PROBUS CLUB Speech: 22 August 2008


The 2008 Election Issues


1. Talking about election issues involves a degree of subjectivity so I thought, as a preliminary, that I should declare straight away where I'm coming from, and why.

First, I believe that a change of government is needed for a variety of reasons, the principal one being that the economy will continue to drift until there is a fresh approach to those issues needed to lift growth and productivity. A change to National MIGHT help us close the huge gap that has opened up between us and Australia, with all the social downsides that we are experiencing as a result.

As you know, I come from a Labour stable. I grew up in a world where there was a general political consensus around the need for governments to plan, to control, and to spend. We had confidence that technology and stabilization could lift growth and productivity - the things essential to higher prosperity for everyone. In the 1950s and 1960s we'd seen what could be done with controls during World War Two and thought the same economic weapons would work in peacetime. Nearly everyone was convinced that the downsides to planning such as inflation, irritating regulations and industrial unrest could be tolerated because of the greater good that would result from plans. Majorities in both the National and Labour parties endorsed planning.

However, by the 1970s the evidence was beginning to show that here, and in Britain, Australia and the United States, plans were based more on wishful thinking than on any hard evidence that they worked or were ever likely to work. The targets we set ourselves were unreal. Consequently, they were rarely achieved. There were no penalties if they weren't achieved except at the ballot box. Since planning involved disciplines, few voters worried if the cane was left behind the door.

Gradually we discovered that top-down controls didn't work because they stifled initiative; regulations on imports and exports and foreign currency transactions were easily circumvented, with the result that we had triennial spend-ups, foreign exchange crises and then devaluations of the currency every few years. Wage and price freezes to control the inevitable effects of excessive government spending created a monetary balloon; when you pinched it in one spot, the balloon bulged out elsewhere. What sensible observers were discovering was that, without market-place disciplines, all governments become rudderless on a stormy sea. Sadly, and I stress that word sadly, not everyone learnt these facts. Today we are dealing with members of the slow-learners club in the current government, people who never tried to understand the disciplines forced upon us in the 1980s and 1990s.

One further preliminary: after many years of personal political involvement, and many more researching and writing about New Zealand political history, I have gradually come to the conclusion that NOTHING does as much to improve the lives of all New Zealanders as maximizing economic growth. No social engineering, no creative tax distribution schemes, no targeted social welfare handouts, can do as much for ordinary folk as a well performing economy. In fact - and this is the hardest lesson of all to learn - any social engineering usually restrains economic growth. What I am saying is that there isn't any substitute for economic growth. As one economist put it: a rising tide lifts everyone's boat, even the smallest tub in the bay.

2. Further to the reforms of the 1980s and 1990s, after a huge, and painful exercise in economic readjustment, sustainable economic growth of a kind we hadn't known for thirty years started again in New Zealand in 1993. There was a temporary hiccup following some burps in the Korean and Thai economies in 1997-8, but it didn't last long. The substantial rises in agricultural commodity prices on the world market due in large part to the huge economic growth in Asia and the gradual Eastern European emergence into the sun after years of darkness, have underpinned our decade and a half of expansion. The changes of the 80s and 90s assisted those improving prices to create relative prosperity by New Zealand standards. Yet we haven't made the most of the opportunities that those good years afforded us. Carelessness these last few years, especially excessive government spending, has allowed inflation to rise more rapidly than is wise. Coupled with the world credit crisis that started twelve months ago, inflation has been putting prosperity at risk and making it likely that it will take time to clamber out of the current slough. In my darker moments I sometimes fear that it is already too late for us fully to recover our earlier standing amongst the OECD. But like the All Blacks after a couple of defeats, I'd like to see us fight back economically.

All that by way of an introduction.

3.If we define the things that governments need to do to increase economic growth, in my view many of this election's key issues come into sharper focus.

