We have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. An unexpected deterioration in our terms of trade adds a further and unwelcome twist to an already distressing story - the damage being done to our productive sector by an overvalued dollar.
The recent admission by the new Governor of the Reserve Bank, Graeme Wheeler, that the dollar is overvalued is welcome evidence that the issue is at last attracting the attention of our policymakers - and so, too, is the suggestion that the Reserve Bank might restrain bank lending for the purposes of house purchase.
But we have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. What we can do, however, to establish whether the dollar is overvalued is to ask what we might expect to see in an economy that has been fundamentally uncompetitive over a long period.
The answer is that such an economy would exhibit slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets - including national assets - into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.
Sound familiar? If we do not recognise these characteristics as the hallmarks of New Zealand's economic performance, it is only because of the resolute refusal of our policymakers to think about our loss of competitiveness, let alone do something about it.
We are not alone in this refusal. Many Western countries are reluctant to recognise that the world has changed and that many developing countries are becoming, or have already become, more competitive than we are.
Yet to ignore our competitiveness problem is to invalidate the whole of our economic policy. It leads us to pay excessive attention to inflation, so that we slam the brakes on at the slightest hint of inflation reappearing, because our unacknowledged lack of competitiveness makes us rightly fearful of any increase in our costs.
It means that we dare not - even in a long drawn-out recession - stimulate the economy to bring down unemployment, restore public services, reduce the government deficit through buoyant tax revenues and resume a sustainable rate of growth because we know any growth will simply suck in more imports, worsen our balance of trade and increase our need to borrow. If we were competitive, we could afford to stimulate the economy because the growth would come in the form of exports and investment, not consumption and imports.
It means that any recovery from recession will lead us straight back to an overheated Auckland housing market and an import orgy.
It encourages the delusion that we can somehow improve productivity in a vacuum and that a few more ministerial speeches about it will do the trick. We do not grasp that productivity improvements are a function of competitiveness, not the other way round.
Most worryingly, our determination not to recognise our competitiveness problem means that we (or at least our Government) are - apparently without a care in the world - destroying our future by selling off our productive capacity to foreign owners. The loss of those income streams makes our lack of competitiveness even worse and handicaps our ability to do anything about it.
And there is another aspect of that blind spot on competitiveness that reflects not just ignorance or carelessness but, perhaps, a deliberate bias in favour of the "haves" as opposed to the "have nots" - an aspect that could be an important factor in New Zealand's widening inequality gap.
The most obvious remedy for an economy-wide lack of competitiveness is to reduce our costs across the board through bringing down the value of the dollar. That would require everyone to make a fair and shared short-term contribution to the solution of our problems while providing a solid basis for future growth.
But our policymakers are reluctant to ask the better-off to make that contribution. They seem to be quite relaxed about workers losing their jobs and beneficiaries being targeted. They are quite prepared to force wages down by reducing workers' rights at work and lowering, in real terms, the floor placed under wages by the minimum wage.
But they draw the line at a devaluation of the currency that, as part of the effort to reduce our costs, would have the immediate effect of reducing the value, in international terms, of financial assets, and would impose a cost on the holders of those assets, and on financial institutions and banks.
They are asking wage-earners to bear the whole burden of improving our competitiveness, while protecting the value of the assets held by the wealthy. Sadly, such a policy is doomed to fail in terms of improving our competitiveness; but it will be effective in widening the already damaging gap between rich and poor.
Bryan Gould is a former vice chancellor of Waikato University and former UK Labour MP.
Debate on this article is now closed.By Bryan Gould