More on Cunliffe’s Great Leap Backwards

Yesterday I noted that David Cunliffe’s recent speech on the economy contained very little beyond populist twaddle aimed at painting himself as the champion of the ignorant and defender of the bewildered. I did not, however, devote much energy to pointing out specifically where and how Cunliffe was wrong.

Cunliffe seeks to exploit the credulity of those who haven’t the foggiest notion of how an economy actually functions – those dissatisfied by the Labour Party’s refusal to once again advocate for a command economy.   And to fuel their fervour, Cunliffe threw his listeners plenty of juicy post hoc ergo propter hoc fallacies and more than a few straight out factual errors in support of their shared delusion that economic freedom has been bad for the economy.

But if Cunliffe’s case against the economic reforms of Roger Douglas in New Zealand, Margaret Thatcher in the UK and Ronald Reagan in the US is weak, is there a stronger case to be made for economic freedom?

Cunliffe’s central argument is that the world began moving away from interventionism in the late 1970s and early 1980s.  Three decades later, the world economy is flat following a recession caused by a financial crisis that began in the property markets.  Therefore, so the argument runs, free markets do not work.  Cunliffe also states that austerity prolonged the Great Depression.

With respect to the claim that austerity measures prolonged the Great Depression, it should be noted that the depression was greatest in those countries that did not respond to the crisis by cutting government spending.  In the US, Hoover responded to the economic downturn by:

  • almost doubling federal spending from 1929 to 1933
  • expanding public works projects to create jobs
  • pressuring businesses not to cut wages, even in the face of deflation
  • increasing trade barriers
  • implementing the largest peacetime tax increase in American history

Hardly austere, surely.  Unemployment in the US peaked in 1933 at about 25%, before declining to around 14% by 1937.

In Britain and Australia, where the governments responded by cutting spending and balancing budgets, unemployment rates peaked sooner at a lower level, declined faster and were below 11% in both countries by 1937.

Admittedly, correlation is not causation.  Britain and Australia may have recovered faster had they implemented a stimulus, and perhaps the depression would have been deeper in the US had they not.  But the data don’t support Cunliffe’s argument.

As for the resurgence of liberal economic policy following the post-war infatuation with Keynes, because economies are influenced by more than the economic policies of the government in power, one cannot simply look at economic performance before and after the implementation of a policy or a suite of policies and draw firm conclusions.  However, by comparing the relative performance of several economies stronger inferences can be drawn about what effect policy settings are having.

Scott Sumner of The Money Illusion had a go at this here in 2008.  Here’s his data:





United States
































Hong Kong
























The above data, from sourced from the World Bank, show per capita income in terms of purchasing power parity expressed as a ratio of US per capita income.  Countries such as Hong Kong, Singapore, Chile and the UK whose economies were heavily liberalised have become wealthier relative to the US.  European countries who embraced economic reform less wholeheartedly have performed less well than the US.  Australia declined in the 80s, but gained ground after it began its economic reforms in the 1990s.

Over the last three decades, the period Cunliffe refers to as a “mostly unmitigated disaster”, countries with free economies have performed well relative to more statist economies.  The picture for the European countries would surely be worse had they not, during the same period, been transforming their continent into a large free trade zone.

This graph, also from Sumner (except for the label on New Zealand, which is all my own work), tells us much the same thing.


Economic freedom, the bogey-man of David Cunliffe’s version of history, correlates very strongly with wealth.  What’s most interesting about this graph, however, is the extent to which New Zealand is an outlier.  All else being equal, New Zealand’s level of economic freedom in 2008 should have seen us around US$10,000 per year better off.

Sumner identifies two likely reasons for this.  The first being our geographic isolation, and the second being that our comparative advantage is in agriculture, which is still highly protected in many large economies.  Both of these explanations seem highly plausible.

Any government elected on the back of Cunliffe’s rhetoric would take New Zealand in completely the wrong direction.  Isolation would still be a problem, but New Zealand would become a steadily less attractive place to invest and do business.  Rather than seeking to turn back the clock and to return New Zealand to the days of wage orders and price freezes, a credible economic plan should seek to put New Zealand at number one on the economic freedom rankings.


