NAIRU is not a nice place

Bernard Hickey says we need a 'huge burst of investment' to get both our public deficit down and unemployment lower and he wants the Government to fund it. Do you agree?

17th Jun 12, 10:05am by Bernard Hickey

By Bernard Hickey

It took me a while to learn that NAIRU was an economic idea, rather than an island in the South Pacific made of bird manure.

The Non Accelerating Inflation Rate of Unemployment or NAIRU denotes the unemployment rate below which inflation starts to pick up.

It seems a very uncharitable idea. It suggests that governments and central banks should stop trying to push unemployment down once it gets to a certain threshold.

But it is a useful idea because it essentially indicates a type of speed limit for the economy, beyond which any attempt to accelerate growth will simply spin the economy's wheels in the form of inflation.

This week the Reserve Bank revealed some uncomfortable and sobering truths about the New Zealand economy. It said in its June Monetary Policy Statement (MPS) on Thursday that New Zealand's potential growth rate had halved from 3% during the 2000s to 1.5% by 2012.

Any attempt to run the economic growth faster than 1.5% will essentially fire up inflation. The Reserve Bank details a couple of reasons for the lowering of our economic growth speed limit.

Over recent years households and businesses have been reluctant to invest. New houses haven't been built, new machines have not been bought and installed, new workers have not been trained with the right skills and existing workers have not been retrained and re-equipped to improve their productivity.

Households have been much more focused on repaying debt. Businesses didn't have much debt to begin with, but have also been reluctant to invest more in a sputtering economy with a volatile global outlook and a high New Zealand dollar.

The end result is bizarre and painful.

The Reserve Bank is saying that within a year New Zealand will be hitting the buffers of its ability to grow without generating extra inflation. It points to signs already evident of skills shortages and wage increases in line with a time when New Zealand's unemployment rate was around 4%.

The Reserve Bank's measure of the difficulty of finding labour is back at levels last seen in 2006 when the unemployment rate was 4.0%.

Now the unemployment rate is 6.7%. The Reserve Bank sees it improving towards 5%, but by then inflation will start accelerating again.

New Zealand's NAIRU has shifted up because the nation has slowed down its investment in its stock of physical and human capital. It is the mirror image of a reduction in New Zealand's economic speed limit.

This stops becoming an academic exercise as soon as any policymaker starts thinking about what a reduction in that economic speed limit to 1.5% means for the government's budget and our ability to pay the mounting health care and pensions bill for an ageing population.

The first indication is in the Reserve Bank's forecast in its MPS that government's budget will still be in deficit to the tune of 1.1% in 2014/15, which is the deadline set by the government for a surplus.

All sorts of problems crop up if we don't lift this speed limit.

New Zealand's public debts will blow out well beyond 100% of GDP within 20-30 years if the limit cannot be lifted, or if some politically painful choices around publicly available pensions and healthcare are not made.

NAIRU is definitely not a pleasant place to be and we're there much sooner than we thought we would be.

Somehow, we need to shift it back down again with a huge burst of investment. Companies and households seem reluctant to do it. Will the Government pick up the baton? The current government is still waiting for the private sector to pick up the baton.

It should have done it already. It did in previous recoveries, but not in the last four years. The clock is ticking and at some stage the alarm will go off for the government when it misses its budget forecasts. It's only a matter of time before the National-led government discovers NAIRU is not a pleasant place to be either.

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This piece was first published in the Herald on Sunday

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42 Comments

by ngakonui gold | 17th Jun 12, 1:35pm 1339896931

are we talking about more roads,hospitals schools etc or am i on the wrong track

by Wolly | 17th Jun 12, 1:40pm 1339897245

Back up and take the left turn instead...the borrowed or printed loot would be splurged on buying power...it would be sold as growth positive...it would only serve to make the deficit worse and create growth in the quantity of BS spewing out of wgtn.

by Justice | 17th Jun 12, 2:30pm 1339900207

"Wants the government to fund it" lol

And WHO funds our government?.

