sign up log in
Want to go ad-free? Find out how, here.

Oliver Hartwich on NZ's rock star economy, violent shocks for global economy, Germany the sick man of Europe, the wrong economics, Dilbert and more

Oliver Hartwich on NZ's rock star economy, violent shocks for global economy, Germany the sick man of Europe, the wrong economics, Dilbert and more

Today's Top 10 is a guest post from Oliver Hartwich, the executive director of the New Zealand Initiative.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. New Zealand’s rock star economy
A new study examining global economic freedom and competitiveness has New Zealand ranked 3rd after Hong Kong and Singapore.

The new report by the US based Cato Institute takes government, the legal structure, sound money practices, free trade, and regulation into account.

As the world is taking note of our good institutional settings, one might hope it will translate into trade and investment opportunities.

But for that, we would need to open up to FDI – which is one aspect where New Zealand typically does not rank highly.

Australia is the eighth and New Zealand is the third on CATO Institute’s annual index of the world’s freest economies, behind only Hong Kong and Singapore, according to its report. It has documented that “global economic freedom fell slightly in this year’s report, and it remains well below its peak level of 6.92 in 2007.” The average score fell to 6.84 in 2012. In the 2014 list, Hong Kong has the highest rating for economic freedom, with 8.98 out of 10.

2. John Key, superstar
Just as the aforementioned Cato report praises New Zealand’s institutional strength, the London Daily Telegraph praises Prime Minister John Key as “the poor boy who saved New Zealand’s economy”.

Without wishing to downplay Key’s performance, it is a little odd to write an article about Key’s management of the economy without a single mention of Bill English’s contribution as Minister of Finance. Nevertheless, it is interesting to note how a British newspaper assesses our government’s performance.

They almost sound a bit jealous and recommend their own Prime Minister David Cameron might learn a thing or two from his Kiwi counterpart.

Last month, thanks to a tax-cutting programme that has hauled the country out of recession, he swept to a third successive election victory, with personal approval ratings of around 70 per cent. That figure officially makes Mr Key the most popular leader in the Western world. But the 53-year-old ex-banker is no longer just basking in the admiration of his fellow Kiwis. On this side of the world, many British commentators are now backing his radical tax ideas as a blueprint that David Cameron might follow.

3. Global economy headed for violent shocks
As New Zealand is going from strength to strength, the world economy is still in deep trouble.

The Bank for International Settlements, the central bank of central banks, just issued a fresh warning that the next phase of the Global Financial Crisis (which never really ended) is about to begin.

The global financial markets are dangerously stretched and may unwind with shock force as liquidity dries up, the Bank of International Settlements has warned. Guy Debelle, head of the BIS’s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to “blow up” as the first sign of stress.

In a speech in Sydney, Mr Debelle said: “The sell-off, particularly in fixed income, could be relatively violent when it comes. There are a number of investors buying assets on the presumption of a level of liquidity which is not there. This is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions. “The exits tend to get jammed unexpectedly and rapidly.”

4. Germany, the new sick man of Europe?
One of those countries that could trigger the next economic crisis is Germany. Though the Germans may have been feeling good about themselves in recent years for not being French, Greek or Italian, their own economy has been moving in the wrong direction under Chancellor Merkel’s leadership.

A rude awakening to the reality of an economy that is hardly growing anymore (if at all) is unavoidable, as an increasing number of German economists warn and the London Daily Telegraph reports.

Growth has averaged 1.1pc since the beginning of the decade, placing Germany 13th out of 18 in the eurozone (or 156th out of 166 countries worldwide over the past 20 years). This chronic weakness been masked by slightly better growth since the Lehman crisis, and by the creditor-debtor dynamics of the EMU debt crisis. German looks healthy only because half of Europe looks deathly.

