Friday, 18 February 2011

Farewell Sir Roger

Sir Roger Douglas has announced he won't be standing for re-election.

It's a tragedy that this is optimal.

Douglas's reforms were critically important in fixing the country in the 1980s. The best argument that can be made against them is that had reforms proceeded more slowly, public support for the reforms might have been built and we'd have had less backsliding around 2005-2008. I'd put less than even odds on the critique being right, but it's defensible. Other critiques I've been seeing around the traps subsequent to the retirement announcement are a little uglier.

The costs of the restructuring were unavoidable. Policy has a hard time turning on a dime; entrenched business practices can be even slower. A whole lot of firms had to learn how to operate in a deregulated and internationally competitive environment. Arnold Kling's recalculation story is probably the best explanation for the prolonged downturn - we don't jump from one equilibrium to another, and the path can be painful. It took a long time to figure out that the best use of some sheep paddocks was grape growing, dairy irrigation for others. You don't move from requiring government permission to get a foreign magazine subscription (currency controls) to a dynamic free trading economy without adjustment costs. The move's still worthwhile.

The country's a better place for Douglas having served. I can't think of many other politicians, here or abroad, about whom that's true.

The last term has had to have been frustrating for Sir Roger. Having National shoot down his bill on the youth minimum wage had to have stung. National voted against Labour's elimination of the differential youth rate, but Douglas couldn't get National onside for a policy move consistent with National's prior position and not ruled out by Key in the election campaign. And about 10,000 kids are now unemployed who otherwise likely wouldn't be. Sad fact is that most voters associate Sir Roger with the pain of the reforms rather than the worse pain avoided and the prosperity that ensued, like the kid that blames the doctor for the medicine's bad taste. And that's enough to poison the well against anything he might propose, regardless of how well grounded it might be in economic theory or how consistent it might otherwise be with the kinds of policies the National party might otherwise support. And so it's time to retire.

It's a good thing that economic reformers aren't in it for the kudos. The hipsters on the left might daydream about what reform package they might have implemented had they had their fingers on the button back in '84. But the risks of currency crisis, debt default, and the country being taken under statutory management weren't trivial. We can armchair quarterback now about whether it would have been possible to implement a superior alternative reform path. It's pretty unclear even now whether it would have been possible. If I put myself where he was in '84, I have a hard time seeing an ex ante better path than the one he took: fix as much as you can as fast as you can and hope the damned thing sticks. And most of it has stuck, despite serious backsliding since 2005 or so.

One of the profs back at Mason told us that perhaps the best any of us could hope for would be to delay the implementation of some bad bit of regulation by a week or two, but that even that would be worth doing - the benefits of those two weeks, aggregated over everybody, could be substantial. Sir Roger did a fair bit more than that. Enjoy the break!


  1. "The country's a better place for Douglas having served. I can't think of many other politicians, here or abroad, about whom that's true."

    Really? If you believe that, you're delusional. I'm referring to the second sentence in that quote.

  2. @Anon: chalk it up instead to perhaps my limited memory. I'm not saying the set of all others has done harm. But few have made really big substantial lasting changes for the better. The rather large majority toil to little result for better or worse. And a few do serious harm.

  3. "...despite serious backsliding since 2005 or so."

    What specifically are you thinking of here? I'm genuinely curious, haven't been following NZ politics very closely.

  4. @Anon: Treasury was broken under the last Labour government - beaten into submission. The Fiscal Responsibility Act won't enforce itself. Regulatory Impact Statements accompanying legislation became trivial. And, around 2005-6, it looked like RBNZ had a side deal with Cullen to ignore the stated Policy Targets Agreement (and consequently the Reserve Bank Act) to keep interest rates low despite inflation forecast above target band that seemed to go on forever.

    A couple specific bad policies: Working for Families (our version of EITC, some effective marginal tax rates above 100%); interest free student loans (cost blowout there is what's driving some of the current uni sector restructuring).

    @Sinc: Ludwig Erhard.

  5. Deng Xiaoping, FDR, list could go on.

  6. One occasionally finds proof of the existence of parallel universes in which other "truths" may be found. In my universe, Mr Douglas'(coupled with those who followed him in the 1990s) failure to sequence reform with any regard to productivity and competitiveness have pushed NZ into a low-cost, low wage, low investment, low R&D, low productivity and low expectations vicious circle.

  7. @Anon: Only if you're taking absolute value.

    @Robert: Things were actually going rather well, up through the early 2000s. Then ERA replaced ECA, RMA got worse, we started ignoring the Fiscal Responsibility Act...

  8. 'And about 10,000 kids are now unemployed who otherwise likely wouldn't be'

    How does that work? Are there 10,000 other people in these jobs and therefore they would be unemployed instead?

    Just in case you haven't noticed we have pretty high unemployment levels at the moment so there is no lack of people looking for work, what we don't have is lots of jobs with no one able to do them.

  9. The econometrics aren't rocket science, rocket boy. Get Stata, run the .do file. The 10,000 figure drops out.

  10. Any chance of a plain word answer in, say, 200 words or less? With maybe a logical reason at the core of the answer?

  11. We are in a recession. Compared to other recessions where the adult unemployment rate has been even higher than now, the youth unemployment rate is much higher relative to the adult unemployment rate. Something broke the prior trend (a trend which included recessions) in late 2008. I call change in youth minimum wage.

  12. Yes I'd agree with that, however I think that instead of having 'kids' unemployed you would have those displaced by these lower wage 'kids' unemployed.

    There is no magic 10,000 jobs that would suddenly appear if the minimum youth rate was lowered.

  13. Maybe not 10 000 but as Eric would no doubt say - look to the margin. When companies create positions they will consider the cost vs. the benefit for each position. Those jobs below the artificial price floor (the minimum wage) are never created, the cost is greater than the benefit. They are the 'unseen' jobs destroyed by preventing youth and employers entering into voluntary agreements at a lower rate. Guessing how many is not possible, but the size of the residual helps to give an idea of deviation from the previous trend. Not perfect, but certainly provides some evidence to go with a plausible theory.

  14. What @Anon said. And, do hit the prior posts tagged "minimum wage". I have a link in the comments there where there's a US estimate of the amount of potential displacement - upshot, it's mostly job destruction, not displacement.