On Thursday Reserve Bank governor Graeme Wheeler will again tell you that if you have money to invest, buy a house to rent out. Economic orthodoxy tells him to keep interest rates very low to get inflation up.
But is economic orthodoxy still right? Some uncertainties stalked conferences last week of government economists and on productivity.
Are economists’ models measuring the right things and accurately? Should the “dominant hypothesis” of economics be cross-fertilised from other disciplines, as Treasury Secretary Gabriel Makhlouf argued last year?
Physics might offer a parallel. November 25 was the centenary of the day when Albert Einstein’s theory of general relativity unpicked certainties that had ruled in that science since Isaac Newton.
In February 2014 in Wellington Lord (Mervyn) King, former Bank of England governor, said his generation of economists was guilty of what we might call Newtonian certainty in their modelling which missed signs pointing to the 2007-08 global financial crisis (GFC).
Economist David Smol, Ministry of Business, Innovation and Employment boss, told last Monday’s Government Economics Network conference the accelerating rate of change” — including digital technology, the labour market, regulatory uncertainties and big data — emphasised economists’ need to be “open minded while remaining disciplined, avoiding the trap of one paradigm fits all”.
Following Smol, New Zealand-born London School of Economics professor of political economy and development Robert Wade was trenchantly critical of orthodox economics (though didn’t offer a convincing alternative).
The essential message: economics, as with other (misnamed) “social sciences”, can at most offer ways to think about aspects of human activity, not sure guides to appropriate policy.
That includes the nature and role of productivity growth, last Tuesday’s conference topic.
Makhlouf there quoted economist Paul Krugman from 20 years ago: “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
So, Makhlouf asked, “why do our very good policy settings, combined with our immense natural capital, our skilled and energetic workforce and our reputation for innovation and agility in business leave us with persistently low productivity growth compared with other OECD countries?”
Well, the United States’ medical system’s productivity is higher than ours but Americans live less long. Hmmm.
And in sectors where fast-developing technology, as in digital devices, lifts use-value but not prices or volume output per worker, do standard productivity measures capture that as a positive?
Might this partly explain why measured global productivity growth fell from 2.6% a year 1999-2006 (before the GFC) to 2.1% in 2014 (1.0% a year in New Zealand through 2008-14)?
And shouldn’t rising productivity raise real wages and contain or ameliorate inequality? If so, why has inequality risen and become embedded in advanced economies in recent decades?
Economist Joseph Stiglitz in four academic articles in May blamed this on policy settings which enabled the better off and the wealthy to cream off “exploitation rents” from monopolies, intellectual property protection and policy-favoured positions in markets.
He said ultra-low interest rates and, in big advanced countries, money-printing, coupled with friendly tax policies and friendly credit, had fattened the already wealthy. Some of that had gone into houses in nice places and pumped land price bubbles. Stiglitz argued for a land tax.
Come back to Wheeler. He delivers his diktat a week after the European Central Bank extended its money-printing to March 2017 and cut its official interest rate to minus-0.3% (yes, minus). The United States Federal Reserve Board’s decides next week on a rate rise, or not, from near-zero.
These bizarre settings are the product of orthodox economics. Here orthodox economics requires Wheeler to get inflation up to 2%. If he follows his own recent logic he will at some point cut the official cash rate from its already emergency 2.75% level.
Strange central banks and high inequalities suggest orthodox economics could do with some re-engineering. Orthodox economists’ productivity is not meeting political stability needs — and a stable economy needs stable politics.
For now political instability needn’t worry Bill English as he fronts his fiscal surplus test in next week’s half-yearly update.
But if global imbalances — of which the central banks, rent-seeking, overpriced sharemarkets and emerging economies’ turbulence are part — spin into another global shock, as some usually calm observers now fear, our politics may well join the global rich-country trend to political instability.
The risk then is that we get voodoo economics. If so, hubristic Newtonian-certainty economics will be partly to blame. Time for an Einstein.