The Hartz IV reforms – so widely praised as the foundation of German competitiveness, and now being foisted on southern Europe – did not raise productivity, the proper measure of labour reform. Data from the OECD show that German productivity growth slumped to 0.3pc a year in the period from 2007 to 2012, compared with 0.5pc in Denmark, 0.7pc in Austria, 0.9pc in Japan, 1.3pc in Australia, 1.5pc in the US and 3.2pc in Korea. Britain has been negative, of course, but that is no benchmark.

5. Teaching the wrong kind of economics
The world might be a better place if we all understood a little more economics.

Problem is, the way economics is taught at high school level is totally flawed – at least in Australia.

An analysis of the Australian economics curriculum reveals that it does not even manage to teach core economic concepts correctly and fails to mention important economists such as Adam Smith. 

Griffith University economics professor Tony Makin and lecturer Alex Robson, in their advice to the federal government’s curriculum review, say the curriculum incorrectly defines some fundamental concepts including gross domestic product, efficiency and productivity.

They argue that the curriculum omits key concepts, such as the difference between micro­economics and macro-economics, or between recessions and booms. It also fails to include the great economic thinkers, including the father of economics Adam Smith and his coinage of the term “invisible hand” to describe the forces of the free market.

Part of the problem seems to be the decision to combine economics and business in one curriculum, which Professor Makin and Dr Robson say is unusual internationally. “The curriculum ... as it stands is grossly deficient and needs rewriting,” they say.

“Australia’s curriculum lacks balance and omits core economic principals and essential material across a range of topics. “(The curriculum) is too wordy, is poorly expressed and contains many definitional errors in relation to important economic concepts. Fundamental problems with the existing document suggest that it is beyond redrafting.”

6. Prize-worth economics
Should Australian students ever be taught the names of great economists, they might even hear about Jean Tirole. After all, Tirole was just announced as this year’s recipient of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (yes, there is no Economics Nobel Prize because Alfred Nobel forgot to include economics in his list of prize-worthy causes).

However, not everyone seems to be completely convinced by Tirole’s work, as economist Peter Klein notes.

As a second-year economics PhD student I took the field sequence in industrial organization. The primary text in the fall course was Jean Tirole’s Theory of Industrial Organization, then just a year old. I found it a difficult book — a detailed overview of the “new,” game-theoretic IO, featuring straightforward explanations and numerous insights and useful observations but shot through with brash, unsubstantiated assumptions and written in an extremely terse, almost smug style that rubbed me the wrong way. After all, game theory was supposed to add transparency and “rigor” to the analysis, bringing to light the hidden assumptions of the old-fashioned, verbal models, but Tirole combined math and ad hoc verbal asides in equal measure. …

As a student I found Tirole’s analysis extremely abstract, with little attention to how these theories might work in practice. Even Tirole’s later book with Jean-Jacques Laffont, A Theory of Incentives in Procurement and Regulation, is not very applied. But evidently Tirole has played a large personal and professional role in training and advising European regulatory bodies, so his work seems to have had a substantial impact on policy.

7. Monopoly is good for you
As Jean Tirole researches the theory of market power, a practioner of market power comes to slightly different conclusion. Peter Thiel’s new book Zero to One makes the case for monopolies, based on a very Schumpeterian idea of entrepreneurship and creative destruction, the Wall Street Journal reports.

Mr. Thiel’s contrarian claim that “monopoly is the condition of every successful business” echoes Joseph Schumpeter, the Austrian economist best known for coining “creative destruction.” Schumpeter explained in a 1942 book the key role of temporary monopolies in innovation: “The introduction of new methods of production and new commodities is hardly conceivable with perfect—and perfectly prompt—competition from the start. And this means that the bulk of what we call economic progress is incompatible with it. As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced.”

Many academics and antitrust lawyers wrongly believe big is bad by definition. The Justice Department pursued IBM in the 1970s and Microsoft in the 1990s without understanding that in a dynamic market, where government doesn’t protect incumbents, new innovators displace old innovators. Apple undermined the dominance of Microsoft, which had ended IBM’s.

