The Silent Recovery Rolls On While Many People Are Still Going On About The Global Financial Crisis

John Key is presiding over The Silent Recovery. It is a shame the GCSB Bill has been so poorly defended and an arrogant comparison to Norton Anti-Virus implemented on Campbell Live in a manner that makes anyone capable of not clicking on a phishing email go “whaaaat?”.

It doesn’t matter that manufacturing confidence is at record highs, household balance sheet restructuring is shifting into purchasing big ticket items again and the capital markets doing very well in the midst of Great Depression “2.0”.

The other day Russel Norman decided to throw his hat into the monetary policy reform ring again. He has a short memory. Monetary policy makes politicians say silly things. The Reserve Bank of New Zealand is arguably the world leader in transparency and accountability. You can infer where they’re headed intellectually on a wide range of issues simply by reading their published documents!

Meanwhile, The Silent Recovery is rolling on. Firms have increased output and raised productivity since the onset of the GFC. For low to medium skill workers, there needs to be a sense of panic in upskilling and creating opportunities for yourself. The robots are coming and Zero Marginal Product workers are unlikely to move beyond part-time hours in the foreseeable future.

There are a lot of opportunities in New Zealand at this point in time. Unfortunately, many young people have fallen victim to the idea that everyone can become an astronaut. They must have missed that story about the Space Shuttle program being cancelled when they were stuffing around on Facebook instead of working an interesting side project that improved their IT skills.

 

Please Kill The Phrase NZ Inc (Why A Country Is Not A Corporate)

The phrase NZ Inc is so nauseating. Please stop using it. New Zealand is a collection of individuals, firms, government agencies, councils, charities, families, iwi and a whole lot of other fluid groups that change their composition and goals frequently.

A country is not a corporate. New Zealand is not some sort of business enterprise that can be called “NZ Inc”. It’s a really lame phrase anyway – the phrase seems to tilt towards protecting the interests of exporters as opposed to the interests of everyone else who benefits from cheaper imports.

Any attempt to centralise NZ business expansion into particular markets will end up being a waste of time and money. The internet is the great enabler of decentralised business development – a lot of firms simply aren’t producing anything valuable and trying to resuscitate a rubbish business with a “China Growth Strategy” is sadistic and highlights the deficient investment in R&D over the past few decades.

Profitable firms don’t need NZ Inc and handholding from MFAT officials in order to grow their business overseas. They’ve got people on the ground, hooked into local business networks and figuring it out as they go. In some countries, due to NZ jumping on the “make it hard to do business in the 3rd world” bandwagon, you probably don’t want squeaky clean green NZ Inc’s brand associated with the realities of doing business in interior regions of China.

The rise of MBIE, the fall of MFAT, the sidelining of Treasury and the fact that even some of our biggest trading partners only know about New Zealand from Hollywood is proof that all of the NZ Inc branding and spending on cocktail parties and seminars is hardly going to achieve any impact.

The same goes for altering our policy choices in order to make NZ Inc a better place to do business. Anyone who complains about doing business in New Zealand really is having a moan. They’ve clearly never known anyone doing business on a large scale offshore and the enormous hurdles that have to be jumped before even getting plans drawn up for a factory.

At least here in little old New Zealand, we can point out really stupid obstacles to growth and recovery, like not letting people put flats on their property in Christchurch and trying to centrally plan our cities for the next 20 years when every single forecast and growth plan before the likes of the Unitary Plan was supposed to be “THE BIG ONE” that would negate the need for any other “SMART GROWTH NZ INC” strategies.

All of the NZ Inc policy optimisation and strategies are for nothing if entrepreneurs don’t bother turning up. Many are sick and tired of how New Zealand culture equates failure with criminality and how NIMBY attitudes make it impossible to do really simple things – like build flats in Christchurch on big sections to alleviate the housing shortage.

Busting this mini-rant back to some Hayekian truthiness – we know that prices are the best form of coordination. They contain a hell of a lot of information that is specialised and will only be revealed in market transactions when needed. Take Auckland house prices – the price signal is SCREAMING out that more houses need to be built, but the entire council and government approach is to shift incentives and make it hard for people wanting to respond to that price signal to actually do that in a timely manner.

