Peter Lyons: Is NZ's prosperity real?

Photo / Brett Phibbs

I was recently called a right-wing self-pleasurer by a person who had read an article of mine. This wasn't the exact terminology used. I responded that I prefer not to mix love and politics.

This would be one of the more divisive elections that I can remember. This may be due to the fact that the majority of Kiwis, who are centralist by definition, are less than enthused about who to vote for. The debate tends to be dominated by extremes on either side.

I may have a touch of autism in having an obsessive streak. One of my obsessions is what makes a nation wealthier compared to others. Adam Smith said "there is much ruin in a nation". Often policies that make sound economic sense are ignored because they don't suit powerful vested interests. The result can be stagnation and sometimes national decline.

In 1999, on the eve of the Clark Labour government, I wrote an article that identified the key issues confronting our economy at the time. The issues were productivity levels, low savings rates and inequalities of income and wealth. It is interesting to revisit these issues with new insights.

Productivity means output per worker. It is regarded as a key determinant of the average incomes in a society. But there is a problem with this. It is possible to be very productive in producing items that don't generate particularly high incomes such as bananas or baseball caps. The real determinant of the standard of living of a country is value added.

New Zealand does poorly on this count; many of our exports are primary commodities such as milk powder, logs, meat and fish. We fail to add value to much of our output and therefore our average incomes are not great by world standards.

Most of us have a nagging feeling that something isn't quite right. Even those on middle incomes are finding it harder to pay the bills. Often the blame is laid on those further down the income ladder for being bludgers.

The savings issue provides a possible answer that is within our control if we choose to confront the elephant in the room. We are constantly informed that we are poor savers and must put more aside for our retirement. Most of us regard paying off the mortgage as our main form of savings.

But the real problem is not our savings but our investment. Investment in economics means using funds to create productive activities such as new businesses, factories, computer systems, software, milking sheds, and other plant and equipment used to generate incomes and jobs. It includes investing in relevant training and skills. Houses are not productive assets in their own right. House prices should reflect growth in average incomes.

Over the past 15 years much of our apparent prosperity has been based on housing inflation and rising debt levels. Yet no political party has shown even willingness to research what is driving the housing market particularly in Auckland. We are heading for a train crash unless this issue is addressed.

Income inequalities are a greater issue now than in 1999. The causes are varied. They include a globalised labour market, differences in education and skills, a more casualised labour market and a less progressive tax system. The budget surplus this year has largely been the product of spending cuts that tend to affect the less well off in our society.

The issue of inequality is ancient to human societies. In a market economy, wealth and the incomes it generates concentrate over time. The lottery of birth plays out in access to quality education, job opportunities, parental expectations and inheritances. Income inequalities are a necessary feature of a market economy. People need to be rewarded for hard work, skills, qualifications and risk-taking.

The problem arises when these inequalities become too extreme resulting in economic and social apartheid. Unfortunately the tax system in New Zealand tends to penalise income earners as opposed to the owners of capital. There have been several independent studies on the tax system in New Zealand that have come to this conclusion. They have provided recommendations on how to implement a fairer and broader tax system. They have largely been ignored because the political implications are too hazardous. There are too many vested interests maintaining the status quo.

For those of us who are centralist in our political and economic views we face a difficult choice this election. A continuation of the current direction provides few answers to these core issues. We can't build a prosperous and inclusive future on fickle commodity prices, housing inflation and earthquake rebuilds. The alternative could be a rainbow coalition aiming to reduce inequalities but offering few answers to the quest for future prosperity.

Peter Lyons teaches economics at St Peter's College in Epsom and has written several economics texts.

Debate on this article is now closed.