At the beginning of this year’s election campaign, Chris Hipkins made the (slightly odd) decision to be interviewed by Alastair Campbell and Rory Stewart on their UK podcast The Rest is Politics. Towards the end of the show, Stewart pointed out - in a gentle, affable way - that Labour and National appeared to be running election campaigns from 40 years ago. Where were the problems and solutions of the 21st century?
The Industrial Renaissance
Economic theory tends to swing from left to right. It does this slowly, over periods of decades: new thinkers emerge and challenge the old orthodoxies. The postwar period was the Keynesian era - the apex of left-wing economic theory. This was followed by the neoliberals whose influence declined in 2008 when their ideology seemed to be directly responsible for crashing the global economy and destroying trillions of dollars in wealth.
Since then, the intellectual pendulum has swung back towards the left with new ideas about industrial policy and the role of the state driving massive policy shifts across Australia, the US and the EU. None of this seemed to influence the Ardern-Hipkins government - but opposition is about soaking up new ideas and thinking about the future. This is some of the terrain a future Labour government could explore on its journey back to political power.
In a feature in the New Statesman in March this year Angela Nagle surveyed the policy trajectories policy in the US under Joe Biden and the EU under Ursula von der Leyen and declared that free trade, austerity and neoliberalism were dead, observing:
Biden is employing state-directed industrial development, protectionism, the subsidised reshoring of manufacturing and trade-war strategies more aggressively and effectively than Trump. The EU is following the same path, increasing state spending on research and development with projects like Horizon Europe, industrial development policy for the whole Union, as well as relaxing state-aid restrictions for national industry.
New Zealand cannot concede that free trade is dead: we’re too dependent on imports and we have enough trouble paying for them as it is. But the “industrial policy renaissance” would address several of our systemic problems. There’s a huge focus on infrastructure investment; this is seen through the lenses of decarbonisation and the creation of new skilled jobs, and there’s a heavy emphasis on state-funded research and development. All of these are things we’re terrible at.
Under Labour, the government preferred to address carbon emissions through its Emissions Trading Scheme, the Clean Car Subsidy - which infamously delivered tens of millions to Tesla owners - and corporate welfare arrangements like the $140 million deal with NZ Steel to build an electric furnace for its Glenbrook plant - but the emphasis is on change delivered via markets, incentivised via payments and subsidies.
The alternate approach of the Europeans and Americans, attempting to harness the dynamic “entrepreneurial state” has been promoted by the economist Mariana Mazzucato, who pointed out that most of the technological breakthroughs of the 20th century were funded by states rather than the private sector. The US government literally landed on the moon, and the technological spin-offs from that project generated enormous economic value. Her framework allows left-wing political parties to bundle all their economic aspirations - jobs, growth, climate, environment, infrastructure, state capacity - into one neat package. There were some Mazzucato fans in the Beehive under Labour, and there were aspirations to deliver huge infrastructure projects - Auckland light rail, Lake Onslow, Let’s Get Wellington Moving. But Mazzucato warns that the entrepreneurial state requires public sector reform. Governments that rely on sclerotic bureaucracies and overpriced consultancies to deliver challenging projects are doomed to fail.
FIRE
In the late-20th century some US economists and financial commentators noted their nation’s transition away from a “smokestack” economy, which built material goods and generated high-wage manufacturing jobs. This was replaced by the FIRE economy - the primary industries were finance, insurance and real estate. These create a small number of high-income jobs and don’t deliver much productivity growth or economic value. Instead, they “kill the host”, as the US economist Michael Hudson puts it. They inflate the prices of assets - especially real estate - which then leads to enormous household debt and housing insecurity.
New Zealand is the FIRE economy par excellence: a gigantic property market generating vast profits for the banking industry which is almost entirely foreign owned. FIRE sectors are always politically powerful - finance and real estate are our largest donor industries - benefiting from generous taxation regimes and friendly regulators that prevent proper competition.
Mainstream economics in the 21st century has become increasingly preoccupied with the problem of “rent-seeking”: the accumulation of wealth via the manipulation of legislative and/or political conditions. Right-wing economists prefer to address this through deregulation: “get the government out of the economy”. On the left the focus is often on tax: Thomas Piketty - arguably the world’s most influential voice on this issue - argues for a wealth tax on large fortunes. Partly on traditional moral grounds - why should the rich have so much when others have so little - but primarily on the basis that most high-net-worth individuals and families generate most of their wealth through rent-seeking rather than value creation.
There was one notable Piketty fan during the last government: former revenue minister David Parker. He lost the debate on tax during his last term - but Hipkins’ alternative policy is increasingly seen as a strategic blunder, so Piketty’s disciple may still win the war.
Childcare as infrastructure
The 2023 Nobel Prize in economics was awarded to the historian Claudia Goldin for her work on labour markets, gender and the gender pay gap. Goldin attributed the pay gap to a number of causes but the most significant were around child care, the choices women made regarding work and family and the lack of state support for working women. The economist Minouche Shafik argues that “childcare is infrastructure”: access to affordable high-quality child care is as important to the functioning of a modern economy as roads or power.
Labour made some modest gains in this area. The gender pay gap in the public sector has been declining steadily since the mid-2000s, so without doing very much it has taken credit for a record low of 7.7%. But a number of recent studies have found that childcare costs in New Zealand are the highest in the OECD. Early childcare in New Zealand is subsidised - but the sector is not very competitive. Labour announced an additional $1.2 billion for ECE in this year’s Budget, but this was criticised by Treasury, which pointed out that the lack of competition meant that the private sector providers were likely to simply absorb the subsidies and charge higher fees.
The sociologist Matthew Desmond describes this as “the leaky bucket problem”. Left-wing governments love to give people money or subsidise their costs. But if the market they’re pouring money into is broken - like childcare, or accommodation - the money runs straight through without helping anyone. It’s a key insight that runs through many of Labour’s delivery problems. The state can help people; it can be entrepreneurial, build great things, deliver growth - but it can also waste incredible amounts of money while failing to accomplish any of those things. The most influential economists in the world are focused on the differences between those two outcomes. Hopefully a future labour government will pay attention to them.