They have 3 options Bwernard:

1: Tax more

2: Sell more TB's and Tax the people more again to pay the interest to bond holders

3: Borrow direct from the US FED like they have been doing in the past, thus selling our soveriegnty along with it

Ponzi Schemes don't have any good exits Bernard UNLESS your at the top

by mike | 17th Jun 12, 5:40pm 1339911658

Why borrow off the US FED?

They owe billions to the Chinese.

So we'll be indebted to China, not US.

by Justice | 17th Jun 12, 7:29pm 1339918173

mike......I DO NOT advocate borrowing from the FED, but.........they did. Got it?

For the record the US FED owe nothing to the chinese, the US taxpayer does. The FED borrows on behalf of the US taxpayer sanctioned by congress

by Kleefer | 17th Jun 12, 10:23pm 1339928610

Also, the US government owes more to the Federal Reserve than it does to the Chinese. It only owes about 8% of its debt to the Chinese, contrary to this notion that China is some all-powerful creditor.

by Alter Ego | 17th Jun 12, 3:15pm 1339902909

too much theory.

not enough practical experience, nor intelligence, nor workers, nor enterprise.....nor tax....strangely enough.

taxpayers have had it + gst+ petrol tax+savings tax, plus income tax, + excise tax, plus rates tax, + inflated egos tax+ kiwisaver funded tax, + inflated import tax, + overseas tax, +dog tax, stadium tax, porkies and pokies tax .....(and that is a big lie...the skies the limit tax), +welfare tax, +prison tax+ acc tax, + can't be fagged tax, + leagal aid tax, + MP's perks tax, mp's pensions tax, + insulation tax, insulting tax and green taxes, + sickness tax, plus insurance taxes, repairs taxes, junkets tax. snivel serpents tax, indemnity tax, olympics and rugby wc..tax....council house tax, housing support tax,,,,,,imf tax, water tax, roading tax road users tax, diesel tax, overseas departure tax,,,,,,,,,,,,,,,,,,,etc.

ya getting my drift....and this is not even taxing me brain....

but they might....tax that...soon.

economics 101, cannot spend what you owe to some one else, again and again and again and get a.........gain.

especially when the spending and the inflation and little interest rate roundabout .....stops.....tax.

why work three quarters of the year to fund the idle and the wastrels....via tax.

no brainer....stop taxing yerself.

the effort ain't worth it.

ask an idle poll-lie, or a bwanker, why they do what they do.....it ain't taxing...that is why, it ain't work, it is a scam......tax...and the margins are huge.

and the big banks are creaming it....and the poll-lies are spending yer munny.

so better tax yer patience sum more...............tax...is next.

by Wolly | 17th Jun 12, 4:15pm 1339906549

Bernard and the Nairu!

"The answer is that anyone with a 6th grade education knows that one cannot spend one's way to prosperity when the problem has been too much spending."

http://globaleconomicanalysis.blogspot.co.nz/

and this too:

"Austrian economists have a word for useless spending: "malinvestment". Instead of spending more, how about pension reform, labor reform, getting rid of useless bureaucrats, and putting more money in the average taxpayer's pocket?"

I would add, slash the bloated bureaucrat paypacks....!

by Kate | 17th Jun 12, 11:28pm 1339932533

I do find it interesting that globally the public is willingly engaging in this 'general public pension' scheme discussion - yet no discussion on the 'politician's public pension' scheme.

Why don't we discuss what politician's get on the public purse first and determine that they should just get what the general public get. After all - it's not as if they work as politicians in a voluntary or charitable manner. And they don't belong to a "private sector" pension scheme. Surely their largesse on behalf of themselves is where the present focus should be? Why not work toward scrapping that by public referendum? See which politician(s) would champion that cause through the House on behalf of the public.