There is no demand for what NZ Inc spruikers are trying to offer the world. The trend for margins in food products is down, middle class Chinese won’t pay a premium for NZ dairy products once they’ve sorted out their internal production quality issues. Clean and green is a myth – just look at rogue dairy farmers and people who think a 2 hour commute is a good use of their time.

At the apex of the “NZ Inc” spin is a really interesting insight into the delusions of grandeur that many New Zealand politicians, officials and businesspeople have. They think we matter, they think we are relevant and they think we can change the way the world does business. It’s so hopelessly naive I’m actually not surprised that John Key aired a while back the idea of New Zealand going for a UN Security Council seat.

We are collectively deluded if we think we can brand ourselves in such a way that it papers over the enormous deficiencies in our labour force, capital stock, housing stock, project approval processes and attitude to business. There are a lot of policy problems that need fixing here before trying to sell a mythical concept to the world.

The Value Of Outreach For Group Thinkers

The other day Eric Crampton wrote about how the reaction to a pretty tame economics series on CBC was knee-jerk along the lines of “all economics is right-wing propaganda!”.

He writes about how mainstream economics just tells it like it is – when you do X, you get Y because people respond to incentives and that’s just the way the cookie crumbles.

For non-conformists, we forget how important groupthink is to those who would dismiss economics. For most people all that matters is fitting in. There are also a whole host of environmental factors at play here. New Zealand’s economics education from high school through to university level barely reinforces the basics before moving on.

I have noticed, anecdotally, that those most hostile to economic thinking are:

  • those who have had no interaction with the commercial sector in their entire lives or
  • those who grew up wealthy and feel guilt they feel the need to atone for through being “against the man” or
  • those who are scared of mathematics and would argue 1+1=3 if you believe or feel that’s the answer

For those of us who grew up in a household where your parents run a business and you see the ups and downs of the business cycle at the coalface, there is an acute appreciation for how micro behaviour makes sense.

When you are aware of how things like resource consents delay or cancel investment projects, how the administration costs of employing people create friction in the labour market, why decisions are made at the margin (potential project by potential project) and how credit risk needs to be constantly managed in the face of incentives faced by creditors it isn’t that hard to see how economics explains and helps you understand how the real world works.

This is where I’d like to bring in Arnold Kling’s theory that he wrote about in The Three Languages Of Politics.

His model of political discourse is called the Three-Axes Model. He argues that libertarians, progressives and conservatives “talk past each other” because they are speaking different languages that view the world through completely different lens.

Conservatives emphasise the civilisation-barbarism axis. Libertarians emphasise the freedom-coercion axis. Progressives emphasise the oppressed-oppressor axis.

People who care about different things will demonise different categories of people differently.

Because everyone “picks their sources” depending on which columnists or bloggers reflect their particular worldview, you end up with an ironic situation where economists of different persuasions either ignore or misrepresent mainstream economics to suit their particular narrative. Paul Krugman < Thomas Sowell, for example.

Bringing the dismissal of economics back into the frame, accepting empirically provable concepts that are in conflict with your dominant axis not only threatens your belief system that you have invested in emotionally and socially, if you come around to a different view your view is no longer that of the dominant group.

Many people are weak. They simply do not have the stomach to hold contrarian views that are out of tune with what the dominant group thinks. They are the enablers of populist despots and “mainstream politicians” alike.

This is one of the reasons why words matter as much as the group think about that issue. Try convincing a progressive that the minimum wage oppresses people wanting to negotiate their own wages.

The value of outreach for group thinkers is therefore low because we are asking people to re-examine their worldview. Some people still think the earth is flat.

This is reflected in the median voter theorem, where policies in society will tend towards the preferences of the median voter.

Increasing the level of economic thinking in New Zealand is a pipe dream, sadly.

The dominant political narrative restricts the sources of information many New Zealanders consume when it comes to news and opinion, that’s if they consume anything other than Super 15 and My Kitchen Rules!