We could do a lot worse…

When I set up this blog, I did so with the intention of promoting classical liberalism and not with the intention of endorsing any political party. Unfortunately, my primary motivation for writing, as it has turned out, is anger. As such, I usually only work up the motivation to write something when someone on the Left advocates something stupid. So while I haven’t endorsed anyone on the Right, I have frequently dis-endorsed those on the Left.

This is no doubt partly reflective of my various personality flaws, but it’s also because there are simply no classically liberal parties in Parliament. ACT, who could be, have yet to shed their socially conservative element, as was made all too clear during the debacle that followed Brash’s tentative suggestion to maybe decriminalise cannabis a little bit at some point. Maybe.

So, I shall cleave to my original purpose and refrain from giving a positive endorsement to any one party in this election. I will be voting, however.

I stand firmly behind my dis-endorsement of all parties on the Left. Labour under Phil Goff has veered wildly toward its Old Labour, unionist roots. This, combined with the fact that any Labour-led government oozing forth from this election would include a substantial Green contingent, would make it the most statist, interventionist, heavy-handed meddlesome government since Muldoon. Not since McGillicuddy Serious has anyone proposed so great a leap backward as would be visited upon us by Goff and his five-headed chimera.

While some of their policies have merit, taken as a whole, particularly as a coalition, a left-wing coalition would be economically ruinous.

While the current government have not shown the flinty, reformist zeal of Roger Douglas or Ruth Richardson, they have demonstrated a willingness to incur some political risk to advance an economically liberal agenda. This is the first government in New Zealand history I am aware of that has passed a zero budget in election year. And starved of the oxygen that the proposed partial sell off of the state-power companies has provided, it’s hard to believe that the Left’s campaign would have got the legs it has done.

When you vote this weekend, I urge you to use your vote to keep the current government in power. They’re not classical liberals, but they’re a bloody sight better than the alternative.

Epic Phail

In the 90’s, I recall it was commonly asserted that there was little real difference between the main parties, and that there was speculation of a ‘grand coalition’ between National and Labour.

Looking back, I suspect that this sentiment was due to the fact that both parties more or less embraced the market economy, and neither was campaigning for a return to any version of New Zealand’s pre-1984 fortress economy/welfare state.

Since 2008, however, the Left have been able to mount attacks on the free market that sound more credible than they have in a long time. The financial crisis has allowed them to piece together a narrative that makes it seem that capitalism has failed, and that the time is ripe to have another go at a planned, socialist economy.

The notion of big government riding in on a white charger to rescue a benighted economy finds fertile ground in the imaginings of some of New Zealand’s under 40s, who never participated in a planned economy, or among those over 40s for whom the pain of reform dulled their recollections of what preceded it.

And so it is that in 2011 around 40 per cent of voters favour a return to state control over the economy to a degree not seen since 1984. It is true that National doesn’t wholeheartedly embrace the free market, and that Labour are not proposing full-throated socialism, but it was with some surprise that I found Bryce Edwards still arguing that the two parties’ policies were almost identical.

This argument seems to me to be a little like arguing that there are no important differences between humans and chimpanzees, since we share 96 per cent of our genome.

Where Labour’s policies differ from National’s this year, with one exception they would slow economic growth and/or further increase national debt. The heroic exception is their proposal to lift the age of entitlement to national super, which is eminently sensible.

National under John Key are dominating the centre ground, and are being careful to alienate as few voters as possible. As such, to a large extent it is Labour’s ineptitude and irresponsibility that make the difference: National’s incrementalist approach being safe but not earth-shattering.

Labour’s key platforms in this election are:

· increasing the minimum wage to $15 per hour
· the reintroduction of compulsory unionism by stealth
· increasing the incomes of beneficiaries
· a capital gains tax
· removing GST from fruit and veges
· a higher top income tax bracket
· opposition to asset sales

National’s campaign has focussed on maintaining the status quo, balancing the books sooner and debt reduction. Its only significant economic announcement was its welfare reform policy, and for the most part it appears content to demonstrate that Labour are fiscally imprudent, while Labour do their level best to make National’s job as easy as possible.