It's nuts that we have the 99% all enthusiastically engaging in discussions about how to take from (others in the) 99%. Time to take back the city (as David Harvey would say) folks.

by Wolly | 18th Jun 12, 5:37am 1339954652

Quite right Kate....a while back I asked why not incentivise the pollies to do the best thing instead of doing what buys them power and the chance to park their fat bums in the pig trough.

Pollies should be rewarded after the event...let the sods understand they get a basic pay the same as a teacher..no more....but if they were in a govt which produced real growth then they shall receive a fat pension payment after the fact depending on that growth rate and the length of time it remained in place. Toss in fat perks.

This would kill off the incentive to 'slice the pork' in election year....it would become the backbone of good govt...

This is no different to linking bank and corporate bonuses to performance after the fact.

There is also no reason why this could not be done...other than the fact that the mob in office today would fight tooth and painted nails to prevent it...

The only tricky thing is to set the rules...have the judgement made by the voters in an election...determine the fat by the % in support.

by powerdownkiwi | 17th Jun 12, 6:13pm 1339913618

The Emperor still clothed, then, Bernard?

Takes a fair while, it seems.

Interesting to note that you don't engage, but carry on with the mantra. " It did in previous recoveries, but not in the last four years" . Why may that be, do you think?

What goods and services are we going to grow, and who will be making money out of what goods/services to 'pay' for the ones we supply. ? At what growth rate, and which doubling-time are you on about?

But answer there was none (with apologies to Lewis Carrol)

by Colin Riden | 17th Jun 12, 6:25pm 1339914341

Too true, but the problem is much broader than just Bernard.

by steven | 17th Jun 12, 10:31pm 1339929073

Strikes me that they are now inventing reasons to explain the problems their failed models dont explain. BH and the RB it seems is in denial and not considering Occam's razor....every time we start to recover, so will energy prices and that will drive out the recovery....so instead we get the "explanation" that this apparantly un-calcuable rate has mysteriously halved....how you halve something you cant calculate sounds dubious at best...

Im beginning to think the words "god help us" might be approriate...

regards

by benwave | 17th Jun 12, 8:11pm 1339920673

That's an interesting measure. So what are the most important factors that influence this NAIRU?

by steven | 17th Jun 12, 10:33pm 1339929239

I think its more likely to be make believe....

It it seems cannot be calculated....so how to you halve it? how do you know that needs halving and not 3rd'ing? mayve it should be x2....?

regards

by Gibber | 17th Jun 12, 9:26pm 1339925204

Bernard,

IF New Zealand DID NOT interact with the rest of the world

THEN NAIRU may actually be an IMPORTANT measure

BUT

As ZIRP in Japan

ZIRP in USA

allowing cheap hot cash into NZ.

And

Hot Chinese Cash Flowing into NZ Central Auckland Real Estate

Are FAR more important than esoteric concepts like NAIRU that assume a stable state economy

THEN

I think the article on NAIRU is a complete waste of time.

by Stephen L | 17th Jun 12, 8:52pm 1339923123

My view is that NZ's best opportunities to expand economic activity that also could improve our current account, and so help pay for some of the nice to haves, are in:

Increasing production in our sweet spot- farming;

Manufacturing and processing of food; including meal preparation; particularly for Australasia, but also Asia.

Export and import substitution of many services including financial, but also more traditional, like vehicle repairs.

Getting construction back to long term means, but no more;

Tourism, with a focus on the domestic, Australian, and Asian markets.

Some minerals, timber, and electricity (through aluminium),

No doubt many other specific industries.

In most of the above cases, the most important thing the government could do, in my opinion, is to get the currency aligned at a competitive long term rate; and give enough signals that to keep it there was a priority. Changing monetary policy and the Reserve Bank act would be a good start.

Then business, small and large, will learn to invest and hire with some confidence that it won't be knee capped by exchange rate appreciation.

