Work during the cut and cover operation to build the Maungawhau Station at Eden Terrace for the City Rail Link where 130,000 cubic metres of material was removed and then restored during the construction process. Photo / CRL
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide,
Q: Hi Liam,
The New Zealand Herald’s special report on infrastructure [Infrastructure: Time for Action 28/8/24] contained a statement by the chair of the Infrastructure Commission, Alan Bollard, that deserves wider attention.
Dr Bollard wrote, “Our stock of infrastructure, against prevailing wisdom, has been increasing in per capita terms for some 30 years. We spend around 5-6% of GDP on infrastructure each year, a percentage that has been stable for around three decades.”
In other words, the “prevailing wisdom” that New Zealand’s infrastructural development has not kept pace with its population growth is simply not true.
A country can waste a great deal of its wealth on excessive “infrastructure” unless it is very careful.
- John Roughan
A: Interesting observation thanks, John. It is always worthwhile stepping back and putting the so-called “conceived wisdom” under a bit of scrutiny.
Alan Bollard makes a good point about the level of spending on infrastructure we do. At first glance, it seems like there is a disconnect between that level of spending and the often-quoted line that New Zealand has a huge infrastructure deficit.
I asked Infrastructure New Zealand chief executive Nick Leggett if he could shed some light.
It seems the answer is that we might have been spending enough money but we’re not getting the quality of return on investment that we might hope for.
That’s a quick paraphrase anyway. Here’s what Nick said:
“Your reader is correct to draw attention to Alan Bollard’s point about New Zealand’s per capita investment in infrastructure. It is not dire, in fact, it stacks up quite well against other OECD nations. The challenge for New Zealand is to get a better bang for what we invest, as Mr Bollard’s piece goes on to point out. We are in the lowest 10% of OECD countries in terms of quality and efficiency of our investment in infrastructure. New Zealand is also ranked fourth to last in the OECD for asset management, and dead last for the metric on Accountability and Professionalism.
Despite our significant investment in infrastructure, it is widely acknowledged that we have a significant deficit of between $100 to $200 billion. 60% of this deficit is a failure to renew the assets we have already built – think about the asset conditions of our water, rail and roads. We cannot afford to pat ourselves on the back in any way when considering our current infrastructure asset base and its general condition. A mindset change at governing levels, fuller economic regulation coupled with a greater public interest, will ensure that maintenance and renewal budgets are not the sacrificial lamb at every budget round.
How do we get more efficient? A more independently driven 30-year strategy and pipeline that successive governments can buy into. A stronger delivery system with clearly delineated roles and responsibilities for government agencies – this is beginning to be signalled with Chris Bishop’s recent announcement on a National Infrastructure Agency enhancing and building on the work of Crown Infrastructure Partners, along with strengthening delivery expertise through Rau Paenga and enhancing the mandate for a 30-year infrastructure strategy and associated pipeline of projects.
Work completed by Infometrics on behalf of Infrastructure New Zealand in 2023 clearly articulates the challenges New Zealand faces from a short-term pipeline that lacks certainty. More certainty could unlock up to $2.3 billion in productivity savings per annum.”
Nick’s article on the need for a bipartisan political approach to infrastructure investment also ran in last month’s special report.
The Herald’s Simon Wilson recently went in for a deep dive into Bishop’s mission to find some unity around long-term planning. The minister is facing a Herculean task to depoliticise the planning pipeline as the controversy about the costs of a proposal to extend the four-lane state highway to Whangārei has highlighted.
But I wish Bishop luck. If a bipartisan planning process can be agreed it will strip out wasted investment on projects that never happen and boost the odds of some big projects - like another Auckland harbour crossing - finally getting built.
It’s one thing to get excited about a rebound business and consumer confidence but that’s just, people’s opinions, right?
Now we’re seeing a rebound in something far more weighty - the bond market yield curve.
Bond markets matter - with a value of more than $130 trillion, they represent more money than actually exists in the world. They’re something like twice as big as global share markets – depending on how you do the counting.
Because these markets control the price of borrowing for nations, they can effectively sink an economy if the world’s traders turn against it.
James Carville, the political strategist for Bill Clinton, made the point with a famous line, back in 1993: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
Carville – who also coined Clinton’s successful campaign slogan in 1992 (It’s the economy, stupid) – was making the point that bond markets rule the world.