The cost of being an informed voter / citizen might be substantially higher than we have thought in the past.

Most people care deeply about what other people think of them. They are obsessed with their in-group status – and political opinions matters a lot in many circles.

Their weaker amygdalas physically panic when they are exposed to differing views.

Think about reading reactions like “I listened to [right wing economist] and my pulse started racing and I had to leave the room!” and wondering “whaaat?”.

As time progresses, I am leaning more and more towards Bryan Caplan’s suggestion to “build a bubble” that insulates you from the world.

Is New Zealand Less Corrupt Than New South Wales?

I am a fan of the Independent Commission against Corruption. Reading through their investigations is a clear indication that New South Wales have really gone after dodgy buggers. When you then look at Sydney Morning Herald archives or AFR archives with certain “names” you can see a clear trend towards stamping out corruption.

New Zealand doesn’t take the Australian approach to stamping out corruption. I know Cam Slater is an advocate of an ICAC in New Zealand, but is that really possible? Does any Kiwi politician have the gumption to front a campaign for an agency with teeth?

We are the nation of the wet bus ticket. When it comes to answering the question “Is New Zealand less corrupt than New South Wales?” I think the answer is NO.

New Zealand’s “low corruption” claim to fame is based on perception of corruption surveys that have very low sample sizes. They are as meaningless as “freedom indexes” or “ease of doing business surveys”. Fodder for the likes of publications that are the shells of their former selves like The Economist or Forbes Magazine.

The creation of an ICAC for New Zealand is a solid policy idea. It’s not like the Commerce Commission, Serious Fraud Office, OFCANZ, NZ Police or Financial Markets Authority have any tendency to aggressively hunt down corruption.

We need to bring back the Latin phrases like “cui bono?” (who benefits?). An ICAC could ask the questions and get some real answers. It would either confirm that New Zealand is an amazing country with no corruption at all, or, like the NSW ICAC has shown time and time again, that there is a rotten core at the top of New Zealand society.

Reality Check On BRIC Stories

The Brazil-Russia-India-China acronym was first coined by Goldman Sachs economist Jim O’Neill.

Ostensibly, it’s a prediction that these four countries will take over the world because of the massive increase in their population, GDP and status as creditors to the developed world.

In reality, the BRIC economies are not as rosy as we might think.

Instead of focusing on GDP as the measure of a nation’s success, the real statistic we care about is real GDP per capita on a purchasing power parity basis.

In this statistic, the BRIC countries fall down in any reasonable assessment of their economic performance.

Let’s compare the BRIC GDP per capita with countries New Zealand would like to compare itself to economically:

What this tells us is that in order for the BRIC countries to truly say they’re economic powerhouses, they’ll need to more than double their real GDP per capita on a PPP basis to even surpass little old New Zealand.

With China currently slowing down, Russia propped up by oil prices, Brazil engaging in destructive monetary policy and India struggling to export anything other than call centre services I don’t see how this is going to happen.

Particularly when a key determinant of BRIC countries growth is demand in countries like the US, Canada, the European Union, Australia and New Zealand. If there is less demand for exports, growth plummets accordingly.

Because external debt must be repaid in foreign currency, export earnings are pretty important. So what do they look like per capita for the BRIC countries plus Greece for an illustration of relative position?

Interesting. Now, putting aside how external debt actually functions i.e. lots of rollovers and reissues from time to time, if all export earnings were applied to running down external debt, how long would it take different countries to do so?

This isn’t a completely out-of-left-field thought experiment – foreign currency has to come from somewhere.

A year has 365 days so Greece would have to apply all of its export earnings for almost 20 years in order to retire external debt whereas China would have to do so for just 8.5 months.

While this though experiment relates to gross exports as opposed to net margin made by exports – which can be enormous – it’s still indicative of how paying down external debt is almost impossible.

It has to keep on being rolled over and new debt issued to pay off the old debt. Both the public and private sector in the BRIC countries and developed countries have binged on debt for far too long.

At some point, there has to be a reckoning. It will be painful, and no amount of central bank intervention or fiscal policy responses can dull the pain of a real debt crisis.