On businesses requiring real scale, there could be a role for the government; it would need them to treat the SOE's as a real commercial opportunity, rather than an administrative inconvenience, as the Nats seem to do. In looking at the opportunities, I would follow the money- see where the largest outflows from a current account perspective are, determine whether there is a chance for NZ to fill some of that gap, and invest directly, or alongside business, if there is.

by scarfie | 17th Jun 12, 10:01pm 1339927282

"NAIRU is definitely not a pleasant place to be and we're there much sooner than we thought we would be."

Just wondering who the "we" is you are talking about Bernard. The inflexion point in the world population growth in 1961 is there for all to see.

by steven | 17th Jun 12, 10:12pm 1339927933

In combustion there is the Stoichiometric or Theoretical Combustion it is the ideal combustion process where fuel is burned completely. Normally something like 3% excess O2 is needed to "guarantee" all the fuel is burned. This is because you have to get O2 next to the fuel molecule. In some ways this seems repeated in employment....the prospective employee has to be in the same place as the vacancy and has to have the skills.....So in effect you can never get 0% un-employment, the costs incurred elsewhere to get it far outweigh the benefits.

To be honest though I think the idea that this has dropped as strange....it strikes me that the failed monetarists are trying to explain whats going on because their models dont apply after peak oil.....expensive energy is killing us so when ever we recover energy price rockets and sends us into a recession again......so an inflation blip....

regards

by Nic the NZer | 18th Jun 12, 12:09am 1339934949

It is widely known that monetarism failed when it was applied, and far before peak oil. Lets not get the mistaken idea that its an idea which had a time, its implementation was a failure and the theory mistaken

I think this NAIRU concept is probably equally foolish. If you look at the wikipedia page, this explains the problem fairly clearly.

Critics of this analysis (such as Milton Friedman and Edmund Phelps) argued that the Phillips curve could not be a fundamental characteristic of economic general equilibrium because it showed a correlation between a real economic variable (the unemployment rate) and a nominal economic variable (the inflation rate).

So people like Friedman and Phelps came across some empirical research which contradicted their favourite assumption of economic general equilibrium, and rather than turfing out general equilibrium they simply found a justification for ignoring the empirical research.

by steven | 18th Jun 12, 7:37am 1339961861

Sorry but I cant agree monetarism was a failure....I can certainly agree that with Greenspan and Reagan/Bush we actually see psuedo-monetarism fail.....in a similar way we saw psuedo-keynes before it. Yes I can also agree that the theory was shall we say barely adequate....I suspect the problem arises from its carte-blanche implimentation without due regards to its known limits and being prepared to move on.

I suppose we might consider that in the 60s~80s good emperical evidence of what worked and what didnt was lacking...or as today its there simply "everyone" is ignoring signs that its inadequate?....and better should be sought? hard to know.....we seem to keep repeating the same mistakes.....like ground hog day.

regards

by Nic the NZer | 18th Jun 12, 7:56am 1339962973

Unlike Keynes, Friedman was in a position to defend his thesis,

http://www.guardian.co.uk/commentisfree/2006/nov/16/post650

Or maybe from somebody with experience in a similar position to Friedman?

http://utip.gov.utexas.edu/papers/CollapseofMonetarismdelivered.pdf

Nobody can argue that Friedman had no hand in the implementation of his theory.

by steven | 18th Jun 12, 10:09am 1339970972

I suppose the answer is we'd need to seperate out moniterism from everything else that was done during the great moderation...

ie was the ideal fairly and properly implimented?

Was it ever workable?

Was doing things like the de-regulation and Greenspan's "puts" detrimetantal to it or where these un-sustainable actions taken to try and hold it together? Just loook at CDSs and all the other fraudalent instruments....striels me that the fox was let in the hen house and told to be a good boy....fat chance....hence we need regualtion and we need criminal charges to be laid to my mind.

I kind of get the feeling that we have had some "systems" that would have worked moderately well just they were "abused" and takem out of context.

regards

by steven | 17th Jun 12, 10:21pm 1339928506

BH, there could be other far more logical explanations, one of which starts with monetary policy no longer works (and given the mess we are in if it ever did) post peak oil. The cost of energy will do the work of "arresting" inflation for us. What I do see as more likely is that the failed idiots who have come up with this "1.5%" have got us into this mess are now trying to scare us into not going to some other economic theory....

