Peter Lyons: When rock stars run out of puff

What happens when our rock star economy runs out of puff? Photo / Thinkstock

Opinion

We seemed to wake on New Year's Day with renewed economic optimism. An overseas commentator referred to our "rock star economy" and several surveys revealed high levels of business confidence.

English economist John Maynard Keynes cautioned against the fickleness of confidence in determining economic outcomes. He referred to it as "animal spirits" subject to wild mood swings.

Here are 10 interesting aspects of our economy for the year so far.

1. Whether we are a rock star economy depends on maintaining our present 3 per cent growth rate. World dairy prices have plummeted, which suggests this level of growth is unlikely to be sustained. After decades of economic reforms and restructuring we remain heavily reliant on commodity exports such as dairy products.

2. Even with recent record dairy product prices, New Zealand is still failing to pay its way in the world. We still have a current account deficit (the measure of the difference between what we earn and what we spend in our dealings with the rest of the world).

3. This stubborn deficit is the most compelling evidence that our exchange rate has been overvalued. We have been able to live beyond our means because of the willingness of overseas parties to lend to us and to buy our businesses, farmland and houses.

4. A key reason for overseas lenders' willingness to lend to us has been our relatively high interest rates. These are due to our strict adherence to monetarist doctrine. Our central bank is required to keep inflation between 1 and 3 per cent. We have followed this policy for 25 years. The bank has quelled inflation by using interest rates to smother demand in the economy whenever inflationary pressures emerge. Unfortunately it has done nothing to address the root causes of inflation. This monetarist policy has addressed the symptoms rather than the causes of inflation. It has caused much collateral damage in the process.

5. Reserve Bank Governor Graeme Wheeler has shown his determination to drive down the value of our currency. The irony is if he succeeds this may unleash the inflationary pressures he is mandated to contain.

6. Prime Minister John Key whimsically stated that his ideal exchange rate would be about US65c, an interesting comment from a shrewd former currency trader.This is almost 20 per cent below its current level. This could hike the prices of items that we trade with other countries, both exports and imports, by 20 per cent. Think of paying 20 per cent more for petrol, electronics, milk, cheese, butter, meat, cars.

7. We have been living beyond our means for a considerable period. We have been protected from this reality by our overvalued currency. When, rather than if, this changes the transition is likely to be a rude awakening.

8. The incoming Government is about to implement educational reforms based on a factory model of schooling. Star principals and teachers will advise under-performing schools how to improve their production processes. This ignores the differences in the raw material that different schools work with.

9. The charter schools experiment looks set to expand. Private entrepreneurs get to unleash their talents to challenge the monolithic state education system. These entrepreneurs will apparently tap into the huge reservoir of talented educators outside the current teaching fraternity. A combination of profit motive and unregistered teaching staff working with vulnerable children could prove a toxic mix.

10. Economics and education often make uneasy bedfellows. Charter schools are apparently accountable to strict performance criteria. If it is so easy to impose fail-safe, objective and quantifiable standards of performance on these schools, why has this not been done for all schools?

Peter Lyons teaches economics at St Peter's College in Epsom and has written several economics texts.