What New Zealand can learn from Trump

An analysis of the economic conditions which gave rise to Trump in the United States suggest we should be worried here in New Zealand. It comes down to one key thing: productivity.

Productivity growth is essentially working smarter, as opposed to working harder. Our low productivity growth means we’re working harder, but we’re not working smarter. This means that each year there is not much more to go around.

The downside of this is that if one part of society wants more, they have to take it off someone else. The risk of low productivity growth is that it takes the focus off growing the pie for everyone – making everyone better off – and puts it on fighting over how the pie is divided.

In their new book Capitalism in America former Federal Reserve Governor Alan Greenspan and Economist journalist Adrian Wooldridge says the United States productivity slowdown (traveling at 1% pa instead of 2-2.5% pa as per the graph below) is bad news. This poor performance has caused rising inequality, discontent and now political dysfunction.

Of course this low productivity growth came on top of two decades of strong productivity growth where the gains weren’t shared evenly across the population. This certainly laid the foundations of discontent, but the period since the Global Financial Crisis hammered it home.

It’s probably not a coincidence that populist movements like the rise of Trump, and Brexit, happened on the tail of this low productivity growth.

So what has been driving the stagnant economy in the United States? Greenspan blames two factors:

The first reason is the deterioration in the quality of banks' balance sheets. He argues they still have too little equity per dollar of "assets” they create and can make money from such poor quality investment. He wants the Fed to require far higher equity requirement so the sustainability of their earnings becomes more important. In other words banks should invest or lend for productive investment instead of underwriting speculative cycles in asset prices (houses, and more recently stocks).

The second reason is the poor quality of government spending, particularly unaffordable pensions that have crowded out investment in infrastructure and businesses for production.

The situation here

This is scarily similar to the situation here in New Zealand. We have terrible productivity, and have relied on working longer hours, irrigating more land (now on the side of the Southern Alps) and higher levels of immigration to keep our economy chugging along. Meanwhile our banks are obsessed with lending for mortgages instead of businesses, driving up house prices and our foreign debt. None of this is really making the average person any better off.

The Opportunities Party policy prescriptions deal with the core of these problems - cutting income tax rates funded by making sure assets pay their fair share, and improving the quality of spending of our health and superannuation budgets.

As long as poor policies continue the focus on speculation and pension welfare rather than real investment, Greenspan thinks that this state of "low growth/intense rage" will continue. Ultimately he paints a picture for the future of the United States that looks unnervingly like what we see in parts of South America, such as Argentina.

Let’s hope we can change things in New Zealand before we see the same issues arise here.

 

 


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