Labour's finance policy release
Last Friday I went along to the launch of Labour's Finance policy. Just over a week out from an election feels like a little late to be launching major policy, but Labour were hit hard early on by Key's Fairfax press debate claims to "show me the money" and seem to have spent the last couple of weeks squirrelled away figuring out how to launch a more comprehensive policy. Goff, Cunliffe, Dalziel and Parker were there to show a united Labour front and represent people who also had experience in the private sector.
As opposed to National's policy, which focusses on increasing free trade agreements and proposes 28 bilateral meetings in the next term with governments outside of Doha, Labour are talking about writing an export-led focus into the Reserve Bank's mandate, which currently is focussed on constraining inflation by slightly widening the Reserve Bank Act. They would also appoint people who are export leaders onto the Board of the Reserve Bank so that it more accurately reflects the interests of the New Zealand economy. They say that this has the potential to help curb the rapid fluctuation of the NZ dollar having an effect on export driven markets.
While this addition has been welcomed by the Manufacturers and Exporters Association, there is an awful lot of hysteria floating around on forums that this will be as wide ranging as Singapore. In fact it is not, all it is doing is extending the mandate of the Reserve Bank to look out for exporters as well, which is something that countries like the US do. To read many of the financial forums there are a lot of people currently comparing New Zealand's situation to Greece and Italy in terms of public borrowing, and this is a really big hyperbole and mistake in terms of economic literacy.
Where we are failing at the moment is in our property bubble, and in our private debt, which like the US is a result of the middle classes overextending themselves. These are factors highlighted by the IMF in its report on New Zealand. In global terms, the economy is shaky because countries have over borrowed and are lacking the mechanisms to protect themselves in the advent of a European crisis, or another shake up in the economy, such as China not being the growth factor that everyone had hoped. The problem is that too many countries in the west have outsourced their production to countries where goods can be made more cheaply, and that this then wipes out the production as prices for production are engaged in a race to the bottom as to who can provide things more cheaply. The writing has been on the wall for a transition to China and India to become economic leaders for quite some time now, and the people who think that the west can continue to dominate economically are dreaming. This transition has now been going on since the 1970s, so it is a mirage to think that we can halt this overnight, particularly when like many other nations many of our goods are produced offshore, the manufacturing sector has shrunk and we have had a growth in bureaucratic, frontline jobs.
I am inclined to think that there is little that countries like New Zealand can do to mitigate this other than increase Research and Development funding and focus on job creation. Labour want to do this by increasing R&D tax credits to 12.5% through the Emissions Trading Scheme that affects 2-3% of New Zealanders who farm and produce most of the carbon that we are required to reduce under the Kyoto Agreement. Actually adhering to our environmental commitments is something that will benefit us in overseas markets, and is not really as dire as the way that its opponents paint it. In fact, around 40% of sheep and beef farmers' gross income was from government subsidies in 1984, and they survived the reduction of this subsidy to around 2% by innovation, effectively increasing their profits by 40%.
This election it has been difficult to cut through the hysteria over the economic crisis, but I think the role that governments can play in mitigating the financial crisis is being overplayed. Renaming a whole pile of Government Departments as New Zealand Inc (as in the case of National's plans) seems to me as equally misguided in terms of overstating its impact on the economy as the whole debate over asset sales, which don't really seem to make financial sense. We are probably in for higher unemployment in an ongoing manner as are many countries, which is why many economists have begun using the phrase "the new normal". In light of how dependent we are on other nations in terms of our economy, making sure that we have mechanisms to soften the ride seems like a good idea.