Mr. Thiel joins a long-running dispute. Justice Antonin Scalia set off a firestorm a decade ago when he defended monopolies in a majority opinion: “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful, it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.”

8. Divided economists
It is not just economists and business practitioners disagreeing with each. There is no shortage of disagreement among economists, either.

In the latest IGM poll of leading economists, the panel was asked whether they agreed with Thomas Piketty’s claim that “The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.”

The result: most economists disagree, some strongly so – and a few agree, and even fewer strongly so.

Which probably suggests that it must be an interesting question.

9. The public has no idea about economics either
Okay, so economists disagree on complex questions. That’s bad enough. But what’s even worse about economic literacy is the fact that ordinary people do not even know basic economic facts.

Case in point: The Pew Research Centre’s poll of ordinary Americans on the Federal Budget.

Turns out, Americans have no idea what they pay taxes for.

Christopher Ingraham of Wonkblog points out that a new Pew Research Center survey shows that most of the public is ignorant about the distribution of federal spending. Only 20% realize that the federal government spends more money on Social Security than on foreign aid, transportation, and interest on the government debt. Some 33% believe that foreign aid is the biggest item on this list, even though it’s actually the smallest. It accounts for only 1% of the federal budget, compared to a whopping 17% for Social Security, which is one of the biggest federal outlays and has been for decades.

The Pew poll is consistent with numerous previous studies that reach similar results, consistently showing that the public massively overestimates foreign aid spending, and underestimates spending on big entitlement programs, such as Social Security and Medicare. British voters are misinformed about their own government’s budget in much the same way.

10. And finally, Israelis get excited about Germany’s price level (and chocolate pudding) 
An Israeli living in Berlin posted a supermarket receipt on Facebook – and reached over a million of his fellow countrymen and women at home. Now Israel is wondering why it is so cheap to live in Germany.

Well, had a Kiwi living in Berlin posted a receipt to his New Zealand friends back home, they would also wonder why in Germany you can buy chocolate pudding for $0.31, a loaf of specialty bread for $1.85 and half a dozen organic eggs $2.24.

So the German economy may be in crisis, and New Zealand has a rock star economy, but German consumers still get better value for their money. It probably takes a few economists to explain all of that.

Five days ago, a young Israeli posted a grocery shopping receipt on Facebook: It included everyday items like orange juice, eggs, bread, pasta and three cups of chocolate pudding with whipped cream on top that people in Israel have nicknamed “Milky” and costs just 19 cents. The 25-year-old challenged his readers: “Find any supermarket in Israel where you can get all of these things for less.” He had filled his grocery bag in Berlin, which is regarded as one of Europe’s most affordable capital cities. “See you there!” he wrote.

 

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.

34 Comments

#1 and 2   Did I just read a verbal masturbation of John Key?   

Up
0

Or a bout of VD (Verbal Diarrhoea)

 

Up
0

It's very disappointing to see comments of this nature masquerading as informed opinion that adds to our knowledge base.

 

They should be removed and the accounts suspended.

i have no interest in seeing this nonsense on what is usually an interesting board.

Up
0

"The Cato Institute

The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded as the Charles Koch Foundation in 1974.

Mission:  To increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace."

Wow, a right-wing think tank (tea-party) which aims to reduce coporate tax and 'limit government' releases 'findings' praising NZs current tax regime. I am 100% sure there are no vested interest in these 'findings', and am also 100% sure low coporate tax and no regulations are in the best interest of all regular New Zealanders...

Up
0

You'd rather live in the countries that are at the bottom of the Cato Institute's list?

Up
0

Fairly sure I wouldn't want to live in the 2 countries above NZ at the top of the list

 

A lot less "freedoms" of the type I value most

Up
0

Key's handling of the economy always reminds me of the golden rule for making a small fortune in the wine industry: always start with  large fortune.

