science, instead of relying on the laissez faire of low government involvement. Haidt’s The Anxious Generation illustrates its dangers, while the book’s drawing on a wide range of American social science research illustrates that neglecting it here will compound those dangers.

What can you do when you have hit your borrowing limit and still want to spend?

One option is to cut back on maintenance of your capital – say, to delay repainting the house or keeping the car in tip-top condition. The government does the same. Hence our three water systems leaking, polluting and flooding; hence the deteriorating quality of the state housing and other buildings such as schools and hospitals ….

Another option is not to add to your capital assets – the car is still outside because you can’t afford to build a garage. Government does the same. Roads, schools and hospitals are crowded when they should be extended …

Or you can borrow sneakily on a credit card or by hire purchase. This is much more limited in the case of the government. The standards set by the 1989 Public Finance Act require reporting all borrowing including that in Public Private Partnerships (PPPs). Part of the reason for the 1989 change was that previous governments – especially Robert Muldoon’s – had been de facto borrowing by giving guarantees to private borrowers which were not reported to Parliament. That failure screwed up the debate of the ‘Think Big’ major projects; had the public known, the resulting decisions would have been different and less costly to the public purse.

But there is a more cunning form of de facto sneaky borrowing which is even more expensive. You can only afford to buy a house an inconvenient distance from the job, so you pay through the nose in the costs of travelling to and from work; you cannot afford to buy a house, so you rent from a landlord who in effect buys it for you and charges you a rent, the total cost of which is higher than if you had purchased the house yourself. The current government seems to be reduced to pursuing such strategies.

For that is the consequence of the Minister of Health’s announcement that he expects Health New Zealand (HNZ) to take out ten-year contracts with private health providers to deliver surgery. This is structural outsourcing, a form of privatisation (although the minister would deny the claim). Since a public hospital could hire the labour inputs directly, the essence of such HNZ ten-year contracts is the government hiring buildings and equipment it cannot supply itself (while giving the private hospital the security of cash flow to be able to borrow to acquire the buildings and equipment).

The minister could have given a direction to HNZ that it install the buildings and equipment for itself. But that would have involved funding public investment and the government judges that it has reached its borrowing limit. It is behaving like a credit-limited person.

At this point I have to deviate from the economics column and discuss whether the outsourcing will compromise the public health system. There are many with far more expertise in the area than this columnist who think that it will. (For instance, Ian Powell argues that ‘increasing the use of private hospitals for elective surgeries will normalise a two-tier system and enable the Government to perpetuate the continuing neglect of public health and further running down public hospitals’.) *

Only an ideologue thinks the private sector will necessarily be more efficient that the public sector (and sufficiently so to pay its higher cost of capital) without evidence. I have not seen many studies and those I have compared delivery where the treatment has been routine rather than complex. Moreover, it is rare for them to allow for the costs of professional training, which public hospitals (mainly) do.

Complexity would appear to be critical. I’ve just read Ivor Popovich’s A Dim Prognosis: Our Health System in Crisis — and A Doctor’s View on How to Fix It, which is salutary for somebody who has never worked in a hospital (and also a bloody good read). Admittedly, as he says, he highlights the medical crises and not the more boring bits. Popovich works in intensive care and there are currently no proposals to outsource that sort of care. But any operation can go wrong and as its complexity goes up, most of us would prefer to be near an ICU.

There are two issues an economist might raise. First is that these ten-year contracts amount to PPPs. I leave it to the accountants to decide whether they should appear as a liability in government accounts, but in economic terms they are an indirect borrowing for capital investment as a consequence of the government’s borrowing being restricted. We should consider costs when making outsourcing healthcare decisions, but it is ridiculous that the primary determinant should be some arbitrary borrowing rule.

(At this point it might be useful to reread last week’s column which explains how lenders function and why the government faces a borrowing constraint.)

So I want to suggest a way around the rule acceptable to the lenders, which means it will have to be transparent and sensible.

During the attempt to commercialise the public health system in the early 1990s – one could argue that the minister’s new directive is related to the notions driving that commercialisation – I argued there was a case for separating out the management of hospital buildings from the management of healthcare services. This corporatisation – for they would still be public-owned entities – would have involved the (then) AHBs renting the buildings from the hospital building owners, who would be managing them as commercial properties. The separation was to get AHBs to focus on healthcare delivery, which is quite a different exercise from managing buildings. As a general rule, ask an agency to do two such different tasks and it will do both badly.

