The Achilles Heel on the Economy

It was Bill Clinton who identified the main issue in his election campaign as “It’s the economy, stupid”.

And so it almost always is – and New Zealand’s 2017 election campaign will be no different.

Of course other issues will matter too, but it is the economy, and the impact its fortunes will have on individual voters, that will usually have the greatest impact on the greatest number.

That is not usually seen as a plus for parties of the left.  It is usually thought – to the extent that it is almost an article of faith for some voters, notwithstanding the evidence of their own experience – that parties of the right are best equipped to manage the economy, and that other contenders for power necessarily start therefore at a disadvantage in that regard.

So Jacinda Ardern showed commendable courage when she devoted part of the time she had available in the first leaders’ debate to an economic issue.  That issue was productivity – or the lack of it.

Many experts, whether on the left or right, will agree that productivity growth is the essential factor in a successful economy.  And most will say that our record in this regard is not good enough.

Why does it matter?  Because it measures how much each individual worker across the whole economy produces on average.   If our productivity gains are sluggish, as they have been, and fall behind those of other countries, we slip further down the international ladder in terms of living standards and prosperity.

We have been able to increase national output over recent years, but that is almost all down to taking in more immigrants.  That produces a larger cake overall, but it does nothing to raise individual living standards – indeed, the reverse, since there are more slices to be cut from only a slightly bigger cake and we have to share our existing capital equipment with that greater number.

So, if productivity growth is the only sure way of raising living standards and providing more resources to spend on essentials, like housing, health and the environment, why have we failed to produce a better performance?

Because, as Jacinda Ardern pointed out, we have failed to invest in the new skills, new techniques, and new equipment and technology needed to increase the productive capacity of each member of the workforce.

We have failed to provide young people as they join the workforce with the skills – the training and apprenticeships – that are needed in a modern and competitive economy.  We have handicapped our workforce by saddling large numbers with poverty (engendered by inequality) so that they have to contend with poor housing, health care and educational opportunities.

We have failed to provide incentives so that the necessary investment in new productive capacity, especially in research and development, and new equipment, is made.  And we have refused, for ideological reasons, to use the power of government to make good all these deficiencies.

Perhaps less obviously, we have failed to do what more successful economies do as a matter of course – move resources to the growth points in the economy.  Where are those growth points?  They should be, and almost invariably are, in the export sector, which is where the biggest markets are and where economies of scale – and therefore productivity gains – can most easily be achieved.

So, has our focus been, as it should, on improving our export performance and improving our export returns?  No – quite the contrary.  We have insisted on running an economic policy characterised by high interest rates (in international terms at least) and an overvalued dollar.

As a result, our exporters face a constant head wind, because they have to charge a premium on everything they sell.  And that makes it difficult both to compete for sales and  to earn a proper return on what they do sell – just ask the dairy farmers or the Manufacturers and Exporters Association what the high dollar has done to them.  Little wonder that the return on investment is so low that there is little to spend on raising productivity.

These failures are the government’s Achilles heel in managing the economy.  It seems Jacinda Ardern picked the right issue to focus on.

Bryan Gould

1 September 2017