I fail to understand how, but for whatever reason, Labour appear to believe that demand for labour is inelastic. It is central to their economic policy that they can increase the cost and risk of hiring staff, and that this will have no effect on how many staff businesses take on. Occasionally, they even proffer the view that increasing the minimum wage will increase the number of people in employment because those on minimum wage will spend more, thereby increasing demand for goods and services and leading to higher employment. If this is the case, I have asked their members on more than one occasion, why do they not propose a $1,000,000 per hour minimum wage? The answer appears to be, in a nutshell, that a little bit of nonsense is OK, but a lot of nonsense is just silly.

To be fair, there is no question that some businesses would benefit from an increase in the minimum wage. Businesses whose customers are on or close to the minimum wage, but whose staff are paid sufficiently more than the minimum wage that the increase wouldn’t affect their own payroll costs would do nicely. The poor have long been a goldmine, and boosting the yield of that mine will benefit some. But regardless of what the latest OIAed email from Treasury dating from early 2010 might say, there is ample evidence that increasing the minimum wage beyond about 60 per cent of the median wage does cost jobs. [Update: Eric Crampton says his piece on Treasury’s minimum wage email.]

Moreover, I can think of very few employers who would be unaffected by the massive increase in the role of the unions proposed by Labour. Since that was the subject of my previous post, I shan’t devote much space to this point, but suffice it to say that the recent grounding of Qantas flights should sound a cautionary reminder about legislating to artificially inflate the power of unions.

Apparently desperate to stem the flow of votes to the Greens, Labour have given up contesting for swing voters and have started stealing Green policies. Or rather continued, seeing as the Greens have been pushing for a $15 minimum wage for some time. Their most recent acquisition from the Green’s manifesto is the extension of in-work tax credits to those not working. In total, Labour’s policies would boost the income of beneficiary families by around $60 per week. Ironically, given their proposed minimum pricing on alcohol, this combination of policies is likely to in effect be a subsidy to retailers of cheap alcohol.

Given that Labour appear to agree in principle on the need to reduce debt, announcing another $2.6b in reducing the marginal returns from getting a job, while at the same time reducing the number of jobs available is ludicrous and grossly irresponsible.

Labour’s capital gains tax policy was among its least bad. A clean CGT could be a good thing, but Labour’s proposal is not clean and is riddled with exemptions that would seriously undermine any potential benefit. Moreover, I am inclined to accept Eric Crampton’s Seamus Hogan’s argument that capital gains are already taxed and the introduction of a new tax would increase, rather than reduce, distortions caused by the tax system.

Labour’s promise to remove GST from fresh fruit and veges is also fraught. Not content with increasing the risk and cost of hiring staff, Labour also intend to make businesses’ monthly GST returns more complicated, and transfer more public money to lawyers while businesses and IRD go to battle over what constitutes fresh fruit and veg.

While bemoaning the wage gap with Australia and the resulting brain drain, Labour have effectively promised to exacerbate the wage gap for our best and brightest by imposing higher taxes on them. The only section of the population who would come close to closing the gap with Australia under Labour are beneficiaries and those on minimum wage. The proportion of the population closing the wage gap for themselves by moving to Australia would increase.

The only policy difference where Labour enjoys clear support is its opposition to asset sales, but it too is incoherent policy. If asset sales are so bad, and if indeed SOEs are the ladder with which we shall dig ourselves out of our hole, why then does Labour not propose to acquire more? If the dividends from profit-making entities are so important, why does Labour not propose to buy back the rest of Air New Zealand? Or other formerly state-owned businesses, such as Telecom? Indeed, why does Labour not borrow to invest in the New Zealand share market if the dividend returns are so good? If you’re a Labour Party member, the answer, once again, is that a little bit of nonsense is OK, but a lot is just plain silly.

The onus should be on Labour to explain how it is we happen to have precisely the right amount of state ownership of profit making enterprises. It seems a remarkable coincidence, and frankly the mainstream commentators have been outright lazy in not calling Labour on it. I can understand National being reluctant to try to make the point in a soundbite, but the plethora of so-called political journalists have plenty of column inches to ask the question.