This is not as extreme a proposal as it might at first seem. That is already how private hospitals function. The doctors using them lease facilities from the hospitals; they don’t own them. Moreover, it is not too different from the debt proposals of the previous Labour Government’s three waters scheme – that had other weaknesses.

The State Owned Enterprise would borrow for extensions. The resulting debt would appear on the government books. Lenders would be more relaxed about this addition, not only because it would be transparent also because it was set off against tangible development. In effect lenders would accept a higher public debt-to-GDP ratio because in the end it is not the number which matters but whether the debt is well managed.

To be clear, I am not trying to get the government to borrow sneakily. That is inefficient, it distorts decisions and is anti-democratic. But we need a regime which treats the provision of quality healthcare on its merits, undistorted by the need to get around accounting and banking rules.

* I am not ideologically opposed to outsourcing. Almost everyone agrees that the public healthcare system should be outsourcing to primary care. Too often patients are turning up at hospital emergency departments because they have not seen their general practitioners or went to see their GP far too late. That is both inefficient and also compromises the public’s health.

Why Government borrowing is limited

This column started out to explain how the proposed structural outsourcing of public surgery was partly a consequence of the peculiarities of our fiscal borrowing practices. In summary, the restriction on the government’s debt level means seeking indirect ways to provide the required capital. One way of doing this is ‘leasing’ the capital from the private sector. Next week I’ll explain how that is done in the healthcare sector; this week is to explain where the debt constraint comes from.

The consequence is that we either make some hard decisions or we undermine the future of the New Zealand economy by having too much debt and not enough capital. Wilkins Micawber reminds us it is not much fun being a debtor.

New Zealand’s Debt Strategy

The asymmetry between borrower and lender is well illustrated by Keynes telling the New Zealand Minister of Finance, William Downie Stewart, that New Zealand should borrow as much as it could to offset the Great Depression, but if he (Keynes) were a lender he would probably not be prepared to advance New Zealand any more.

Each lender has to make an assessment of the borrower’s ability to service and repay the loan in the future. The lender is likely to be more cautious about that prospect than the borrower. Arguably, the financial cost to the lender of failure is greater than the cost to the borrower. (However, the human cost may be less, although this is not usually a major consideration in such financial decisions.)

This superior position of lenders frames New Zealand’s debt policy. The government judges that its net-debt-to-annual-GDP ratio should not exceed 50 percent (based on its chosen debt measure). Because there is a need for a margin for emergencies – like the Great Depression – the government targets 30 percent. Currently the ratio is about 40 percent as a result of measures taken during the Covid pandemic.

In my view a 20 percent margin for emergencies is reasonable, so I focus on the 50 percent ratio. It largely comes from discussions with credit rating agencies (CRAs) and larger lenders. A credit rating saves every potential lender going through the same process of assessing the risk of default. The awarded grade help sets an industrywide benchmark – the higher the grade, the lower the risk and the lower the interest rate charged, not only for the government but for private borrowers too. As Keynes indicated, their judgement is decisive even if it is irrational (which it need not be).

I have never been at an assessment meeting with representatives of a CRA but I have had discussions with a number of those that have. I was told that the raters are sophisticated and knowledgeable; their questioning can put the New Zealand team under considerable pressure (which, those who have told me to their chagrin, is usually justified). CRAs do not just look at the government-defined debt ratio (which has varied under different regimes) and they include the NZ Super Fund assets in their assessments. They also look at private foreign debt, especially the offshore debt of the private banking system, because it can affect the ability of the government to service its debt.

This was well illustrated during the GFC, because a deterioration in the liquidity of foreign exchange markets meant the banks might not have been able to roll over their maturing offshore debt and could have turned to the Reserve Bank, forcing it to do the international borrowing instead.

I am certain that the CRAs are tetchy about borrowing for consumption. I’d like to think they accept that such borrowing can be temporarily justified during an emergency, as occurred with the GFC and the Covid pandemic, just as you would do during a household crisis. But, as I reported in an earlier column, the government’s relative net worth is projected to decline from about 40 percent of GDP this year to under 36 percent in 2029. That suggests we are borrowing for consumption and running down the public assets.

Borrowing for Development

Credit rating agencies are more benign towards funding investment for development (providing politicians are not syphoning off funds for personal use). Even so, there are caveats which mean that there will still be limits to how much lenders are willing to advance. Vogel’s publicity, aimed at lenders to fund his ‘think big’ development, insisted that New Zealand’s total debt was not high. Attitudes have not changed much since.

