Kiwi News and Views

A physician’s memoir describing a successful research program leads to pondering about research funding strategies.

A few years back, I was, in effect, commissioned to review the development possibilities of a local biotech industry, especially one for creating new pharmaceuticals. At the time, it was fashionable in every regional plan – anywhere in the world – to claim that local prospects of developing an innovating biotech industry were high.

From my reading I concluded that the United States did not have a biotech industry. Rather, a dozen of its large urban centres had one and everywhere else hardly mattered. That was because the industry had to function in a deep, skilled-labour market with numerous medical centres and tertiary educational institutions, and a variety of specialist ancillary services such as precision assaying (measurement) and patent lawyers. Smaller centres would not have enough work to support the specialisation. (The technical term is ‘economies of agglomeration’; they are central to economic development as my Globalisation and the Wealth of Nations explains.)

The population of the smallest of the US biotech centres was larger than Auckland, although if Hamilton was added it just exceeded the threshold (especially given the expertise in Ruakura). That led me to argue that good linkages between the two centres were vital – we are getting there – and it seemed likely we could further enhance the potential ‘size’ of greater Auckland by improving its connections with the rest of New Zealand. (At the time, the expertise for maintaining high air quality was in Wellington, a short air trip or overnight shipping away; broadband was to come.)

Even so, the biotech industry has not thrived as much as was hoped. My guess is that there has not been enough private venture capital to fund the development of a biotech industry which has a high rate of failure, while the government was unwilling to fill the gap. I moved on to other issues.

Reading Eric Espiner’s A Physician’s Journey: Chasing Hormones You Never Knew You Had, and Why You Need Them prompted a return. (A warning. The book is not an easy read; its target audience is those very familiar with general medicine. This layman struggled to keep up.)

Hormones (their study is called ‘endocrinology’) are one of a body’s signalling devices in which molecules flow between glands and organs which react to their signals. The known number is 75, but more will be discovered. Most people know of a handful – adrenalin, cortisol, dopamine, growth hormone, insulin, melatonin, oxytocin, oestrogen, testosterone … – and a handful of the glands which produce them – ovaries, pancreas, pituitary, testes, thyroid …

To my surprise, even the heart secretes hormones. (On reflection, I shouldn’t be surprised at anything in endocrinology.) In between his clinical duties as a hospital physician, Espiner (and his team) was a pioneer in the study of one of three hormones the heart secretes: the C-type natriuretic peptide (CNP), which plays a crucial role in regulating various bodily functions, including cardiovascular homeostasis, bone growth, and neuronal function. (I am afraid you’ll have to look up elsewhere if you want more detail; I don’t trust myself.)

This internationally pioneering research was based in Christchurch. It occurred, serendipitously perhaps, because, like Espiner, Don Beaven was a Christchurch boy, who established what is now known as the Don Beaven Medical Unit. His interest was diabetes, where he developed a world class reputation and he recruited to his medical unit endocrinologists in training such as Espiner. The unit was not just an isolated part of the University of Otago. It drew on other local institutions: the Canterbury hospital system, the Canterbury Research Foundation (which Beaven helped found), Lincoln University (a lot of the experimental work was done on sheep) and the University of Canterbury science faculty. It had good connections with other international centres of excellence; as well as the professional interchange, they used the Christchurch team to do some of their assaying.

Such a centre of excellence does not make Christchurch a biotech centre comparable to the American dozen. It is a reminder that centres of excellence can exist in just about any city. It is also a reminder that public policy has to be flexible. Who would have guessed that such pioneering medical research would arise in Christchurch? (There is other excellent research being done outside Auckland. The Dunedin Multidisciplinary Health and Development Study has recently celebrated its fiftieth anniversary to international accolades.)

I am not convinced that our approach to public research has been responsive enough. Espiner grumbles about the time he wasted making abortive research grant applications. (The Canterbury Medical Research Foundation could only make a small contribution but what it did was invaluable.)

I know of a lot of other quality researchers with similar grumbles. It’s partly the funding shortage, but also – in my experience – the way the research funding selection boards tend to favour the fashionable and the conventional; moreover they tend to support projects rather than programs in centres of excellence. The failure applies to the social sciences as well as the natural sciences. You would have to be Trumpish brain-dead to support the Ministry of Culture and Heritage’s abandoning Te Ara, Aotearoa New Zealand’s world-leading electronic encyclopaedia.

What about commercialising the research by a patent which produces something which could be sold, thereby paying a royalty? That was the background to my original investigation. Create a new medical drug and one can end up with zillions; the fashion did not notice that only a trivial number of chemicals investigated got as far as commercial use (which was why venture capital is so important). Espiner describes the difficulties patenting their findings – patent lawyers were hard to find in New Zealand – but ultimately there was no commercial firm that could see how it could make a profit from them; eventually the patents were dropped because of the expense of maintaining them. The intellectual property is available free to all endocrinologists and their patients.

That is characteristic of a lot of research. The findings may be immensely valuable but they cannot be commercialised. Einstein was working in the Swiss patent office during his 1905 annus mirabilis when he published four groundbreaking papers, including one which was foundational in quantum mechanics while another was his special theory of relativity. He could not take patents out on any of them.

