NZ Roundup

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Most of my blogging lately has been about the effects of political ignorance. I'll be doing a lot more on that topic in posts and papers yet to come. If there's sufficient demand from readers outside of Middle Earth, I'll supply updates on what New Zealand's up to.

Here's a current roundup. While the Wall Street Journal has praised us for not being too stimulating, we do run the risk of doing things. One nice one is a cheap symbolic move: the construction of a national cycling path running from the northern tip of the North Island to the southern tip of the South Island (whether Stewart Island gets included, I've not seen). Current cost estimates are $50 million, and I've little doubt the project would be dumped if it proved to be substantially more costly. The project wouldn't do much harm, would be more likely to use unskilled labour than would more complicated infrastructure stimulus projects, and is a nice way of looking to be doing something. Kiwi Pundit reckons it a useful symbol that might forestall calls for more harmful actions.

The more worrying proposal on the horizon is for a government-funded 10% reduction in the standard work week. Large employers could send employees home one day per fortnight, with government paying the stood-down workers for up to five hours per fortnight at the minimum wage. Kiwiblog has the details. I think the idea is to let employers with restrictive union contracts get some flexibility without having to lay off staff. Initial versions of the scheme would have had the day off be used for training, but I had a really hard time working out how that could be implemented.

Of course, the whole scheme is predicated on some form of the lump of labour fallacy: that there's only so much work to be done, and the more of it that I do, the less of it there is left for you to do. While this may be true for any particular firm in the short term, it can't hold for the economy as a whole or over the longer term. I can imagine second-best arguments for this where we're constrained against nominal wage cuts in a low inflation environment, but wouldn't the better policy be to encourage greater wage flexibility and to introduce a general employment stimulus by having government temporarily pick up part of the employer's ACC contribution (a payroll tax that covers workplace accident insurance)? The government's reckoning on costs of about $20 million. While cost estimates on these things tend to be low-balled, $5 per capita can't do terribly much harm even if costs are underestimated by an order of magnitude. But it won't help productivity.

The most worrying proposal still on the horizon is the potential that the government require the currently politically-neutral New Zealand Superannuation Fund invest 40% of its portfolio on New Zealand assets, with some risk that government infrastructure bonds count as New Zealand assets. The disadvantages of the scheme are obvious: with a diversified portfolio, absent the kinds of global shock we're currently experiencing, returns from the overseas investments can offset New Zealand specific shocks to tax revenues to help pay pensions; with a New Zealand concentrated portfolio, fund returns tank at the same time that tax revenues tank. Not a great idea. And, it breaks the current bright-line rule that the SuperFund is completely independent to make its own investment decisions on the basis of maximizing returns. It will be a lot easier for a subsequent government to introduce ethical investment rules if Key goes through with this one.

But, on the whole, we're not doing too badly yet. The unemployment rate is still only around 4.6%. The whole country has taken a massive real wage cut with a drop in the dollar from about $0.80 to the US to about $0.50 to the US. We came into things with a very low level of overall government debt but with a bad ongoing fiscal position left by the outgoing Labour government which set up long term spending programmes when tax revenues were high and which violated the Public Finance Act by misrepresenting the government's accounts going into the election to conceal a massive deficit in the government's accident compensation scheme. We're consequently somewhat falling into a rather large fiscal stimulus, if we define fiscal stimulus as government spending a fair bit more than it takes in in taxes for a while. This has been less a result of deliberate policy and more a consequence of Labour's big spend-up, Labour's previously-announced tax reductions, and National's election promise to enhance the previously-announced scheduled tax reductions. The government's accounts are going to look bad for some time, but we can afford to build up a bit of debt given where we're at. Hopefully, the current National government will be able to claw back some of the prior government's spending initiatives: they can do a fair bit of that while maintaining a net stimulus position. On the whole, Key's National government has so far done a lot less harm than have others. Let's hope it continues.

If readers outside of Middle Earth are keen, I'm happy to give semi-regular roundups of this sort.