Consider the Ardern-Hipkins Government’s three-waters proposal which involved $10b and more of funding for future investment on fresh, waste and storm water systems. It would have made no sense to load onto this generation the cost of the infrastructure which provides for four and more generations. It seems that the Treasury was keen to keep the debt off their books and potential lenders were asked to advise which of the various funding options was most acceptable to them. This was one of the sources of the contorted policy; politics was another. The lesson is that funding arrangements affect the ability of New Zealand to develop.

Can we do better? First, because it is generally considered last, the private sector has a role. The more it borrows overseas, the more it compromises our credit rating, making it more expensive for the government to borrow. The more we save, the less we borrow overseas. There are some fine-tuning options. For instance, foreign direct investment in businesses is considered less compromising than bank borrowing. (Since the GFC, the Reserve Bank has reduced the exposure of the banking system to short-term international crises.)

Second, the CRAs probably think the government accounts remained exposed. (The government goes on and on about reducing borrowing but it is the debt and net worth levels which really matter; perhaps they don’t want the public to notice that net worth is deteriorating.)

Third, it seems likely that lenders would be more willing to make advances where it is transparent that the funds are being invested competently in real infrastructure. That suggests that separate entities may be relevant. I illustrate this in regard to hospitals next column.

The measures outlined require sacrifices to implement. But there is no easy alternative unless compromising the future of New Zealand is easy.

Footnote: I would not expect my readers to make this mistake, but they may have to remind friends that the government issuing cash is borrowing. In effect a banknote is an anonymous deposit in the Reserve Bank. (Issue too much cash and people try to dispose of it for goods which can contribute to inflationary pressures.)

In the 2004 film Downfall (Der Untergang), which portrays Hitler’s last days in a Berlin bunker, he says that if the German people are weak they deserve death. It is a view from philosopher Friedrich Nietzsche who argued that conflicts are won by those with the strongest will. The particular situation shows the flaw in the argument. Whatever the will, there is not always a way; there has to be the resources. The film has Hitler ordering his nonexistent armies to resist the allies, but they had already been overwhelmed by Russian boots and American weaponry.

I was reminded of Downfall by Fintan O’Toole’s description of Trump’s version of history that the default condition of American capitalism is global capitalism; if it has been lost, it can be restored by sheer political will. I do not equate Hitler and Trump – there are parallels and there are perpendiculars. I am drawing attention to the parallel of the importance each ascribes to political will and the danger of not having the resources to back it.

Therein sits the inherent failure of the Trump strategy to make America great again. He is correct that America is not as relatively powerful as it was once – say after the Second World War, when the US share of world GDP was 27 percent while next down were the Soviet Union and Britain at about 7 percent each, and only the US had nuclear weapons. Currently, China’s GDP is about 19 percent of the world total, with the US at 15 percent, fractionally ahead of the EU. Russia and Britain are in the 2-3 percent group with Indonesia, Brazil and Turkey, while India (8%) and Japan at (4%) sit above. (GDP is measured in common prices.)

This column is about economics but there is an endnote about military strength; in the long run it also depends upon the economic base. A second endnote reviews the international monetary world order; this column focuses on trade.

Economists have a reasonably coherent account to explain America’s falling share of world output. To simplify, it is hard to progress the technological frontier which drives economic growth at the top of the affluent economy hierarchy; it is easier to import existing technologies and apply them once local governance is favourable. (There are lots of complications and caveats, many of which I wrote about in Globalisation and the Wealth of Nations.) But basically, we should not be surprised that the US share has decreased as other economies have grown faster. It happened to Britain in an earlier era, as America and the European continent with their larger populations overtook it. I shall not be surprised if eventually the world returns to the pattern of 1750, when the relative size of economies roughly corresponded to the relative size of their populations; of course there are complications and caveats.

Trump and many Americans have an entirely different explanation for America’s relative decline. They think politicians (of both parties) and the Washington bureaucracy have not had the will to maintain the US hegemony, making concessions to other countries at the expense of America. A leader with strength of character and purpose will not just stay the decline but reverse it, making America great again.

An economist finds this a difficult proposition; here I focus on the policy responses. The logic of this success-by-strength approach is for the strong to operate bilaterally. In a bilateral negotiation the stronger party can win by bullying the weaker one. Trump repeatedly tries this approach, hence his abandoning the multilateral trading system. The US is usually stronger than the other party, but in the case of China the two contestants are more equal. (This is also true for the European Union but its clumsy political structure, which gives many of its countries a near veto, has led to Trumpian America interfering in domestic politics to create regimes more favourable to MAGA.)