(a) First and foremost, governments must always maintain a steady, predictable investment climate with policies that are clear and defensible. This involves the Minister of Finance and the Prime Minister singing from the same song-book. Any differences between them, and economic confidence and investment soon dry up. We saw that when David Lange and Roger Douglas fell out in 1988. New investment faltered, confidence sagged, unemployment raced ahead, and the recovery from the big changes of the mid 1980s was delayed by at least two years necessitating Ruth Richardson's famous "Mother of all Budgets". The problem with disagreements at a high level is something that Helen Clark and Michael Cullen learned when they were part of David Lange's government, and I suspect they got their second, and certainly their third terms of this Fifth Labour Government by NOT disagreeing in public about anything. Sadly, that was just about the only thing they learnt from those years.

(b) Restraining inflation must be very high in any government's ambitions. Rising prices are no friends of anyone except a handful of speculators. As we saw in the 1970s and 1980s constant inflation gave an illusion of progress to many people. But over a twenty-year period from about 1970 to 1990 the portion of the national cake enjoyed by wage and salary earners - ordinary folk - actually declined. And those on fixed incomes - especially the retired - suffered cruelly from inflation. The initial target goal of 2% inflation set in negotiation with Reserve Bank Governor Don Brash in 1989 was achievable. Jim Bolger's government at the behest of Winston Peters lifted it to 3% after National had lost its reforming zeal. In recent years that ceiling has been breached several times. Some inflation has been imported, but with excessive domestic spending, often in low quality areas, this government has helped to stoke inflation.

(c) There are some areas of expenditure that are more useful than others. A study conducted by Macquarie Research Economics recently told us that for every 1% increase in the money spent on infrastructure a country can expect to lift GDP growth by 0.5%. Remember, it was that spending on infrastructure by early New Zealand governments and especially by the Liberal Party of King Dick Seddon around the turn of the 20th century that catapulted New Zealand to one of the highest living standards in the world at that time. For this reason I'm pleased about National's promise to borrow for infrastructure. As all Aucklanders know, despite the investment in motorways, traffic movement has slowed over recent years. And that has occurred even though the number of overseas students and their cars have fallen back over the last four years. With the dollar sliding, they'll soon return, adding more cars to the roads, and more delays. Count me a sceptic that anything much that is useful will come from the money being spent on public transport.

(d) Setting a taxation regime that encourages effort is another must. As Paul Goldsmith has shown in his excellent history of taxation in New Zealand, tax has been a very political issue throughout our history. The 39% top rate established as soon as the current Labour Government came to power in 1999 was based on nothing more than a feeling of envy that translated into a belief that the rich should pay more for no other reason than that they had more. There was no financial imperative driving that tax increase. The high top rate, and the slowness to lift the income level at which it applies, have led to more and more tax evasion, a bigger "black economy", and for many, a diminution of individual effort. I should add that I'm one who favours putting more emphasis on taxing expenditure rather than earning, and I wouldn't mind seeing GST rise to 15% so long as there was a commensurate fall in income tax, and an increase in benefit levels. The evidence suggests that the introduction of GST on 1 October 1986 had a positive impact on the economy. But I see no sign of a GST increase from any party.

(e) Closely allied to taxation is the need to control the numbers on the state's payroll. Employees in the core public service topped 89,000 in early 1986 before the SOEs came into effect on 1 April 1987. Once they were running efficiently as stand-alone agencies and expected to make a profit like any private company, and pay a dividend to their shareholders, the core civil service dropped gradually to fewer than 30,000. For reasons that have much to do with Labour's central belief that public employment equals good, while private employment is bad, the core public service has risen again by at least 14,000 - at a conservative estimate by nearly 2,000 new employees per annum. I am unaware of any evidence to show that a 50% increase in the number of bureaucrats has made us a 50% better society. Worse, along with more employees has gone a generous attitude towards remuneration. A form of leap-frog in wage rates has emerged with nurses and others in the health sector, all of them basically female professions you'll note, leading the way. It is relevant that virtually none of the current Labour MPs has ever worked in the private sector. I spent much of my life in the public sector too, but I'm at a loss to explain Labour's sentimental attachment to it when 70% of all jobs in the economy, and probably half the jobs of their voters, are actually in the private sector.

