Deepish Thought

In contrast to the previous post, from time to time data emerges that illustrates how wealthy New Zealand is in ways that are not really captured by GDP. The fascinating book Microtrends contains the following, very encouraging, observation:

“And who gets the most sleep? New Zealanders and Australians, where 28 and 31 percent, respectively, get more than nine hours of sleep a night.”

By contrast, the average American apparently sleeps less than seven hours a night, while four out of ten Japanese sleep less than six hours a night. Inspired by this evidence of cultural superiority I think I will take a relaxing mid-morning nap.

One of the things that has always struck me about the US is what a spectacularly wealthy country it is. Or alternatively, how pathetically poor New Zealand is by comparison. Occasionally data crops up that depressingly reinforces this impression.

The cunning cartographers responsible for this map of the US have replaced the name of each state with the name of a country that generates similar GDP.

Embarrassingly, it turns out that New Zealand’s GDP roughly approximates that of Washington DC (population 580,000, area 177 square km).

Today Justice Minister Annette King tabled 150 amendments to the government’s highly controversial Electoral Finance Bill.  A couple of these amendments “urge the Electoral Commission, which deals with parties, and the Chief Electoral Officer, who deals with individuals, to use their discretion to not refer ‘inconsequential’ cases to the police for prosecution.”

This is a very slick trick.  Instead of putting in all the tiresome effort required to put together a coherent piece of legislation the government is proposing to ram through a thoroughly hashed up law that people will then be invited to ignore.

Were this simply a case of governmental ineptitude it might be forgivable, however the this particular legislative boondoggle may well have a chilling effect on future political campaigns.  What constitutes a ‘consequential’  breech is going be a highly subjective judgment with serious political implications.  Would anyone be surprised if, in the midst of future elections, the government demonstrates extraordinary enthusiasm for investigating possibly ‘consequential’ breeches on the part of the opposition?

This week the New Zealand stock exchange ‘shockingly’ came out in favor of looser monetary policy. The main reason the NZX is pushing this ‘bold’ reform appears to be that interest rates are inconveniently high.

The NZX50 has essentially doubled since 2003 despite New Zealand consistently having some of the highest interest rates in the OECD. Unsatisfied with this very solid performance the NZX has apparently been watching the low interest rate fueled Dow over the past couple of years and come to the conclusion that things could be even more fun if only those killjoy central bankers weren’t so fixated on controlling inflation.

Of course Wall Street hasn’t looked so hot over the past couple of weeks. The resulting panic has also knocked around the NZX, which suggests a second reason that NZX management may be interested in monetary policy reform. They may be trying to create a kiwi version of the ‘Greenspan Put’. Essentially a Reserve Bank that takes a ‘balanced view’ would chop interest rates whenever the markets take a tumble, helping to mitigate losses. Such a policy reduces the risk inherent in the share market and thus tends to increase valuations, which wouldn’t upset the NZX in the slightest.

While a ‘balanced’ monetary policy may well be in the best interests of the NZX, a come what may attitude to inflation has some serious downsides. Contrary to some reports inflation is very far from dead. In fact it is likely to be back about thirty seconds after we conclude it doesn’t matter anymore. To paraphrase a famous quote, ‘The price of stable money is eternal vigilance’.

Later this year congress will sit down to consider the 2007 Farm Bill. This multi-billion dollar pork-fest will establish the direction of US farm subsidy programs for the next five years. Unfortunately for US taxpayers neither radical cuts nor outright abolition are on the table.

For America’s politically powerful farmers and rural lobby beholden politicians a rural economy without massive federal subsidies is simply unimaginable. I don’t pretend to know what would happen if congress succumbed to a sudden attack of economic rationality, but there is reason to believe that it might not be all bad.

Consider the experience of New Zealand:

“Many had worried that the end of subsidies would destroy agriculture in the country, yet the agricultural sector grew as a percentage of GDP. Today approximately 90 percent of farm output is exported, making up more than 55 percent of total merchandise exports. Productivity gains have allowed farmers to remain competitive in a world market where they compete with farmers in subsidized countries. Real farm incomes have recovered, and in some sectors income is even higher than it was under subsidies.

Instead of disappearing into the mists, the country’s farm sector became known throughout the world for high-quality, innovative, and efficient agricultural practices. After the initial failures, farm numbers held constant, and the amount of land in agriculture fell only slightly as marginal land went out of production. Decreases in farm employment have been offset by increases in employment in rural tourism. Thus, the percentage of the population living in rural areas remains virtually unchanged. Real land values, which initially plummeted, have recovered and surpassed their pre-reform level.”

This is a fairly reasonable summary of New Zealand’s experience with ending farm support. Farming did not collapse, civilization miraculously survived and, in a not unimportant consideration, the government that whacked the farm support system won the next election by a handsome margin.

So why couldn’t this happen in the US?

Our correspondent omitted to mention the political circumstances that made such a radical move possible. In 1985 the incoming Labor government discovered that the country was essentially bankrupt. New Zealand was in fact on verge of a massive Argentina style debt default. The impending financial meltdown focused minds and made the unthinkable not only possible, but necessary.

While the federal government is undoubtedly on an unsustainable fiscal path, the day of reckoning is still many years away. Only when the US is backed up against the fiscal wall will a radical reform, such as applying the chainsaw of economic rationality to the bloated paunch of farm politics, become possible.