By Bernard Hickey
Feedback loops are a great way to change behaviour.
Just think of those electronic signs by the side of the road near school zones that flash up your speed and warn you to slow down immediately.
They are remarkably effective.
I got to thinking about this idea of feedback loops after test driving a Honda Insight a few weekends ago. It's a petrol-electric hybrid car that has all sorts of tricks and techniques to reduce fuel consumption. It has a stop-start motor and also charges its batteries when braking.
But I found it's best trick was the glowing green light that showed up on the dashboard whenever you were driving carefully. Whenever you put your foot down it changed from green to blue and showed the actual fuel consumption at that moment in litres per 100 kilometres.
I found myself deliberately leaving my foot off the gas to hit the 5 litres per 100 kilometres target I wanted to achieve. By the end of the weekend I had ratcheted down my average to 5 kms/100kms. It was a marvellous feedback loop for my driving behaviour.
It got me wondering. Just imagine if New Zealand's politicians and consumers had a similar type of feedback loop applied to their spending and borrowing behaviour.
It might change our terminal short termism in a hurry.
At the moment Prime Minister John Key has made a deliberate decision to govern for the short term by running continued budget deficits that encompass such Middle Class welfare as the 39c to 33c income tax cut, Working For Families tax rebates, Interest Free Student Loans and 20 hours of free early childcare. Key is paying for this over-spending now by borrowing overseas and loading this extra debt onto future generations. Like many consumers, he is choosing to consume now and have someone else pay later.
The long term effects are horrendous. This foreign borrowing, much of it from the Chinese government, is helping to push our currency up to record highs. As happened from 2002 to 2008, this will kill off our non-commodity exporters for another generation. However, a strong New Zealand dollar is in the short term interests of Key as a politician because it keeps petrol cheap and makes imports and foreign holidays accessible for consumers and voters ahead of the November 26 election.
John Key is choosing short term consumption and votes ahead of the long term health of the economy. It's almost as if he needs some sort of dashboard that flashes up in front of his face every time he makes a decision to keep spending money the nation doesn't has. Perhaps it could show how much the national debt rises every time he pushes on the budget accelerator? Or maybe how many high value jobs are destroyed every time the currency rises another cent? Or the future value of lost dividends and increased interest payments whenever assets are sold and money borrowed?
But to be fair to John Key, he is not the only one obsessed with short term consumption at the expense of long term jobs and wealth.
As dictated by its Policy Targets Agreement, the Reserve Bank is also focusing on the short term inflation outlook rather than the long term health of the economy. It is letting the stronger New Zealand dollar do its dirty work of keeping inflation between 1-3% over the next couple of years.
But what happens in four or five years time when our export sector is decimated and we are running up massive current account deficits, as as forecast by the Treasury? Perhaps Alan Bollard needs the same dashboard with the lost jobs and higher foreign debts that John Key needs.
And consumers, ultimately, need some sort of feedback loop to stop the short term focus on consumption. All of the flashing signs consumers have now are to borrow and spend. Everything is interest free for the first 36 months and at half price in the advertisements. What if everyone had a flashing sign on their wallets and mobile phones that showed how much that debt would cost over the long term and how many high wage jobs the associated borrowing was destroying?
If only New Zealand had a national 'dumb debt' feedback loop we might actually have a chance of turning around the economy.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.