06 November 2012

Avoiding the economic icebergs

Q&A session at the end; Russell Brown at the mic
The Voyage of a Lifetime
Downstage Theatre
Wellington
4 November 2012

On a sunny and blustery Sunday afternoon last weekend I enjoyed attending a seminar organised by the Fabians bringing together a collection of speakers to discuss alternative economic policies, in the wake of a similar seminar held in Auckland earlier this year. It being the hundredth anniversary of the sinking of the Titanic, the theme was 'charting a course for a better New Zealand', and the lectures were all sprinkled with nautical metaphors. For example, each speaker was assigned a crew role - Dr Rick Boven was the navigator, Rod Oram was the Wireless Operator, and student politicians Arena Williams and Rory McCourt were rated as First Mates.

Opened by comedian Michele A'Court and compered by Russell Brown, the seminar fitted in seven brief addresses of perhaps 20 minutes each. Photos and videos appear not to have been posted yet, but picking three highlights at random:

John Walley ('Ship's Doctor' and head of the Manufacturers and Employers Association) introduced me to a phrase I'd not heard before, the 'Dutch disease'. This refers to 'the impact of a particularly dominant sector crowding out other areas of the economy leading to problems if the dominant sector becomes less profitable or obsolete', and in the New Zealand context, Walley argues, this role is held by the dairying sector. I'm familiar with the problems faced by manufacturing exporters in New Zealand, but Walley argued that it was worst than I'd expected: the structural constraints of the New Zealand economy reward unproductive and a low-employment-generating farming model and penalise a potentially valuable and high-employment-generating manufacturing and innovation-based economy. Farms employ on average only a meagre 2.6 people, and due to the absence of a capital gains tax farmers structure their finances to produce operating losses or minimal profits to minimise tax exposure, instead relying on capital gains on retirement when they sell their farms for a huge tax-free amount. Walley argues that 'New Zealand’s macroeconomic policy framework has featherbedded high debt, low revenue, low wage activities and the effect is manifest in our economic performance'.

Prominent commentator Bernard Hickey ('the Engineer', and editor of Interest.co.nz) was probably the most technical of the presenters, and delved into detailed explanations of modern methods of quantitative easing (governments printing money to stave off or minimise the effects of a recession). He noted that despite such concepts being perceived as beyond the pale and outside economic orthodoxy, they are being practiced around the world in many of the major Western economies - with varying degrees of success. One noteworthy proposal, which will no doubt scandalise the dries, is quantitative easing for the people (QEP), here described by Anatole Kaletsky of Reuters back in August:

One such radical measure is too controversial for any policymaker to mention publicly, although some have discussed it in private: Instead of giving newly created money to bond traders, central banks could distribute it directly to the public. Technically such cash handouts could be described as tax rebates or citizens’ dividends, and they would contribute to government deficits in national accounting. But these accounting deficits would not increase national debt burdens, since they would be financed by issuing new money, at zero cost to government or to future generations, instead of selling interest-bearing government bonds. 
Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective.

The key to the proposal is that existing bailout funds and quantitative easing has ended up being hoarded by the well-off and the flat-out rich, and so it has not primed the economy as governments had hoped. QEP target the 'real economy' by directly reducing household debt and encouraging spending. Kaletsky addresses some of the obvious objections in a later column, including its practicality and its potential impact on inflation. Personally I have no idea if it would work, but as Kaletsky points out, the current methods certainly aren't working.

Finally, millionaire entrepreneur Selwyn Pellett (e.g. Imarda) stressed the damage a high dollar is doing to the export sector, and decried the economic environment that discourages entrepreneurial growth, prevents vital economic diversification, and encourages young and talented New Zealanders and New Zealand companies to shift overseas permanently to find more receptive environments in which to operate. The exchange rate is of course not the only economic lever affecting business development in New Zealand, Pellett argued, but it is a key factor limiting business growth and the ability of New Zealand companies to compete internationally. Pellett said plenty more of interest too, but for a change I was listening rather than taking notes!   

Voyage of a Lifetime was an excellent way to spend a Sunday afternoon and definitely provided plentiful food for thought, particularly for someone like me who doesn't have a free and easy grasp of modern economics, but is interested in how national policy settings can influence the national economic agenda and our future wellbeing.

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