We need to find a Kiwi Adam Smith

Photo: Dominion Post

PM John Key and Finance Minister Bill English.

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OPINION: The "recovery" has gone patchy.

Not surprising, after the biggest financial crash in 70 years, perhaps of all time. But what are we supposedly "recovering" to? That question will dog economic policymakers for some years ahead.

It has been obvious for at least 18 months - arguably for five years or more - that we are not going back to business-as-usual.

There will still be economic growth but it will be qualitatively different from the 1990s and 2000s.

This sort of thinking is now entering the mainstream. Anatole Kaletsky, star economic columnist for The Times, writes in a new book that we are in "capitalism 4.0", the fourth major variant of capitalism. Financial Times guru Martin Wolf wrote last week of a "conservative counter-revolution", post Thatcher and Reagan.

Each, only three years back, was celebrating the financial wizardry that then gave us the great crash. Hindsight sharpens insight.

Three great forces will shape the new business-as-usual. One is the rearrangement of economic power, with the rise of east Asia and especially relative late- comers China and India. That doesn't just change the who but the how. China's economy isn't "capitalism 3.0".

That ends the North Atlantic supremacy as "rich" countries struggle to stay rich while deeply in debt. Washington, famous for the "consensus" of free markets and tight budgets that the world institutions it dominated preached to "emerging" economies, is now deep in "socialism with American characteristics": massive fiscal and monetary handouts.

Bill English thinks it will be 10 to 20 years before the prodigal sons of capitalism can contemplate a feast of fatted calves. Meanwhile, Shanghai and Bangalore are defining "capitalisms with Asian characteristics".

The second great force is digital technology and its globalising power, which is jarring the global economy's tectonics.

It both flattens the world and pushes up powerful new peaks which increasingly will be in the arc from Tokyo to Mumbai. New Zealand is an outlier.

The third great force is under-45s' expectation that goods and services, including "public" services, are customised to individual needs and wants.

None of these forces is new. But the great crash has pulled back the curtains. That requires new thinking from the Government, not just risk management.

A start of sorts is that the Government's macroeconomic policy has been getting more coherent. Mr English got up a paper for John Key to read on the way to the soccer. Out of that came a stronger commitment to shift us from consumption to saving. (Then Mr Key got excited about making us save. Not- easily-excitable Mr English will want an opt-out provision if compulsion is introduced.)

As a Treasury discussion paper for the savings working group next week will show, a net savings gain of about $5 billion is needed just to hold our towering net debt to the world to 90 per cent of GDP. Ideally, if we are to ride tidal waves generated by the economic tectonics, that 90 per cent must fall.

That $5 billion or so requires a big shift from driving economic growth through state and household spending to driving it through exports. The 1990s-2000s shift from exports to houses and flash TVs is the big sin Mr English demands we now atone for.

Enhancing exports is where Gerry Brownlee's microeconomic programme of targeted policy adjustments for 18 sectors fits.

Saving is a national issue, not just an imperative for households. The state is part. So Mr English is holding government spending growth below inflation until he has enough in surplus to put $2 billion a year into the Cullen fund, plus some to cut debt a bit and cushion against shocks.

That requires cuts in "low-priority" or low-achieving programmes, efficiencies and more flexible delivery mechanisms using the private sector and not- for-profits much more. This is the "supply side" of public services and is concerned with volume.

That will save money. But it should also improve the public sector's flexibility and potential responsiveness to the rising generations' different expectations, which will in any case force changes. This is the "demand side", concerned with changing values.

Mr English touched on the changing nature of the "demand side" in a mostly "supply-side" speech in August. Treasury Secretary John Whitehead said a few days later: "We're working for a new generation now, with different needs and high expectations . . . active and vocal consumers who use a range of ways to access public services and information".

This is not the language of "recovery" to where we were. It is the language of a new world, needing new thinking in place of simplistic 1980s celebration of markets or microwaved neo-Keynesianism.

But it is only a start.

In 1776, in the outermost sliver of Europe, Adam Smith did insightful, inventive thinking that fitted a new era.

There is no compelling reason why this time such thinking can't be done here in this outermost sliver of Asia. It would beat fussing over the "recovery".

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