Other economies are much smaller and offer the possibility of successfully divide and conquer. Thus far the strategy has hardly worked because the smaller have sat tight rather than settle. Some have concluded that by working together they can resist the bullying. ASEAN, a loose federation of 10 South East Asian economies which collectively make up about 6 percent of the world’s GDP, is aiming to increase cooperation – including that none will make concessions to the US which harm the other nine – and to diversify which means working more closely with China, the EU and Japan. China is particularly keen because it would welcome a greater leadership role in the international economy, although it faces a number of limitations. (Who wants to replace one bully with another?)

Regrettably, much of our public discussion on international relations ignores its economic dimension (it’s a bit like Hitler and his armies) Meanwhile, the government has long been pursuing international cooperation and diversification, which will be vital in these troubled times. But Australia aside, we have few natural allies and Australia at about 1 percent of world’s GDP is only a larger tiddler – we are a sixth of Australia. (Sure, we may have special responsibilities towards nations in the South Pacific but they have even less economic leverage.) Our preference is for a multilateral world order based on the rule of law. That is not Trump’s, nor have recent US presidents – and, especially, the US Senate – seen it as a priority.

That is the irony of MAGA. It will not reverse the long-term diversification of the world economy but it may speed it up. The US will increasingly need friends too, but ‘America First’ is alienating them. It is certainly not going to make the country great again. Trump’s policies are undermining the arts and literature, science and technology, universities and its moral leadership, which is what has really made America ‘great’. While he may be trying to make America dominant again, the logic of the world’s economic development is that the dominance objective will fail whatever the strength of will of its leadership.

Endnote on Military Spending. The military story is slightly different but as revealing. The US totals about 22 percent of the world’s military spending at common prices, compared with 12 percent for China and 9 percent for Russia, together almost equalling the US total. But NATO, excluding the US, pitches in another16 percent. What is unusual about the US spend is that it is worldwide, whereas most other countries’ military are focused on their backyards. Ukraine uses just over 5 percent (including that supplied by NATO countries) so there are other factors which affect the effectiveness of the spend, but only by so much. That the US is insisting its NATO allies spend more suggests that it judges there are severe limitations to its ability to police the whole world.

Endnote on the International Monetary Order. The US dollar dominates the world monetary system more than the US dominates the world economy. The issue is not that the US dollar is internationally the common unit and means of exchange. Critical is its share in international currency reserves. That is steadily diminishing as central banks reserves increase the share of other currencies (especially the euro). Nothing Trump has done will reverse the trend. His ‘big beautiful’ budget measures may accelerate the decline since it not easy to see how a reserve currency can be backed by a government with trillions of dollars of debt. However, in the immediate future the world will still depend upon the US Fed (Federal Reserve) in an international financial crisis, as it did in the 2008 GFC. In turn, the Fed has to be backed by the US Government which may this time be less reliable, especially if a cabinet of billionaires is more concerned with its personal fortunes rather than the world’s. The central banks governing the euro, renminbi and yen have been strengthening their abilities to play a greater role than in 2008, but they are not there yet.

The Government’s plans to remove the wellbeing provisions in the Public Finance Act represents a reversal of the way society is travelling.

 I welcomed the Ardern-Robertson’s Government decision to focus on wellbeing in its budgets. It went on to amend the Public Finance Act to require the government to state the wellbeing objectives that will guide its Budget decisions. The Luxon Coalition Government has a bill before a parliamentary select committee to repeal that provision.

My support for wellbeing as a more relevant notion than simply income evolved over the years. I was taught that the main determinant of utility (the notion we had then for wellbeing) was material spending, which was a function of income; perhaps it was the only economic variable which mattered. The basic model was so pervasive it seems to be hardwired into many people’s thinking and many economists’ models. There were some obvious extensions such as goods and services supplied by other sources like the government and whether the decision unit is the person or the family, while a time dimension is needed, but they do not undermine the model.

The difficulty with the proposition is that in an affluent economy additional income does not seem to add much to individuals’ life satisfaction (caveats to come). There is an effect but it is tiny – doubling one’s spending power gives about the same lift to happiness as an average marriage. Moreover, using American data which goes back to the 1940s, it does not seem that the average level of happiness has lifted much even though average real incomes have about trebled.

There are two major caveats. It would seem that a lift in the incomes of the poorest fifth of the population will increase their life satisfaction. There is nothing in the research or this column to suggest that we should ignore poverty. Second, there is evidence that happiness rises with rising incomes in economies which are much less affluent than we are (so poor nations are right to pursue rising material incomes to improve wellbeing). That suggests that in the late nineteenth century when the equation between well-being and income was being bedded into economics, equating material satisfaction with life satisfaction may have been a plausible assumption. With growing affluence we have gone past that simple equivalence. Those who still cling to the first proposition may not be so much wrong, as they are a century out of date; their economic models are increasingly irrelevant to the challenges we face.