So I see it as its more like a failed economic mantra burp. There is, for instance, no theoretical basis for predicting the NAIRU..........

http://en.wikipedia.org/wiki/NAIRU

However in practice from what I can observe there does seem to be a signs of such a point, but saying its 1/2 of what it used to be well b*llocks is all I can say.

regards

by Patricia | 17th Jun 12, 10:32pm 1339929139

So why did we not have the obsession about the inflation rate when we had full employment in the '60s? In fact if I remember rightly inflation was not an iinfrastructure. In those days the Government certainly provided and built the infrastructure

by steven | 17th Jun 12, 10:53pm 1339930381

Possibly because we didnt have a real understanding of the cause of inflation....did we really have full employment? and if so for how long? I would be surprised, for instance you cant get a sheep shearer to do say car body repairs (properly)....or if the shearing is in say Chch and the person is in Auckland.......in such a situation I'd expect wage inflation.....as wages would go up to attract qualified ppl from some other company...or vacancies stay....in which case your company isnt as productive as it could be...In the UK such was tried and the result was inflation....then un-employment went up....under Labour no less.....

Might well google to see what facts there are...............

http://www.eastonbh.ac.nz/?p=315http://www.eastonbh.ac.nz/?p=315

this suggest 3% "un-offically" un-employed....which is what I would think would be reasonable...

regards

by Patricia | 18th Jun 12, 4:07pm 1339992460

I wonder what the definition of unemployment is now and how it is massaged to give the percentage it does. I wonder what the percentage of "un-officially unemployed" is now.

by Nic the NZer | 18th Jun 12, 12:20am 1339935609

You shouldn't make the mistake of thinking that full employment or that sort of economy is in everyones best interests.

by steven | 18th Jun 12, 7:40am 1339962052

Im not.

Though in some ways its an ideal that has merit, why shouldnt everyone who wants work have work?

regards

by Wolly | 18th Jun 12, 5:24am 1339953881

"How can broke economies lend money to other broke economies who haven't got any money because they can't pay back the money that the broke economy loaned to the other broke economy and shouldn't have lent it to them in the first place because the broke economy can't pay it back?"

http://www.marketoracle.co.uk/Article35152.html

by Stephen Hulme | 18th Jun 12, 9:17am 1339967830

Will the Government pick up the baton?

No chance, if John Key continues to trot along the route worn by Camelot.

The failure to root out entitlement is rarely better defined than by this UK policeman.

by Bernard Hickey | 18th Jun 12, 9:33am 1339968787

FYI from a reader via email:

