Each year, I present my students with my 10 economic con jobs, conundrums and contradictions for the year. Most are interested and lively debate ensues because of differing political viewpoints. There is often one student who sits patiently wondering when we are going to start baking scones. He has yet to realise that home economics is now called food technology and is in the next classroom block. It has been a long year for him. This year's list includes domestic and international issues relevant to New Zealand.
1. It is generally accepted that a sustainable economic recovery for New Zealand must be export led. Many debtor countries are in similar positions. The problem is that all nations cannot export their way to prosperity at the same time because for each exporter there must be an importer. This is a key fault line in the world economy. Large countries such as Japan, China and Germany have based their economies on export-led growth. They have then lent their profits back to debtor nations to allow them to continue consuming. This cannot continue indefinitely. This problem lies at the heart of the European debt crisis.
2. The United States Federal Reserve has recently announced that it will continue its policy of massive quantity easing. Some of this money has flooded into share markets, including New Zealand's, creating an illusory boom. Much of it is sitting in the US banking system. At some stage the Federal Reserve will need to mop up this liquidity. This is likely to precipitate a sharp drop in the NZ/US exchange rate as short-term interest rates rise in the United States. It will also cause a rocky patch for our sharemarket. The big question is when?
3. Our Reserve Bank continues to operate an expansionary monetary policy with record low interest rates. This is designed to get us borrowing and spending again to pump up the economy. This has contributed to the surge in housing inflation in certain areas. The irony of this policy is that excessive private debt was a cause of the global financial crisis in the first place.
4. Major banks in New Zealand continue to make record profits as their lending helps to facilitate housing inflation. The big question is whether government would guarantee them if things turn ugly, as it did in 2008.
5. The Government continues to operate a contractionary fiscal policy which contradicts the Reserve Bank's expansionary monetary policy. The government is cutting spending, which reduces demand, while the Reserve Bank is trying to stimulate demand through low interest rates.
6. The Government is pressing on with its asset sales programme. An aim of this is to encourage more people to invest in the sharemarket. The danger is that new investors are being invited to invest in a narrow range of stocks primarily in the electricity sector, which is subject to risks such as possible closure of Tiwai aluminium smelter, the Labour Greens price reforms and stagnant demand.
7. The Government paid a $30 million subsidy to the international shareholders in the Tiwai aluminum smelter to ease its partial sale of Meridian. The irony is that this taxpayer subsidy to a private company was paid to facilitate a policy based on the premise that the private sector is the best model for running businesses.
8. The Government wants to override the Commerce Commission, which sought to reduce the charges on copper phone lines for broadband. This favours Chorus, which is the monopoly provider of these lines. It is a political decision which raises questions about the point of having an independent watchdog against abuse of monopoly power.
9. The Labour-Greens proposal to have a wholesale purchaser of electricity to ensure fair pricing is packed with fishhooks and complexities. It has created enormous uncertainties for investors in the electricity sector. There is a lack of evidence on the degree to which electricity companies have abused their market power. This needs to be established before reforms are undertaken.
10. According to some commentators, hosting the America's Cup would have been a huge boost for our economy. We hosted the Rugby World Cup in 2011. Yet economic growth for 2011 was little different from 2012. Much of the spending was domestic. It is fun to host and win these events but they are not game-changers for our economy.
Peter Lyons teaches economics at St Peter's College in Epsom and has written several economic texts.