Focusing public funding on commercialisable research – that which contributes directly to GDP rather than wellbeing – is very short term and, probably, not very rewarding. Some might conclude that we should abandon public research funding altogether (aside from some obvious exceptions such as into potential geological disasters). But that is thinking around the wrong way.

The work of Espiner, Beaven and their colleagues was vital for importing frontier endocrinology into New Zealand. Because they were doing quality research this transfer of international knowledge was more effective. That some research was pioneering increased the effectiveness of their interactions with overseas colleagues and the transferring of their findings here. The learnings from Christchurch flowed into endocrinology practice throughout New Zealand. We all benefited.

What can Econ101 tell us about Trump’s tariffs?

Before reviewing the economics of tariffs as indirect taxes, here is a brief account of their constitutional role. In particular, in some jurisdictions, including New Zealand, taxes and therefore tariffs are the preserve of Parliament, not that of the executive or kings. England’s civil war is complicated – wars always are – but one factor was that King Charles I was raising taxes without the approval of Parliament. The issue was eventually settled in the 1689 Bill of Rights – now a part of New Zealand law – which clearly states that only Parliament can raise taxes. One factor in the American colonists’ revolt against Britain a century later was ‘no taxation without representation’, which is enshrined in their constitution in its first article.

It is true that sometimes Parliament or the US Congress gives the executive the power to raises some taxes in an emergency but that power is usually for circumscribed situations. President Trump has claimed that such situations give him the power to raise tariffs. One American court has ruled that the increases are not legal, although reverting tariffs back to the pre-Trump levels has been suspended until the US Supreme Court makes a ruling. There is a view that the Court will back down on the constitutional principle as fast as Taco Trump always chickens out.

It is necessary to go through this because it is not certain that the Trump-imposed tariffs are firmly in place, adding to the uncertainty that the world economy faces. This column is going to assume that the Trump tariffs are permanent – until the times do alter.

It is a routine Econ101 exercise to distinguish between the apparent incidence of an indirect tax – who pays it – and the actual incidence – who ultimately pays it. Excise duty on beer is paid by the brewery to the government, but they then pass the tax on in higher prices to the drinker who bears (most of) the burden of the excise hike. I have said ‘most of’ because consumers may reduce their consumption and that will affect the brewers’ profit. As the Econ101 student learns, this balance between the suppliers’ burden and consumer’s burden depends upon the elasticities (responsiveness) of supply and demand.

Trump wants to have it both ways. Part of his rhetoric is that the burden of his tariffs will be borne by the exporters, as a punishment for their country running a trade surplus with the US or for its (alleged) political misdemeanours. In which case, US consumers will not face price rises. Another part of his rhetoric is that it will stimulate competing US production, but that requires US consumers to face higher prices so that the US producers find it more profitable to increase supply.

Both will happen to some degree. The conventional wisdom is that most of the burden of Trump’s tariffs will be pushed onto consumers. The expected price hikes are only dribbling through because exporters and those purchasing from them are uncertain as to how long the tariffs will apply.

Given the complexity of Trump’s tariff changes it is difficult to assess their quantitative impact, especially over time. Among the educated guesses is that the impact on output in the long run may be small – a reduction in output of much less than 1 percent. It will be even smaller in the short run. There is a view that the distributional changes will be larger than the aggregate output changes. In particular, it is argued that the working class – who tended to vote for Trump – will be hit most heavily. The tariffs will contribute to government revenue (although not sufficiently to cover the deficit form the ‘Big beautiful bill’).

Trump’s tariffs may contract the world economy. The uncertainty of it all is probably its greatest difficulty the world currently faces. If you export to the US, do you start looking for alternative markets? If you are a US producer do you invest to expand production? The additional output will take time to come on stream and by then the tariffs may be wound back. Better at the moment to tai hoa. Thus, we may see extra US inflation which will affect US – and hence the world’s – monetary policy with some fall-off in demand. Trump prides himself on his ‘weaving’; his negotiating strategy is based on the uncertainty it generates. What this ignores is that businesses (generally) want as much political certainty as possible; it’s hard enough dealing with market uncertainty.

(The analysis is further complicated by what happens to the US dollar; it has fallen relative to the US’s trading partners since Trump became president – but no further than the level it was during the last two Biden years.)

The analysis of tariffs compared to other indirect taxes is complicated by only some suppliers being taxed. Think what would happen if only North Island brewers, say, were levied excise duties. It would be even more complicated if North Islanders north of the Bombay Hills were levied differently from those to their south. That is why every country wants to get the tariffs it pays to the US down. They are put at a competitive disadvantage relative to those countries where Trump has imposed lower rates.

Moreover, unlike in much of Econ101, external suppliers can look for alternative markets. After all, across the board the US only absorbs about 10 percent of the world’s exports even if it produces about 18 percent of the world’s output. (Large ‘generalist’ economies tend to export relatively less than small specialist ones; we don’t classify a sale of a New York-made product to California as an export.) The likelihood is that proportion will be even smaller in the future.

As an economist, I am enthralled by Trump’s tariff experiments; it allows us to test theories and measure magnitudes. As a citizen of the world, I am appalled.

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.)