Dear Bernard Hickey. Your "Inflation risk lowers growth speed limit" article quite correctly concludes, that somehow we need to shift the "Naimu" back down with a huge burst of investment - but regrettably, you offer no ideas to discuss on how that could be achieved. Herewith I wish to submit for your critical perusal, comments, and (hopefully) public discussion, some realities with a subsequent answer to the question: How to accelerate growth at a time of slack consumer demand and reluctance of business to invest, without inflation? 1. We know(?), that if you are poor with no better income available, the only way to improve your income and wealth in an honest way, is through saving and investment. 2. We also know(?), that the least inflationary way possible for investment is through domestic savings, not excessive overdrafts or influx of foreign savings. 3. We should know, that needed public works and infrastructure construction and maintenance does not depend on profit expectations through consumer market demand. 4. Therefore - should it not be publicly debated, that the most effctive way for us to achieve non-inflationary substantial investment would be in introducing a basic (long term retirement) capital savings for investment rate into our taxation system, under the condition of its immediate investment in needed infrastructure etc as a priority at least until excessive unemployment has been overcome? 5. Would this not initiate jobs for wealth creation, budget deficit reductions, widening consumer demand and the stimulation for business resulting from? 6. If this increased saving and investment sequence operates through the NZ Super Fund amended into a permanent institution (of Personal accounts - PAs), additional benefits become achievable, such as better secured sustainability of our current NZ Super, including its entitlement age at 65. 7. Another argument in favor of this operating through the NZSF and not through KiwiSaving is that while KS caters for personal retirement prosperity depending on personal savings contributed and profits earned, the NZSF has no direct pressure for highest investment returns, because it only helps to keep the already Govt. guaranteed NZ Super sustainable EQUALLY to all, regardless of differences in individual contributions or what the NZSF earns. Thus, it can afford to finance - up to a point - lowest reasonable interest cost "infrastructure bonds" with the additional advantge that their repayment will deliver NZ Super cash flow, which otherwise would have to be paid to some private or overseas lenders. There are other advantages in amending the NZSF into a permanent institution of PAs in support of the answer to the original question: a) PAs deliver budget deficit relief from their 1st year of allocation by financing their owners' NZ Super until exhausted, releasing that amount of taxation revenue for use in other areas. b) Just like the NZSF as at present helps the sustainability of NZ Super to baby boomers, it would do the same to our increasing proportion of longer living retirees after the baby boomers. c) Since NZ Super entitlement at 65 well before serious old age disabilities is something very desirable and comforting to look forward to by most(?), that would be strong motivation to gradually raising the universal basic savings rate to the level needed to achieve that level of wealth, and as a "by product" reduce and eliminate another problem among us - "have not" poverty amidst relative plenty!! d) With all this, would it not become the most effective motivator for taking on the "austerity" needed for at least "keeping up" with Australia - and John Key's most impressive political legacy would be in transforming his "no change with NZ Super in my terms of office" into a permanent accord across the political spectrum?

by powerdownkiwi | 18th Jun 12, 10:07am 1339970873

That had the smell of a patsy parliamentary question.

Wealth creation? Why don't these folk wake up = you don't 'create wealth', it's entirely reliant on resources, and on energy being expended. Most of the 'wealth' folk think they 'hold' globally, is not underwritten. Just like folk 'buying gold', but not possessing it physically.

Super, and kiwisaver, and ACC, rely on 'investments' returning them something, and those 'investments' are themselves 'valued' by their ability to supply those returns.

At this point, we are so far overshot, that all bets are off, particularly the one which expects a return on those 'investments'.

At the end of the day, we will barter - there will be nothing left. That will include intergenerational barter; the old will be asset-rich, labour poor, the young will be the inverse.

Where's the leadership? Where's the media?

by steven | 18th Jun 12, 10:31am 1339972309

Both are running scared..........

regards

by scarfie | 18th Jun 12, 11:59am 1339977552

Yes it is a stunning flaw in the proposal that investing savings that are from a fund that expects a return into a depreciating asset . When you build infrastucture it doesn't provide a return to the investor, and on top of that then you have to spend further money maintain it. Isn't this the problem with local governance? They are having to factor in long term maintenance/replacement of infrastructure?

Further to that, the growth rate in population is slowing and in a peaking trend. Within a generation we are going to need less infrastructure not more. Less people means less resources to even maintain what we already have, the existing infrastructure is set to become a liability.

by powerdownkiwi | 18th Jun 12, 10:10am 1339971050

That had the smell of a patsy parliamentary question.

Super, and kiwisaver, and ACC, rely on 'investments' returning them something, and those 'investments' are themselves 'valued' by their ability to supply those returns.

At this point, we are so far overshot, that all bets are off, particularly the one which expects a return on those 'investments'.

At the end of the day, we will barter - there will be nothing left. That will include intergenerational barter; the old will be asset-rich, labour poor, the young will be the inverse.

Where's the leadership? Where's the media?

by steven | 18th Jun 12, 9:59am 1339970397

1. Missed education, I would argue that this is the single biggest enabler of someone's future as it allows you to get a better job...