Up
0

#5 - Teaching the wrong kind of economics

"Griffith University economics professor Tony Makin and lecturer Alex Robson"

 

These two guys must be very very bright and would have predicted the GFC long before everyone else.

 

Up
0

oh like Steve Keen maybe?

um....

Up
0

#4 the FT expertly fingers Germany's utterly muddled energy policy as a prime cause of their current (sorry) woes....

 

They now mine and burn more brown coal (that's Lignite to you'n'I) than at any time since 1990.

 

So their  'Grün' should probably be henceforth pronounced 'Braun'.....and their 'Energiewende' looks to be more of a 2014 Schadenfreude.

 

Oldest story - careful wotcha wish for.

Up
0

While watchng the EU melt down, its due to their muddled energy woes? yeah right.

by the FT....

yeah right.

Up
0

#9 - The public has no idea about economics either

 

The public have been saying interest rates will stay low, while economists have been saying the opposite. They even told people to rush in and fix their mortgages before they went up.

 

The blind leading the blind

 

Up
0

You must have missed the gold bugs and many other Austrians in here promising inflation for some 4~6 years....except many dont come in these days, or stay quiet.

regards

 

Up
0

#1

"Australia is the eighth and New Zealand is the third on CATO Institute’s annual index of the world’s freest economies"

 

Do these types of "Index" tell the truth or tell you what you want to hear?

 

 

 

Up
0

Yes, they tell you what you want to hear. They are usually formed by people with vested interests for this reason.

Up
0

#7 Monopoly is good for you

 

Pre Reagan, Thatcher, Rogernomics all products that we purchased were expensive because of "middle-men"

 

The importers got their cut. Then the warehousing and distribution people got their cut and finaly the retailer got their cut.

 

After Rogernomics the middle-men were cut out. Places like "The Warehouse" did their own importing, distributing and retailing. Cutting out all the middle-men.

 

Cutting out the middle-men displeased our Free-market rulers so they moved them into the Government and Councils.

 

We now have heaps of middle-men creaming us on government and council services.

 

I pay the Council to collect my rubbish and the Coucil gives the job to the middle-men who take their profitable cut. Instead of just paying wages to collect this rubbish we now have to pay wages plus CEO salaries and company profits.

 

Now we cannot afford our rates and get very little for our taxes because the middle-men are milking us.

 

 

Up
0

Yes Mike B those are the anti-evolutionary processes of government and centralisation.

As things become more organised they get more efficient - but the process itself carries overheads (middlemen)  the more that the middlemen have to be paid, and the higher they have to pull off for oversight and insurance and costs then the less effective their input is - and it doesn't take much to make things inefficient especially in smaller projects.

That is one reason the government can never do a Keynesian coup and tax itself to profitability.  the actual effort of improving the tax system tends to increase overheads and decrease productive output, the more the system is evened out and more that is paid out, the larger the leakage becomes.     In electronics we see this in transformer and silicon doped gates, short of magic there is no way to beat the themodynamic unity.  a monopoly will start more efficienty, but it's own efficiency will result in funds that would have been extracted elsewhere being directly extracted from the monopoly, just like a cat sucked onto the bonnet of a warm car.

Up
0

#1 A new study examining global economic freedom and competitiveness has New Zealand ranked 3rd after Hong Kong and Singapore.

 

I just don't get why Singapore is ranked better than New Zealand.  Wages are high in Singapore and it is not exactly an icon of freedom. It's an epitome of a nanny state.

Up
0

Maybe they are right.

Maybe Lee Kwan Yew knew a thing or two and Jonkey is just a mirage .

Is turning a burden of under $15bn into one of $70bn+ a measure of success?

At least Singapre pay for everything when the bill comes in rather than putting it on tick and selling of the family silver.

Up
0

Depends on how you define freedom

Freedom for who?