(f) Maintaining employment laws that are fair to both employer and employee is another must. Governments should do nothing to discourage an employer taking on people at the margins. The trade unions in this country have persuaded this Labour-led government to maintain an extremely short-sighted hiring policy, one that discourages an employer who has any doubts about the suitability of an applicant. If there were a substantial pool of unemployed to choose from, this might not be the problem it has become in the more recent tight labour market. National's 90-day probationary policy is so self-evidently sensible that I wonder how some people have convinced themselves otherwise. There's many a spotty teenager or a Maori kid with tats over whom a prospective employer automatically hesitates before employing. The result could be more positive, and the employer give the kid a go, if he/she realized the situation could be reviewed in 90 days. Quite simply, the Labour government-union stance on this issue makes it very difficult for anyone with gumption to break out of the underclass. Both political and industrial labour tend to represent the privileged: those already in the workforce. They don't think about society as a whole. Sometimes, in my more pessimistic moments, I think Labour actually wants an underclass so that its political near and dear can farm them, something I'll come to in a moment

(g) Any government should always be cautious about special favours to any sector. If a government feels obliged to assist a particular group then there ought always to be a compelling reason. There are two forms of middle-class welfare costing billions that this government has introduced for no better reason than votes: student loans with the interest-free component being rorted big time, and Working For Families where the eligibility category reaches up into high income levels. The escalating student loans that are shown on the government's balance sheet as assets, worry me. With Working for Families it's not just the cost to the taxpayer that's the problem. The abatement rate for this form of welfare, and that's what it is, amounts in effect of more than 60 cents in the dollar if the earner gets extra work over and above his/her basic declared income. This discourages effort. More likely, it encourages some form of cash arrangement with an employer and the black economy expands a bit more.


4. So as you can see, I'm pretty sceptical about the extent to which this Labour Party will ever do what is necessary to ratchet up growth. Jumping into the top half of the OECD that Helen Clark claimed was her goal in 2001 was quickly dropped when Labour discovered that some economic disciplines like restraining government expenditure would have to be put in place. Labour's approach to the economy is based on nothing more than ideology and votes. The calculations that are made in the Beehive keep assuming a high degree of ignorance on economic matters amongst the voters, something about which, of course, they are right. The taking of tax from people, and the churning of it involved in paying it back in the form of subsidies and tax credits like WFF, is extremely wasteful. Money vanishes in the transmission like electricity escaping from long distance lines. Bureaucracy absorbs most of it. The income churning engaged in by this government is prodigious. That's one of the reasons why the bureaucracy has ballooned out. Surely, paying WFF to people who earn well above the top income tax rate is madness? Better to look at lowering tax rates overall, I'd have thought.

5. This current government is at its most vulnerable when its social policies are examined. The leading lights in it are feminists trapped on a remote beach intellectually clutching their 1970s agendas. Many of their goals are laudable. Helping people in need; giving equal rights to women etc. But some of the policies used to reach those goals are destructive for the very women who are meant to be being assisted. The present cabinet is mired in agendas that are now outdated everywhere in the world. 25 years ago a friend of mine, a fellow historian, the late Jim Holt, analysed many people on what was Labour's left at the time. He called them "mushies":

"A typical mushy is of middle class origin who acquired an interest in left wing or liberal causes while studying history or politics or sociology at university. He or she (they are often shes) was drawn to the Labour Party because of its stand on issues like Vietnam or the Springbok tour, or because he wished to use the party to push such issues. Mushies are generally warm to environmentalism, feminism, ban the bomb causes, and any issue that has a high moral content and a slogan that can conveniently be placed on a lapel button. They are also concerned about underdogs and hostile to establishment forces in a general way, though they live rather well themselves and collect fine paintings and wines along with values.... Their mushiness lies in their approach to economic issues.... They are almost invariably protected personally from the sorts of life situations that teach people about economic realities. Usually they work in the public sector and have little fear of either unemployment or of a fall in real income. Although well educated, they know nothing about economics and indeed have studiously avoided studying it."

Holt had Helen Clark in mind. Back in 1981 when he wrote that he dubbed her the "princess of the mushies". Nothing has changed much, has it. She, like them, has never known a thing about economic realities. Neither have her ministers. If there's a social problem then they'll establish an agency to deal with it. The thought that there might be a wrong set of economic incentives at work that is creating the problem that their agencies have to deal to, doesn't cross their minds.

