Thursday, August 19, 2010

Laissez-faire is a recipe for failure

The National government's economic policy (and its response to the recession) can be roughly summarised as laissez-faire - take a hands off approach, and leave the market to sort itself out. And somehow, miraculously, by the power of the invisible hand, this will close the gap with Australia by 2025.

Today the new Zealand Institute called bullshit on that approach. Their latest report, A Goal is Not a Strategy looks at the reasons for the gap with Australia and how it might be closed. They find that, contra National, its not a problem of too much public spending, or too few people in jobs. Instead, its a problem of labour market productivity. And this requires strong state intervention to resolve.

The average New Zealand worker is only 57% as productive as an Australian one, creating only $42 of GDP per hour worked compared to Australia's $74. This is a legacy of two things; undercapitalisation - New Zealand managers prefer to strip mine businesses rather than invest in them - and a longstanding "low skill, low wage" employment policy. The solution to this isn't more trial periods or lower wages; that just perpetuates the problem and allows those crap managers to escape the consequences of their short-sightedness by gaining increased profits at the expense of their workers. Instead, the solution is greater investment in education and skills, both for the workforce and for managers and entrepreneurs. Which means that National, with its education cuts and caps on student numbers, is doing exactly the wrong thing.

The NZI compares New Zealand to Denmark. Both countries have similar levels of agricultural exports, but Denmark has a vastly larger manufacturing sector, despite having a similar population to New Zealand. Part of this can no doubt be explained by its being in Europe - they have 80 million Germans just to the south, which provide a ready market for their goods. But that's not the only explanation. Denmark has consciously invested in building and diversifying its manufacturing sector, precisely to avoid the trap of being a low-value agricultural exporter. The NZI suggests that we could do the same.

The catch? It requires intervention in the market - an anathema to both the current government and much of the policy community, who are still slaves to the market Darwinism which was so spectacularly successful in the 80's and 90's (irony, for the impaired). While not promoting "picking winners" at the level of particular firms, the NZI is advocating an active industrial policy, with strong government support at the subsector level to help niche sectors grow and provide alternative sources of growth to the farming sector.

National, dominated by jealous farmers and free market purists will no doubt ignore this advice. And by doing so, they'll ensure that their goal of matching Australia by 2025 is never met. Achieving that goal requires active intervention. Laissez-faire is a recipe for failure.