2. Dont see why....I dont see how they are related.

7. Trouble is, it is then controlled by the whim of the party in Govn...."hey this would be nice lets build one"....just look at the stadiums that councils are thowing money at as an example.

When you set up a system then having a simple and straightforward goal ie maximum return is the most likely way to succeed IMHO. If you give it lots of nice to ahves then someone(s) has to figur eout a balance between the conflicting goals....and set priorities.

I get the distinct impression that this is a tax increase by another name....

regards...

by KH | 18th Jun 12, 10:03am 1339970603

Bernard. In what way is it bizarre that households are reducing debt and businesses have low debt. They see the fallacy of the ever increasing debt fueled GDP. Even if the government and you services don't.

by KH | 18th Jun 12, 10:03am 1339970634

Bernard. In what way is it bizarre that households are reducing debt and businesses have low debt. They see the fallacy of the ever increasing debt fueled GDP. Even if the government and you don't.

by KH | 18th Jun 12, 10:04am 1339970663

Bernard. In what way is it bizarre that households are reducing debt and businesses have low debt. They see the fallacy of the ever increasing debt fueled GDP. Even if the government and you don't.

by notaneconomist | 18th Jun 12, 11:25am 1339975505

Unemployment is not and should not be an isue here in NZ at this time. Why have we allowed so many migrants from Ireland, Scotland etc to come to Christchuch for the demolition and rebuild? Solving the unemployment issues should be about getting Kiwis working first. So do the Kiwis not want to work, not want to re-skill, not want to relocate?

One of the biggest problems NZ faces is the laziness of so many people who want to sit their backsides in offices doing unproductive jobs. They don't want to get dirty and they don't to do anything physical. I think we have far to many men and women who don't want to break a nail or mess their hair who are in unproductive lazy jobs who's livelihoods are parasitic.

Bernard - Government spending is not a solution and if it was all citizens would be wealthy! It does not work and anyone who advocates Government spending as the solution doesn't want the majority of NZ'ers to be wealthy which should be the main goal of every Govt. Real wealth is earned not taken from the silver platter of other producers.

The free market if left to it's own devices will produce entrepreneurs in abundance. It is not Big Government or Big Business that makes good economies it is small to medium sized business that are the most effective. Big Business like Big Goverment always needs BIG BAILOUTS as they are too inefficient and they can pull the whole economy back/down with their failure.

by Waripori | 18th Jun 12, 11:57am 1339977424

Nairu just seems like a complex way of examining poor productivity in an economy. You run up against capacity restraints faster because your labour force lacks skills and there has been insufficient capital invesment.

I think we know instinctively that our Social Welfare policies and probably our education system dont create incentives or mechanisms to enable our work force to be as flexible to change or as skilled as necessary for what the future is likely to hold. That is why we have low wages and highish unemployment at the same time as we have skills shortages.

I dont have any recent first hand experience of the sorts of investment the private sector should have been making but haven't, but I'll take Bernard's word there is a problem. One reason for that may well be a small local market and an overvalued exchange rate that makes it difficult to sensibly add value to what we do produce here.

What I do have difficulty with is the Government setting out to fix the problem with direct capital investments ( building factories ). The track record of NZ Governments making good investment decisions is pretty dodgy. The last one I can remember that worked out was planting Kaingaroa forest in the 30's but that was driven by the need to make work for unemployed.

What governments can do is ensure the education system is doing the best possible job , that infrastructure is as modern as possible ( UFB? ) and that policy settings ( tax , interest rates , labour regulation and possibly exchange rate) are as accommodating to investment as possible.

It may also be sensible to fire up the Cullen fund but with a nation building mandate as being the best way to achieve its goal of safeguarding superannuation.If we can grow the economy we will generate enough tax revenue to get us over the baby boomer hump. It might be worth borrowing to do that.

The world may well be going to struggle to maintain growth rates of the past but that does not mean that New Zealand has to as well. We have significant underutilised resources both natural and human and we can accommodate quite a lot more people, as long as we can find them something to do when thay get here.