NZCPR guest

Dr Roger Bowden

Roger Bowden is currently a visiting research fellow in financial system design at Ulm University in Germany. He is the former Professor of Economics and Finance at the Victoria University of Wellington. Prior to returning to his native New Zealand, he worked or researched at a number of offshore institutions, including the universities of Manchester , Western Australia , and New South Wales as Professor of Finance. In addition Roger has been visiting Professor of Economics at the universities of California at Berkeley and British Columbia ; held a Humboldt Foundation Senior Research Award at Bonn University ; and visiting fellowships or appointments at the Institute of Advanced Study in Vienna , CEPREMAP in Paris , and the IBRD Development Research Department in Washington DC . He holds the degrees of BA, BSc , MA (mathematics and econometrics, Auckland ), PhD (economics, Manchester ).

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Opinion piece by Prof Roger Bowden
2 May 2011
The economic consequences of Mr Key

It’s been an odd sort of government, these last three years. The one thing they’ve done really well, namely the slick PR job on Mr Key (and the awful one on the hapless Mr Goff) should be enough to get the National Party back on the treasury benches. Looked at more dispassionately, however, the economic consequences of the Key Gang are pretty disturbing.

To be sure, the government has had to cope with a concatenation of economic shocks: the global financial crisis; last year’s drought in the rural sector; Pike River; and of course the Christchurch quake. Fortunately the GFC largely passed us by, give or take a few finance company bailouts, and the mildest of recessions. Thanks for that, and for the drought recovery, go to stronger commodity prices, even for wool, and of course Taranaki oil and gas. The Pike River disaster will always be a humanitarian tragedy, but the portents are that the region’s economy will recover from new mines, sensibly opencast this time.

The Christchurch earthquake put a more significant hole in the government’s finances, not just for the support and rebuild, but from the requirement to recapitalise the EQC and rescue AMI. So, too, will the cost of the Rugby World Cup, controversial in its economics, but a sure bet in its likely political payoff. Yet in spite of the slings and arrows of outrageous fortune, the government’s books and borrowing projections are overall not too bad, certainly not in the league of the European basket cases. To give it some credit, it has moved to curb the public sector spending bubble inherited from the previous Labour administration, even if one does wonder about the cost of all those department reorganisations. All the same, we have become quite badly exposed to further calls on public resources, the more so because the government capital asset reserves have become so depleted with Waitangi settlements and the like.

But even if the government had simply sat on its hands and done absolutely nothing, we would now be in a strong economic position, perhaps the strongest for years. I cannot remember a time when so many of our commodity prices were so high at the same time. The usual lag in the flow through to the rest of the economy is a couple of years or so. This one may be a bit slower because of the flock rebuilding following the 2010 drought. But I expect 2012 will be a good one, though with higher interest rates and a stronger kiwi dollar.

Where the worry beads really come out is in reviewing the things that the National led coalition has slipped underneath the radar in its unbending commitment to achieve and retain power (not to mention photo ops for Mr Key with the great and good, even if he does look like an overawed schoolboy at times).

Some things were well intentioned. The Tax Review was one. Getting rid of the real estate depreciation rort was good in itself, but it squeezed the Auckland rental market. In time it will fix itself, as higher rentals restore asset prices and stimulate new construction, but at the cost of a dose of inflation.

What about carbon? No matter which way you look at it, and what you personally might believe in re global warming, carbon emissions trading is a real can of worms. The central problem is that you are required to buy or sell bits of paper that are simply someone’s estimate as to carbon emission or carbon saving. It’s a recipe for a massively expensive consultant feeding frenzy, not to mention the accompanying official bureaucracy and compliance, even fraud. And in many cases the estimates are simply on a wing and a prayer, no matter that they are dressed up with official looking ISO documentation and the like. That even applies to forestry as well as farming. Experience from the European market has already shown high carbon price volatility with poor price discovery (and they don’t even allow forestry planting as a carbon sink).

Personally, I agree that we should not continue to pump huge quantities of guck into the atmosphere; just visit any big Chinese city. But I do wonder whether the realistic solution isn’t a much less sexy tax on obvious polluters (‘Pigou tax’), with a cast iron commitment to recycle the proceeds to reward those who create carbon sinks (‘hypothecation’). If we handle this badly, we risk de-industrialising NZ, as what remains of our industry migrates to Australia or SE Asia with less stringent emission regimes. ‘Displacement’, it’s called in the carbon literature.

Much more insidious is the nation’s obsessive and continuing preoccupation with economic rent seeking, which means dividing up existing wealth by political or other means, at the expense of creating new wealth. It’s an ancient preoccupation, but in this day and age, rent seeking is built on the rights movement and its accompanying mantras and mythologies.

It’s alive and well on several fronts in NZ, but iwi and their activists have become grandmasters, extracting not only immensely valuable real assets, but co-management deals for natural resources that amount to an iwi tax. And just when we thought the Waitangi gravy train was coming to an end, the National led Coalitio n has started up an entirely new one. We all knew where we stood with the Labour government’s Foreshore and Seabed Act; and certainty itself has economic value. I find it impossible to think of the National led coalition’s 2011 Marine and Coastal (Takutai Moana) Act as anything but tacky and dangerous in the way it was rushed through; the potential for use and misuse in its lack of criteria; and the framework of reference and expectations it has set into train. This is too much to pay for the baubles of political power or legislative immortality, for it threatens our very nationhood.

“Bloody economists”, you’ll say, “always the dismal science”. I like to think of Ecclesiastes as the first economist – such a gloomy chap. But he wasn’t too bad at prediction. When I look at the continuing exodus of our abler young people, it’s hard to avoid the conclusion that the future is happening before our eyes. Nationhood is important. We’re making a fearful mess of it.