Moreover, in their attacks on National for surrendering future dividend income, Labour forget to mention that there is a tax on corporate income and the government will, therefore, sell the shares for 100 per cent of their market value, and get to keep 30 per cent of the income generated from those shares. It’s a fantastic deal, and one which any private company would jump at if they had the opportunity.

The relatively low-key campaign from National masks the extent to which New Zealand faces, in my view, the starkest choice since 1984. Phil Goff’s Labour has put forward the worst economic policies from a major party since Muldoon.

It is an old aphorism that all political careers end in failure. This could hardly be more true than it is for Phil Goff. Entering Parliament on the side of the angels opposing our most disasterous prime minister, he contributed to the most transformational government in New Zealand history. Having finally taken the helm of his party after a 30-year career, he has turned against his own convictions and followed his caucus ever leftward. In doing so, he looks set to go down as the least successful leader in the history of the Labour Party. He will leave Parliament, probably shortly after the next election, unmourned and unmissed. And in the long years of his retirement he will lack even the consolation of reflecting on a noble defeat, earned fighting bravely for what he knew to be right.

Is it any wonder he now wants to talk about voluntary euthenasia?

Government of the unions, by the unions, and for the unions

I don’t know why, on reflection, but I actually expected Labour’s employment policy to be rather bland. I guess I thought that a poorly-considered populist bribe in the form of a massive increase to the minimum wage would be all they would feel the need to do. What I didn’t consider is the extent to which the once-sensible Phil Goff’s blind pursuit of his caucus ever leftward has delivered his party well and truly back into the union fold.

It’s hard to believe that this policy is seriously being advocated by what was once a mainstream party. It’s so bad that Labour was already on the defensive before the policy even hit the mainstream media, so the first news item that Stuff ran on it was titled “Labour defends jobs policy“.

Labour, in mounting said defence, say that their policy would “bring New Zealand in line with other developed countries”. David Farrar has already pointed out that by abolishing the probationary period and by lifting the minimum wage to 72% of GDP per capita, Labour would in fact be taking New Zealand even further out of line with other developed economies. Amusingly, Labour refer repeatedly to Australia in their policy, and cite our low minimum wage as a reason that New Zealanders emigrating to Australia. Yet Australia’s minimum wage is a paltry 52% of GDP per capita.

Don Brash has pointed out that Labour seem determined to ignore the fact that “the more something costs, the less people buy [and that] employers are no different to their customers in this regard”. This has been proven, at huge cost to young people, in the case of Labour’s misguided abolition of the youth minimum wage. Eric Crampton has shown the effects of this policy about as graphically as one could imagine, and yet still Labour pretend that demand for workers is inelastic and not affected by price increases.

Except when it suits them to do acknowledge the laws of supply and demand are in play in the labour market. In part one of the policy that their union masters drafted for them, Labour claim that low wages provide employers little incentive to lift productivity. So Labour appear to believe that higher wages will encourage employers to invest more in technology to improve productivity so that they require less labour, but that this won’t cause them to use (and therefore hire) less labour. It is worth nothing that the last Labour government’s record on productivity growth was atrocious.

Having recently fought tooth and nail to defend left-wing students’ right to force other students to pay fees to support their left-wing political activism, Labour now acknowledges that “a return to compulsory unionism is not the answer”. Instead, Labour plan to give their affiliated unions a privileged position to negotiate employment conditions on behalf of the more than 80% of workers who have chosen not to join a union. Instead of making people join unions, Labour will simply make irrelevant the decision of 80% of the workforce not to.

Almost every line of Labour’s new policy increases the risk and cost to business of employing staff. That is seldom good policy, but to do so at a time of flat demand for labour is mind-bogglingly stupid. Labour’s policy, if implemented, would increase unemployment, increase net migration to Australia, reduce productivity, reduce GDP growth and make New Zealand poorer and more backward.

If any were needed, the fact that Labour’s policy was released by the unions before the party is proof positive that Phil Goff’s only remaining ambition is to be a figurehead leader of a government of the unions, by the unions and for the unions.