Friday, January 21, 2011

Perhaps we'll all be too drunk to notice

(First published in the Nelson Mail and Manawatu Standard, January 19).

We are a nation in denial.

In every glossy magazine I open – and in newspapers, to a lesser extent – page after page is devoted to the pursuit of pleasure in one form or another. We are endlessly absorbed with food, fashion, travel, design and other trappings of an affluent, self-indulgent lifestyle.

A visitor from another planet could be excused for thinking we are a prosperous country with so much money at our disposal that we have no concerns more pressing than where to go for our next overseas holiday, which trendy architect to engage for our new beach house or what $50 bottle of Central Otago pinot noir to drink with our Moroccan lamb tagine.

Something is seriously out of kilter here. Our preoccupation with the good life is completely out of line with economic reality. As a nation, we seem far more interested in consuming than producing.

I don’t want to sound like a killjoy, but New Zealanders are living in a dream world. Economically speaking, the country is in a bad way. We have gone from being one of the richest countries in the OECD in the 1960s, when we had strong export-led growth, to one of the poorest.

The best analogy I can think of is a cruise ship on a very long voyage. Once a stylish liner, the envy of other fleets, it set out from port under brilliant skies with flags fluttering gaily, bands playing and paintwork gleaming. Several decades later it’s running on one engine, the hull is rusted and encrusted with barnacles, the sea has turned ugly, there are menacing skies ahead and the captain is worried he’ll be refused fuel at the next port – yet still you can hear the clinking of champagne glasses and the whooping of merry-makers as the ship limps on.

It’s a sobering fact that the last year in which our income from exports exceeded our spending on imports was 1973. We were once frequently reminded that we were living beyond our means, but we tired of hearing it and tuned out. We prefer to party and hope.

Late last year the Budget deficit was revised upwards to more than $11 billion. To cover this, the government is borrowing the eye-watering sum of $300 million a week – money that we taxpayers will eventually have to pay back. In the meantime, Standard and Poor’s has pinned a “negative outlook” to our credit rating, which may mean higher interest rates on whatever we borrow.

And it’s not just the government that is living on borrowed money. New Zealanders have binged on private debt as well, which would be all very well if that money had gone into activity that generated the exports on which our economy ultimately depends. But it didn’t; instead it fuelled a property boom. A strange sense of entitlement – one that would have been completely alien to previous generations of New Zealanders – convinced us that we all deserved to live in McMansions, even if we had to mortgage ourselves up to the eyeballs to do it.

Our leaders knew what was happening but were happy for household debt to expand because it provided an illusion of economic growth. As the former BNZ chief economist Len Bayliss has pointed out, such policies went down well with the majority of voters because they saw themselves benefiting from rising house prices.

More recently, sluggish economic growth has been exacerbated by adverse events such as the Canterbury earthquake, finance company collapses (most notably the South Canterbury Finance failure, for which the taxpayer is picking up the tab), the Pike River tragedy and the leaky homes fiasco, with its potential multi-billion price tag.

The income gap with Australia is widening, despite the government’s avowed attention of catching up. Half a million New Zealanders now live across the Tasman because of the better economic opportunities there, and the number is likely to rise.

This disparity between New Zealand and countries like Australia is not just a matter of sterile economics; it has social consequences too. Three of my four children now live overseas, and my family is by no means exceptional. It’s said that among developed countries, only Ireland has lost a greater proportion of its population to other countries, and those losses include some of our best and brightest.

There is talk of rebalancing the economy – of reducing state spending and putting more resources into the export sector – but the government shows little sign of having the political courage to make the necessary tough decisions. Politicians, locked in to a three-year electoral cycle which militates against coherent long-term planning, have difficulty seeing beyond the next election.

The media don’t help either. Coverage of serious issues such as the state of the economy is relegated to the back pages or to TV current affairs programmes viewed by a tiny audience on Sunday mornings.

The country is assumed to have little stomach for debates about such vexatious issues as the recent report of the 2025 Task Force on how we might catch up with Australia. Better to send a reporter out in search of the city’s most exotic cocktail or best eggs benedict.

Banality and frippery too often take priority, reinforcing the impression that we are a nation of airheads, determined to keep carousing even as our stricken ship slips below the waves.