An excellent example is the DPB. They tell us that the DPB is good because it separates women from violent men who, for the most part, they have little respect for anyway. The fact that women who go on to the DPB get locked into welfare dependency where the only way they can improve their income short of work, is to have another child, is something this government won't face up to. This is why we have an expanding underclass of people who don't know what it is to work, and who have a huge, dangerous sense of entitlement to yours and my money. Continuing the DPB without a work requirement is entirely due to mushy agendas. No increase in the number of social workers or of social agencies, or for that matter of police, will root out problems caused by hopelessly misguided welfare policies. Today's underclass is largely caused by the biggest fallacy of modern times: that generations of people can be separated off from the need to work, to plan, and to care for themselves. We are dealing with the adverse social results of thirty years of mushy agendas. The state can't run peoples lives for them. What it can do, and should do, is to look after the handicapped, the sick and the destitute. We know that governments are capable of doing a good job for those who, through no fault of their own, are disadvantaged. But welfare should be a hand-up, never a hand-out to able-bodied people. Today there is a plethora of overlapping agencies all falling over each other to do good for the underclass (during working hours, that is). Many of the well-intentioned schemes governments have created or funded to deal with the underclass don't produce encouraging results, even if they do employ lots of members of Labour Party branches. There are youth schemes, family violence courses, welfare and truancy officers, you name them, all dealing with the underclass that government policy has created. Some of them seem to make matters worse. There was an article the other day about the specialist family violence courts; thanks to them, the re-offending rates have risen above what was previously occurring, and the taxpayer, as usual, foots the bill for making things worse.

I hasten to add that whether, by itself, John Key's work requirements for welfare will produce beneficial results is another matter. I worry about whether cutting the DPB for a woman who's youngest is six and who doesn't want to work will do other than encourage her to keep on producing. Certainly some of the policy's critics are saying that.

6. Which brings me to the key issue if you'll pardon this rather over-used pun. The problem as I see it is that National is so terrified of voter reactions that they have kept responding to too many Labour initiatives and failed, or questionable policies, with "me too". The wider public worked out some time ago that many parts of the education system need re-designing, and that they are having a particularly bad influence on boys. Me too isn't an adequate response. The public knows that welfare policies are wrongly focused, and need major readjustment. The best that can be said for the social welfare release last week from National is that it's timid, and might well have downsides. The public knows that a completely new approach to the Waitangi grievance industry is required, but I'm not sure whether it is will come from National. Yes, it's good that at last, thanks belatedly to Labour, no new historical grievances can be filed; that should have happened ten years ago. But if a lot more money is poured over the Waitangi industry with a view to speeding resolution of those claims that are already in the system, then experience tells us much of it will be wasted.

The public knows that the relatively small, though steadily expanding underclass in New Zealand causes most of the police's problems. People have long-since dropped to it that the present command structure in the Police is part of the problem, not part of the solution. They have worked out that in the government there is no will to defend the police, only suppressed pleasure that a group of testosterone-charged males keeps being humiliated. But if we don't have an effective police force, where does law and order come from, especially when those who decide to defend themselves effectively end up by being charged. Where are National's alternative policies to turn the effectiveness of the police around? Imitation only looks like flattery of Labour, which isn't what, I suspect, most members of the public want to hear.

7. So to round things off, I have some confidence that a change of government will be good for the economy; that's where the great engine for human betterment is located. Lower taxes, less regulation, a re-designed RMA ought to encourage investment. However, as we have learnt over the last nine years, it is possible to have an economy performing fairly well, but to have social indicators getting steadily worse. That is where my optimism about a change of government flags.

8. On one point, however, I remain optimistic. If the government does change, and we get the promised referendum on MMP, it is possible that a system that constrains National from saying what it knows to be right could be thrown out. Proportional representation has lowered the quality of parliamentarians wherever it is tried, and it breeds corruption as we have seen with Winston and his big backers, especially within the racing industry, who have used him to extract big sums from us, the taxpayers. A referendum might see MMP thrown to the wolves? The prospect of being able to get rid of MMP could in the end be the greatest cause for celebration on election night.