The Ardern government is weakening many of the pillars of the free market reforms implemented in the 1980s and 1990s, including undermining the Reserve Bank and Fiscal Responsibility Acts.
More alarming is its failure to learn that bestowing privileges on a few results in enormous costs for the many.
So says Nicholas Kerr, son of the late Business Roundtable executive director Roger Kerr.
A marketing consultant in Dallas, Texas, Nicholas Kerr delivered a speech last month to the Dallas chapter of the Bastiat Society, an organisation established by the American Institute for Economic Research as a forum for business professionals to help advance peaceful trade and human flourishing.
The speech (the full version can be read here) was headed Unleashing New Zealand’s Potential and Suppressing Washington State’s — Lessons for Texas.
Here’s an edited version: –
While the New Zealand I grew up in during the 1970s and early 1980s was idyllic for most children, its citizens had long been experiencing declining relative living standards. In the 30 years prior to 1982, New Zealand’s rank in the per capita gross domestic product league table fell from third to 32nd.
Government owned all manner of things, including but not limited to, one of the largest hotel chains in the country; a shipping company; both television channels (New Zealand only had two until 1989); many radio stations; most hospitals; major banks; a steel mill and a printing company; all the country’s airports, ports, universities and coalmines; half the country’s forests; and, the only telecommunications, electricity, airline, and rail companies.
Naturally, all these businesses were run incredibly inefficiently at a huge cost to taxpayers. New Zealand, by 1984, was awash in price, wage, rent and interest rate controls along with subsidies, quotas and tariffs. For the average Kiwi, this meant limited choices for most goods or services. The government’s monopoly businesses and regulations over industries it didn’t own also meant limited career choices and prospects.
Tariffs of up to 60% on imports of assembled cars protected local car assembly plants and made millionaires out of a few select people such as the Todds, to this day one of the wealthiest families in New Zealand. The tariffs and local content requirements made new cars unaffordable for average New Zealanders.
Key economic reforms implemented by the Lange government in 1984 included:
- The floating of the New Zealand dollar, the removal of foreign exchange controls, reductions in corporate and individual taxes and the implementation of a broad-based goods and services tax;
- The removal of price and interest rate controls, and the elimination or drastic reduction of tariffs;
- Numerous former government departments and agencies were corporatized and registered as public companies. As state-owned enterprises they were given the principal objective of operating as successful businesses. These included the post office, railways, ferries and electricity company. Many were subsequently privatised, including the hotels, banks, telecommunications company, airline, airports and ports;
- Agricultural subsidies were removed; and
- The Reserve Bank Act made the bank’s primary focus targeting inflation.
Despite the tectonic changes that rippled through the economy, New Zealanders let the Labour Party know that good policies can be good politics by re-electing it in 1987 with an even larger share of the vote in 1984.
A second wave of reforms began in 1990 following the election of the National Government (traditionally New Zealand’s conservative party) These included further privatisations, much needed labour market and welfare reform, and a Fiscal Responsibility Act requiring transparency in fiscal policy. Modest healthcare and education reforms were passed but were not transformative.
In the 1990s, unemployment fell to record lows as the labour market was now able to adjust more easily, and GDP growth averaged about 5% annually from 1993 to 1995. For average New Zealanders, this meant not only increased job opportunities but more meaningful ones.
It also meant greater consumer choice as grocery store shelves filled with new brands, and shops offered clothing and other items previously only seen on foreign TV shows.
The National Government was re-elected in 1993 but the reform momentum largely stalled. In the decades that followed, nevertheless, there was no major unwinding of these reforms. The debates had taken place and governments had been re-elected as voters endorsed the need for these policies.
While these reforms are often referred to, quite accurately, as free-market reforms, another way of looking at them is as the removal of an incalculable number of privileges that each benefited the few at the expense of the many. These privileges meant fewer opportunities for New Zealanders to reach their full potential. Once these shackles came off, innovative and entrepreneurial Kiwis started countless new companies and even created new industries.
While New Zealand’s reforms are a case study for supporters of free markets, like Washington state it has more recently become a cautionary tale. This may come as a surprise to some given that the country has received glowing coverage for its handling of the coronavirus pandemic. However, the pandemic is partly responsible for the economic trajectory it is now on.
While New Zealand has avoided large numbers of COVID-19 deaths or infections, it’s wrong to suggest that this is due to astute policy choices or excellence in their execution. Rather, it had few choices and got lucky.
