Who is responsible for the terrible economy? It’s hard to look past Christopher Luxon and Nicola Willis, who promised the nation an economic turnaround, congratulated themselves for every rates reduction delivered by the Reserve Bank and launched the year promising economic growth.
They then attacked commentators who pointed out the business failures, dire manufacturing indicators, low construction rates and high outward migration suggesting a deepening of the recession, instead of the green shoots only they could see.
Now that this has been confirmed in the headline statistics – negative 0.9% in the June quarter and the economy contracting by nearly $5 billion since they took office – they’re reduced to excuses. We learnt they can deliver incredible economic management only if they inherit a flourishing economy from their predecessors, accompanied by low interest rates and stable geopolitical conditions. The Finance Minister blamed the downturn on Trump’s tariffs; Luxon blamed (say it with me) “the previous government”.
The nation also heard from former finance ministers Roger Douglas, who called on Willis to resign, and Ruth Richardson, who urged a “hard reset” – by which she meant drastic reductions in public spending. We can imagine Richardson losing her car keys or tripping on a loose floorboard and thundering, “This situation calls for massive cuts to welfare!”
Willis was probably grateful for their suggestions, reminding older voters how dire the alternatives could be. And she was surely appreciative of comments from her old boss, John Key, who endorsed Willis and observed the government “hasn’t had a mate in the Reserve Bank”, joining a chorus of complaints about the monetary policy committee’s decision to pause rate reductions in July.
It’s worth noting inflation is near the top of the RBNZ’s target band, the government is still borrowing and spending an awful lot of money, and if this combination overstimulates the economy and prices spiral the bank will have to crash it again. Key knows this, of course – he also knows most of the public does not.
Willis may be less enthusiastic about Key’s solution to the nation’s prolonged slump: reigniting the housing market. His logic is when property values rise, people feel wealthier, they borrow more from the bank, consumer spending and business confidence lift and we’re off!
This was the economic model Key inherited from Helen Clark in 2008 and bequeathed to Jacinda Ardern in 2017, before Grant Robertson and Adrian Orr inadvertently blew it up in 2021. Key’s reign is regarded as a golden age for much of the National Party. He won three terms: the current lot will be lucky to last one. Shouldn’t they take his advice?
The broken window
One of the foundational texts in modern economics is Frédéric Bastiat’s 1850 essay, “That which is seen, and that which is not seen”. It introduces the parable of the broken window: a child smashes a pane of glass in a shop, and the shopkeeper’s friends console him, saying this creates work for the glazier and so stimulates the economy.
But, Bastiat argues, we don’t see what would have happened with that money if it hadn’t replaced the window. It could have been used to grow the shopkeeper’s business, to buy shoes for his children – anything. Instead, he has merely restored a window to its previous state, redirecting existing wealth rather than generating more.
Every form of economic activity has effects we can see – the job for the glazier – and the effects we can’t. Key’s vision for national prosperity is two glaziers who keep breaking each other’s windows, paying themselves to repair them at ever-escalating costs while refurbishing their kitchens or buying new cars with money borrowed from the bank.
What is not seen? The firms that weren’t founded because it was more lucrative to buy rental properties; the businesses that didn’t scale up; the skills workers didn’t acquire because their soaring valuations made them feel rich; the jobs that weren’t created; the foreign earnings we never earned.
The generation of Kiwi builders, health workers, engineers and entrepreneurs who are founding companies in Sydney or building apartments in Brisbane because they were locked out of the housing market. The infrastructure that wasn’t repaired because all that property speculation happened outside the tax system. The many grandchildren growing up in Australia.
Policy mish-mash
The residential property bubble wasn’t the only flaw in our economy during the past two decades (size, remoteness, productivity; we trashed education … ).
One of the odd things about the coalition is that once we tune out from the torrent of nonsense from the Prime Minister’s mouth, we get distorted bursts of what sounds like a vision for a post-housing economy: Housing Minister Chris Bishop’s insistence on reducing property values and reforming the Resource Management Act; Education Minister Erica Stanford’s immigration pivot towards fast-tracking skilled workers and her educational reforms. Foreign Minister Winston Peters and Trade Minister Todd McClay are diversifying and expanding our trade relationships. Building and Construction Minister Chris Penk is deregulating the construction sector; Willis strengthened the Commerce Commission.
There’s no narrative around any of this: it’s just a disconnected assortment of ministers introducing policy, their leader talking up the glorious future they’re crafting while the building and manufacturing sectors collapse around them.
The coalition does not seem to agree on any kind of vision: it’s currently squabbling over housing intensification in Auckland, the residency visa changes and electricity market reform. Perhaps it’s reluctant to admit to voters that their multimillion-dollar property portfolios are not worth close to the mortgages they’re paying on them, that the economy that overvalued it is not coming back, and that unwinding the loss will take time and much pain.
And perhaps they struggle to admit to themselves that popular centrist heroes – John Key, Jacinda Ardern – inflicted more damage on the nation’s prosperity than Roger Douglas and Ruth Richardson, its most radical villains.