The New Zealand Institute, one of several organisations with a record of pointing out facts that New Zealanders don’t want to hear, recently produced a bleak scorecard for the nation in which we managed only a “C” overall and a dismal “D” in such crucial areas as household wealth, labour productivity and innovation (violent crime, too – but that’s another story).

NZI director Rick Boven was quoted as saying New Zealanders are an under-performing, complacent lot with an over-generous estimation of themselves. The “she’ll be right” attitude, which he traces back to the era when Britain bought all we could produce and guaranteed our prosperity, is ingrained in our culture.

Oh well. Perhaps the best we can hope for is that when the SS New Zealand eventually sinks, we’ll all be too drunk to notice.

6 comments:

Shane Pleasance said...

Karl, I have been shouting this from my rooftop for some time, to the point that passers by find me now more amusing than even irritating.

Even more frustrating (to use your seafaring analogy) is the squandered opportunity we have as a nation to build more and better boats.

Perversely, your writing is probably too articulate to appeal appropriately.

LJ Holden said...

While I appreciate the sentiment, I have to quibble with one point:

"It's a sobering fact that the last year in which our income from exports exceeded our spending on imports was 1973."

Technically this isn't correct. There's two parts to the balance on payments, the balance of goods and services (which is usually in surplus) and the balance of income and transfers:

http://www.stats.govt.nz/browse_for_stats/economic_indicators/balance_of_payments/BalanceOfPayments_HOTPSep10qtr.aspx

Our real problem is that we borrow too much from overseas - and we're not borrowing for productive things - the government's deficit is a testament to that. Households also borrow far too much and don't invest very well. While KiwiSaver and the Cullen fund have helped, what we really need is a strong dosage of financial prudence, particularly from the government (which must also set policies to encourage productive investment).

Most people don't know it, but the last Labour government actually managed to reduce government spending as a percentage of GDP from 1999 - 2004 and still run surpluses. This was because the economy was growing faster than spending. However 2004 - 2008 the economy slowed (largely due to other Labour policies, but also due to external factors) and Labour had a big spend-up on the middle class (e.g. interest free student loans, working for families).

pdm said...

Excellen Karl - well said.

The probligo said...

I have no argument with the fact that as a nation we are living well beyond our means.

That fact is illustrated in part - as you point out - by the close to unsustainable levels of overseas borrowing. You leave out an important distinction at that point. At the time of the last elections a major part of that external borrowing was to fund private overspending. That portion has changed as private borrowing has either been repaid or defaulted and government borrowing has increased. The reasons for current government over-spending are many and endlessly debatable.

The other thing that gets right up my nose is the obsessive preoccupation some people have with "income equality with Australia".

I could achieve that overnight. People might not like it, but it could be done. The numeric value of the total wage could be increased by 20%, but the purchasing power would decrease commensurately.

It is called wage-led inflation.

LJ Holden said...

Wages won't go up if we don't increase our productivity. The last Labour government killed off productivity growth, the current government has done little to arrest the decline.

That said, Bill English constantly articulates New Zealand's basic economic problem well: the productive "tradeables" sector is sluggish in its growth, and has been in a technical recession since 2005. The non-tradeables sector has been what's propped the economy up 2005 - 2008... if anything good comes from this recession it will be the end of private equity being put into non-productive investments like housing.

Rob Glennie said...

Karl, I quite agree that the NZ economy is in a spot of bother. There are several reasons for our sluggish performance I think, some of which are years old and some of which are somewhat newer ones. Nonetheless at the end of the day, they raise serious questions that none of the political parties so far have seriously attempted to answer.

I don't know if political parties in NZ are capable of answering these questions.

One of the older problems I think would be our "eggs" all being in a couple of baskets. This may be interpreted as we only have to have a couple of disasters like a major Foot and Mouth Disease outbreak and there will be huge problems in agriculture.

Another of these older problems is our relatively low investment in research, science and technology. Whereas other western nations invest between 2-3% of GDP on this, we have rarely spent more than 1-1.2%.

More recently though, when the "good times" have turned sour, like a lot of people I have noticed that NZ has not shown more fiscal restraint. A figure being bandied about that a nation whose debt is more than about 95% of GDP is generally in big trouble is quite disturbing because New Zealand is not that far off.