Sure, income is a relatively precise notion and economics knows quite a bit about how it increases. Wellbeing is a much less rigorous notion. Keynes pointed out that it is better to be vaguely right than precisely wrong.

The task facing twenty-first-century economists and other social scientists is to improve our understanding of wellbeing, based on evidence rather than a nineteenth-century dependence upon introspection and anecdote. Probably economics goes only so far. The wellbeing chapter of In Open Seas uses Maslow’s hierarchy of needs to show that the economy provides only the foundation of wellbeing, not its totality. It’s a humbler task than that which economists tend to claim; we can do it better.

Progressing these insights is not easy, but they are fundamental to thinking about the future of the economy. That is why the first analytic chapter of my In Open Seas is titled ‘Wellbeing’ and explores and extends these issues in far more detail than there is room for here.

This does not rule out economic growth measured, say, as hourly labour productivity. But we might expect that the benefits of growth to appear increasingly in fewer hours of paid employment rather than in increased material consumption and more expenditure on public goods. (I did not use the term ‘leisure’ because many seem to use much of the additional time in the non-paid labour force.)

I am not alone with these concerns. The New Zealand Treasury grappled with them under Bill English with its ‘living standards framework’ which had a pentagon of economic growth, sustainability, increasing equity, social cohesion and managing risks (here and here). I am not saying they got it right but that they recognised the issue. Treasury was responding to thinking at the OECD.

Where the Ardern-Robertson Government got its commitment to a wellbeing budget is not known. (Presumably Treasury advice was one source.) I am not sure that ‘commitment’ is the right word. While in office, it hardly did anything – such as the creation of new institutions – to bed in the notion and there was not much mention of it when Labour campaigned in the 2023 election. (One could argue that the success of its Covid campaign was a triumph of wellbeing being prioritised over narrow economic concerns, even though the unwinding was badly managed.) Whatever, I keep stumbling across overseas comments that the Labour Government was an international pioneer in promoting wellbeing: I wish.

The incoming Luxon-Coalition Government has been very uncomfortable with the approach. When the incoming National Minister of Finance, Nicola Willis, presented her first budget policy statement she grumpily footnoted that a ‘2020 amendment to the Public Finance Act requires the government to state the wellbeing objectives that will guide its Budget decisions’ and made but two desultory mentions. Her 2025 Budget Policy statement identifies three traditional (and worthy) overarching goals: building a stronger more productive economy, delivering more efficient, effective and responsive public services, and getting the government’s books back in order. It added that the goals are ‘the Government’s wellbeing objectives, as achieving them is the most important contribution the Government can make to the long-term social, economic, environmental and cultural wellbeing of New Zealanders’. We are back to judging wellbeing in narrow economic terms.

Labour also seems to have lost the wellbeing plot. In her post-2024 Budget speech, Labour’s spokesperson on finance, Barbara Edmonds, said her focus would be on household costs, small business, climate change and roads. There is a glancing mention of well-being, equating it with inter-generational issues. No doubt Labour will contest the removal of the wellbeing provisions from the Public Finance Act.

One infers from the Minister of Finance’s public statements that she is uncomfortable with the notion of wellbeing. She has said that she wanted the Treasury focused on economic and financial advice. But wellbeing is a subject which economists can – and must – advise upon, even if many are stuck within the old paradigm.

The Treasury supported deleting the wellbeing provision in the Public Finance Act, arguing in its Regulatory Impact Statement that ‘on balance, we consider [that] it is most likely to improve the clarity and effectiveness of Section 26M [about budget policy statements], without restricting flexibility. The introduction of the wellbeing requirements in 2020 have added complexity to how the Government can articulate their priorities and objectives, but it is unclear if they have brought about a clear increase in accountability that the changes initially intended.’ The RIS makes an allusion to the Treasury Living Standards Framework but it is unclear how that articulates with its decision. The impression is that there was a vigorous debate within Treasury with the balance favouring abolishing the extra work that is currently required.

But the issue will not go away. Economics and public policy has to struggle with the evolution of wellbeing and living standards and its implications. It is disappointing that the government is scrolling back its contribution. The likelihood is that there will be an increasing divergence between reality and the narrower economic public discussion. The Luxon Coalition Government’s ambition to get us back on track, appears to be getting us back past Bill English, possibly back to the nineteenth century.