The Purpose of Economic Policy

Brian Easton

The annual May budget is a public spectacle. The Minister of Finance is photographed holding aloft a copy of his speech while those from political parties and sectors dominate media discussions debating the significance of economic growth targets, the level of inflation, and the fiscal deficit – there will even be the occasional mention of unemployment. Some will predictably claim that these economic manoeuvers will lead us to a brighter future; others to disaster. In the cacophony it is helpful to distinguish between rhetoric and reality.

For while the rhetoric will be about accelerating economic growth, there is surprisingly little evidence that any New Zealand government has been able to do so. The New Zealand market economy has grown at much the same rate throughout its history, except for five longish periods of economic stagnation. Four were caused by events outside New Zealand, but the fifth – the Rogernomics Recession from 1986 to 1994 – was the result of poor economic policy. Despite world economic prosperity the stagnation was caused by the neoliberal macroeconomic policies of the era; Rogernomes promised to accelerate the growth rate and utterly failed. There was not even a long-term growth-rate dividend. Business cycles aside, that growth rate has been much the same as throughout New Zealand’s market economic history.

Yet the macho chest-beating politicians will continue to declare that ‘mine is bigger than yours’. We will see it repeatedly during the budget round, right through to election day and after.

If economic management does not have much impact on the growth rate, why bother? Recent research indicates that in rich countries individuals’ material standard of living has little impact on their wellbeing, and economic growth has even less (except on those who are the poorest). Many of the most important wellbeing factors – like one’s family relationship – are barely relevant to economic considerations. However economic policy can influence:

The Quality of the Output: The market poorly delivers many valued goods and services including the arts, culture and heritage, education in the broadest sense, the environment, healthcare, recreational facilities and public safety and security as well as infrastructure – such as in transport and law – which underpins economic activity.

The Level of Economic Inequality: There is nothing in economics that says markets generate fair outcomes. Unfair outcomes are both a threat to social coherence, whilst adding to public costs (as argued in The Spirit Level) and undermining human development. Social investment is as important as physical investment.

Employment: A meaningful job in a safe work environment with a good social atmosphere is a boost to one’s quality of life.

So the public rhetoric makes a fetish of economic growth which the research evidence concludes economic policy has little influence over (poor quality management aside – as the Rogernomic era demonstrates) and that, in any case, the material standard of living does little for individuals’ wellbeing. Ironically to pursue that goal demands that measures which actually address wellbeing should be cut back.

That is why the debate on the budget will stress the need to restrain expenditure and pay little attention to a host of quality-of-output activities being reduced. The examples are too numerous to list but it is well to remember that the consequences may not become immediately apparent.

  • The deaths of 29 miners at Pike River for want of mine inspectors is an extreme example, but there are many other examples of inadequate industrial supervision which gives us one of the highest accident rates in the rich world (even if we exclude the Pike river miners).
  • Ordinary New Zealanders lost hard won savings when finance companies collapsed in part because of inadequate public financial supervision.
  • We once thought there was a leaky building crisis that was the result of poor building inspection. It is now clear that the problem of poor quality building is much more widespread – 115 people lost their lives when the CTV building collapsed – with huge remedial costs.
  • Perhaps these doors are closed now the horses have bolted. But where else are there open doors that compromise our future because of underfunding and ideological distaste for government action?

One is among the poor. By underfunding them – especially children – we compromise their education, their health, their future, their wellbeing. Too frequently discussions on poverty ignore that children in impoverished circumstances will have their future life chances severely limited and that they will be a future drag upon publicly provided services such as health care and justice. It seems likely that the damage far exceeds the previous examples great though there costs are. A child has little influence over whether they are in a poor or well-off family, yet we treat poor children as responsible for their situation rather than its victims.

We are told we cannot address inequality in New Zealand because that would compromise accelerating economic growth, even though the policies don’t work. Yet if anything, countries with low social and economic inequality tend to have higher economic growth.

What is the purpose of the growth rhetoric? Why do we frame discussions about the budget in this way instead of aiming to improve the wellbeing of New Zealanders? Why the obsession with the policies that go with the rhetoric, when as long ago as 1997 a World Bank report admitted its previous obsession with market fundamentalism had gone too far and went on to stress the importance of the role of government in enhancing wellbeing?

Of course it was not saying that markets and the associated activities of private production and consumption are unimportant; rather it was saying that the wellbeing of people requires good government and good governance as well. This hardly seems a deep insight but following a period of neoliberal economics and its obsession with limiting the scale of government, it is a reminder of just how imbalanced policy discussions became – and remain so in New Zealand.

In fact the constitutional purpose of the annual budget is as part of a system of the Crown reporting to parliament, representing the people, of how well it is governing in the public interest, thereby asking for the funds to continue. Sadly governing in the public interest has been corrupted into pursuing narrow neoliberal policies in the name of accelerating economic growth.

Any close analysis shows that the advocates have a couple of agenda items. One is selfish. They are asking for preferential treatment for their private interests even though it may not be particularly in the public interest and will certainly be at the expense of others. Second, they frequently have an ideological vision of society which they are pursuing in the name of economic growth. We all have ideological visions, but these advocates claim a privileged position using it to suppress dissent and to drown the notion of the public interest and wellbeing.

The dominance of such narrow advocates with their unattainable public interest and their all too attainable private ones cannot be the purpose of economic policy in a democracy. Surely that is to advance the economic and social wellbeing of all New Zealanders while ensuring the policies of today are also protecting future generations.

Categories: Economic policy
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Brian Easton
About the author

Brian Easton

Brian Easton is one of New Zealand’s leading economists with a unique profile as an economic development practitioner, consultant, journalist and commentator. A former director of the New Zealand Institute of Economic Research and a one-time member of the Prime Minister’s Growth and Innovation Advisory Board Brian has numerous awards to his credit including being a distinguished Fellow of the New Zealand Association of Economists. Dr. Easton is an adjunct Professor of the Auckland University of Technology and is currently writing a history of New Zealand from an economic perspective, Not In Narrow Seas: A Political Economy of New Zealand’s History, to be published by Massey University Press.