Suprising NZ is listed 3rd after HK and Singapore

Both of whom have a 15% property tax on outsiders

Which helps protect and pay for the freedoms of insiders

Up
0

Well, you could have a look at the report itself, which no doubt contains explanations of what the authors mean by "freedom" and how they measure it.  In this case I would imagine that the nanny-statism that you refer to in Singapore is more to do with social than with economic freedom

Up
0

It's also not unusal for report writers to consider the nanny state a good thing, after all not having to worry about certain things is "Freedom" isn't it??  That's the problem when people start equating "freedom" with "ease", and start losing their freedoms.

Up
0

#2 They almost sound a bit jealous and recommend their own Prime Minister David Cameron might learn a thing or two from his Kiwi counterpart.

Wouldn't the David be better off learning from the Hong Kong and Singapore, both of which surpassed New Zealand?

Up
0

I am curious who wrote the gush piece on Jk and then sent it to the paper. I doubt they know much about JK and care little about what we do on the other side of the world. Do we expect it to be a well researched article?

Up
0

#7 photo: The many marks of the Beast, soon to hit NZ with full force when the TPPA is enacted.

Up
0

#6 "Alfred Nobel forgot to include economics in his list of prize-worthy causes" like hell he did, he simply didn't want to remembered as a fool

Up
0

Yep, the smart man decided not to include it and economists thik he forgot.

Up
0

$1.1 trillion stimulus from oil dive.

http://www.bloomberg.com/news/2014-10-15/citigroup-sees-1-1-trillion-st…

The biggest beneficiary that country Singapore again.

“The real wild card in this whole thing is Venezuela,” said Philip Verleger, an independent consultant who worked in the Ford and Carter administrations. “The economic situation is getting really bad. It’s just possible things could blow up and you could lose a couple million barrels a day of exports.”

http://www.bloomberg.com/news/2014-10-16/don-t-mess-with-saudis-in-oil-…

Up
0

Citigroup are deluded, though interesting they say so little about how the old high price stagnates things, but when it drops it will be stimulating, the other side of the coin. Problems are many and severe with an oil price drop.

regards

Up
0

#5 it seems economists don't do the study either, so the new generation seems to be taught prropriately in light of the old.

 

http://mattbruenig.com/2014/10/16/how-much-do-economists-understand-pik…

Up
0

... I love the photo with item #4 , David Cunliffe's inner sanctum , his brain's trust , the three wise men behind the boy genius ...

Up
0

Low inflation is just trhe effects of deflation but not quite so bad....

"One thing he doesn’t do, however, is make it clear that zero is not a magic red line here — as even the IMF has made a point of emphasizing, too-low inflation has all the adverse effects of outright deflation, just to a lesser degree."

http://krugman.blogs.nytimes.com/2014/10/18/why-to-worry-about-deflatio…

and,

http://blogs.wsj.com/washwire/2014/10/16/5-reasons-to-worry-about-defla…

regards

Up
0

So many negative comments here ... is that mainly because Oliver is from Germany? Pity he is not from economic lighthouse Bangladesh, like the other guest expert on everything eco-comical around here. 

 

Anyways ... I feel that repeating what everyone else is saying does not shed much new light on the situation. What does e.g. NZ's status as a free economy mean, when around the world market economics is being replaced by central planning thru reserve banks and NZ is massively benefitting from all the printed money?

 

Where would NZ be today, had market forces been allowed to do their job and eliminate badly managed banks riddled with bad debts? 

 

 

 

 

Up
0

Probably negative because obviously the whole article is satire.   My first read I got to #2 before I realised it was just a ficiton piece (except for the supermarket pricing).

A perfect example is #6.  You won't last in business if you don't have some grasp of economics.  "economists" however just make reports, they don't bet the company on getting it right.

And Peterpan...  just because people post things you don't like doesn't mean they're nationalist bigots.   In fact, assuming that people must be bigots because they disagree with a foreign, show bigotry and prejudice on your part.

Up
0