Losing our way

Forbes reports:

On September 23, the people of New Zealand elected 37-year-old Jacinda Ardern as prime minister, the youngest prime minister in New Zealand’s history. Ardern has brought youthful energy to New Zealand politics, but her scary rhetoric during the campaign (like calling capitalism a “blatant failure”) has some people wondering if she will take the country back to the bad old days of the 70s and early 80s.

New Zealand is a supply-side economic miracle. Not long ago, it was one of the most unfree economies that was not actually Communist in name. Most industry was nationalized, from telecommunications and transportation, to banks and hotels. There were strict capital controls and prohibitions on owning foreign assets. And of course punitively high tax rates, inflation, and extraordinary levels of government debt. The 1980s saw an enormous rollback in the size and scope of government, and the beginning of a supply-side revolution. Of course, economic liberalization was happening around the world at that time, but it was most dramatic in tiny New Zealand.

New Zealand enjoyed unprecedented economic growth, and leapfrogged to near the top of the economic freedom rankings, where it usually sits only behind Hong Kong and Singapore. It became one of the richest countries in the world. Part of New Zealand’s success was due to good central banking; the Reserve Bank of New Zealand was the first central bank in the world to institute a formal policy of inflation targeting, which other central banks have copied over the years, to everyone’s benefit.

If you only listened to the nay-sayers of the government parties, you’d think New Zealand was an economic backwater. Reality is that we have, or used to have an economy the envy of the world, with low unemployment, high value export goods and a good welfare system as well.

It is this policy of inflation targeting that Ardern takes issue with; she observes that inflation is well below the target, and has proposed introducing a dual mandate to the RBNZ, whereas the central bank would also target unemployment. At 4.6%, unemployment is already low, but she wants to take it well below four percent, for starters. She would rather that the central bank tolerate higher levels of inflation in order to get unemployment lower, risking all that the RBNZ has achieved over the years. She also wants to include an external committee in the RBNZ’s monetary policy decisions, which will certainly give the bank a more dovish tilt.

Inflation is evil, it robs households, perniciously, of income. If it gets out of control then it robs industry of productivity and it robs jobs.

One of Ardern’s first acts as prime minister was to ban foreign ownership of residential real estate; New Zealand has, by anyone’s measure, one of the biggest housing bubbles in the world. Banning foreign ownership of property sets the country up for a possible real estate crash. You might recall that Canada instituted a foreign ownership tax in British Columbia and Toronto; New Zealand takes it a step further with an outright ban.

Already tanking. I know of several high powered bankers who are rather scarily talking about 100,000 plus mortgagee sales in the 18 months and interest rates approaching 9%.

Ardern also opposes high levels of immigration, along with her coalition partner, Winston Peters. It is set to drop dramatically. Immigration, especially skilled immigration, has been a big contributor to economic growth over the years. It is still early in Ardern’s term, so she has yet to say much about tax, although the tax cuts proposed by the opposition National Party are no longer being considered.

It seems likely that New Zealand will experience a recession during Ardern’s term. Nobody is predicting a return to the bad old days of the 70s, but New Zealand will probably lose its status as one of the most open, free economies in the world. It takes decades to weaken an economy, just like it takes decades to strengthen it. But investors will probably want to avoid New Zealand for the time being.

Jacinda really is getting all the media stories she doesn’t really want.

The problem is she has no real world experience and has no idea about market forces. She thinks she can wag her finger and make market forces go away. She can’t.

Luckily, and this is why we have never changed it despite a couple of referenda, we have three year terms. Three years is too short for a National government, but too long for a Labour government.

 

-Forbes

 


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