Well, as the Business Herald’s Jamie Gray reports, in the past week New Zealand’s yield curve, seen as an indicator of things to come, has turned positive for the first time in a little more than two years.
What does that mean exactly? Jamie explains:
“A negative or inverted curve, when short-term wholesale interest rates are higher than long-term rates, reflects a difficult outlook and is seen as offering an early warning of a recession.
On the other hand, an upwardly sloping curve can imply stable economic conditions and a normal economic cycle.
A steeply sloping curve signals strong economic growth, accompanied by inflationary pressures that normally go with that, driving longer-term yields higher.”
If you think about it an upward sloping yield curve makes sense. If you give your savings to a bank for a longer term you should expect a higher rate of return.
So at face value at least this is another sign that economic conditions are returning to some kind of normal. But there’s a note of caution to it all.
To some, extent the upward slope has been driven by a sharp drop off in the short-term yields reflecting a very gloomy outlook about things right now. That makes the longer-term outlook look good in relative terms. All of which brings me back to the Jim Morrison quote I dug out a couple of weeks ago for a column on business confidence: “... been down so goddamn long, it looks like up to me.”
When it comes to style and cultural values nobody is getting confused about where US presidential candidates Donald Trump and Kamala Harris stand.
The pair square off in their first (and possibly only) televised debate this morning. Everyone expects a lively spectacle.
But the economic policy debate is not quite so simple. Trump‘s Republican Party has moved a long way from the neoliberal free market globalism of the Ronald Reagan and the Bush family.
If there is anything consistent about his policy platform across the years it is that he is a nationalist unafraid to use tariffs to keep cheaper foreign competitors at bay.
If anything, he’s pulled the Democrats along with him, with Biden also retaining and implementing his own protectionist policies in the past four years.
Anyway, the Financial Times has produced a helpful overview looking at trade policy but also tax plans and how likely they are to address America’s vast fiscal deficit.
For the record, neither candidate is fiscally conservative, the feature article concludes.
“Both candidates’ plans would increase the deficit, according to the Penn Wharton Budget Model at the University of Pennsylvania. But Trump’s plan would add US$5.8tn to it over a decade versus Harris’s US$1.2tn.”
Yes the little “tn” does mean trillion. In 2023 the US Federal Government ran an annual Budget deficit of around US$1.7 trillion!
“How a mind-boggling device changed economic history. In 1949, a little-known engineer astonished the academic world with the first-ever computer model of a national economy — made of Perspex and water”
That’s how the Financial Times billed its weekend magazine cover read honouring legendary New Zealand economist Bill Phillips - the little-known engineer.
Actually, in the world of economics, Phillips is well known for pioneering the Phillips Curve in the 1950s. It’s a curve we’ve heard a lot about lately as it describes the relationship between unemployment and inflation.
But it was the Moniac (Monetary National Income Analogue Computer) - a mechanical computer that used water flows to model the flow of money through the British economy - that scored him his big break and a job at the London School of Economics.
Phillips, who was born in 1914 at Te Rehunga near Dannevirke, was one of those adventurous, No. 8-wire inventor types that Kiwi legends are made of. He dropped out of school early and headed to Australia, worked as a crocodile hunter, and travelled to China where got caught up in the Japanese invasion and had to escape through Russia.
When he got to the UK he trained as an electrical engineer and then signed up to the Royal Air Force when World War II broke out. He was in Singapore when it fell to the Japanese and escaped on a troopship to Java.
Seemingly a lightning rod for Japanese invasion, he was stuck in Java when it fell, and he ended up being a prisoner of war for three and a half years. While in the prison camp, he learned Mandarin from Chinese prisoners, repaired and miniaturised a secret radio, and fashioned a secret water boiler for tea which he hooked into the camp lighting system.
After the war, he was made a Member of the Order of the British Empire (MBE) for his service and enrolled at the London School of Economics where, while he studied, he invented a hydraulic computer in his spare time.
This week the FT honoured the invention by building a virtual reality model which you can download for free if you have a pair of Apple Vision Pro goggles. The odds are you don’t (as they haven’t been released in New Zealand yet). But it’s a testament to the ongoing legacy of Phillips that he still attracts this kind of international attention.
Meanwhile, the RBNZ has a working copy of the Moniac in its Museum and Education Centre, you can check out a regular 2D demonstration here:
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Economic recovery is coming but won't solve structural problems.