When announcing what some described as a “near-complete societal lockdown” Prime Minister Jacinda Ardern noted the consequences of not doing so would be that the:
…health system will be inundated, and tens of thousands of New Zealanders will die.
The country’s health system has always been regularly inundated. Despite essentially zero COVID-19 cases, the latest hospital crisis hit earlier this year and patients were being treated in corridors. A story quoted a doctor explaining that it’s easier to list hospitals that don’t have a major problem than the ones that do.
New Zealand was able to prevent a major COVID-19 outbreak for two main reasons. First, it’s fortunate to be a remote island nation, so it was feasible to shut down the country’s borders. Second, it has a unicameral legislature and no constitution.
Legal scholar and former prime minister Sir Geoffrey Palmer wrote a book describing the political system titled “Unbridled Power”. With few checks and balances on government, so long as a New Zealand prime minister can maintain the support of her caucus, she is essentially free to do what she wants and citizens have almost no recourse to stop it.
Given that background, it’s easy to see how New Zealand was able to impose its draconian lockdown and why almost no other developed countries followed suit. It’s also fortunate that Big Pharma created vaccines in record time, which will limit the economic damage and allow its borders to fully reopen later this year or next.
Although the lockdown has been draconian, given its relative success it’s also been generally popular, especially among the elderly. This resulted in the re-election last October of the Ardern government in a landslide. It no longer relies on a coalition partner to pass its agenda. The New Zealand First party, its former partner, had checked some of its worst excesses.
Until recently, the major economic reforms of the late 20th century had remained largely intact. Governments had only engaged in limited tinkering of them. However, multiple factors that had held them in place have fallen away over time.
There has been a notable decline in talent in the public sector, especially at the Reserve Bank and the Treasury. My father was so concerned about the situation at the Treasury that, before losing his battle with cancer in 2011, he seriously considered returning there to help turn it around again. Government ministers no longer receive the world class economic advice they had come to expect and that provided an important check on their proposals.
As in many countries, the local media is in a perilous financial state, resulting in a loss of quality journalism. For example, Stuff owns many major daily newspapers and the country’s most popular news media website. Its previous owner had valued the company at over AUD$40M, but in 2020 sold it in a management buyout for $1. Last year’s NZ$50M government bailout of New Zealand media companies also raises doubts about impartiality.
Shortly before my father passed away, a friendly takeover of a struggling business think tank was initiated. It was completed after he died and the Business Roundtable was rebranded as The New Zealand Initiative. Today it again stands alone in pushing back against the government’s agenda and advocating for free markets. The chambers of commerce and industry organizations have lost their nerve and returned to some of their bad habits of the past.
The end result of all of these developments is that the Ardern government is now weakening many of the pillars of the free market reforms, including undermining the Reserve Bank and Fiscal Responsibility Acts. Perhaps even more alarmingly, it’s apparently not learned the lesson that bestowing privileges on the few results in enormous costs for the many.
It’s currently in the process of dismantling the central pillar of the labour market reforms of 1991 and bestowing special privileges on unions again. Under its proposed Fair Pay Agreements, unions will be able to force employers to the bargaining table to establish minimum pay and conditions for an entire employment sector. Unions will only need 10% of a workforce or 1,000 employees to agree, which will set up the very likely scenario of a tyranny of the minority in many sectors.
Once again, New Zealanders will have more limited employment choices. While they might like to trade off salaries or conditions with their preferred employer, that will no longer be possible as the entire sector they are seeking work in will have those locked in place. The least skilled will be priced out of jobs altogether.
The Ardern government is also doling out privileges to New Zealanders of Maori descent. For example, it is establishing a Maori Health Authority to deliver healthcare to Maori communities and is exploring passing control of New Zealand’s freshwaters to Maori tribes.
The net result of these developments and an absence of any economic reform momentum for more than two decades is stories predicting the return of a ‘brain drain’ to Australia. One recent piece noted:
New Zealand has a rich country on its doorstep that’s facing labour shortages, that pays better wages and has as affordable or more affordable houses.
New Zealand and Washington state provide important lessons for Texas. If you value liberty and free markets, you need to continually make the case for them. While Texas is free relatively speaking, many freedoms have been lost over the years and there are those who would like to take even more away.
Progressive politicians and organizations have a clear agenda and are making the case to implement it every day. It’s insufficient to rely solely on conservative politicians and free market think tanks here to defend against these efforts.